The Benefits of an Audit
The following is an article published by ICPAS titled " The Benefits of an audit ". Click on any of the link below to read the desired portion of the article. Else you may just scroll through to read the full article.
[ This is a information feature catered by Akber Ali & Co for your knowledge and information. ]
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Company accounts and Auditors |
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Reasons for having an audit |
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What does the law require? |
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Why should small companies invest in an audit? |
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What exactly do auditors do? |
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Looking to the Future |
Company accounts and auditors
The vast majority of limited companies, both private and public are required by law to prepare accounts and, except for dormant companies and exempt private companies with annual turnover of less than $5 million, to make them available for public inspection by filing them at the Registry of Companies and Businesses.
The content of these accounts is prescribed by law and accounting standards and larger companies are required to disclose more about their affairs than smaller companies. Large companies usually employ their own accountants to prepare these accounts. Smaller companies often enlist the help of an external accountant, who may well also act as the company's auditor, to help with the statutory disclosures even though the responsibility for the preparation of the accounts always lies with the company's directors.
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Reasons for having an audit :
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What the law requires |
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Other reasons for having an audit |
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The credibility of published information |
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Taxation issues |
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Banking covenants |
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Fraud and error |
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Advice on the structure and operations of systems |
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Good corporate citizenship |
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There are a number of reasons why the law requires larger companies to have an audit. There is usually a clear distinction between ownership and management in larger companies, and the directors and the majority of shareholders are different sets of people. Shareholders need assurance on the accounts that the directors prepare for them.
The law requires that the accounts prepared by directors give a true and fair view of the financial performance and position of the company, and that the auditors prepare a report to shareholders stating whether, in their opinion, those accounts do give a true and fair view. The auditors' responsibility is to the shareholders
There are many reasons why companies of all sizes invest in an audit, regardless of the legal requirement, including the following:
Without credible, high quality financial information, decision-making by directors and investors is both difficult and unsafe. Both institutional and private investors are increasingly active and critical of poor quality information. Financial information is available to a wider audience than ever before, thanks to the Internet. It is important that such information is of the highest possible quality.
Employees, customers, suppliers and many others are increasingly willing and able to voice their dissatisfaction where information lacks credibility. The audit helps smooth the wheels of investor, customer, supplier and employee relations. The audit process commonly unearths adjustments that are significant for tax purposes and without an audit, tax compliance for many companies would be significantly more difficult than it is at present.
Many companies, including small companies, are bound to banking covenants that require the accounts to be audited, regardless of the statutory requirements. The audit provides banks with important information relating to their lending decisions.
The audit report is not a guarantee that a company's accounts are free of fraud and error, particularly management fraud. Nevertheless, the audit is a deterrent to fraud and the audit process is designed to detect fraud and errors that may be material to the accounts. There is no doubt that in the absence of an audit, fraud and error are more likely to remain undetected.
Part of the auditors' routine work involves the assessment of accounting and internal control systems. It is common for auditors to report to directors on structural and operational weaknesses in systems and to make recommendations for improvement. This advice can be invaluable where directors are inexperienced in such matters.
Reputational risk is now recognised as a major risk facing larger companies. A good reputation is important for businesses of all sizes and investment in audit is recognised as an essential element of good corporate governance both in Singapore and internationally. |
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What does the law require?
The Companies Act requires all companies to be audited by an approved company auditor. An approved company auditor is also known as a practising Certified Public Accountant or a Public Accountant. So far we have talked about 'small' and large' companies. Companies that qualify as small under the law are not required to have an audit and are described as 'audit exempt'.
Dormant companies and exempt private companies with annual turnover of less than $5m are exempt from audit.But not all small companies that fulfil certain criteria are audit exempt. Companies that are not entitled to take advantage of audit exemption include the following:
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public companies, banks, insurance companies, companies regulated under the financial services legislation, trade unions and employers associations
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certain charitable companies.
Furthermore, the constitutions of many small companies and entities, including clubs and societies, also require an auditors' report.If you are not sure whether your company is entitled to an audit exemption, you should seek professional advice from a practising Certified Public Accountant.
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Why should small companies invest in an audit?
A high proportion of small companies that are not required to have an audit by law continue to have an audit. Smaller companies invest in audits for the same reasons as larger companies, but there are particular issues facing smaller companies that make investment in an audit worthwhile.
Smaller companies invest in an audit because :-
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the cost of the audit is often marginal to very small companies, particularly where the auditor is involved in the preparation of the statutory accounts
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adjustments arising from the audit (such as those for obsolete stock, bad debt and other provisions) can be significant for companies who prepare their own accounts
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small companies grow, and may find themselves subject to a statutory audit requirement as they do so - tfie first year of an audit can be very difficult if the accounts are not in good order
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an audit is essential in take-over, buy-out and financing negotiations
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the close involvement of the auditor provides companies with comfort when faced with regulatory investigations
For some small companies, there are considerable risks associated with taking advantage of audit exemption prematurely. Directors of some companies may believe, for example, that because there is no longer any statutory audit requirement, there will no longer be any external 'checking' of the books and records. The powers and resources of the Inland Revenue Authority of Singapore and the Department of Customs and Excise are increasing all the time. This means that there are likely to be more investigations in the future, and that they are likely to be more thorough.
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What exactly do auditors do?
The object of an audit is for auditors to form an opinion as to whether a company's accounts give a true and fair view and whether the accounts comply with the law. They are required to report their opinion to the shareholders. If they do not consider that the accounts, or some aspect of them, give a true and fair view, or if they consider that the accounts are not prepared in accordance with the law, they are required to say so and such reports are described as 'qualified' audit reports.
They also modify their audit report if they are unable to form an opinion on the accounts, or some aspect of them, because of a lack of evidence, for example. If there are significant concerns about a company's going concern status, the auditors are required to draw attention to those concerns in their audit report.
All auditors are required to comply with the Singapore Standards on Auditing or SSAs issued by the Institute of Certified Public Accountants of Singapore, although many auditors go well beyond what is required by SSAs. Under SSAs, auditors are required to plan their work by familiarising themselves with the business, its structure, history and performance, and the industry in which it operates. They ore required to analytically review the accounts to highlight those areas which are subject to higher audit risk and to which greater audit effort should be devoted. Put simply, these are areas in which things are more likely to go wrong. Auditors are required to familiarise themselves with the accounting systems and, for all but the smallest of businesses, internal control systems (many very small businesses do not have formal internal control systems). Auditors then test these systems, usually making extensive use of sampling techniques, and form an opinion as to whether the system is likely to produce information that is free from material error. The amount of testing on individual transactions and balances in the accounts themselves normally depends on the results of systems testing. Finally, auditors draw all of their work together and form their opinion as to whether the accounts give a true and fair view. They also check whether all of the disclosures required by law have been made. As noted above, they normally also provide a report to management on any weaknesses that they find in the structure or operation of systems during the course of the audit.
This is a very brief description of what can be a complex technical process. An audit can take many months for larger businesses. For smaller businesses it can take from a few days to a few weeks. Most firms now make use of computer software in planning and performing their audits.
Auditors are not required, and are not able, to test every single transaction that a company has entered into or to provide a guarantee that the accounts are 100% accurate. The costs of doing so would be prohibitive. Auditors do provide an expert opinion on the accounts. The audit process requires the use of professional judgement and a high level of training. Auditors performing statutory audits have to be 'Registered', which means that they must have a professional accountancy qualification, hold a practising certificate, and be entitled to perform audits. Entitlement to perform statutory audits is determined by the Institute of Certified Public Accountants of Singapore and the Public Accountants Board that are required by law to supervise auditors.
The Institute Certified Public Accountants of Singapore and the Public Accountants Board have rigorous disciplinary processes to deal with any complaints about the work of the practising Certified Public Accountants/Public Accountants they supervise and actively exercise their rights to discipline those auditors where they do not maintain appropriate professional standards.
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Looking to the future
If you expect your business to grow, if you value your corporate reputation, if you need reassurance about your accounts or if you need to be prepared for negotiations or investigations, consider investing in an audit. Investment in audit is an investment in the long-term financial health of your company
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