If you’re embarking on a compliance audit for the first time, a step-by-step guide can be an invaluable resource. A well-structured guide can help you plan your audit, keep you on track throughout the process, and ensure that you cover all the necessary steps. This type of guide can take you through the process of defining your audit objectives, selecting the appropriate regulatory requirements or industry standards to audit, identifying the key stakeholders and relevant documentation, and conducting the audit itself. By following a compliance audit step-by-step guide, you can have confidence in your approach and be better positioned to uncover any areas for improvement that may exist within your organization. Ultimately, a successful compliance audit can provide peace of mind that your organization is meeting its obligations and operating at the highest standards.
In this article, we’ll discuss how to conduct an effective audit that meets all necessary protocols and covers potential risks — focusing on making sure your organization has what it takes to reach its goals and its compliance objectives. Read on for more insight into best practices when executing a compliance auditing program!
Compliance Audit Step-By-Step Guide
Learning how to conduct an internal audit can be valuable, regardless of whether you prefer to do it daily, weekly, or annually. To help you navigate this process, we recommend using a compliance audit step-by-step guide, which can provide you with a clear roadmap for conducting a successful internal audit. Whether you prefer to do it daily, weekly, or annually, conducting internal audits can help you identify potential issues, improve operations, and maintain compliance with regulations. The process involves several steps, including planning, preparation, data collection, analysis, and reporting.
Identify the Areas That Require Auditing
Begin by identifying the various departments and their procedures and policies. List each area and determine which parts need reviewing, such as accounting or manufacturing processes. Define the scope of the audit, whether it’s limited to one department or covers the entire company for systemic issues.
Plan the Frequency of Audits
After determining the scope of the audit, it’s essential to decide on the frequency of audits for each area, as some may require annual reviews while others require more frequent attention.
Create an Audit Calendar
Improving a structured audit schedule involves considering the frequency of department audits. Effective planning and execution of internal audits throughout the company calendar can promote dependable and efficient department operations.
Inform All Departments About the Internal Audit
It’s important to notify all departments about the upcoming internal audit so that they can gather and organize the necessary documents and materials for review. Moreover, informing the department managers beforehand will minimize negative responses and ensure effective management of their respective areas.
Get Ready for the Internal Audit
Auditors should familiarize themselves with all policies and procedures before conducting an audit. Additionally, it is beneficial for them to have a comprehensive list of items to review. Planning can lead to a more streamlined and effective auditing process.
Conduct Employee Interviews
During an internal audit, auditors ask employees to explain their work process. It’s compared to the written policy to identify gaps and possible areas for improvement. This process facilitates positive change and identifies areas that require additional attention or training.
Perform a Data Analysis
When analyzing data, it’s essential to consider different methods, such as spreadsheets and software programs. It is advisable to document the reasoning behind your chosen method.
Provide a Report of the Findings
After analyzing the data and documenting the reasoning behind the decisions, the next step is to report the findings. It involves creating a report outlining the audit results, recommendations for improvement, and a risk assessment plan of action to implement the necessary changes.
Implement the Changes
After completing your report, the next step is implementing the necessary actions. Communicating findings to the appropriate parties is vital to implement recommended changes successfully. Not taking these actions could result in a loss of credibility with both clients and employees.
Developing a Risk Assessment Plan for an Effective Compliance Audit
A critical aspect of conducting a compliance audit is performing a risk assessment plan. Identifying and assessing potential risks that could affect the organization’s ability to meet its compliance objectives is essential. The risk assessment plan should identify and evaluate the risks specific to each area that requires auditing, including regulatory compliance, financial reporting, operational processes, and internal controls. The risk assessment plan should also prioritize risks according to their likelihood of occurring and their potential impact on the organization. By conducting a risk assessment plan as part of the compliance audit process, the organization can better prepare and implement controls to mitigate potential risks and enhance its compliance program’s effectiveness.
Why are Internal Audits Important?
Internal auditing plays a significant role in maintaining consistency within a business and is one part of the compliance audit process. Internal audits have the following advantages:
- Identify potential problems or compliance risks before they escalate
- Ensure a safe working environment by following safety protocols
- Perform performance evaluations on employees
- Analyze new processes and systems
- Check for any violations of regulatory requirements
- Analyze security measures for weaknesses
- Investigate possible frauds
- Make sure there are no legal infringements
- Analyze the performance of your company
Internal vs. External Audits: What’s the Difference?
Internal and external auditors aid organizations in verifying the consistency of the company’s financial reporting and operational processes with accounting principles, ensuring proper functionality of regulatory compliance and internal controls with relevant laws and regulations. However, the two audits have distinct procedures.
Internal auditors are company employees, while external auditors are independent of the organization they assess. Internal audits are optional, whereas external audits are necessary for certification and for certain financial requirements.
For example, publicly traded companies must undergo annual audits. Further, lenders and other stakeholders may require audited financial accounts to continue providing financial assistance. If you are certified to ISO, IATF, VDA or another standard, external audits are required to maintain your certification. Sometimes customers or government funders will conduct an audit of their suppliers.
Types of Internal Audits
Organizations can choose from different types of internal audits depending on their specific goals and objectives. Below is a brief explanation of them.
Operational Audit
This audit aims to evaluate the performance of a particular function or department based on established policies, processes and procedures the organization has adopted. It can cover various areas such as controls, efficiency, organizational structure, processes and procedures, data accuracy, asset management, security, staffing, and productivity.
Compliance Audit
A compliance audit evaluates whether an organization adheres to laws, regulations, codes and statues it is subject to. It is typically auditing against legal requirements and not voluntary obligations. It’s commonly performed due to a policy or statutory requirement to guarantee adequate control of an essential internal process.
Financial Audit
A financial audit is a process that independently evaluates financial data for fairness, accuracy, and reliability during a fixed time frame, typically a fiscal quarter or fiscal year. Its primary purpose is to ensure that financial statements accurately reflect a department’s, unit’s, or organization’s financial activity.
Follow-up Audit
Follow-up audits occur after (sometimes six months) an internal or external audit report is finalized. It aims to check if the appropriate department took corrective measures to address previous audit issues. In the aerospace industry, companies may call these effectiveness assessments. The auditor examines previous recommendations, actions taken by management, and their effectiveness. Follow-up audits also determine if any changes have occurred that need different actions.
Investigative Audit
This audit occurs when a report of unusual or suspicious activity targets specific aspects of a department or individual’s work. Investigative audits aim to assess the extent of a loss, identify control weaknesses, and provide recommendations for corrective measures.
Information Technology (IT) Audit
IT audits assess the controls of an organization’s information processing systems. They provide management with recommendations on the adequacy of internal controls and security and the effectiveness of risk management. These audits ensure IT systems protect assets, maintain data integrity, and operate efficiently to meet business objectives.
Management Audit
Also known as Performance Audits offer unbiased analysis of business processes to assess efficiency. Internal auditors can conduct these audits without fear of retribution from management, allowing for an objective review of organizational structure and administrative operations to identify opportunities for improvement.
Integrated Audit
The audit combines one or multiple audits into a single audit. This can be beneficial for cross-referencing regulations or standards and making the audit process more efficient.
The 5 Cs of an Internal Audit
Internal audits should cover five core aspects.
- Criteria – What were the reasons for mandating an audit? Who initiated the audit request?
- Condition – What was the situation within the organization that necessitated it?
- Cause – Why were these conditions triggered to require an audit?
- Consequence – Would these conditions lead to adverse outcomes if not audited?
- Corrective Action – What steps can the organization take, with the assistance of the audit findings, to take control and improve the situation?
Key Attributes of a High-Performing Internal Audit Program
In today’s highly competitive business landscape, having a robust internal audit program has become a must-have for organizations. It requires a combination of several attributes, including strong communication skills, a proactive approach to risk management, and a commitment to quality.
Moreover, to achieve greater efficiency and effectiveness, organizations should adopt a framework for implementing changes that, when followed and repeated, will result in repeated improvements. And one framework that could help is the Deming Cycle, also known as Plan-Do-Check-Act (PDCA).
The framework has four stages – Plan, Do, Check, and Act. Developed by Walter Shewhart and popularized by Edward Deming – two of the fathers of modern quality control. It emphasizes a continuous improvement approach focusing on planning, implementing, monitoring, and adjusting operations.
How does the PDCA Apply to Internal Audits?
Here’s an example of an internal audit program for an Oil & Gas company that mirrored the traditional financial internal audit program but looked at operational risks instead of financial risks.
A traditional Health, Safety, Environment, and Quality (HSEQ) group also existed, and it managed over 400 HSEQ professionals embedded throughout global operations. In 2012, the company implemented an integrated Operations Excellence Management System (OEMS) built off a clear and well-communicated set of long-term corporate strategies, policies, and values.
Using the PDCA model, the company categorized the 18 elements of its OEMS to manage its safety management programs.
| Plan | Do |
| Leadership and Accountability Risk Management Legal Requirements Objectives Targets Management of Change | Structure, Responsibility & Ressources Learning & Competence Asset Life Cycle Operations & Maintenance Controls Contractor Management Data Document & Information ement Communication & Stakeholder Management Quality Assurance/Incident Management |
| Check | Act |
| Audit & Assessments & Corrective Actions | Management Review |
Make Compliance Management Easy With Nimonik
Addressing any gaps found during an internal audit and performing a follow-up audit can improve the chances of a successful external audit. However, if your organizations use spreadsheets or other manual processes for internal audits, it may result in a time-consuming and frustrating experience.
Fortunately, Nimonik can help. Our audit and compliance solution allows you to streamline the entire process with an automated system. Here are some of the benefits:
- Upload your internal documents and identify applicable compliance requirements
- Create a risk assessment plan based on risk obligations ranking
- Schedule audits to regularly review internal policies
- Create reports in PDF or CSV formats to document any findings and share them with the necessary teams
- Conduct audits based on your compliance obligations
- Receive notifications whenever new legislation is published
FAQs (about conducting a compliance audit)
What is a compliance audit, and why is it important?
A compliance audit is important because it helps organizations identify potential compliance issues, mitigate risks, improve internal controls, and maintain stakeholder trust. It can also help avoid legal and financial consequences of non-compliance.
What are the steps involved in conducting a compliance audit?
Conducting a compliance audit involves various steps such as planning, risk assessment, creating an audit program, reviewing documentation, conducting interviews and testing controls, analyzing findings, reporting results, and recommending corrective actions.
How do you identify the scope of a compliance audit?
To identify the scope of a compliance audit one must review applicable laws, regulations, and internal policies, considering the organization’s operations and risk profile, and determining which areas require the most attention.
What is a risk assessment and how does it factor into a compliance audit?
An organization conducts a risk assessment to identify and evaluate potential risks. As part of a compliance audit, it helps determine which areas of the organization are most vulnerable to non-compliance, thus requiring the most attention. A thorough risk assessment can help ensure the audit focuses on areas of the highest risk and importance.
Why is documentation necessary during a compliance audit?
Documentation is necessary because it proves an organization’s adherence to laws, regulations, and policies, enabling auditors to evaluate its operations, identify potential concerns, and gauge the effectiveness of its controls. Moreover, accurate documentation aids organizations in demonstrating compliance and reducing the likelihood of non-compliance.
What types of testing should be conducted during a compliance audit?
Compliance audits employ various testing methods, such as substantive testing for the accuracy of financial statements and related data, compliance testing for applicable laws and regulations, and control testing to examine the effectiveness of internal controls. The testing method will depend on the extent of the audit and the risks identified.
How should compliance audit findings be reported?
Report audit findings accurately with details of issues, impact on the organization, and recommendations for corrective action. Use evidence and be factual and objective. And keep the report concise and understandable with practical suggestions. Once done, share findings with relevant parties and establish follow-up for corrective action.
What is the follow-up process after a compliance audit?
The follow-up after a compliance audit is to review the recommended corrective actions, provide evidence of the actions taken and evaluate their effectiveness. Inform management of the follow-up results and quickly address any remaining issues.
How often should a compliance audit be conducted?
The frequency of compliance audits varies based on factors such as organization size, industry, and regulations. However, it’s ideal to do it yearly or as regulations require. Additionally, it’s essential to periodically review the frequency to ensure ongoing compliance and address any new risks or regulatory changes.
What are some common compliance audit pitfalls to avoid?
Some obstacles organizations may face include unclear goals, inadequate preparation, incomplete documentation, failure to consider significant risks, excessive reliance on automated tools, and a lack of involvement from relevant stakeholders.
