Compliance Audit
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Compliance audit is the independent assessment of whether a given subject matter is in compliance with applicable authorities identified as criteria. Compliance audits are carried out by assessing whether activities, financial transactions and information comply in all material respects, with the authorities which govern the audited entity. It is the type of audit service that their performance or procedure is mainly focusing on whether the entity complying with local law, regulation, and related rule.
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Compliance auditing may be concerned with
- Regularity - Adherence of the subject matter to the formal criteria emanating from relevant laws, regulations and agreements applicable to the entity.
- Propriety - Observance of the general principles governing sound financial management and the ethical conduct of public officials.
While regularity is the main focus of compliance auditing, propriety is equally pertinent in the public-sector context, in which there are certain expectations concerning financial management and the conduct of officials.
Purpose of Compliance Audit
Compliance audit promotes transparency by providing reliable reports as to whether funds have been administered, management exercised and citizens’ rights to due process honoured as required by the applicable authorities. It promotes accountability by reporting deviations from and violations of authorities, so that corrective action may be taken and those accountable may be held responsible for their actions. It promotes good governance both by identifying weaknesses and deviations from laws and regulations and by assessing propriety where there are insufficient or inadequate laws and regulations. Fraud and corruption are, by their very nature, elements which counteract transparency, accountability and good stewardship. Compliance audit therefore also considers the risk of fraud in relation to compliance.
The objective of compliance auditing, therefore, is to enable assessment of whether the activities of auditable entities are in accordance with the authorities governing those entities in order to express a conclusion designed to enhance the degree of confidence of the intended users.
Compliance audits can be part of a combined audit that may also include other aspects. Though other possibilities exist, compliance auditing is generally conducted either:
- in relation with the audit of financial statements, or
- separately as individual compliance audits, or
- in combination with performance auditing.
In general, the compliance audit performs its audit against certain requirement as follows:
- Local law and regulation.
- Business-related regulation and framework.
- Entity’s policy, procedure, and processes.
The legislature, as an element of the public democratic process, establishes the priorities for public-sector income and expenditure and for the calculation and attribution of expenditure and income. The underlying premises of legislative bodies and the decisions they take are the source of the authorities governing cash flow in the public sector. Compliance with those authorities constitutes a broader perspective alongside the audit of financial statements in budgetary execution.
Laws and regulations are important both in compliance auditing and in the audit of financial statements. Which laws and regulations apply in each field will depend on the audit objectives. Compliance audit focuses on obtaining sufficient and appropriate evidence regarding the compliance of a given subject matter with applicable authorities identified as criteria. Whereas, in the audit of financial statements, only those laws and regulations with a direct and material effect on the financial statement are relevant, in compliance with auditing any law and regulation relevant to the subject matter may be relevant for audit.
A follow-up process facilitates the effective implementation of corrective action and provides useful feedback to the audited entity, the users of the audit report, and the auditor (for future audit planning). The need to follow up on previously reported instances of non-compliance will vary with the nature of the subject matter, the non-compliance identified, and the particular circumstances of the audit.
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