The purpose of an audit is to obtain an independent opinion on the financial report of an organisation to enhance confidence for intended users of the financial report. (For more information on the purpose of an audit, see our previous article What is the purpose of a financial report audit)
Auditors establish whether the financial statements are fairly presented and in accordance with generally accepted accounting principles.
Auditing your accounts promotes consistency and objectivity in financial reports and helps outside parties to be sure that the financial reports are true and fair.
Here are some examples of when an audit may be required:
Regulatory Requirements of Financial Reports
Certain types of entities must have their financial reports audited by a registered auditor.
The corporate regulator in Australia, the Australian Securities and Investment Commission (ASIC), requires a company (other than a small proprietary company – more on this later), registered scheme (managed investment scheme) or disclosing entity (e.g., a Listed Company) must have its annual financial report audited.
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 $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.
As noted above, some organisations have an option for either an audit or review. The difference between an audit and a review is:
- An audit enhances confidence for intended users of the financial report that it is free from material error in accordance with an applicable reporting framework,
- A review enhances confidence for intended users of the financial report (or data) by evaluating and concluding whether anything has come to the auditor’s attention that the financial report (or data) is not free from material error in accordance with an applicable reporting framework.
A review differs substantially from an audit. Review engagements provide less assurance to the user of the financial statements because the auditor performs fewer procedures than would be completed had an audit been undertaken. (For more information on the different types of assurance services, see our previous article What are assurance services).
Charities and Not for Profit Organisations
For charities and not-for-profit organisations with revenue under the audit or review thresholds only need to submit the Annual Information Statement – there is no requirement to provide financial statements to the ACNC. Although we encourage you to also consider your constitutional requirements which may have additional reporting obligations to members – discussed later in this article.
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.
A small proprietary company is generally not required to prepare financial reports, unless directed to by ASIC, or directed to by shareholders. Accordingly, any small companies are exempt from the compliance requirements as are small foreign-owned companies in certain circumstances. A company can easily overlook the requirements – particularly if you’ve never had to lodge financial reports with ASIC in the past.
(For more information on whether your company is eligible for small company relief, see our previous article Are you eligible for a small company audit exemption)
Strategic and Transactional Purposes for Audited Financial Reports
Each organisation is unique and may need audited accounts to satisfy other purposes. Common motives to need an audit include:
- To obtain a grant or investment: Companies, associations or charities seeking external funding and grants may have to undertake an audit. This could be part of the qualifying criteria (i.e. to satisfy eligibility requirements) or to satisfy the conditions of the grant (i.e. acquit the grant).
- To qualify for a loan or satisfy loan requirements: Lenders may require an audit of financial reports if a business seeks a loan. This is part of satisfying the eligibility requirements as well as establish the veracity of the figures presented prior to providing the funding. Similarly, to the above, lenders might also require ongoing compliance audits to ensure loan criteria and requirements are being satisfied (e.g. compliance with loan covenants).
- In connection with an acquisition or sale: If you’re planning to sell your business or change ownership, potential buyers want to be able to rely on your financial data. Auditing adds value to your business – not only do you have an independent opinion on the credibility of the financial report, but it presents an opportunity to improve and rectify areas of the business prior to sale.
Constitutional or Other Requirements for Audited Financial Reports
Some organisations may have a requirement for an audit specified in their constitution, rules or other documents (e.g. a shareholders agreement). Again, if this is the case, you will need to have your accounts audited by a registered company auditor.
What is Included in Audited Financial Reports?
The specific inclusions in audited accounts varies based on the purpose outlined above. In general, audited accounts include:
- An annual directors’ (or responsible entities’) report
- Financial statements, which comprise:
- Statement of profit or loss and other comprehensive income
- Statement of financial position (“Balance Sheet”)
- Statement of changes in equity
- Statement of cashflows
- Notes to the financial statements
- Directors’ (or responsible entities’) declaration
- An auditor’s independence declaration and auditor’s audit (or review) report.
An audit of your financial reports and statements is a proactive way to ensure your organisation is operating at maximum potential and efficiency. If you would like to discuss whether you need audited accounts and your company’s reporting and compliance obligations, Bishop Collins would be delighted to have an obligation-free and confidential discussion.