Content provided by a guest contributor.
Auditing in relation to SMEs has always been a debatable and contentious issue. Out of just about every SME owner that I have met, almost all would opt to have their business audited. That is, of course, if there was a combination of a reasonable price attached to it, together with a professional and efficient service guaranteed.
I have come across very few professionals that can fill the SME gap. The big guys aren't interested in doing an Audit that doesn't generate an invoice over R300K, and many of those small accounting firms that can come in at a reasonable fee just don't get the job done.
After the implementation of the new companies act, expected to now come in on the 1st May 2011, the most significant decision any SME owner will have to make in the next 12 months is whether to keep having their financial statements audited or only have an independent review performed.
To make that decision, one must have a clear understanding of what the difference is between them. An independent review consists of analytical procedures, and enquiries from management. The reviewer has no obligation to corroborate the explanations provided by management. A limited assurance report is issued.
An audit is performed according to the International Audit Standards, which requires that the auditor obtain an understanding of the internal controls of the business, obtain sufficient knowledge of the business to plan the audit, perform analytical procedures and corroborate explanations provided by management for exceptions, perform substantive and control testing. An audit report is then issued which provide a higher level of assurance.
Advantages of having your financial statements audited
- A voluntary audit provides third parties with the security and impression that the company is dedicated to being transparent in its business practices, is willing to comply and has good business ethics. This promotes the reputation of the business among third parties.
- Having financial statements audited is investing in the future of your business. Your business may require significant supplier accounts, financing or tenders to grow, all which may require audited financial statements at some time.
- Not having your financial statements audited for a year or two, and then deciding to have them audited will have a significant cash flow affect on the business. Audited financial statements will then have to be prepared for all the years outstanding, which will result in a significant expense in a single year. Alternatively a qualified audit report may have to be issued which provides a negative image of your business. It may also be more expensive as documentation of more than a year ago might take longer to find.
- An audit can serve as an annual health check for any business. Weaknesses in controls can be identified and recommendations implemented to help your business work more effective and efficiently. Identifying weaknesses may also prevent fraud.
There are ways that SME Owners can reduce the cost of their audits. Owners can obtain client assistance lists from their auditors before the audit starts and prepare audit files. Further discussions with their auditors should be held to find further ways to decrease the audit fees. Ask your staff to assist the auditors when looking for paperwork like invoices and receipts. This will decrease the time spent by the auditors.
Considerations to take into account before making the decision
- If you already have some kind of financing or supplier accounts, contact your financial institution/supplier and enquire from them whether they will need audited financial statements.
- If you are considering applying for financing or will need supplier accounts, an audit will most probably be required.
- What will the financial implications be for your business should you need to audit your financial statement in the future?
- Are you considering selling an interest in your business sometime in the future? Buyers or potential partners might need audited financial statements.
- What the affect of a SARS audit be on your business? Are your financial records and documentation in order should SARS require an audit?
The content in this article was provided by Mike Anderson – a passionate entrepreneur focused entirely on helping small business owners to stay in business and achieve beyond the norm. This he does as founder and CEO of the National Small Business Chamber (NSBC).
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