Question

Ron McLellan established his business, McLellan’s Shoes, in 1985. Since then, he has run his business as a sole proprietor. Ron keeps records and his wife helps him prepare basic accounting records. As McLellan’s Shoes has no outside owners, Ron has never seen the need to have his accounts audited.

When Chip Masters from Cloud 9 Inc. expressed an interest in buying McLellan’s Shoes in 2020, Ron was asked to provide audited financial statements. Ron discussed his concerns about having an audit with his friend Ernie Black. Ernie is concerned that Ron may forget their conversations and has asked you to prepare a summary of the issues listed below for Ron.

What are the main differences between a financial statement audit, a compliance audit, and an operational audit?

Answer 1

Financial statement auditing is done by external auditors. A compliance audit is the types of audit service that their performance or procedure is mainly focusing on whether the entity complying with local law, regulation, and related rule. Operational audits focus on the review and assessment of a business process. The differences between each type of audit are the information being examined and the criteria used to evaluate the information. An example of a financial statement audit would be the annual audit of Amazon.com, Inc., in which the external auditors examine Amazon.com, Inc. financial statements to determine the degree of correspondence between those financial statements and generally accepted accounting principles. An example in a dry-cleaning business, operations would include all work that contributes directly to cleaning customers' clothing. An operational audit in this case would consist of an examination of those procedures used to complete the dry-cleaning process efficiently and effectively. An example of a compliance audit would be an IRS auditor’s examination of an entity’s federal tax return to determine the degree of compliance with the Internal Revenue Code.