The purpose of a financial audit is to provide assurance that financial statements are presented accurately and in conformity with generally accepted accounting principles (GAAP) allowing business owners to make confident business decisions.
External financial audits are required under specific situation for small and large proprietary companies. Beyond this, there is real value in conducting an internal and/or external audit for the purposes of proactive risk management, particularly in relation to vulnerabilities to internal or external fraud.
Are you a large proprietary company?
Large proprietary companies must prepare and lodge a financial report and a director’s report for each financial year. The accounts must be audited unless ASIC grants relief.
In 2019, amendments to the Corporations Regulations Act 2001 effectively doubled the thresholds for determining an entity’s reporting obligations. Under these regulations, a proprietary company is classified as large if it meets at least two of the following thresholds in relation to a financial year:
- the consolidated revenue for the financial year of the company and any entities it controls is $50 million or more
- the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more, and
- the company and any entities it controls have 100 or more employees at the end of the financial year.
If the company does not meet at least two of the above criteria, it is classified as ‘small’.
What about small companies?
A small proprietary company is generally not required to prepare financial reports, unless directed to by ASIC, or directed to by shareholders. Accordingly, any small companies are exempt from the compliance requirements as are small foreign owned companies in certain circumstances. A company can easily overlook the requirements – particularly if you’ve never had to lodge financial reports with ASIC in the past.
Other specific instances in which a company may be required to prepare financial statements for the purpose of an external audit include the following:
Foreign controlled small companies
Small proprietary companies that are controlled by a foreign company for all or part of the financial year must prepare and lodge audited financial reports with ASIC unless it was consolidated into financial statements lodged with ASIC by a registered foreign company or Australian company, registered scheme or disclosing entity.
However, ASIC relieves certain foreign controlled small proprietary companies from their financial reporting obligation where that entity is not part of a ‘large group’ (as defined in the Instrument).
Medium and large charities
For reporting periods starting from the 2022 annual information statement, medium charities (with annual revenue of $500,000 or more, but under $3 million) must have their financial statements reviewed or audited. Large charities (annual revenue of $3 million or more) must have their financial reports audited.
For reporting periods prior to 2022, refer to https://www.acnc.gov.au/tools/topic-guides/charity-size
Application for government grants
Companies, associations or charities seeking external funding and grants may have to undertake an audit. This could be part of the qualifying criteria (i.e. to satisfy eligibility requirements) or to satisfy the conditions of the grant (i.e. acquit the grant).
Qualifying for a loan
Lenders may require an audit of financial reports if a business seeks a loan. This is part of satisfying the eligibility requirements as well as establish the veracity of the figures presented prior to providing the funding. Similarly, to the above, lenders might also require ongoing compliance audits to ensure loan criteria and requirements are being satisfied (e.g. compliance with loan covenants).
Selling a business
If you’re planning to sell your business, potential buyers want to be able to rely on your financial data, so it’s a good idea to have your financial statements audited. Auditing adds value to your business.
Some organisations may have a requirement for an audit specified in their constitution, rules or other documents (e.g. a shareholders agreement). Again, if this is the case, you will need to have your accounts audited by a registered company auditor.
An audit may be required in certain industries due to regulation – for example, for manufacturers supplying products to the government.
Do you need help with an audit?
At the National Audits Group, we are experienced in providing audit advice to a broad range of clients, from public companies to large and small private companies and not-for-profits.
To find out more about how we can help your business with an audit, contact us directly on 1300 734 707
Assistant Audit Manager, National Audits Group
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