Fraud audits are essential for protecting your company from financial misbehavior. They guarantee the accuracy of your financial procedures. But what are the two main types of fraud audits?
Audits are specialist inquiries used to reveal dishonest behavior occurring within a company. Fraud audits are broadly classified into two categories: internal and external.
Every type has a different function. Each uses a different set of techniques to identify and stop fraud.
So, if you’re looking to safeguard your assets and uphold stakeholder trust, keep reading to learn what are the two main types of fraud audits.
External Fraud Audits
Independent auditors or auditing companies unaffiliated with the company under audit carry out external fraud audits. These auditors contribute an impartial viewpoint to the inquiry to ensure impartiality and credibility.
Objective
The main objective of an external fraud audit is to detect instances of fraudulent activity carried out by non-organizational entities, such as:
- Vendors
- Customers
- Other third parties
Read about the IRS & state audit representation.
Techniques Used in External Audit
External auditors use a range of methods to find evidence of fraud. These consist of:
- Data analysis
- Forensic accounting
- Personnel interviews
What Do External Auditors Examine?
External auditors examine:
- Contracts
- Transactions
- Financial statements
It is done to look for trends and inconsistencies that might point to fraud.
So, What’s the Outcome?
The results of an external fraud audit are usually provided in a comprehensive report that can be used by:
- Management
- Stakeholders
- Regulatory agencies
It helps make necessary corrections and implement robust internal controls.
Internal Fraud Audits
Your organization’s internal audit department or specialized fraud investigation team handles internal fraud audits.
The main goal is to find and stop fraudulent activity committed by staff members or other insiders. For example,
- Financial statement fraud
- Payroll fraud
- Embezzlement
- Expenditure reimbursement plans
Techniques Used in Internal Audit
Internal auditors possess a unique ability to identify insider fraud because of their extensive understanding of the systems, controls, and activities of the company.
To find fraudulent activity, they use a variety of strategies, including:
- Process reviews
- Transaction testing
- Surprise audits
Furthermore, internal auditors collaborate closely with management to improve internal controls and foster an ethical culture.
The Bottom Line
Learning what are the two main types of fraud audits is essential for identifying and stopping fraudulent activity. External fraud audits aim to detect fraud committed by external parties, using the impartiality of independent auditors to guarantee reliable results. Because insiders have extensive knowledge of the company’s systems and procedures, internal fraud audits are carried out by the audit team within the business. They are designed to identify and stop insider fraud. So, enhance your shield against financial wrongdoing and preserve stakeholder confidence by comprehending and executing both fraud audits.
Contact L&Y Tax Advisors, LLC. to ensure a peaceful audit session for your company.
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