What are the Three Types of Auditing?

The progressing countries apply business rules differently for each industry, with their unique set of financial principles, distinct laws, and practices. These sets of laws are measured through auditing by the leaders, stakeholders, and government to keep the business always compliant. This financial checkup is not as simple as it may sound, but it is a well-defined methodology. There is a wide selection of audits, each with its distinct purpose, but each has a single goal to scrutinize and affirm that business accounts are not just well-structured but also prepared by the principles of laws laid by the government. To help you understand the various types of auditing better and how it may benefit your business, this article will explore the three core types of auditing, but let’s first elaborate on the main idea behind auditing services.

What is the Main Aim Behind Auditing?

Auditing is the foundation for analyzing, investigating, and double-checking financial paperwork or compliance-related information. The aim is to make sure that every business is fully in line with the legal instructions presented by the government. Apart from that, auditing services also elevate transparency, accuracy, governance controls, identification, and prevention of fraud. It also boosts the confidence of stakeholders and investors, which shows that these technical assessments not only help stay legally sound but also strengthen the credibility of an organization, specifically in the high-stakes markets like KSA.

1.   Internal Audits

Internal Audits are conducted inside an organization but either an internal auditor or an outsourced auditing company. These audits are not mandatory by the government authorities, but are important for a company’s internal safety by improving the internal processes. They are reported by the auditors to the board or audit committee directly after the examination.

• The Process

The complete process includes the review of internal controls, management of any risks present, operational inefficiencies, policies, and governance systems, which elevate proficiency, professionalism, and compliance. It’s not merely about the financial statements but about how a business works, how it reacts to the risks, and whether it is actually future-proof enough to stay guarded from any upcoming challenges.

• The Purpose

Internal audits are essential to strengthen a company thoroughly through the following objectives:

• Underlining any gaps in the internal assurance measures
• Making sure that operations are fully efficient
• Spotting any fraud and guarding from financial mistreatment
• Encouraging compliance with legal and internal instructions.
• Backing the risk management efforts and policies
• Analyzing complete business procedures and endorsing improvements

The process of internal auditing is more proactive than reactive; instead of fighting with the challenges, businesses plan, which prevents them from financial, operational, and reputational loss.

• The Scope

Internal audits are essential for every part of an organization, from HR to sales and marketing; they cover it all. They facilitate companies in accounting and finance operations, vendor management, HR, payroll, cybersecurity, quality control, operational productivity, and business governance practices. Internal audits expand across the organization and take care of how it functions as a whole.

• The Benefits

Internal auditing services come with several benefits, like

• Improved Risk Management
• Enhanced operational controls
• Prevention of fraud and wrong utilization of resources
• Make sure that the policies are enforced strictly
• Develop a culture of transparency

Businesses with solid internal controls are not just more secure, but strong enough to clear any barriers. Their examples include daily stock reconciliation, inventory management through automation, CCTV installation, cashier duties, etc.

2.   External Audits

External auditing services are one of the most used forms of auditing. It is done by a dedicated auditor who is registered with a licensed auditing company and doesn’t have any link to the organization.

• The Process

An External audit is a separate audit that is done by investigating a company’s financial data thoroughly to determine if they are in their actual value and compliant with the applicable accounting laws. They don’t offer any recommendations like internal auditing, but they present an opinion. Their role is to make sure that every business operation is reliable and validated.

• The Purpose

External audits are designed to make sure that:

• You don’t have material misstatements
• Your paperwork is precise and trustworthy
• You follow the applicable accounting standards like GAAP and IFRS
• Your operations and documentation are clear to present in front of shareholders and regulators

With the aid of external audits, businesses are in a better position to stay financially sound.

• The Benefits

External audits are mandatory to manage business governance and facilitate:

• Uplifting the confidence of investors and shareholders
• Proving the credibility of a company in the market
• Helps in gaining loans and investment opportunities
• Making sure that the business is compliant with legal requirements
• Underlining any fraud and errors in financial data
• Prioritizing a financially disciplined environment

External audits are necessary in the modern-day risk-sensitive environment to meet regulatory needs and to stay safe from any surprises. Common areas where external auditors assist are comparing the cost reports, recomputing the revenues, premature revenue recognition, and identifying the project completion status. This leads to corrective actions, smarter, and high-impact reporting.

3.   Compliance Audit

Compliance audits emphasize external regulations, internal policies, and industry-focused legal requirements and standards. This audit is important to know if a company is actually on the right track to fulfill its legal obligations.

• The Process

This audit is a type of independent evaluation to determine if an organization is fulfilling the laws and regulatory frameworks completely as per their applicable standards and contractual instructions. It differs from internal and external audits in a way that it specifically focuses on the legal rules and requirements

• The Purpose

The main idea behind compliance audit is to,

• Assure that your business is up to the legal mark
• Highlight any non-compliance issues before they lead to severe penalties
• Safeguarding an organization from legal obstacles and queries
• Analyzing the ways to implement the policies
• Finding what is mentioned in contacts and the industry-focused laws
• Focus on certifications and approvals from regulatory bodies
• Reinforcing governance and ethical practices

• The Scope

The areas that are covered by the compliance audits include tax compliance, labor laws compliance, health and safety measures, ESG regulations, Anti Money Laundering rules, Data and privacy protection laws, vendor compliance, and industry-focused certifications like ISO and HACCP. etc

• The Benefits

With the compliance auditing services business can gain the benefit of:

• Lower risks of fines and penalties
• Better governance and ethical controls
• Improving the relationship with regulatory bodies
• Minimizing operational costs and risks
• Improving the organizational discipline
• Protecting the reputation of the company
• Gaining the required certifications and licenses

Regulatory Bodies Involved in Auditing in KSA

Saudi Arabia has one of the most progressive and advanced economies in the Middle East. Through their Vision 2030 plans, they are not just working towards a modernized compliance system across the nation but also an environment that is attractive to international investors. For this, it is also essential to keep a track of whether businesses are implementing these regulations in their routine operations, or not for that sake. KSA has established some key authorities to look after the auditing matters. They include:

1. Zakat, Tax and Customs Authority (ZATCA): Governs the tax compliance and tax audits
2. Ministry of Commerce (MOC): make certain that businesses adhere to the Companies Law
3. Saudi Organization for Chartered and Professional Accountants (SOCPA): Oversee the auditors and set standards
4. Capital Market Authority (CMA): keep a check on the listed companies and financial market practices
5. Saudi Central Bank (SAMA): Regulates financial institutions with complete legal instructions

Why Saudi Businesses Must Emphasize Auditing?

Auditing in KSA is as important as any other business function; companies that don’t prioritize it result in huge losses. It is particularly important to stay compliant with:

• The changing Saudi Tax laws and rates
• Precision in Zakat and Corporate Tax
• Compliance with the VAT Tax
• Boosting the confidence of investors
• Compliance with the legal labor laws
• Meeting the SOCPA and IFRS requirements

Why SS&CO Auditing Company is Your One-Stop Auditing Solution

SSCOKSA is a single platform that covers all your auditing needs. Being one of the leading accounting firms in Riyadh, we are expanding our services across the KSA and GCC markets. Our qualified auditors know what it takes to deliver auditing solutions that are not just compliant but also up to the mark to keep your investors’ trust and your market credibility. That being said, we are also well-familiar with the Saudi legal Obligations, from simple VAT requirements to the Complex registration and certification process. We know the fact that auditing is not just about keeping your financial statements accurate, but it’s also about protecting you from any future stumbling blocks that can hinder your journey to success. We proactively forecast and resolve your compliance obstacles and keep you guarded and sound legally, financially, and reputationally.