An Audit is a formal examination of accounting books, documents and vouchers of a business concern in order to verify the profit and loss and the financial position of a business. It’s a systematic check or assessment of financial records of a business, department or organization to establish accuracy or efficiency. The examination of the financial records is performed by someone independent of that organisation and would include reports such as the balance sheet, an income statement, a statement of changes in equity, a cash flow statement, notes comprising a summary of significant accounting policies and other explanatory notes.
When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. With some exceptions, all organisations subject to the Corporations Act must have an audit each year. Other organisations may require or request an audit depending on their structure and ownership or for a special purpose.
Audit is an effective tool for a Business Management, as internal audit is conducted in order to ensure the policies are being followed. It enables to make valuable suggestions for improvement and to formulate future policies of a business. Audit also helps management to review the policies from time to time.
The need of an audit arises due to the fact that a business enterprise needs to ensure the correctness of all accounts pertaining to the business. In some cases, the high level of assurance of an audit is required and no other substitute will do. Third parties, like investors and lenders, may insist on assurance that the financial statements they are basing their decisions on accurately represent the state of your financial condition. It is also important to ascertain whether or not, the financial statements, profit and loss account and balance sheet have been prepared in a way as to show the summary of the flow of transactions for the whole period and the true picture and position of a business enterprise. Besides, in order to ensure the accuracy or the efficiency of the records, detection and prevention of errors is vitally important.
Here are some examples of when an audit may be required:
As a regulatory requirement
Certain types of entities must have their financial reports audited by a registered auditor. According to the Australian Securities and Investment Commission (ASIC), a company (other than a small proprietary company), registered scheme (managed investment scheme) or disclosing entity (a body that holds enhanced disclosure securities) must have its annual financial report audited.
Medium-sized charities with annual revenue of more than $250,000 must have their financial statements reviewed or audited, while organisations that fall under the Incorporated Association Act and large charities with annual revenue of more than $1 million must have their financial reports audited.
An audit may be required in certain industries due to regulation such as manufacturers supplying products to the government.
When a company is deemed ‘large’
When a company becomes a large proprietorship, they must be audited, under the Corporations Act. As of 1 July 2019, the Australian Securities and Investments Commission (ASIC) defines a proprietary company as being “large” if, at the end of the financial year, the company and any entities it controls meets two of the below three criteria:
- A consolidated revenue of $50 million or more
- Consolidated gross assets of $25 million or more, and
- 100 or more employees.
To obtain a grant or investment
If companies or charities are seeking a government grant, they may have to undertake an audit. The government will need proof that the figures in their financial statements are true and fair. If your business is seeking investment, an independent audit may also add credence to your proposal.
To qualify for a loan
Lenders require an audit of financial statements if a business wants a loan. This is to protect them and verify the figures within the financial statements are accurate.
If you plan to sell the business
If you’re planning to sell your business, potential buyers want to be able to rely on your financial data, so it’s a good idea to have your financial statements audited. Auditing adds value to your business.
If an audit has been requested, it’s still worth having a conversation with the third-party financial statement user to confirm what level of assurance they are looking for and whether a lower-level assurance will suffice.
Even if you don’t need an audit quite yet, it makes good business sense to keep solid financial records. You want to make sure you’re documenting your processes and controls for all of your financial transactions — even those that don’t directly affect your cash balance. This will help you to run your business more effectively and will set you up for success if and when you do find yourself in need of an audit.