A financial statement audit is a close examination of an entities financial records and statements, as well as any accompanying disclosures. These audits are normally carried out by an independent auditor.
While public companies, large private companies and registered charities that meet prescribed thresholds as well as those with audit embedded in their rules are legally obligated to have their financial statements audited regularly, smaller private businesses, not for profits or charities have no such obligation. However, there are times when such audits are highly recommended, and occasionally mandatory for small or medium enterprises (SMEs). Here’s what you need to know about financial statement audits as a business owner or member of a governance board—what they are and how they impact your business.
Why have an audit?
Audits provide evidence as to whether a financial report fairly reflects the true financial performance and financial position of your entity. They involve consulting with management, testing the effectiveness of the business’s internal controls, and reviewing a sample of financial transactions. The auditor will want to see that anything listed on the financial statements has supporting evidence to substantiate the amount. Depending on the type of business that you run, all plant and equipment may also be examined.
In a nutshell, financial statement audits are simply good business practice.
The benefits of an audit
Business owners, or those charged with governance, responsibilities, as well as managers, need to be confident that their financial reports are accurate, so they can budget more accurately, seek required funding and plan better for the future. An audit should provide them, and in the case of the charitable and not-for-profit sector, funders, with that confidence.
An audit will also draw attention to any potential threats of fraud, which is especially important when you are not involved in the day-to-day running of the business. Auditors will look at your cashflow, creditors’ risk and market risk, and the controls you have in place to prevent or manage those risks. If they discover a deficiency of any kind in your controls or financial statements, then they are the best resource to advise you on addressing that deficiency. It should, however, be noted that an audit may not detect Fraud.
Remember, an audit may not reveal that your business is in tip-top shape, but at least you will have the knowledge that you are working with accurate information and the best processes. Again, this will help you to plan the future direction of your business. For those in the not-for-profit sector or charity sector, an audit provides comfort to members and the community that funds are being spent as intended.
The timing of an audit
While suitable for all business types, audits are especially beneficial for entities operated by a management team which are separate to the owners or those charged with governance (e.g Trustees). They are also suitable for growing businesses seeking potential investors.
For those in the not for profit/charity sectors, the timing of an audit maybe enshrined in your rules or constitution so it pays to check those documents. Community funders, regardless of your rules, quite often require an audit of your financial statements to show accountability and transparency of spending. Audited Financial Statements presented on a timely basis shows strong and diligent governance.
Audits are great for maintaining business health
An audit shouldn’t be just an obligation, or a process of identifying everything that’s wrong about your business’s financial position. Rather, it is an opportunity for improvement. BDO specialise in audit and assurance services for small to medium businesses, including not-for-profits and charities. Contact our experienced audit team today to learn more.