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What Is a Compliance Audit?

Financial audits are mandated by state & federal regulatory agencies.
Compliance audits focus on the actual operation of the company, including business practices and processes.
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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 14 December 2014
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A compliance audit is an operational-style audit that determines if a company is following the rules of an agreement or contract. Companies make agreements or enter contracts for a variety of business purposes. These agreements and contracts are carefully reviewed and audited to ensure no fraud or misstatements exist as the company meets the contractual obligations. Public accounting firms or individual certified public accountants (CPA) may be responsible for conducting the external compliance audit on company contracts and agreements.

Public accountants are usually given the contract or agreement pertaining to the compliance audit during a meeting between both parties listed in the agreement. During this audit meeting, accountants will be given specific guidelines on what they should test during the compliance audit. Once the audit is complete, the accountants will meet with both parties and discuss their compliance audit findings. Internal compliance audits may also be required by the contract or agreement between the companies.

Companies use internal compliance audits to ensure employees are following the standard operating procedures of a company when fulfilling contractual obligations. Standard operating procedures are implemented to ensure all goods and services produced by the company meet the same standard. Internal audits are usually completed by accounting employees for the purpose of preparing internal documents for management review. Managers use these reports to determine if any changes need to be made in the business operations or if new guidelines need to be implemented.

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Companies may also be subject to compliance audits to maintain professional workplace certifications or quality management systems, such as ISO 9000, six sigma or total quality management (TQM). ISO 9000 is a safety certification company’s implement to help limit financial liabilities regarding employee injuries in the workplace. Six sigma and TQM are quality production tools used by companies to ensure the fewest amount of errors occur during the production process or wasted economic resources are held to a minimum. The compliance audit process helps companies measure and maintain these non-financial aspects of business operations.

In addition to workplace certifications or quality management tools, companies may be subject to a compliance audit for insurance purposes. Insurance companies use compliance audits to determine if clients do not meet the agreed upon statements of written insurance contracts. Failing to adhere to insurance policy guidelines may result in the company being dropped from its insurance agency. Losing its general liability or business insurance may cause the company to significantly decrease business operations in fear of not being able to cover workplace or other legal issues.

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faithstewart
Post 2

A compliance audit is only as good as the compliance audit checklist used. The auditor has to be knowledgeable about the compliance requirements before a useful checklist can be development. This can only reliably be received from the contract itself.

aarons
Post 1

Compliance audits are also used to monitor compliance with grant regulations.

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