Compliance in Audit: Why Is It Important for Firms?

Posted on May 26, 2021 by Jonathan Kidd

Compliance is a word thrown around a lot in audit firms, but what does it mean? The consequences of non-compliance for audit firms are severe. Internal and external compliance is essential for audit firms to maintain a good reputation.

This post will cover the importance of compliance for auditors and ways to maintain it. You’ll also learn about the risks of not complying and how you can avoid them!

What is compliance in an audit?

To comply means to obey all regulations and policies. It includes checking external rules such as regulatory bodies and industry policy and internal procedures set by the organisation itself. For auditors, it’s a lot more challenging if they don’t care about compliance. 

The purpose of compliance audits is to assure on behalf of your stakeholders, who expect you to comply with applicable laws and regulations when conducting an audit.

Compliance audits also help assure stakeholder’s confidence by ensuring you’re doing what they ask (i.e., complying).

They will see if the auditor has taken steps needed for compliance, such as consulting stakeholders on how best to maintain adherence to minimise risk.

In most cases, companies adopt a “comply or explain” approach when conducting an internal review of their procedures.

This means that auditors should either have documentation showing they complied with a particular regulation/requirement; or document why they couldn’t comply at this time–the reason would need to be justified based upon facts and circumstances.

Why is compliance in audit so important?

Auditing is a complex area with many regulations that require specific steps to be taken during an audit process by one or more independent external experts (audit committee). 

Maintaining compliance can sometimes seem like it’s all an unnecessary hassle when there are so many other things going on at your firm. 

It certainly takes time, resources and commitment from everyone involved – but staying compliant has been shown over time to result not only in better audits and reporting but reduced risk exposure.

Compliance is critical for auditing firms because the consequences of non-compliance can be quite severe.

For starters, non-compliance with regulation can lead to audits not being accepted by the audit authorities. This means that it will be difficult for firms to do business because they’ll have no way of proving their compliance when asked for certification or other related documents.

Compliance auditors earn higher trust from their clients. That’s why maintaining high levels of compliance are so important – without them, there would be a loss of confidence in this profession which could cause billions of dollars’ worth of damages per year.

Because audit firms face risks—such as fines and loss of business, poor audit work that could affect a business’s bottom line in one way or another—compliance with internal procedures and regulations is essential.

How to build an effective compliance program for audit firms

Internal controls are a set of management policies, procedures and practices that help an organisation achieve compliance with laws and regulations.

Compliance can be achieved through several initiatives, including:

– Creating policies and bulletproof audit processes

Relevant reading: Successful SOPs and What They can Mean for Your Teams and Business

– Training auditors on compliance responsibilities and changes within the company’s operations or environment

– Establishing accountability systems to help ensure performance standards are met

-Developing detailed records about transactions between different parts of the business

One must also demonstrate that internal controls are effectively implemented in day to day activities by comparing actual transaction costs with budgeted amounts should there be any variance from what was expected.

The auditor is responsible for helping companies identify risks as opportunities, which could lead to improvements in their efforts toward achieving compliance objectives.

Components of Internal Control for Compliance

Control environment – Auditors must maintain a comprehensive set of procedures, processes, and structures to prevent errors. To avoid mistakes, it is essential to include all details in the audit.

Risk assessment – Identifying potential risks and setting up guidelines for risk management is a lot of work, but it’s crucial to think about those significant picture objectives.

Documentation – Proper documentation is crucial to maintain compliance. Without proper documentation, the auditors may find it challenging to track events and decisions made throughout the audit process.

Data Validation – Data validation is a method of ensuring that data collected during an audit reflects what was intended by adjusting or deleting errors from the database/system.

Information and communication – Important information supporting internal control must be continuously obtained and shared with insiders and outsiders. Regular and honest communication is key to boosting transparency.

Monitoring – Senior management in the company should routinely review whether the individual components of internal controls are present and functioning.

To strengthen monitoring, senior management requires a bird’s eye view of operations. One way to achieve this is to utilise the Kanban method, a part of Lean Methodology.

Here is an useful workbook to help you start your Kanban journey:

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Maintaining compliance requires a solid risk management process that uses checks and balances across all departments or areas of responsibility.

Internal compliance policies are intended to prevent errors from happening again by reminding people about responsibilities, punishment if they fail their duties, and setting boundaries on what employees should not do without legal consequences. 

Audit Compliance Software

Do you want your firm to have an easier time managing policies and procedures and assessing compliance requirement?

Audit firms need more than compliance training; they also require audit compliance tools that provide data about current performance levels before determining where there needs are.

For compliance levels to be maintained, there are three things accountants should do:

1.Implement procedures in practice management software – this will help them maintain their high level of compliance

Audit Practice Management Software by Boombirds

2.Don’t forget to do compliance training, at least once a year

3.Conduct internal audits periodically to review compliance policies and procedures – this helps identify any risks before they happen. Usually, you need to audit your public business at least every 6-8 months

4.Don’t forget about back-office – regulatory inspections can uncover discriminatory practices in the back office such as nepotism or discrimination against women that would have never been revealed through an internal audit

5.Maintain transparency so that everyone knows what’s always going on. By being transparent, it’ll make people more likely to buy into your mission and vision statement or otherwise trust you as a professional entity, making the process much easier

External Regulatory Compliance Requirements in Audit

Compliance in audit firms is a priority for the organisation, as well as an obligation. There are regulations in place which must be adhered to, and it can lead to penalties if these obligations are not met satisfactorily. These requirements include:

– The Sarbanes Oxley Act of 2002 (SOX)

– European Union Accounting Directives 2004/385/EC as amended by Directive 2006/43/EC (known as EU AD) 

– International Financial Reporting Standards 2010 – IFRS

Some countries may have existing national regulations. For example, in Singapore, registered public accountants are obligated to meet the Code of Professional Conduct and Ethics rules, maintain the technical aspects of their work with professional education and have audit work inspected under ACRA’s Practice Monitoring Program.

Compliance is one of the essential elements for an audit firm. Audit firms must comply with external and internal standards to maintain a good reputation and avoid heavy fines or penalties that could threaten their existence.

If you’re looking to stay on top of your game with audits, then we have what you need! Boombirds offers custom solutions tailored specifically to your needs. Improve accountability, transparency, and compliance levels with Boombirds today!