The Three Different Types of Auditing and Their Importance


Running a business is always challenging, especially since you have to juggle various responsibilities. One example is auditing, which involves reviewing and analyzing a company’s financial statements and records. Auditing helps business owners identify potential risks, find areas of improvement, and ensure that their financial statements are accurate and compliant with applicable laws and regulations.

Auditing is done with other business financial processes, such as accounting and bookkeeping, because it ensures everything is updated and accurate. Because of this, any business or company may face potential legal and financial risks without auditing. Additionally, auditing helps business owners understand their financial standing and make more informed decisions about their business.

It is also worth noting that auditing is not a single process, and different types of auditing are better suited for certain financial situations. These include:

Internal Audits

An internal audit is an audit conducted by an organization’s personnel. It is used to evaluate the accuracy and reliability of the organization’s financial statements and identify potential risks and areas for improvement. Internal audits are also used to assess the effectiveness of internal control systems and processes and to ensure compliance with applicable laws and regulations.

Internal audits are essential because they can help an organization identify and address any potential issues before they become significant problems. Additionally, they can help business owners and management make more informed decisions about their operations and finances. This is vital because internal auditors are independent of the organization and are not influenced by outside interests.

External Audits

Unlike internal audits, external audits are conducted by an independent third party, such as a Certified Public Accountant (CPA). These audits assure stakeholders that the organization follows generally accepted accounting principles (GAAP) and other applicable laws and regulations. External audits are also used to evaluate the effectiveness of internal controls and to detect any financial misstatements or irregularities.

External audits assure stakeholders that an organization’s financial statements are accurate and reliable. This is especially important for publicly traded companies, which must have an annual external audit. The audit process also helps to identify areas of risk, which can help the organization mitigate potential losses.

External audits are also an excellent way to build trust with stakeholders and potential investors. By assuring that the financial statements are accurate and reliable, external audits can help to increase confidence in the organization’s economic performance.

Internal Revenue Service Audits

The Internal Revenue Service (IRS) ensures taxpayers comply with federal tax laws. As part of this responsibility, the IRS conducts audits to verify that taxpayers accurately report their income and deductions and correctly calculate their taxes.

IRS audits are conducted on both individuals and businesses. Audits can be conducted randomly or due to specific information, such as discrepancies between a taxpayer’s reported income and the IRS’s records. The IRS also conducts audits in response to complaints or tips from the public.

The audit process begins when the IRS sends the taxpayer a letter explaining the audit and requesting documents and records. The taxpayer is expected to provide all the necessary documentation to the IRS. The taxpayer may be asked to appear in person or be interviewed by phone. During the audit, the IRS may ask questions about the taxpayer’s finances and review their records.

Once the audit is complete, the IRS will issue a report. This report will detail any discrepancies found, taxes owed, and penalties or additional taxes due. The taxpayer can appeal any audit findings or challenge any penalties or fines.

When Should You Audit?

The recommended frequency for auditing for most companies is at least once a year. The audit should be completed during the same fiscal year as the accounting cycle, typically the calendar year. However, depending on the size and complexity of the company, more frequent audits may be necessary. Any changes in the company structure or financial activities should also be reviewed and audited.


An audit is essential because it evaluates a company’s financial performance and ensures all records are updated and accurate. For this reason, auditing is a process that must never be overlooked. This way, any company can avoid potential losses and keep its financial records in the best possible condition.

If you are looking for accounting audit firms, Ash CPA can help! Our professional accountants will ensure your financial records are accurate and organized for a fair price. Call us today at (617) 462- 6651 for an appointment!