Audit 101: What It Is & The Importance Of Each Audit Type
Auditing is often defined as a close examination or evaluation of the financial statements made by a specific business or company to verify the accuracy of their financial data and make sure that it is represented accurately.
Most of the time, big businesses have a go-to accountant or auditor who will perform the tedious task of auditing, but this is also something that SMEs (small and medium-sized enterprises) can outsource from companies or firms that offer a variety of audit services.
Hence, read on and understand the various audit types that you should be aware of and their importance.
Why is auditing necessary?
Apart from the fact that the government in Singapore mandates every non-small registered business to be audited on an annual basis, auditing also helps to make sure that every single financial statement made by a business in a given year is compliant with relevant accounting standards. This will help accurately establish a business’s financial positioning, which will determine whether they are very profitable or not.
Financial statements are documentations prepared by a business’s internal management. The users of the financial statements, such as their shareholders, creditors, the government, business partners, suppliers, and customers, have access to helpful information about the business.
But because these are prepared internally, there is a possibility of misappropriation of funds or incorrect financial data being inputted in the system, which may affect the decision of the users of the financial statement. That is why auditing is essential – it helps guarantee that this does not happen.
What are the different types of audit services?
This type of audit is performed internally by a business’s employees. These are done specifically to provide essential information to the management and internal stakeholders – not for parties outside of the business. The information provided in the internal audit helps the company make more effective strategies by providing the business’s decision-makers with items that can help increase internal controls.
Apart from that, internal audits also allow business management to surface possible errors and deficiencies before having a third-party auditor look at all of the business’s financial statements.
An external audit is an audit type conducted by an organisation or a small audit firm that is not affiliated with the company. External audits are performed to give an alternative perspective that internal auditors are probably influenced by and look for misrepresentations in the financial statements made by the business.
If the audit done internally matches the one done by an external party, it means that the business’s financial positioning is represented correctly.
These audits are performed to ensure that a business’s financial statements do not misrepresent its taxable income. This helps to make sure that companies are compliant with the tax regulations imposed by the government because an error in the representation of a business’s taxable income is automatically considered ‘tax fraud’, regardless of whether or not it was done purposely.
It’s common practice for small business owners to learn as they go. This includes learning more about accounting as they run their business. However, working together with reliable, experienced audit firms can help minimise any risk of potentially costly financial mistakes.
Get in touch with OneStop Professional Services to plan and prepare for a smooth business setup process – we can offer several services like company incorporation, corporate financing, financial outsourcing, auditing, and accounting.