What is an Audit and Why Does a Company Need to be Audited?

• Auditing and Assurance
• ||
• September 25, 2024

An audit involves an independent examination of an organization’s financial information by an auditor to form an opinion on the financial statement. A Financial statements a record of an organization’s financial information. It includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and related notes comprising a summary of significant accounting policies and other explanatory notes.

Are you looking for auditing services?

Given below might be your questions related to audit services: –

• Why audit is necessary?
• Types of audits
• Benefits of audit
• Requirements for companies in relation to audit
• Consequences of non-compliance with audit requirements
• Whom do we need to consult?
• Frequently asked questions

Why Audit is Necessary?

The Audit is necessary to protect your business and encourage its thriving. It includes features such as early warnings, open communication, and pragmatic resolution of issues.

It helps to ensure that the organization’s financial statements reflect its true and fair view of financial position and performance.

Audits contribute to verifying a Company’s adherence to relevant regulations, laws, and Generally Accepted Accounting Principles (GAAP).

It helps to detect errors and promote transparency and accountability in financial reporting. This builds trust among stakeholders.

E.g.:

Companies conduct audits because they are often managed by professionals hired by the owners, whose responsibility is to maximize the company’s wealth. To track this wealth maximization, the company’s management prepares financial statements for the owners. However, owners need someone to review the financial information for accurate and fair presentation. Auditors carry out audits on behalf of the company’s shareholders.

Whether an audit is mandatory or optional depends on the type of entity.

For example, sole proprietors or partnership firms may not be required to have their accounts audited in some jurisdictions, while it is compulsory for public companies.

Types of Audits

Various types of audits are done to provide reliability to users. Here are a few of them that are most commonly done by auditors.

• Statutory Audit– A statutory audit is an audit by an independent auditor to determine whether the financial statements present fairly with the applicable accounting standards by examining the information such as bank balances, account receivables, and financial transactions that occurred during the period under audit.
• Internal Audit: An internal audit is an audit of internal control systems to identify the weaknesses in the organization’s processes and control environment to prevent any harm to the organization or its stakeholders. Other focus areas include asset safeguarding, adequate authority division over key control areas, and compliance with internal operating policies and guidelines.
• Stock Audit: A stock audit is an evaluation of the company’s physical inventory that involves counting and valuing, comparing the quantities on hand with the records, and thereby identifying any discrepancies. Being carried out on behalf of banks and financial institutions, it aims to objectively ensure that the security against which funds are lent by the bank is safe and valued correctly.
• Due Diligence: It is a process used by potential investors to assess the risk involved in the entity. It includes examining the figures and comparing them, which helps the investors to understand the business’s prospects.
• Tax Audit: It is an examination of an organization’s tax return to verify its accuracy and compliance with tax laws. The audit process involves reviewing financial records, transactions, and other relevant documentation to ensure that the reported tax information is complete and correct.

A sound understanding of local laws, regulations, and accounting practices enables Mercurius to assist clients in critical issues like conducting financial, legal, and accounting reviews in mergers, acquisitions, and investments.

Benefits of Audit

• It safeguards the financial interests of persons not associated with the entity’s management, whether partners or shareholders, bankers, financial institutions, the public at large, etc.
• Audited financial statements help settle trade disputes for bonuses or higher wages and claims regarding damage suffered by the property, by fire, or some other calamity.
• Lenders and bankers can rely on audited financial statements to make their credit decisions, i.e., whether to lend to a particular entity.
• Audited financial statements are helpful to government authorities for determining tax liabilities.
• Audit experts suggest ideas for improvement that can make your day-to-day business more efficient and provide ways to improve internal control accounting practices.
• Government authorities may require an audited and certified statement before they give assistance or issue a license for a particular trade.

Requirements for Companies in Relation to Audit

In India, every Company, irrespective of its size, registered under the Companies Act 2013, is mandated by law to get its financial statements audited annually. All listed entities and certain classes of unlisted entities shall also be required for a quarterly limited review of financial statements.

However, there are some exceptions in law for Companies incorporated in the USA.

• There is no federal law mandating audits for private companies.
• At the discretion of private Companies, they may do this voluntarily for various purposes, like loan requirements, prospective public offerings, etc. Instead, publicly traded companies are mandatorily required to have their financial statements audited annually and reviewed quarterly.

Consequences of Non-Compliance with Audit Requirements

The table below illustrates the requirements of audit for the Companies:

Companies might face various legal, reputational, and financial issues. In 2018, $250,000 was fined for failing to provide reviewed financial statements.

Whom do we need to consult?

In India, a Practicing Chartered Accountant (CA) or a CA Firm registered under the Institute of Chartered Accountants of India (ICAI) is authorized by Indian law to perform audit services.

In the USA, a firm registered under the Public Company Accounting Oversight Board (PCAOB) is authorized to perform audit services.

Top 10 Frequently Asked Questions Related to Audit

Our expert has compiled the most frequently asked questions from all questions about the audit. Whether you’ve been seeking answers for a long time or just looking to expand your knowledge for your next audit, you’ll find valuable information here.

Q1. What is the right time for your company to get an audit?

The primary purpose of the audit is to ensure that the financial statements are free from mistakes and that all misleading events that might affect the company have been disclosed. Many companies contract the services of a public accounting firm to audit their financials. Although audits can be expensive and time-consuming, they may be necessary for businesses.

An audit is a chance for a CPA firm to give you a second opinion on the accuracy of your financial statements. Auditors conduct work by evaluating assertions and determining if there is evidence to support a particular view.

Q2. Who is responsible for the preparation of financial statements?

The Board of Directors/Management is responsible for the preparation of financial statements.

Q3. What are the responsibilities of the management of the Company in relation to audit?

Management is responsible for applying applicable accounting standards, maintaining internal controls, complying with laws and regulations, and providing all the data/information to the auditors.

Q4. One of my close relatives is a chartered accountant and is registered under PCAOB. Can he audit my Company?

No, as per requirements of law, every person engaged in the audit should be independent from the Company.

Q5. Is the Auditor obliged to give an unmodified/clean audit report?

No, the auditor may give a modified report (i.e., qualified/adverse/disclaimer report), as the case may be.

Q6. Is it the duty of the auditor to detect & correct the fraud & errors?

The fraud includes “Misappropriation of assets” or “Fraudulent Reporting”. Error is an unintentional mistake. The primary responsibility of detecting or correcting fraud/errors is management. The auditor is responsible for maintaining professional skepticism (questioning mind) throughout the audit.

The auditor may be liable for not detecting fraud when it is proved that he has not exercised professional skepticism during the performance of an audit.

Q7. What is the difference between accounting and auditing?

Accounting includes recording all day-to-day financial transactions that occured in the organization. The organization’s employees do it.

Auditing is an examination of financial records by an independent certified accountant qualified to perform the audit.

Q8. How many times does the Company need to get its books of accounts audited?

As per SEC/SEBI, every publicly traded Company needs to file audited/reviewed financial statements annually/quarterly to avoid any legal consequences/penalties.

Q9. How many auditors do I have to appoint?

The Company may appoint one or more auditors based on the size and nature of its business operations.

Q10. Can an auditor provide audit services and non-audit services to the same Company or group of Companies?

As per PCAOB rules, an auditor cannot provide non-audit services to the same Company or group of Companies.

The term “non-audit services” means all services other than audit services like bookkeeping services, actuarial services, legal services, management functions, human resources, investment banking services, etc.

Out of many, these are just a few sorted questions and their answers. We hope they are helpful in your quest. Please let us know if you have any other queries related to your next audit or any ongoing audit.

How Mercurius Can Help You

We, Mercurius & Associates LLP, are a PCAOB-registered firm. We assist our clients in dealing with internal audits, statutory audits (USGAAP audits), government audits, Bank audits, and various corporate matters (Company incorporation, ROC compliances, Company winding-up) worldwide by providing them with adequate support and guidance.

If you have any questions or wish to know more about the benefits and why the company needs to be audited, kindly contact us.