Compliance Audit

Compliance audits are intended to determine whether an entity has complied with specified policies, procedures, laws, regulations, or contracts that affect operations or reports.  Examples of compliance audits include auditing a tax return by an Internal Revenue Service agent, an auditing components of financial statements to determine compliance with a bond indenture, auditing a researcher’s expenditure under a government grant to determine compliance with the terms of the grant, and auditing an entity’s hiring policies to determine whether it has complied with the Equal Employment Opportunity Act.  As with all the audits, a compliance audit requires established criteria (such as those contained in a law or regulation) to measure the relevant assertions against. Compliance audits are performed by independent auditors and by internal and government auditors (often as part of the performance audit). Compliance audits are generally performed by the compliance auditors.

If a policy, contract, law or regulation has a direct and material effect on the entity’s financial statements, determining the extent of compliance with it usually will be an integral part of a financial statement audit. For example, an auditor reviews an entity’s conformity with the restrictive covenants in a long term debt agreement in order to ascertain that a violation of the covenant has not made the entire bond issue date and payable at the lender’s option, which might require that the debt be reclassified as a current liability. Independent auditors do not however, plan their audits of financial statements to provide assurance about an entity’s compliance with policies, contracts, law and regulations that do not have a direct and material effect on the financial statements.

Questionnaire:

• What are compliance audits?
• Explain more about the compliance audits with an example?