After incorporation, companies always aim to give confidence to their shareholders to ensure continuous support, to do so, companies audit their financial statements as required by Singapore’s Companies Act. An audit can be defined as an independent and systematic assessment of statutory records, books of accounts, and financial documents of an organisation.
Why Company Audits Are Important
Audits are primarily performed or conducted to determine to what extent the financial statements of the company as well as all of its non-financial disclosures present a proper representation of the company’s financial status.
Some of the benefits of audits include:
Provides credibility to a set of financial statements
Gives confidence to shareholders that the accounts are true and fair
Improves a company’s internal controls and systems
Ensures that the books of accounts are properly maintained according to the laws of the country
Analysis of Material Misstatement Risks
Audits involve the analysis of the company’s financial reports and the material misstatement risks present within them. Here are some of the differences between audited and unaudited companies are listed below.
- Able to create reliable financial reports, for internal or external purposes
- Able to determine the proper allocation of its resources or the different levels of productivity of each product sold by the company
- Able to manage financial affairs because they would not be able to analyse the status of their assets and liabilities
- Reliable in the marketplace due to an inability to consistently produce and distribute high-quality goods and services
- Unable to create reliable financial reports, for internal or external purposes
- Unable to determine the proper allocation of its resources or the different levels of productivity of each product sold by the company
- Unable to manage financial affairs because they would not be able to analyse the status of their assets and liabilities
- Unreliable in the marketplace due to an inability to consistently produce and distribute high-quality goods and services
The unreliability of companies that are unaudited stems from the fact that the company would have no way to ensure that there are no misstatements in its reports and records.
Fraud Prevention and Detection
Audits assists companies in the prevention and detection of fraud.
The recurring analysis of a company’s operations and maintenance of internal control systems can prevent and detect various forms of fraud as well as other accounting irregularities.
A company which has undergone the auditing process in the appropriate manner will be able to facilitate fraud prevention. A company with the reputation of being frequently and properly audited will be less likely to have an employee or vendor attempt a scheme to defraud the company.
How Can Audits Reduce Risks
Proper audits can also reduce the risks associated with a company.
Investments with more risks require a higher rate of return for the purposes of investment. Auditing can reduce various forms of risks in a company including
Those related to information
Material misstatement in financial reporting
Misappropriation of assets
Mismanagement caused by insufficient information on the part of those in charge of the company
Which Companies in Singapore Must Be Audited
Companies in Singapore are audited based on the Companies Act which was amended in 2014.
It introduced the concept of small companies, where these small companies are exempted from audit. A company is considered to be a small company if it is a private company in the financial year in question or it meets at least 2 out of 3 of the following criteria:
Total annual revenue is S$10 million or less
Total assets over a specific financial year are S$10 million or less
Does not have more than 50 full-time employees at the end of a specific financial year
The small company will remain a small company for subsequent financial years until it is disqualified. A small company is disqualified when:
Consequences of a Lack of Auditing
There are consequences for companies who did not conduct their audits – whether internal, which is conducted by their employees, or external, which is conducted by third-party auditors.
Reduced business performance as there is no identification of underperforming areas
Lack of action taken to solve the underlying issues within the company
Lack of initiation of new policies to address process-driven issues
Possible loss of income due to legal issues
May experience lawsuits or press criminal charges