TYPES OF AUDITS

Depending on who performs financial audits, we categorize audits into three main
categories: internal, external, and government audits.

1. Internal audits
- Define: An internal audit is an evaluation of a business’s internal controls
and accounting processes.
- Process: management will identify a department that they wish to audit-> an
internal auditor will attempt to collect an understanding of the current
internal control process and conduct fieldwork testing -> follow up with
management about the issues they have identified, prepare the official
auditor’s report, review the report with management, and follow up with
management to guarantee the suggested recommendations are in place.

- How often: An internal audit can be conducted on a daily, weekly, monthly,

or annual basis depending on the circumstance and schedule which fits a
business’s needs best.
- Purpose:  assess and improve the effectiveness of administration and
operations, provide risk management, and provide more control over the
critical financial processes in your business. 
2. External Audits
- Define: conducted by an independent accountant or accounting firm. This
type of audit results in a verified certification of the financial statements of a
business- These are required for all publicly-held businesses and can be
requested by shareholders, investors, and lenders if there is a suspected
discrepancy in the reports.
- Process: starts with either the appointment or hiring of an independent
auditor -> collect, assess, and interpret data to gain a full understanding of
all of the company’s activities ( include examining the business's accounting
 records, looking through financial statements in order to obtain evidence,
verifying compliance with standard accounting policies, and confirming the
assets that have been purchased) -> submit their report and state their
objective opinion. 
- =>  An auditor’s opinion and rating can mean whether or not a company
stays in business.

- How often: a company will not have more than one external audit per year.
- Purpose: validate a company’s financial statements and to provide assurance
of the accuracy of financial reports. The results of an external audit assure
third parties that the financials of the company are correct and secure.
- Internal audit vs External audit:
3. IRS Audits:
- Define: An IRS audit is a formal investigation conducted by the Internal
Revenue Service in order to verify that the information entered on your
business’ tax return is accurate and correct.
- How often: Your tax return is subject to an audit at any time within six
years of initial filing, though in general the IRS only includes tax returns
filed within the last three years.
- Process: Mail audits ( documentation requests from the IRS that a taxpayer
will receive and respond to via mail)-> Office Audit ( in-person interviews
conducted by an audit officer at your local IRS office. During these
interviews, you will review bank statements, past tax returns, and other
relevant documents in order to legitimize the suspect items on your audited
tax return.)-> Field Audit ( in-depth, in-person interviews conducted by IRS
 agents at your home or business. During a field audit, an IRS agent will not
only review financial statements and past returns but also make assessments
based on observations about your place of business and the processes
occurring there.)
 Once the investigation is complete, the agent will conclude the audit with
one of three findings : Agreement, Disagreement and No change.

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