A compliance audit is an assessment carried out, mostly by third party auditors, to examine the extent to which a company’s internal policies, procedures and documentations are in compliance with the external laws, rules and regulations that are set forth by the state in which the company is operating.
It’s important to note that compliance audit can also be conducted by in-house internal audit department of the company with an intention to improve compliance. However, external auditors perform compliance check to get assurance on viability of the business processes.
Businesses conduct different types of audits; financial audit, operational audit, internal audit, with the purpose of comparing desired performance with actual performance and making improvements accordingly. Unlike other audits, which are intended for increasing a company’s profits, a compliance audit is performed for the betterment of the end users, employees, society and environment. For instance, a compliance audit will evaluate the following aspects:
- Ensuring data privacy and security of customers and employees.
- Ensuring ethical standards and fairness in HR, IT, Marketing and sales policies and practices.
- Ensuring safety and health measures in workplace.
- Ensuring environmental protection through safe disposal of chemicals, use of sustainable energy products, waste management practices etc.
- Ensuring quality standards in products and services.
- Ensuring against financial crimes like bribery, corruption etc.
- Ensuring risk management against natural disasters like earthquakes, pandemic and economic conditions like recession.
- Proper Taxation
- Managing user access controls.
If any instance of non-compliance is revealed in the compliance audit then the company is bound to face legal consequences like fines, penalties and sanctions etc. Hence, it becomes important for companies to prepare for a compliance audit in advance by getting the company’s policies and procedures reviewed from professionals like lawyers and professional accountants.
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Difference between internal audit and compliance
Given the similarity in the nature of compliance audit and internal audit, both terms are usually confused but there is a significant difference in the purpose served by each of them. An internal audit is conducted to check the extent to which a company’s processes are following the standards set by its internal regulatory body. While a compliance test is usually done to check the conformity of a company’s processes to outside standards set by the government’s regulatory bodies.
Example of compliance audit
A footwear manufacturing factory produces tons of wastes in the form of leather tanneries, leather dust, leather savings and rubber along with harmful gases like carbon monoxide and nitrogen oxide gases. The Environmental Protection Agency (EPA) compliance audit would make sure that the factory is not set up in residential area and that these wastes are disposed of safely instead of being dumped into clean water supplies. Similarly, a Social audit would guarantee that employees of a corporation or workers of a factory are provided decent working rights.
Difference between audit and compliance
Audit function is independent assessment of the business operations and processes. It’s about current status and conclusion if thing are in line with the expectation or there are some gaps. For instance, auditor issues report on the true and fairness of financial statement.
On the other hand, compliance is seen as continuous activity to ensure business is protected from loss and SOPs are strictly followed. Generally, compliance is about comparing operations with the written policy.
Compliance audit is about comparing business processes with the business policy. It helps to assess if business processes are well optimized and directed in the right direction. Generally, compliance regulations are imposed by external regulators. Hence, non-compliance can lead to penalties and losses for the business.
This audit can be conducted by regulator to assess if the business is following regulations. It can also be done by internal audit department to improve on the business process, and it’s also done by external auditor to get assurance on compliance as they need to issue an audit report.