A compliance audit is a review of adherence to laws, regulations, or policies and procedures. Compliance audits can be done internally, externally, or by a government agency to ensure adherence.
Individuals and companies sometimes elect to undergo audits by internal or external auditors to ensure compliance. Government agencies also have a responsibility to audit for compliance. The type of records audited varies depending on the laws, regulations, or policies and procedures being audited. Regardless, there is common ground to every audit that will help prepare a compliance audit checklist. Before beginning an audit, ensure the following have been provided:
- Audit Period
- Record Requirements
- Appeal Procedures
Each of these should be well defined by the auditor before beginning the audit, in the pre-audit appointment.
The Audit Period
At the beginning of an audit the individual or company will be notified of the audit period. This is important because it indicates the time frame of records that will be reviewed. A common time frame is three years. This means that records need to be available for the entire three-year period. However, the auditor will not likely audit the entire audit period. Sample periods are selected; for example, three quarters from the three-year period, might be analyzed extensively. Anytime failure to comply is found in these sample periods, or fraud is suspected, the auditor may extend the audit period beyond the initially stated time frame. To prepare for an audit, ensure the records from the indicated period are present and easily accessible to the auditor. Showing that the records are present and good record keeping practices were followed will often eliminate further investigation into other periods.
The Records Required
Before the audit begins, the auditor will also explain in detail exactly what records will be reviewed. Generally, they are looking for documentation of what was reported. For example, in a sales tax audit they are reviewing records to determine that the correct amount of sales tax has been collected and remitted. Records requested will likely include copies of sales tax returns to the state and federal government, general ledger, worksheets, canceled checks, purchase and sales invoices, exemption certificates, bank statements, and cash receipts journal.
Appeal Procedures
An auditor is required to provide the individual with a copy of the working papers used to determine the audit findings. The auditor is also required to review them with the individual, or entity being audited, to ensure the working papers are understood. If there is data or determinations used in the audit that the taxpayer does not agree with, they have the right to appeal. The auditor is also responsible for providing procedures to appeal their findings to another authority.
Audit Findings
At the end of an audit, recommendations are made that typically notify the individual, or company, where improvements in processes and controls can be made to ensure compliance with regulations. At this time an assessment, or refund, is also made, if it is a tax audit with a government agency. Penalties and interest can be assessed if underpayment on taxes were made.
To eliminate assessments, it is important to refer continually to the compliance audit checklist. Is the entity maintaining records throughout all time periods that could be audited? Are all the records present? Finally, does the entity have the business knowledge it needs to fully understand the laws and regulations with which it must comply? Knowing the record keeping responsibilities is critical in the event of an audit.
Heather Schulte - Heather Schulte is a freelance writer based in the Midwest. She writes web content for a variety of publications such as Suite101, eHow, ...
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