Author: talkagency

Preparing for a business audit can save your organisation time and money. An audit doesn’t have to disrupt your business: it can effortlessly form part of your operational processes and not impose many additional demands on your resources.

Our top tips for preparing for a business audit include:

• Prior planning prevents poor performance
• Ensure accounts are reconciled before an audit of your financial statements
• Identify significant changes which may affect the process of your financial audit
• Designate a key contact in the preparation of a financial audit
• Professional development and training
• Ask questions about your financial audit
• Learn from the experience

What Is an Audit: A Refresher

An audit is a reasonable assurance engagement where the auditor provides an opinion about whether a company’s financial report is prepared in accordance with particular requirements or legislative framework (e.g. the Corporations Act 2001 or the Australian Charities or Not-for-profits Commission Act 2012). This includes giving a true and fair view of the financial position of a company at year end, and of its financial performance for the period ending on that date, and complying with Australian Accounting Standards and certain legislative requirements (e.g. Corporations Regulations 2001 or Australian Charities or Not-for-profits Regulation 2013).

Many other types of entities are also required to have their financial report audited, including unlisted companies over a certain size threshold and large charities.

You can read more about the distinction between assurance services here.

What information is audited and supported by the audit report?

Only certain sections of a company’s annual report are audited. The auditor’s report provides an opinion on the financial report, which comprises the financial statements, the notes to the financial statements and the directors’ (or responsible entities’) declaration.

As the directors’ (or responsible entities’) report is intended to complement and support the financial report, it may appear to be part of the audited financial information. It is important to note however, that although the information provided in the directors’ report is not audited (with the exception of the remuneration report of listed companies) the auditor still needs to consider and report on whether it contains material inconsistencies with either the financial report, knowledge gained through the audit, or appears to be materially misstated.

What is the result of an audit?

The result of an audit is the auditor’s opinion which is included in the audit report. An audit report is a document that auditors attach to the statutory audit report that reflects their opinion of the audit. The audit report also contains a range of other information to explain the context in which that opinion has been reached. Similarly, an auditor’s review report contains the auditor’s conclusion on the financial report, which provides a lower level of assurance than an opinion, and also  explains the context in which that conclusion was reached.

What Information Does an Audit Report Include?

An audit report , which is appended to the financial report, includes the following information:

• Title and addressee
• Auditor’s opinion (More on this later!)
• Basis for the opinion, which includes important information about the auditor’s opinion, including:
• That the audit was conducted in accordance with Australian Auditing Standards:
  • A reference to the section of the auditor’s report that describes the auditor’s responsibilities under the Australian Auditing Standards;
  • A statement that the auditor is independent of the company in accordance
  • The relevant ethical requirements and fulfilment of the auditor’s other ethical responsibilities
  • A statement whether the auditor believes that the audit evidence they obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

NOTE: When the auditor modifies the opinion on the financial report, the heading ‘Basis for Opinion’ is amended in accordance with the type of modified opinion (see modified auditor’s opinions below) and within this section, the auditor includes a description of the matter giving rise to the modification.

Key audit matters

For listed entities, Key Audit Matters (“KAMs”). These are matters which are, in the auditor’s professional judgement, of most significance in the audit. KAMs are selected, in consultation with the directors or audit committee, on the basis of needing significant auditor attention in performing the audit. The reasoning for this may include areas of higher assessed risk of material misstatement or significant judgement and estimates. The KAM section includes, at a minimum:

• Why the matter was considered to be a KAM
• Reference to the related disclosure
• How the matter was addressed in the audit.

Other information:

• Responsibilities for the financial report
• Auditor’s Responsibilities for the Audit of the Financial Report
• Other Reporting Responsibilities.

Types of Audit Report Opinions

Auditors have the option of selecting amongst four different types of auditor opinion reports.

Unmodified Opinion (Clean Opinion)

Auditor’s reports containing an unmodified auditor’s opinion are the most common type of report a user is likely to come across. This is in part because management usually addresses most of the matters which the auditor has raised by adjusting the financial information or including further disclosures when finalising the content of the financial report before it is issued. An unmodified auditor’s opinion, also referred to colloquially as a “clean” audit opinion, for a public company in Australia will state that in the auditor’s opinion the financial report is in accordance with the Corporations Act 2001, including giving a true and fair view, and complying with accounting standards and the Corporations Regulations 2001.

Even where there is a clean opinion, it is important to look for and pay attention to the KAMs raised and any Emphasis of Matter, Other Matter or Material Uncertainty relating to Going Concern paragraphs. These additional paragraphs highlight matters of significance contained in the financial report and contribute to the overall understanding of the report.

Unqualified Opinion

An unqualified opinion is considered a clean report. This is the type of report that auditors give most often. This is also the type of report that most companies expect to receive. An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any disclaimers about any clauses or the audit process. This type of report indicates that the auditors are satisfied with the company’s financial reporting. The auditor believes that the company’s operations are in good compliance with governance principles and applicable laws. The company, the auditors, the investors and the public perceive such a report to be “free” from material misstatements (emphasis added).

Modified Opinion

Modified auditor’s opinions are issued in circumstances when the auditor believes the financial report contains a material misstatement, or when the auditor is unable to obtain enough evidence to form an opinion. Such an opinion should be a red flag for readers, as it indicates that part or all of the financial report cannot be relied upon.

If the audit opinion is modified it can be either a Qualified opinion or an Adverse Opinion.

Qualified Opinion

If you’ve ever wondered “what is a qualified audit report?” then this one is for you. A clean opinion is provided “except for” the matter identified. This might occur when an auditor isn’t confident about any specific process or transaction that prevents them from issuing an unqualified audit report. Auditors write up a qualified opinion in much the same way as an unqualified opinion, with the exception that they state the reasons they’re not able to present an unqualified opinion. An example where a qualified opinion might be issued includes where a company didn’t conduct a stocktake on inventory, or didn’t recognise and present its investments at fair value in accordance with Australian Accounting Standards.

Disclaimer

The auditor cannot provide an opinion because the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for that opinion. When an auditor issues a disclaimer of opinion report, it means that they are distancing themselves from providing any opinion at all related to the financial statements. Some of the reasons that auditors may issue a disclaimer of opinion are because they felt like the company limited their ability to conduct a thorough audit (also known as a management-imposed scope limitation) or they couldn’t get satisfactory explanations to their queries or information requests (for example, where records might have been destroyed by natural disaster). Importantly, a disclaimer of audit opinion signifies that the effects on the financial report are likely to be material and pervasive. Accordingly a disclaimer of opinion is often interpreted as a severe position and consequently it potentially creates an adverse image of the company.

Adverse Opinion

The final type of audit opinion is an adverse opinion. Auditors who aren’t satisfied with the financial statements or who discover a high level of material misstatements or irregularities know that this creates a situation in which stakeholders (including investors, suppliers, customers and even the government) will mistrust the company’s financial reports. An auditor’s adverse opinion is a considerable red flag. An adverse audit report usually indicates that financial reports contain gross misstatements. There is also a higher susceptibility to the potential for fraud. Adverse opinions send out a high alert that the company’s records haven’t been prepared according to accounting principles or the law. Financial institutions and investors take this opinion seriously and will reject doing any kind of business with the company. Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability of companies. Unsurprisingly, companies, investors and the public highly value unqualified audit reports.

Bishop Collins – The Audit Experts

It’s simple; with Bishop Collins Accountants, there are no surprises. We listen. We educate. We deliver. If you would like to discuss your organisation’s external audit requirements, the accounting experts at Bishop Collins would be delighted to have an obligation-free and confidential discussion with you. We provide solutions beyond compliance and help you to protect your assets and move toward achieving your goals.  Get in touch with us today to see how we can help!

Every year, the Australian Taxation Office (ATO) contacts over one million Australian taxpayers to clarify or question information provided in their tax returns. This is usually prompted by what has, or has not been, included (or excluded) in a tax return. This might include unreported income, unusually high deductions claimed, or potentially non-business related expenditure. Whilst the ATO has been relatively “understanding and sympathetic” during the pandemic (yes, many taxpayers have received leniency in mistakes made in reporting to the ATO, as well as concessions on interest and penalties), the ATO is reverting to a more assertive approach to its compliance program.

The ATO has many tools to assist in identifying potential non-compliance which includes data-matching and ATO-prefilling of information. You can read the specifics on these triggers in the ATO tax audit article written by our colleague, and one of the Bishop Collins resident tax experts, Tim Ricardo, here.

Despite accurate and honest declarations, even those completed with the assistance of a qualified accountant, a taxpayer can still be fortunate enough to be selected for a tax audit or review by the ATO. This occurs when the ATO recognises you, or your business, as a compliance risk. Initially, you will get notified of a tax review. The purpose of a tax review is to determine if any compliance issues need to be further examined. A tax review is usually conducted by an ATO delegate over the phone or face-to-face with a view to clarifying elements of your tax return. You’ll get the chance to resolve any issues and avoid escalating the matter to a full tax audit.

If the compliance risk is found to be significant, the outcome of a tax review can lead to a full tax audit where the ATO will further scrutinise your tax affairs. The ATO may request records for up to 5 years from the date of lodgement, as well as conduct intensive analysis on business transactions and interview staff. Unfortunately, getting audited by the ATO isn’t a relaxing affair – it can be a stressful and intimidating process – even more so if you’re not adequately prepared. Frankly, the best way to mitigate this problem is to take appropriate measures to prevent it from happening in the first place.

Top tip: It is also important to note that although some tax audits are random selections, some are triggered by certain factors.

What Factors Could trigger a Tax Audit?

There are numerous factors which might trigger a tax audit. However common factors (in no particular order of preference) include:

• Running a cash business. The ATO targets businesses that make a lot of cash transactions because they are perceived to be at a higher risk of not declaring all of their income.;
• Not paying staff enough superannuation;
• Discrepancies between the tax return and business activity statements (BAS);
• Poor record of lodging tax returns, including several years’ of returns outstanding. You may be perceived as not taking compliance obligations seriously.
• Significant fluctuations in income and expenses between years. Mismatches in income, such as capital gains, dividends, and foreign income can be readily identified by the sophisticated data matching systems used by the ATO. The ATO can also cross check your tax return against information provided by businesses and financial institutions you’ve transacted with. Excessive work-related deductions will raise concerns with the ATO. Note that a deduction can only be claimed in the year it is incurred. Claiming for deductions you are not entitled to, claiming the same deduction twice and poor record keeping are at the forefront of the ATO surveillance regime.;
• Financial performance above or below industry benchmarks – you or your business might be considered an outlier;
• Income inconsistent with assets (not just business, but personal ones as well!). This includes inconsistencies between your lifestyle and your reported income and unexplainable surprise wealth. The ATO can assess your assets and work out how much income you need to maintain your current lifestyle;
• Consistently reporting operating losses;
• International transactions and dealings.

5 Tips to Reduce the Risk

Our top 5 tips to reducing the risk of an ATO audit are:.

1. Recording ALL Taxable Income

Include all taxable income in your tax return from all sources. This includes business income, capital gains (e.g. on assets such as property and investments (i.e. shares)), cash transactions, foreign income from property, shares or employment and bank interest.

2. Only Claim Deductions you are Entitled to

The deduction must be directly related to earning assessable income. Deductions can only be claimed on work-related expenses. Ensure you keep good records to prove your expenses and their relationship to being both work-related and connected to earning income.

3. On-Time Tax Lodgements

Ensure tax lodgments are on time and up-to-date. Build a positive image for you and your business by lodging your tax returns, BAS, and FBT on time. Review your tax returns and reconcile your BAS regularly to ensure there are no variances.

4. Maintain Accurate Records

Maintaining accurate records and keeping invoices and receipts is a must. Keep your personal and business expenditure separate to reduce the likelihood of claiming a personal expense as a business expense. Have minimal variances between tax returns and BAS.

5. Pay Super On-time

Pay the correct amount of superannuation on time for your employees. Note that directors can be held personally liable for unpaid superannuation contributions as well.

BONUS: Insure Yourself!

Take out an audit insurance policy. Having audit insurance in place can take the pressure off by not having to worry about the professional fees which will be incurred in handling an ATO audit.

Handy hint: An audit insurance policy for tax compliance covers only the professional costs in reviewing and responding to the ATO audit program. This insurance does not cover the direct and indirect costs of unpaid tax liabilities, penalties and interest. Again, more incentive to get it right the first time.

If The Inevitable Happens…

It always helps to be honest and upfront with the ATO and own up to your mistakes. Your cooperation with the ATO during a tax audit will be looked upon favourably. In many cases, the ATO has maintained leniency to taxpayers who have cooperated in full and conceded an inadvertent omission or error.

Speak to Bishop Collins about Tax, Audit and Risk Management

The experts are here to help! It’s simple; with Bishop Collins Accountants, there are no surprises. We listen. We educate. We deliver. We provide solutions to protect your assets, and assist you with minimising your tax and moving toward your goals. Speak with one of our team today.

Please reach out to us at Bishop Collins if you would like to seek professional advice on your tax needs.

Both internal and external audits are completed with a high degree of independence, diligence and ethics. However the difference between an internal audit vs external audit is not always clearly understood. Both internal and external audits seek to provide an independent opinion about a company’s finances or practices. However, they differ significantly when it comes to who performs the audit, its overall purpose, and its scope.

Comparing Internal Audit vs External Audit

Here is a brief snapshot of these differences:

Scope

Internal audits usually focus on a specific area of a company, while external audits look at all relevant financial information and any other practices that could confirm the veracity of financial statements and disclosures. In some circumstances, an external audit might be scoped to provide an opinion on a specific line item or financial schedule.

Purpose

Internal audits focus on measuring current performance or compliance with particular policies or procedures and finding areas for improvement. An internal audit is primarily focused on helping an organisation improve and helping to achieve your business objectives while managing risk. An internal business audit is beneficial to evaluate and improve the effectiveness of risk management, control and governance processes. You can read more about the “flavours” of internal audit here.

External audits, on the other hand, focus on verifying the accuracy and veracity of financial statements, thus providing reliable information about the results of a company’s operations, its financial position, and its cash flows. You can read more about external audits here.

Auditor

External auditors are from a third party (i.e. independent firm) while internal auditors can either be internally appointed and work on behalf of a company, or an external firm, and report independently to the audit committee or Board.

Key Differences Between Internal Audit and External Audit

Let’s take a look at some of the key differences between an internal audit and an external audit in a bit more detail.

1. Appointment

Generally, external auditors are appointed by the shareholders of a company, while internal auditors are often employees of a company, although in some cases, they can be appointed externally. In either case, the internal auditor reports independently to the audit committee or board of directors. Bishop Collins Audit provides both internal audits and external audits, along with IT, fraud prevention and risk management expertise.

2. Area of Focus

Internal auditors generally focus on an organisation’s processes and control systems, providing evaluations on financial and operational business activities. They analyse and bolster the risk management, internal control and governance processes of the company. Internal audits are aimed at identifying how well risks are managed including whether the right processes are in place, and whether agreed procedures are being adhered to. Internal audits also identify areas where improvements and efficiencies might be achieved.

External auditors mostly focus on ensuring that the policies and procedures of the organisation are adequate and meet regulatory requirements and standard practices. The focus is primarily on financial compliance and accuracy. In Australia, external auditors are registered with the Australian Securities and Investments Commission (ASIC). Importantly, there are a variety of benefits in undertaking an external audit (whether legislatively imposed or voluntarily), including:

• Fraud deterrence and prevention;
• Confirm compliance or departures from relevant legislation (e.g. the Corporations Act 2001 or Australian Charities and Not-for-profits Commission Act 2012);
• Provide confidence to stakeholders (e.g. customers, shareholders, creditors and the general public) that the company is financially sound;
• Identify ineffective or inefficient business or operational practices.

3. Engagement Period

Internal auditors generally provide auditing and control services related to the company’s finances, business practices and risks over an extended period of time. This might be on an annual basis, or over several years, depending on the internal audit plan and broader assessment of risks. External auditors are appointed, and generally hold office, until either their resignation, removal or death (hopefully not the latter!). Each annual audit engagement runs for a certain period and once the audit is completed, this engagement is finalised until the next year.

Is It a Requirement to Have an Audit?

Well, that depends on your specific requirements, risk appetite and perspective. Internal audits are a fundamental way of improving your company’s systems and developing sound risk management practices. However, internal audits are discretionary.

Many large organisations, including publicly listed companies, have established internal audit functions to satisfy and boost shareholder and market confidence as well as mitigate broader risks. Progressive private companies also voluntarily undergo internal audits to access the benefits internal audit can provide to their organisation. This includes:

• Ensuring accounting processes are efficient and effective,
• Identifying, understanding and managing high risk areas,
• Ensuring compliance with policies, procedures, laws and regulations,
• Streamlining operations,
• Safeguarding assets and ensuring efficient use of resources,
• Ensuring governance and risk assessment processes are in line with best practice,
• Preventing and detecting fraud.

We often get asked how often do businesses get audited? Well, external audits must be assessed on a case-by-case basis, however for the most part, public companies, large private companies and many not-for-profit organisations are required by law to have an audit at various times. For example:

• The Australian Charities and Not-for-profits Commission (ACNC) and State Departments of Fair Trading (e.g., NSW Fair Trading in New South Wales), which are the regulators of charities, not-for-profits, and associations, also have audit requirements. For example, medium-sized charities with annual revenue of more than $1,000,000 must have their financial statements reviewed or audited, while large charities with annual revenue of more than $3 million must have their financial reports audited.
• Large Companies: When a company becomes a large proprietorship, it must be audited, under the Corporations Act. From 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.

Small private companies may also be required to undergo an audit, including those which are foreign-owned or those companies subject to a shareholder direction under s293 of the Corporations Act 2001. In certain circumstances, ASIC might direct a company to undergo an audit. Take a peek at our article on whether you need to have an audit completed on your financial statements here.

The Experts Are Here to Help!

If you would like to discuss your organisation’s external and internal audit requirements the accounting experts at Bishop Collins would be delighted to have an obligation-free and confidential discussion with you. Please reach out to us if you would like to seek professional help with internal and external audits. Get in touch with us today to see how we can help!