A lot of management and employees live in fear of the annual company audit. They feel it offers no real benefit to the company other than focusing on their errors and shortfalls during the year. However, the annual company audit should be used as a way to bring the financial procedures of the company in order and up to date. It should give confidence in the strength of the financial statements.
WHAT IS AN AUDIT?
An audit is an independent examination of the books and records of a company to determine if the financial statements presented by management give a ‘true and fair view’ of the company’s financial performance and position. The management responsible for the day to day running of the company are not always the same as the shareholders who have ownership in the company. An audit gives assurance to these shareholders that management are presenting accounts that give a fair view of the company’s results.
WHO CAN PERFORM THE AUDIT?
Auditing is a regulated activity and company law specifies that only the following may undertake an audit engagement:
- A member of a recognised accountancy body.
- A person appointed under the rules of that recognised accountancy body.
A recognised accountancy body is an accountancy body that has been granted recognition under section 191 of the Companies Act 1990. The regulated accountancy bodies you commonly come across in Ireland are the Institute of Chartered Accountant (ICAI) and Association of Chartered Certified Accountants (ACCA).
WHAT ARE THE BENEFITS OF THE AUDIT?
An audit will help to identify any weaknesses in the controls and procedures in the company. The auditor will issue a letter to the company on the completion of the audit identifying any weaknesses and suggesting where improvements can be made. An audit will enhance the credibility and reliability of the financial statements presented to the shareholders and stakeholders in the company i.e. banks, customers, suppliers, etc.
WHAT ARE THE DISADVANTAGES?
There is additional time required to complete an audit engagement this leads to an increase in the cost of audit fees over accountancy fees.
The auditor will require the attention of management and staff during the course of the audit which can cause disruption by taking them away from their day to day duties of running the business.
WHAT INFORMATION WILL I BE ASKED FOR?
Most of the information that will be requested will be items that the company will have as part of its normal accounts preparation. An example of some of the information that may be required is as follows:
- Bank statements for the current year and subsequent year.
- Bank lodgement slips and cheque stubs
- Sales invoices issued to customers during the year.
- Purchase invoices received from suppliers during the year.
- Hire Purchase/Lease agreements.
- Statements from suppliers at the year end.
- Cash flow projections for the following year.
- Minutes of meetings held during the year.
The auditor may wish to send out external confirmations to third parties i.e banks, customers, solicitors, etc… to allow them obtain further appropriate audit evidence.
The auditor will carry out various tests and procedures during the audit to gather sufficient evidence to gain reassurance that the accounts are not materially misstated. The types of testing carried out are as follows:
- Analytical Procedures – the relationship between the financial and non-financial factors in the accounts are examined and it is determined whether they are in-line with expected results. Explanations will be sought and documented where large variances are recorded.
- Testing of Internal Controls – the system of internal controls are documented from discussions with management at the planning stage. During the audit fieldwork tests are performed on these controls to determine if they are operating effectively.
- Substantive Testing – transactions and account balances presented in the financial statements are tested. Every audit requires a level of substantive testing, the level of this testing is determined by how much reliance can be placed on the internal controls.
The audit opinion is a key part of the audit report which forms part of the financial statements. It states whether the auditor has been able to gather sufficient evidence to determine the financial statements are presented fairly in all material respects.
At the end of the audit, the auditor will issue an audit completion letter outlining the following points:
- The proposed audit opinion
- Details of any outstanding matters which have to be cleared before the audit report can be issued.
- Schedule of misstatements identified during the course of the audit which have not been adjusted for in the financial statements.
- Observations relating to the accounting systems and internal controls.
In our next article we will discuss audit exemption, who can avail of the exemption and the extended audit exemption criteria to be introduced in the Companies Act 2014.