A Guide to Compliance Audits and Its Types

Purpose and Objective

The purpose and objective of a compliance audit is to strengthen the organisation’s overall well-being by maintaining regulatory integrity and operational discipline. A compliance audit, although often considered tedious, enables organisations to excel in the quality and reliability of their processes and operations while remaining compliant.

It ensures that organisations follow ethical, legal, regulatory and industry-specific rules and standards.

A compliance audit also helps identify and correct practices or workflows that may lead to financial, legal, or reputational risks for the organisation. It serves as a preventive measure to maintain accountability and strengthen governance.

A compliance audit can be seen as a full body health check-up for your business. It is a systematic, holistic review that evaluates whether your business is adhering to local & external laws, internal policies, and regulations. This health check-up covers various areas of potential ailments like data protection, financial reporting, operational procedures, and company ethics.

Let us take an example. If a business handles customer data, it must demonstrate adherence to data protection frameworks like GDPR or India’s Digital Personal Data Protection Act, 2023. Nowadays, regulatory complexities have increased significantly, and compliance audits have become a cornerstone for businesses to prevent costly violations and maintain their operational integrity and stakeholder trust.

Now that you know what a compliance audit is, let us break down its types and how each type of audit is essential for your business in its own way.

1. Financial Audits

Financial audits, as the name suggests, focus on assessing your business’s financial records. This audit assesses the accuracy of financial information on your books and compliance with the accounting standards. The main purpose of this audit is to validate various statements like income reports, balance sheets, and internal accounting against the relevant regulatory guidelines like GAAP or IFRS. Conducting financial audits can foster building stakeholder trust by identifying any financial discrepancies and dealing with them on priority. This is especially relevant today to maintain your brand’s credibility and reputation amidst increasing vigilance on financial practices.

2. Regulatory Audits

Regulatory audits focus their attention on specific laws and regulations in your industry, as well as your third-party relationships. For example, hospitals and health organisations in India must comply with regulations under the Information Technology Act, 2000, to safeguard patient data privacy. These audits will help your business avoid penalties and protect the integrity of your reputation by keeping adaptive and accountable to these ever-evolving governing bodies.

3. Internal Audits

Internal compliance audits serve the purpose of evaluating your overall operational efficiency, risk mitigation, and compliance management. These are conducted by in-house teams to identify potential vulnerabilities like inadequate control measures before external audits occur. While internal audits can and should be conducted regularly, they are most certainly done before any external audits. Businesses mostly time it this way to identify any discrepancies beforehand and foster continuous improvement and resilience against external scrutiny.

4. External Audits

External audits are performed by independent organisations. These audits ensure an unbiased overall assessment of the compliance and operational standards of a business. The value of these compliance audits cannot be rivalled since third-party verification for accuracy in financials or compliance with regulations is huge. The reports from these audits are required by investors, lenders, regulators, and other stakeholders to verify their trust in your business. With ESG reporting becoming increasingly prominent, under frameworks like India’s Business Responsibility and Sustainability Reporting (BRSR), external audits have become even more important in demonstrating transparency over corporate responsibility.

A compliance audit process takes place in four main steps. This systematic approach ensures that the process covers every relevant corner to assess and develop the most revealing insights that can help a company grow. Here is how it goes:

1. Planning & Scoping the Audit

Begin by defining objectives, highlighting the major risks in your field of business, and identifying the scope of what will be audited for the business. Auditors also must work with stakeholders to maintain transparency for requirements under various regulations and which aspects to focus on accordingly. For example, during financial audits, they would focus on areas where discrepancies are often found, like in payments. For example, the reconciliation of receipts and payments is a common starting point in a financial audit to identify any discrepancies. Planning and scoping the audit will help you ensure that your resource optimisation aligns with the organisational goals.

2. Data Collection & Evidence Gathering

During this stage of the audit process, the auditors will gather relevant data through document reviews, system analytics, and interviews. Then, they will comprehensively assess various pieces of evidence, such as financial reports, operational logs, compliance certifications, and more. If your business utilises audit management software or compliance solutions for Chief Compliance Officers (solutions for CCO), it can streamline the process of keeping track of all of this. This will help your business maintain efficiency and accuracy in compliance and financial reporting.

3. Testing & Evaluation

After the auditors are done collecting data and evidence, it goes through a rigorous testing phase. This is done to validate all the collected data’s adherence to policies and regulations like GDPR or equivalent. It can involve various activities like testing the data encryption practices of your business to ensure there are no holes in your data protection strategy. This phase can provide you with actionable insights into the areas of your operations that need improvement.

4. Reporting & Corrective Action

This is the conclusion part of the audit process. It sums up all the findings in a comprehensive report, which outlines your business’s strengths and areas that need improvement. Actionable insights and recommendations in this report should then be addressed by your business for corrective actions to resolve the issues. Reporting and corrective action emphasise your business’s ability to take accountability and correct course, building trust with your stakeholders and enabling the long-term sustainability of your business.

Your business should always foster a culture of taking accountability to ensure long-term sustainability and success. Compliance auditing enables this and more by identifying gaps in your governance, optimising risk management, and improving your operational frameworks. With regular compliance auditing, your business can anticipate and be better prepared for regulatory changes to avoid any disruptions. Lastly, investor and stakeholder trust is strengthened further with the transparency and validity of your business that external audits provide.

While they are important, conducting compliance audits is no easy task and poses a set of challenges due to the evolving regulatory landscapes.

Organisations often struggle with resource allocation and managing voluminous data during audits. Additionally, staying updated on evolving compliance standards requires continuous effort, which can overwhelm smaller teams. Common challenges include:

• Insufficient Resources: Limited staff or budget can hinder thorough auditing.
• Data Management Issues: Inconsistent or incomplete records complicate evidence gathering.
• Evolving Regulations: Frequent changes in laws require constant monitoring and adaptation.
• Stakeholder Resistance: Resistance from departments can delay the process or affect accuracy.

To overcome these hurdles, your business must implement strategic planning, trusted tools, and cross-functional collaboration.