What is an Audit? The Importance of Finance Auditing & Why Industry Specific Auditors are Vital

There is a lot to consider when running a business. It’s imperative that your finances are in order and that there are no anomalies.

That’s where an audit comes in. An audit goes over the financial records of your business with a fine tooth comb, and is generally conducted by a person from outside of the business so that independence is maintained.

The most common reason for an audit is to assess the information presented in the organisation’s financial reports. The purpose is to verify that the financial records the organisation keeps are accurate on a particular date.

So below, we’ll dive deep – looking into exactly what audits are, what you can expect with them and, importantly, why you’ll need an auditor with detailed knowledge specifically for your industry.’

What is an audit?

An audit involves a thorough review of the organisation’s balance sheets, income statements, changes in equity, cash flow and any additional information related to significant accounting policies or other notes.

When an auditor reviews the financial reports, they will adhere to the auditing standards as set out by the regulatory body – usually the Australian Tax Office (ATO) or the Australian Securities & Investments Commission (ASIC). After they have completed the audit, they will write a report and form an opinion based on the information.
Although there are some exceptions, all organisations must be audited annually pursuant to the Corporations Act 2001, Australia’s primary corporate law.

What does an auditor do?

An auditor’s job is to make an independent assessment about the financial position of an organisation. They have the skills and knowledge to determine the audit procedures they will use which will based on any risks they have identified. Procedures they may use could include asking individuals within the organisation a range of questions.

They will review the financial and accounting records and other tangible items and make an assessment based on estimates or assumptions that management gave in the financial report.

An auditor will gather written confirmation in certain situations, for example they may ask a debtor to confirm the amount of debt they have with the organisation.

The auditor may test some of the organisation’s internal procedures or watch various procedures in practice.

What you can expect in an audit

When an organisation is being audited, the management team will prepare a financial report so that it is up to date. It is vital that it is prepared in compliance with regulatory and financial reporting standards. Before the auditors review it, the directors will approve the financial report.

The auditor will then begin their assessment of the organisation by doing research to understand their activities and the economic conditions they operate in.

During the audit, the auditor will review any risks that might have an impact on the organisation’s financial performance or position. They will also review measures that have been introduced to minimise those risks.

The auditor then considers the accuracy of the information that management has given and will analyse the information before making an assessment as to whether the financial reports give an accurate representation of the organisation’s position.

At the end of the audit the auditor will prepare a report giving their opinion based on the available information.

What are the auditing standards in Australia?

The Auditing and Assurance Standards Board sets out the guidelines that auditors must operate under in Australia. The purpose of the auditing standards is to set out the guidelines and requirements that auditors must adhere to.

The general requirements are that an auditor must:

• Identify and assess risks of inaccurate information whether it is due to fraud or a simple mistake based on an understanding of the organisation and the environment it operates under.
• Gather sufficient evidence to determine whether the information contained in the financial reports is accurate.
• Make a judgement based on the information provided in the financial reports.

Ultimately the standards are designed to improve the quality of an audit.

Why is audit quality important?

Audit quality is important because the information presented in the report is used by investors and markets to make decisions. Maintaining high quality audit standards is imperative to maintain confidence in their independence.

If a financial report doesn’t accurately show the position of an organization,  thenan audit will then test the information in the financial report so that business decisions can be made. A good auditor will ask a lot of questions and seek evidence rather than just accepting the given information as being accurate and truthful.

To maintain high quality auditing standards, it is best to choose an auditor based on their expertise rather than their cost. An auditor may be cheaper initially but if they don’t offer a thorough audit then it could cost you more in the long run. That may mean you have to have multiple audits rather than just the one.

How often should you have an audit? 

The frequency you should have an audit depends on business factors.

If the business has revenue of over $50 million, gross assets of $25 million or more, or 100 or more employees than you will need an annual audit as set out by ASIC.

Certain industries also require audits, like Australian Financial Services License holders and Not For Profit entities.

When seeking financial investment, you may want an audit. Most investors and lenders will want to be assured that their investment is a good risk.

Another time may consider an audit is if you are selling the business. Knowing the financial data of the business will help you set the price accurately and buyers determine the value of the business.

What does an Auditor not do?

While auditors do a lot, it’s important to understand what they won’t do.

Make business decisions 

Auditors do not make a judgement on the business strategy, decision or review every transaction made within the organisation.

An auditor will not comment on the quality of the management, directors or corporate governance. Their job is merely to verify the validity of the figures in the organisation’s financial reports.

Business decisions are rightfully left to the management team. The auditor is just there to crunch the numbers and present their findings to management.

Predict the future

An auditor is not able to predict the future. They can only make an assessment based on the information that they are presented, which relates to a specific period of time.

An audit is conducted over a limited amount of time so they cannot support the business full time. This is because the main purpose of an audit is to make an assessment based on current financial information. Although the auditor looks for signs of fraud or mistakes in the financial documents, identifying them is not guaranteed.

Do you need an industry specific auditor?

It is best to have one. While it is not always imperative to have an industry specific auditor, they can provide a higher quality auditor than one who does not specialise.

Industry specific auditors are better at identifying inconsistencies which means the auditor’s final assessment may carry more weight and validity.

This is because the auditor has more in-depth knowledge of the industry and its risks and they know what to look out for.

For example, if an organisation said in their report that their revenue was much higher than others in the industry then the auditor will see that as a red flag. That will prompt them to ask questions and if the information is inaccurate the organisation may have to prepare another report.

An auditor without industry-specific knowledge and experience won’t know the finer details of what to look out for when assessing the financial records.

Need help to prepare for an audit? 

We know that audits can be incredibly stressful. If a regulator is scheduled to audit your accounts, then it’s best to have an expert review all your finances to ensure you are completely ready for the audit.

Here at 2account, we can help audit your accounts so that you can feel comfortable when the independent auditor knocks on your door. Whether you need compliance with ASX listing rules, the terms of your AFSL or you just need someone to look after your bookkeeping, our accountant professionals are here to help.

Get in touch with us today and we’ll be more than happy to assist.