The term audit can be defined as the evaluation and examination of the financial records of an entity, for purpose of ensuring that the financial records are properly maintained and provide a true and fair view of the financial position and financial performance of an entity to the users of financial statements.
A company’s financial statements must be accurate and compliant with legal requirements for them to be audited. Additionally, an audit provides reasonable assurance that a company’s integrity and dependability to creditors, investors, and other interested parties.
Audits are undertaken for various purposes and as per the requirement of an entity. The different types of audit that can be conducted include internal audits, forensic audits, financial audits, etc.
A financial audit is an audit of the financial statements conducted by an independent professional. The audit commences after the closure of accounts of the respective financial year. The auditor analyses risks, plans and conducts audit procedures, examines accounts and financial statements, discusses the results with the entity’s management and prepares an audit report on the basis of his conclusion.
The following are benefits of auditing financial statements:
Submit audit report as per statutory requirements and compliance with relevant legislation
Provide a comprehensive view of the business
Improve an entity’s credibility with third parties
Identify weaknesses and risks of a business
Improve shareholder confidence
The financial statements are prepared depending on the structure of an entity. These are as follows:
These financial statements are prepared for an entity that is not a parent company. The entity does not hold investments in a subsidiary, associate or joint venture.
b. Separate Financial Statements
These financial statements are prepared when a parent company finds it appropriate to present its stand-alone financial statements, without combining/consolidating the accounts of its subsidiaries, associates and joint ventures.
c. Consolidated Financial Statements
Consolidated financial statements are prepared for a group of entities owned by the same parent company. It incorporates the financial statements of all the subsidiaries, associates, and joint ventures in which the parent company has a controlling financial interest.
d. Combined Financial Statements
These financial statements are prepared by combining the financial statements of two or more entities under common management or control into a single set of financial statements.
The following are the purposes of the audited financial statements within the perspective of UAE laws:
Certain regulatory authorities such as government authorities, tax authorities, ministerial offices, etc., require the submission of audited financial statements. Companies registered in most free zones are required to submit audit report for the renewal of their license.
2. Lending Institutions
Lending institutions such as banks analyze audited financial statements to understand the company’s ability to repay a loan.
3. Other Legal Compliance
The audited financial statements are also required for the submission of the ESR Report filing, Tax Residency Certificate, ICV Certificate, and many other legal compliances.
4. Management / Owner’s Perspective
The audited financial statements with analytical information allow the management/owner to assess the financial position and performance of the company.
5. There are many other circumstances that will require a company to submit the audited financial statements.
Do you know the purpose of auditing and financial statement?
Understanding the definition and purpose of an audit can be essential for any business or individual looking to ensure their financial records are accurate and up to date.
The Economic Substance Regulations bring specific requirements for businesses to demonstrate that their actual economic activity is in UAE, and it is not driven solely to benefit from a low or non-tax jurisdiction.
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