In this article, we delve into what an external audit is, highlighting their importance and the key distinctions that set them apart from other forms of audits.
An external audit is an objective assessment of an organisation’s financial statements and related processes conducted by an independent third party. This type of audit provides stakeholders, such as shareholders and regulators, with assurance that the financial reports are both accurate and comply with regulations.
What Is the Purpose of an External Audit?
The purpose of an external audit is to:
- Provide an independent and objective review of an organisation’s financial statements.
- Ensure accuracy, reliability, and compliance with accounting standards and regulations.
- Offer confidence to stakeholders, including shareholders, creditors, and regulatory bodies, about the authenticity of financial information.
- Identify discrepancies or weaknesses in financial reporting processes.
- Bolster trust and transparency in the financial disclosures of an organisation.
Essentially, an external audit bolsters trust and transparency in the financial disclosures of an organisation.
Internal Audits vs External Audits
Let’s look briefly at internal vs external audits:
Internal Audits
- Focus on a company’s internal controls and systems.
- Collaborate with management to review all operations.
- Examine both tangible aspects (like finances and IT) and intangible areas (like culture and ethics).
External Audits
- Conducted by independent auditors registered with ASIC.
- Validate company’s accounting procedures and financial accuracy.
- Ensure fraud prevention, legislative compliance, stakeholder assurance, and operational efficiency.
While internal audits delve into a company’s inner workings, external audits validate its financial presentations and compliance from an outsider’s perspective. Both play crucial roles in a company’s financial health and transparency. Find out more about what an internal audit is and what external vs internal auditors do.
How Often Should External Audits Be Performed?
External audits are typically conducted annually. This frequency aligns with the financial reporting cycle of most organisations, ensuring that stakeholders receive timely and up-to-date financial information. For publicly listed companies in Australia, an annual external audit is a regulatory requirement to maintain transparency with shareholders and comply with the Australian Securities and Investments Commission (ASIC) guidelines. However, in specific circumstances or industries with higher risks, more frequent or interim audits might be necessary to meet other regulatory requirements or stakeholder expectations. Always consult with your auditing firm to determine the most appropriate audit schedule for your organisation.
Are External Audits Compulsory?
Understanding the need for an external financial audit is vital for the transparency and financial health of your business. Here’s a rundown of the scenarios when your company might be required to undergo an external audit:
Large Companies
Large companies must lodge a financial report and a director’s report every financial year.
The accounts of such companies need to be audited unless ASIC provides a relief.
Post-2019 amendments to the Corporations Regulations Act 2001 set specific criteria. A company is categorised as ‘large’ if it meets at least two of these thresholds during a financial year:
- Consolidated revenue of $50 million or more.
- Consolidated gross assets valued at $25 million or more at the year’s end.
- 100 or more employees at the financial year’s end.
Small Companies
Typically, small companies don’t need to prepare financial reports unless directed by ASIC or shareholders.
Exemptions from compliance requirements apply to some small foreign-owned companies.
Foreign-Controlled Small Companies
They must prepare and lodge audited financial reports with ASIC. Exceptions are when they are consolidated into another entity’s financial statements lodged with ASIC.
Medium and Large Charities
From 2022 onwards, medium charities (annual revenue between $500,000 and $3 million) must either review or audit their financial statements. Large charities (annual revenue of $3 million or more) have to audit their reports.
Application for Government Grants
Companies, associations, or charities may need to undergo an audit as a qualifying criterion or to meet grant conditions.
Qualifying for a Loan
Lenders may ask for an audited financial report when a business applies for a loan.
Selling a Business
Audited financial statements add value when you’re selling your business, as potential buyers seek reliability in financial data.
Other Requirements
Some organisations may have audit requirements specified in their constitution, shareholder agreements, or other documents.
Certain industries may also mandate audits, like manufacturers supplying to the government.
At Allen Audit & Advisory, we understand the significance of timely, accurate, and transparent audits. Ensuring compliance while also recognising the value they bring, it’s not just about meeting regulations, but also about sound business management and strategic decision-making. Whether you’re a large entity or a small business, we’re here to guide you through the audit maze with clarity and expertise.
Benefits of an External Audit
- Enhanced credibility and trust: External audits bolster the authenticity and reliability of financial statements, offering stakeholders, including investors and clients, confidence in the company’s transparency.
- Error detection: By pinpointing discrepancies in accounting, audits ensure financial information accuracy and facilitate the correction of potential mistakes.
- Regulatory adherence: Audits ensure that businesses are adhering to accounting standards, legal obligations, and tax regulations, thus avoiding potential liabilities or sanctions.
- Risk identification and management: External audits identify potential business risks, vulnerabilities to fraud, and offer recommendations to mitigate these risks.
- Educational value: They provide insights to business owners about proper accounting processes, current issues in the sector, and potential improvements.
- Objective insights: External auditors offer an unbiased review, facilitating better decision-making and process improvements.
- Facilitates funding: A robust audit report can attract investors and lenders, aiding in projects and business expansions.
- Support in budgeting: Audit insights can guide budgeting decisions, helping to optimise expenses and income.
- Valuable for stakeholders: Whether it’s directors valuing better corporate governance, management aiming for stronger financial discipline, or financiers seeking reliable financial data, external audits cater to a range of users.
- Support for sales and acquisitions: Audited financial statements can increase business value and reduce risks for potential buyers.
- Strategic decision-making: With a comprehensive view of the company’s financial health, management can strategise more effectively.
- Support in acquiring grants and loans: Lenders and grant agencies may require an external audit to verify financial data and ensure compliance.
- Advocates better internal controls: Through identifying weaknesses, audits advocate for stronger internal systems, enhancing overall business efficiency and security.
By engaging in comprehensive external audits, businesses can enjoy a myriad of benefits, ensuring not just compliance but also driving forward with clarity, confidence, and strategic agility. At Allen Audit & Advisory, we champion the value that such audits bring to the table, illuminating pathways for enhanced growth and stability. Contact us today to find out more.