An audit that has a narrow focus and only examines one particular aspect of an organization’s operations is called a special audit. This kind of audit may be directed by a government body, but it may also be authorized by any entity or even internally within an organization. In this blog, we discuss the meaning and types of special audits.
Need for special audit
When it is suspected that laws or regulations have been violated in managing & administering the finances of an organization, a special audit becomes necessary. It helps to locate the extent of and reasons for violation.
Apart from that, audits relating to duties, authorizations, responsibilities, and internal control policies, for instance, might also be conducted in addition to the investigation of violations. Further, special audits may also be conducted in instances of bankruptcy or business reorganization. Many bankruptcy lawyers can help simplify the process.
Who initiates a special audit?
The majority of special audits are initiated by third parties. A tax authority may, for example, demand a corporation to conduct a specific audit to investigate the correctness of income heads and tax calculations. This audit is carried out to increase trust in the numbers and processes in place for the effective and efficient creation of financial reports.
Apart from this, a special audit can also be initiated within a company to dive into any specific area that drives attention or where any discrepancy is suspected. As stated in the preceding paragraphs, it could be related to authorizations, internal controls, business processes, or even more.
Types of special audit
Generally, a special audit is performed to accomplish a specific goal or to check certain facts. Understanding what audit processes are relevant for a given assignment or a given situation would entirely depend on the type of special audit. Each type of audit serves a distinct purpose.
Given below are some examples:
1. Compensation audit
Compensation audit allows for the yearly examination or audit of employee salary, bonus, incentive, and stock option programs in order to assess their efficiency, competitiveness, and legal compliance.
2. Compliance audit
A compliance audit is a type of audit in which the purpose is to evaluate whether or not an organization is following the terms of a contract or certain rules and regulations. Compliance audits may be used by regulatory agencies to determine if a business is in compliance with the requirements of its operating license.
The basic objective of a compliance audit is to evaluate an organization’s conformity to laws, norms, internal bylaws, and codes of conduct.
As far as Indian laws are concerned, an audit that checks compliance with the Companies Act is termed a secretarial audit.
3. Construction audit
A construction audit, as the name implies, is performed to assess the costs of any given construction project. It deals with keeping track of various construction costs such as payments made to suppliers, contractors, and so on. To determine the authenticity of construction expenses, the costs as recorded in the books are compared to the actual papers.
4. Internal audit
An internal audit can be used to evaluate an organization’s performance or the execution of a process against a set of standards, policies, metrics, or guidelines. These audits may include an examination of a company’s internal controls in the areas of corporate governance, accounting, financial reporting, and IT general controls.
5. Cost audit
We all know that audit involves verification and examination. When this concept of auditing is applied to cost records, it becomes a more specific and specialized form of audit activity. It is named cost audit. A cost audit is an audit of cost records on the utilization of materials, labor, overheads, and other items of cost applicable to the production of goods. It checks whether the cost accounting system followed in the company serves as a correct basis for ascertaining the cost of production.
6. Fraud audit
It is a special form of investigation to identify whether or not there is any fraudulent activity in any particular area of financial statements. Fraud can be done in a variety of ways, including falsifying accounting records, misusing assets, and passing fictional journal entries to conceal fraudulent activities. As a result, if the entity finds that management or officials are involved in fraud, a special audit to investigate such fraud can be undertaken. A fraud audit involves checking any specific area of finance that is likely to be affected.
For example, if a cashier steals cash and escapes, a fraud audit will be conducted to determine how much money was taken away by theft, to carry out a detailed analysis of cash records handled by the cashier, and to investigate the tasks previously performed by the cashier, etc.
7. Information systems audit
An information systems audit is required to ensure that the information systems are running properly and that there are no errors or malfunctions in the system. This particular audit is important for determining whether general controls connected to software development are functioning properly or not. An information systems audit is also performed to assess various controls such as data processing, software applications, IT infrastructure, access to information systems, and so on.
8. Royalty audit
A royalty audit is a financial verification that determines whether a licensee (user of a patent, license, or franchise) is paying the licensor (owner of the patent, license, or franchise) the correct amount of fees that have been agreed upon in the agreement they have in place for use of the patent, license, or franchise.
9. Income Tax audit
The verification of the books of accounts maintained by a taxpayer is referred to as a tax audit. The goal of a tax audit is to validate the taxpayer’s income tax computation in the income tax return and to ensure compliance with the relevant laws of Income Tax. The books of accounts must be audited by a professional Chartered Accountant.
10. GST audit
In terms of indirect tax regulations in India, the Assistant Commissioner of CGST/SGST can initiate a Special Audit under GST [Section 66 of the CGST Act 2017], taking into account the nature and complexity of the case as well as the interest of revenue. If the Assistant Commissioner believes that the value of the taxable supplies disclosed by the registered person is erroneous or that the input tax credit has been improperly claimed, a special audit can be undertaken at any stage of scrutiny/inquiry/investigation.
Usually, an audit is conducted annually to assess a company’s financial statements by an independent auditor (statutory audit). Besides this audit, some special audits can also be conducted to determine the genuineness of any specific area of operations. It could be to verify compliance with laws, computation of tax, cost records, etc. Although mostly it is ordered by a government authority or third party, it may be initiated internally too.
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