Contract Audit: Meaning, Types, and Best Practices [2025]
Contract audits can be simple and manageable with the right approach.
Thanks to rapid advancements in technology, it’s now possible to simplify and speed up contract compliance audit what used to be a tedious, manual process. Instead of spending endless hours searching through stacks of contracts and deciphering complex legal language, legal teams can now work smarter, not harder.
That said, auditing large volumes of contracts can still be a tough challenge especially when deadlines are tight. But why settle for old-fashioned, time-consuming methods when modern tools can make the process easier and more efficient?
In this post, we’ll guide you through everything you need to know about contract audits and how do it effectively in 2025.
What Is Contract Audit?
A contract audit looks at how well a company and its partners keep their promises in an agreement. It helps find any issues or risks with the quality of work, following the rules, or delivering on time.
The purpose of an audit is to make sure everything is working as planned. In some cases, the audit focuses only on reviewing the contract’s specific terms. Other times it also looks at the methods and tools the company uses to manage contracts. This helps make sure contracts are handled correctly from beginning to end.
Importance of Contract Audit
It play a key role in helping businesses work smoothly and avoid costly mistakes. By carefully reviewing contracts, companies can catch problems early and make sure everyone is doing what they agreed to. This helps protect the business and builds stronger relationships with partners.
- Helps find mistakes early so small problems do not turn into big issues later.
- Makes sure that all parties keep the promises they made in the contract.
- Reduces the chances of risks that happen when contracts are not handled well.
- Saves money by checking that prices and payments are correct and fair.
- Builds trust between companies and their partners through clear and honest agreements.
- Provides clear and useful information that helps leaders make wise decisions.
- Makes sure that contracts follow the company’s rules and legal requirements.
- Improves the way contracts are managed for smoother work in the future.
Different Types of Contract Audit
Not all agreement audits are the same. Depending on what a company needs to check, audits can take different forms and focus on various areas. Understanding the different types of audits can help you choose the right approach to spot risks. Let’s explore the main types of agreement audits and what each one focuses on.
Scheme audits: These audits focus on projects that are paid for with large investments. They check if the money is used correctly and if the project follows the plan.
Contract compliance audits: These reviews make sure all parties keep the promises they made in the contract. The goal is to confirm everyone follows the rules agreed upon.
Defective pricing audits: This type of audit looks at prices and costs. It helps find out if the company is paying too much for products or services.
Clause audits: These audits check the contract terms. They look for mistakes or parts that are no longer valid because of changes in company rules or the business environment.
Contract management audits: This process reviews how well a company handles its contracts from start to finish. It checks if each step in the contract life is managed properly.
When Should Contracts Be Audited?
Because it can take a lot of time, many businesses tend to delay them. But when is the right time to carry one out a them, and how often should it be done? There are certain key situations when audits are especially important, such as:
- When making large capital investments, it is important to review contracts carefully to ensure that all terms and conditions support the significant financial commitment.
- Before entering new markets, this process helps verify that agreements comply with local laws and reduce any risks involved with expansion
- During mergers or acquisitions, auditing contracts ensures that all existing agreements are understood and any potential issues are identified early.
- Prior to a new funding round, it helps give investors confidence by confirming that all obligations and liabilities are clear and well-managed.
- When ending or starting relationships with vendors, an audit helps confirm that contract terms have been met or are fair before making any changes.
- If there are doubts or mistakes found in how contracts are being carried out, an audit is essential to identify the problems and find solutions quickly.
- Businesses can perform contract audits in advance to spot risks early and ensure everything is on track.
- They can also be done reactively when problems or doubts arise.
- It is a good idea to regularly perform smaller audits on individual contracts. At the same time, it is important to carry out thorough reviews of the entire set of contracts from time to time to keep everything on track.
How to Effectively Prepare for a Contract Audit?
We have explored the importance of conducting a contract audit and the different types of audits involved. Now, let’s look at the best practices and key steps.
1) Set the Scope and Timing for the Audit
Before starting the process decide what you will check. Choose how many contracts to review and which types to business contracts focus on. Decide if you will look at the whole contract or just certain parts.
After you set the scope, pick the best time to begin. Think about your business needs and other work going on. It take time so plan carefully to avoid issues.
2) Include the Right People
It involves more than the legal team. It is important to inform everyone about their role in the process.
For example, if the audit checks service quality, the operations team should take part. If only certain contracts are reviewed, those who worked on them should join. This makes the audit thorough and accurate.
Sometimes, working with the companies in the contracts is needed. Being clear about the audit’s purpose helps build trust and avoid misunderstandings.
3) Establish Clear Objectives for the Audit
It is important to know the purpose of the agreement audit and what you want to achieve. Clear goals guide the process.
Sharing these goals with everyone involved keeps the team aligned and focused. This helps make the audit more efficient and effective.
4) Organize Files and Make Them Easy to Access
One of the first challenges in a in this process is finding the right contracts and having quick access to them. Contracts might be stored in different places, like on a computer system or as paper documents in filing cabinets.
This can make it hard to gather everything needed for the audit. Taking time to organize these files clearly and keep them easy to reach can save a lot of time and frustration. When contracts are well arranged, the audit process becomes much faster and less stressful for everyone involved. It’s better to use contract management software which has contract repository system to store and monitor all contracts at one place.
Checklist for a Contract Audit
This clear and simple checklist can help guide the agreement audit process efficiently. It ensures that each step is completed with care and nothing important is missed.
- Know why the audit is being done and what you want to achieve. Clear goals help guide the process from start to finish.
- Pick the contracts that are most important. This could be based on contract value, risk, or if they are due for renewal.
- Gather all contract documents in one place. Make sure they are easy to access so the audit runs smoothly.
- Check each contract for important details like payment terms, service levels, start and end dates, and deadlines.
- Review any changes made to the contract. Look at amendments and check if the contract is set to renew soon.
- Find and note any missing or unclear information. This includes unsigned pages, missing dates, or unclear terms.
- Include people from other teams like legal, finance, or operations. Their input helps make the audit more accurate.
- Write down what you find. Use this to fix issues, improve contract practices, or plan future audits.
Difference Between Contract Audits and Contract Reviews
Contract reviews and contract audits may seem similar, and some use the terms in the same way. They differ in both purpose and timing. A contract audit takes place after the agreement is signed.
A contract audit is done after the contract is signed. It checks if both sides are following the terms of the deal. It is a deeper process often used to find mistakes or missed steps.
A contract review can happen before or after signing. It is part of the contract setup and helps both sides agree on terms that match their rules and goals. It also helps spot old or incorrect clauses that may no longer work due to changes in the business.
How CLM 365 Helps Businesses Manage Contract Audits
CLM 365 is built on the Microsoft ecosystem and works smoothly with tools like MS Teams, Outlook, and SharePoint. This allows all teams to work together on a single platform without switching between apps.
CLM 365 also offers a strong audit trail feature. It tracks and records all contract changes along with the person responsible and the time they were made. This ensures full transparency and makes it easier to follow compliance rules. The audit trail helps reduce risk and gives a clear record for future checks or audits.
Conclusion
It helps make sure all terms are followed and checks for errors or missed steps. Audits reduce risk improve trust and help fix issues early.
They are often done at the end of a project before renewals or as a routine check. The process includes gathering contracts reviewing terms and tracking performance.
Streamline your contract audits with CLM 365. Keep your contracts compliant, save valuable time, and stay fully informed.
Frequently Asked Questions
Who conducts a contract audit?
They are usually carried out by internal teams such as legal, finance, or compliance. These teams understand the company’s policies and risks. Sometimes, businesses hire external auditors or third-party experts to ensure an unbiased and thorough review.
How often should contract audits be done?
Audit timing varies based on how big the business is, how many contracts it holds, and its risk exposure. However, conducting contract audits at least once a year is considered a good practice. High-risk contracts may require more frequent reviews.
What are the key outcomes of a contract audit?
It helps find important issues like missed payments, non-compliance with terms, outdated clauses, or missing approvals. It also helps improve future contracts by highlighting process gaps.
What is an audit trail in audits?
An audit trail is a complete record of all changes made to a contract over time. It shows who made the change, when it was made, and what was changed. This trail supports accountability and protects against disputes.
What are best practices for contract audits?
- Define clear goals – Know what you want to achieve, like checking payment terms or legal risks.
- Involve key teams – Bring in legal, finance, and compliance to get different views.
- Use a checklist – A standard list helps make sure nothing important is missed.
- Keep records clear – Store contracts and changes in a well-organized way for easy tracking.
- Act on findings – Don’t stop at identifying issues; fix them and monitor progress over time.
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