Audit time comes around once a year often at this time. But to many of the people involved, the whys and wherefores of the audit process, are confusing.
What is an audit? The dictionary simply defines an audit is an “official examination of accounts”. The distinction between the accounting reports, and the audit of the accounts, is important. To many smaller organisations the audit function includes the preparation of the financial reports. While in practice this often happens, it is preferred that the auditor has no involvement in the preparation of financial statements which he or she is auditing. But rather, the audit process seeks to independently verify the accuracy of reports that have been prepared by another party. This distinction will become important when we come to consider how to get the best value for money from the auditor: part of the secret is in ensuring that, as far as possible, the auditor doesn’t have to become too involved in doing the accounting work, as well as the audit.
But first, we should consider who needs a financial audit? So long as we don’t include those who have been chosen by the IRD for a tax audit, the list of organisations who may require a financial audit includes:
• Small organisations will often be required by external parties to have an audit. For example funding providers (the ASB Charitable Trusts are a good example) often require applicants for grants or loans, to have had their financial statements audited before they will give or loan funds.
• Members of any organisation, be it a club, society, church, or company, can call for an audit, and often the Constitution will require it anyway.
• All limited liability companies are required by the Companies Act to have an audit, unless the shareholders resolve unanimously not to.
• Special purpose audits such as those required for the Trust Account of Real Estate Agents.
So what does an audit involve? In New Zealand all professional financial auditors belong to the Institute of Chartered Accountants of NZ (ICANZ). In fact, it is a relatively small proportion of ICANZ members who have sufficient training and experience to comply with that Institute’s standards. ICANZ has a robust volume of audit performance standards embodied in what is known as the “Codified Audit Standards”. These standards contain a wide range of mandatory procedures that auditors must follow.
Although this means that any audit, regardless of the size of the organisation, will take a reasonable amount of time to complete, it also means that if a Chartered Accountant does the audit, it should be done to a high minimum standard. For example, a CA’s audit must involve a formal approach plan, a review of the financial controls within the organisation, an assessment of the extent that those controls can be relied upon, and an examination of the organisation’s financial transactions. The items that must be examined range from matters such as the basic arithmetic accuracy of the financial statements, and checks to ensure that payments are adequately authorised and supported, to more complex issues such as governance performance and organisational probity.
Increasingly there is also a trend for auditors to need to be on the look out for internal fraud. There was a time when auditors learned that their function was to act as “watchdogs, rather than blood hounds”, but international trends are tending to force a change in that view. Nevertheless, if an organisation is concerned about the potential for internal fraud, it is wise for the auditors to be given specific instructions accordingly.
But what about the cost of the audit? Regardless of the quality of the audit, most organisations will place a fairly high priority on value for money paid for their audit. And why not? But like most goods and services, the best value for money won’t necessarily be found in the cheapest audit available. A good audit should add value to the subject organisation. The audit can be a “health check”. It can identify areas where internal controls can be improved, and uncover valuable opportunities to improve efficiency. This can result in significant savings and a lift in performance – desirable outcomes in anyone’s language.
When you talk to your auditors about the next audit, why not ask them this: “What value are we going to get from our audit this year?”. And as far as cost is concerned, there are often ways that the audit process can become more efficient, and organisations need to work closely with their auditors to identify areas for improvement. Ask your auditors how you can prepare the records and accounts to minimise the bookkeeping and preparation work that they may have to do before they can get into the real task of doing the audit.
A note about “Review Engagements” : For the organisation that is only after a modest level of assurance, and perhaps is not having to report to an external party, a lower cost assurance method can be a “Review Engagement”. A Review Engagement is still a process which is governed by ICANZ Standards, and it can usually be done at a lower cost than a formal audit, albeit providing a lower level of assurance. For more details, ask a Chartered Accountant.