If you’re a business owner expecting a financial audit this year, there are a few things to know about what financial statements will be evaluated and what you can do to prepare yourself. Financial audits are quite different from internal audits and have different audit benefits, so understanding the workings of the audit process is essential knowledge for UAE businesses looking to stay compliant.
Simplifying Financial Audits
Unlike internal audits, a financial audit is an external review of a company’s financial statements. Stakeholders generally hire an independent auditor to critically assess a business’ finances to confirm the accuracy and reliability of their documents.
Every financial audit is required to adhere to an auditing standard to ensure fairness and compliance. In the UAE, auditors are mandated to follow the International Standards on Auditing (ISA).
Financial audits aren’t compulsory for every business, but certain government authorities may require audited financial statements every year to maintain compliance. The duration of a financial audit will depend on the size of the company and the purpose of the audit, but is generally around 2-3 months.
Why do UAE Companies Need to Audit Financial Statements?
Companies in the UAE have to maintain audit compliance or risk losing their trade license. The audit requirements vary across business locations (free zone or mainland), but having accurate financial reporting throughout the year is key for getting a good audit report.
To Maintain Regulatory Compliance
If your business operates on the mainland, registered for corporate tax, and has a turnover more than AED 50 Million, you need to submit your audited financial statements to the Department of Economic Development (DED) every year.
Free zone authorities set the audit requirements for companies. Most free zone businesses need an annual audit to renew their trade license or maintain their corporate tax exemption but you may be allowed to skip the annual audit if you’re a small business. An audit firm in Dubai can advise you on how to navigate this.
To Reassure External Parties
One of the main financial audit benefits is the ability of a clean audit report to provide reassurance to external parties invested in the business. This could be stakeholders, lenders, suppliers, clients, or investors.
As most external parties use a company’s financial statements to influence their business decisions and investments, a favourable financial audit report is essential to strengthen a company’s future.
To Improve Company Operations
Due to the nature of financial audits, they can also uncover deficiencies in a company’s organizational structure and operations, which auditors can communicate to the senior management and add to their report. It can give any company an unbiased perspective of their business operations and help them fix problems they may have not discovered otherwise.
Stages of a Financial Audit
A financial audit has multiple stages, but this is the general process every auditor follows when conducting an audit of this kind.
1. Planning
The first stage of the audit involves the auditor setting a plan for the process. This means verifying their independence from the auditee, selecting a team, and estimating the duration of the audit. The audit plan can always change if the auditors discover new information, as long as it is mentioned in the audit report.
The initial stage also involves some level of risk assessment. The auditors will take this time to familiarise themselves with the company’s activities and discuss which areas of the business are more prone to risk.
2. Field Work
This stage of the financial audit will consist of auditors testing a company’s policies for risk prevention, cross checking calculations, verifying information from external sources, and inspecting assets and documents for inconsistencies. These processes are known as “internal controls testing” and “substantive testing”. The results from these procedures will inform the overall audit opinion.
3. Reporting
The last stage is when the auditors prepare and submit their findings in the form of an audit report. As the auditors will constantly be in communication with the management during the course of the audit, the company will know the contents of the audit report before its publication. It’s normal for companies to challenge the audit opinion. If they are able to back up their claim with sufficient evidence, the audit opinion can be changed before the report is published.
Main Financial Statements in an Audit
Auditors are expected to assess every company document with scepticism and a critical eye. Every financial audit evaluates three main financial statements:
Balance Sheet
This is an overview of a company’s assets, equity, and liabilities at the end of a certain time period. It could be the end of a financial year or even just a business quarter. The auditor must review each item on the balance sheet to assess its credibility and accuracy.
Cash Flow Statement
This financial statement outlines the movement of cash in a business during the financial year. The audit team will cross check the inflow and outflow of cash with the company’s bank statements to check the reliability of the reporting.
P&L Statement
Also known as an income statement, this financial document shows the gross revenue, total expenses, and the resulting net profit or loss for a given period. The financial audit process will involve a thorough examination of the revenue and expenses in this document as it represents the financial health of a company.
Tips for Businesses for a Smooth Financial Audit Process
A&A Associate offers seasoned auditors who are committed to providing expert services that are unbiased and comprehensive. We can also help businesses with risk management and IFRS compliance so that they are better positioned for success.
If you are a business expecting an audit, keep these tips in mind to make your financial audit process as smooth as possible.
Be Organized
Audits involve detailed and comprehensive examination of a company’s policies, documents, and processes. The best thing you can do for your business is to keep your records organized. Having all your financial statements, invoices, procedure documents categorized and stored accessibly will make it easier for the audit team to find what they need.
Be Open
Audit compliance requires complete cooperation from the auditee. Auditors have the right to demand to see confidential information, cross check statements, and ask for verification on certain reports. Maintaining a good relationship with your auditor and providing all the information they require will make the process much faster.
Be Communicative
Assigning a point of contact with the auditors will streamline communication and information sharing. It is also a good idea to inform your employees of the audit process and advise them to respond to information requests as soon as possible to avoid delays.
To get started with your Auditing, contact us at +971 50 483 6190 or email us at enquiry@aaconsultancy.ae.
FAQ’s
A financial audit is basically an external examination of the financial statements of a company. Financial audit benefits include boosting investor confidence, building company credibility, and maintaining regulatory compliance.
Balance sheet, Income statement, and Cash Flow statement are the three main types of financial statements. These are the three main documents a financial audit team will review during the audit process.
Financial audits are conducted with the intention of verifying the fairness and accuracy of financial statements. Audits assess these documents for fraud, misreporting, or inaccuracies that may misrepresent a company to the public.
Every business may need to conduct a financial audit at some point in their lifespan. Larger companies may be required to submit annual audit reports to government authorities to maintain compliance.
Audits can be internal, external, or tax related. Internal audits are conducted to unearth organizational weaknesses and improve operations. External audits aim to assess reporting compliance with international standards. Tax audits are generally conducted by tax authorities if they believe there are inaccuracies in tax reporting or instances of tax evasion.
Companies based in UAE free zones may need to conduct annual audits as per the requirements of the relevant free zone authority. Mainland companies with income over AED 50 Million who have registered for corporate tax will also need to submit audited financial statements to the DED.
UAE businesses operating in a free zone will need annual audits to renew their trade license and maintain regulatory compliance. However, small businesses may be exempted from this rule.
Qualified Free Zone Persons (QZFP) need annual audits to maintain their tax exemption while UAE businesses and residents with revenue over AED 50 Million must undergo yearly audits for corporate tax compliance.
Look for audit firms who have experience in your industry sector, check their reviews and previous clients, and their pricing structure. A&A Associate is one of the leading audit firms in Dubai offering both internal and external audit services.
