Audits and compliance reviews may seem similar at first glance, as both processes are designed to identify gaps and safeguard an organization’s operations. But that’s where the similarity ends.
Audits and compliance reviews are completely different, as they have different goals and can vary in depth and scope. In this article, we take a detailed look at audit vs compliance review to help you understand the differences, know when you should use each, and how you can make the most of these processes to improve your organization’s operations and profits.
Let’s start with a basic understanding of what an audit is.
What is an Audit?
An audit is an independent function that analyzes the existing documents, processes, financials, policies, etc, to determine if they align with the organization’s goals. Often conducted by independent professionals, audits provide a fresh perspective on the effectiveness of a tool or process.
Audits can be both internal and external. Internal audits are handled by in-house teams that check for risk management and governance. On the other hand, external audits are those done by third-party auditors to boost the organization’s credibility in the eyes of its stakeholders.
Regardless of the type, audits must be an independent function to get the best results. Every audit must thoroughly examine all the necessary aspects within its scope to identify the existing gaps. Based on the findings, it must provide appropriate recommendations that will take the organization closer to its goals.
Some common types of audits are:
- Financial audit – Checks the accuracy of financial statements and existing accounting practices.
- Operational audit – Reviews the business processes to check for efficiency.
- IT audit – Evaluates whether the IT systems and controls align with the organization’s cybersecurity goals.
- Quality audit – Checks if the products meet the defined quality standards.
- Vendor audit – Evaluates if the third-party vendor adheres to the agreements or contracts.
Each of the above audits follows a defined process. It starts with planning, where the scope is identified, followed by a collection and analysis of the necessary evidence. During this process, it’s common for auditors to interview employees and test or simulate controls where needed. Based on these outcomes, a final report with a list of recommendations is prepared, and in some cases, the action items are followed up to see if they are implemented.
Now that you know what an audit is, let’s move on to compliance reviews.
What is a Compliance Review?
A compliance review, also known as compliance testing, is the process of evaluating whether an organization meets the requirements of specific standards and laws. Depending on the geography, industry, and the nature of operations, every organization has to comply with a set of legislation or mandatory regulations. Additionally, organizations may choose to voluntarily comply with some standards to increase their credibility in the eyes of their stakeholders. A compliance review checks if an organization’s operations, including its processes, tools, and assets, meet the needs of these mandatory and voluntary regulations.
Compliance reviews are largely informal and do not have a defined structure. They are also conducted mostly internally to check for compliance gaps, so they can be addressed right away. Also, compliance reviews start with the creation of checklists and evaluating whether each aspect meets the checklists. They are done periodically by compliance teams within the organization. In some organizations, compliance reviews are a part of their everyday operations.
With this understanding, let us compare audit vs compliance review.
Audit vs Compliance Review – Key Differences
Below is a look at how audits and compliance reviews differ.
| Feature | Audit | Compliance Review |
|---|---|---|
| Purpose | Independent assessment to verify if tools and processes meet the organizational goals. | Checks for adherence to specific compliance provisions. |
| Scope | Could cover entire organizations. | Focused on specific areas or activities that come under the purview of a specific standard or legislation. |
| Frequency | Scheduled, and can be annual or bi-annual. | Ad hoc, and can even be a part of daily operations. |
| Reporting | A detailed report with a summary of findings. | Mostly informal, and is summarized internally. |
| Standards | May follow recommendation audit processes or standards, but it is not mandatory. | Must follow the checklists. |
Despite these differences, there can be confusion about when you should do an audit and a compliance review. Let’s see specific examples to better understand the differences.
When To Do A Compliance Review?
A compliance review helps organizations identify issues and fix them before they turn into big problems. Below are some situations where a compliance review can come in handy.
- Monitor ongoing activities like reviewing access logs, checking training completion rates, evaluating password policies, meeting documentation requirements, and more.
- Run periodic checks to ensure that the internal policies meet the compliance requirements.
- Check if vendors and other third-party providers are meeting the cybersecurity obligations, like data privacy and safety standards.
- Identify and take corrective action before violations become penalties for non-compliance.
Overall, compliance reviews are used for evaluating policies against specific provisions of compliance standards.
When To Do An Audit?
An audit is a formal and independent assessment that checks if a company is operating the way it should. Sometimes, these audits are also conducted to meet regulatory or legal requirements.
Regulatory and Legal Requirements
Organizations operating in specific industries like finance and healthcare must submit proof of audits, especially to organizations like the FDIC and SEC.
Oversight for Investors and Board
Audits are a way to provide assurance to investors and board members that everything is well with the organization and it is moving closer to achieving its goals. In some cases, these audits form the basis for funding decisions, mergers, and acquisitions.
Certifications
Audits are necessary to obtain certifications and accreditations. Such audits are highly structured and performed by firms that are authorized to conduct them.
Trigger Events
When certain events occur, like a data breach, organizations undertake an audit to understand the gaps and to reassure stakeholders.
As you can see, audits and compliance reviews address very different scenarios.
Next, let’s look at a few real-world examples.
Example Scenarios
The following are a few real-world scenarios in which audits and compliance reviews are used.
Compliance Review Use Cases
HIPAA Checks
A healthcare provider reviews access logs periodically to ensure that only authorized users are viewing patient health records. This check is necessary to meet HIPAA compliance.
KYC and AML Reviews
The compliance team views a random sample of customer onboarding files to confirm if the Know Your Customer (KYC) and Anti-Money Laundering (AML) checks were completed successfully.
Title IX Evaluations
Educational institutions that receive federal funding must follow Title IX requirements. A compliance team can check if the new faculty have completed mandatory training on harassment and discrimination policies.
Audit Use Cases
SOC 2 Audits
Many SaaS and tech companies prefer to undergo the SOC 2 audit, as it demonstrates their focus on cybersecurity. It also builds trust among customers and investors, especially when the company handles sensitive data.
Grant Audit
Nonprofit organizations that receive large funding from governments must complete a Single Audit, also called the Uniform Guidance Audit. This audit checks if the funds are used appropriately.
Financial Audit
Publicly traded companies must conduct annual financial audits and submit them to the concerned authorities. These audits are handled by external firms that check financial statements for accuracy and compliance.
These examples show that audits are highly structured and can serve multiple purposes, while compliance reviews are largely internal to identify and fix gaps in compliance with standards.
Audit vs Compliance Review – The Final Verdict
Audit and compliance review, though used synonymously, serve different purposes for an organization. While an audit is a formal and independent evaluation, compliance reviews are more internal and informal. Given their differences, organizations use both audits and compliance reviews to achieve varying goals.
In this article, we discussed audit vs compliance review to help organizations allocate resources, meet obligations, build confidence, and reduce risks. We hope this information is a good starting point to effectively use them both.