The purpose of an audit: an explanation for those that require, or should seek, an audit
1 June 2021 | Minutes to read: 7

The purpose of an audit: an explanation for those that require, or should seek, an audit

By William Buck

This article will explain why organisations require audits, identify the legislation that enacts those audits, and detail why you should consider getting an audit, even if it isn’t required by law.

What is an audit?

An audit is an examination of financial information/records, a process culminating in us giving an opinion on whether that financial information is true and fair. Both the financial information and the opinion come in many shapes and sizes depending on the type of entity you are and the type of audit you require.

Why get an audit?

In the overwhelming majority of cases, you are required to get an audit as a result of specific legislation. The Corporations Act covers most companies, the Associations Incorporations Act covers associations, various trust account legislation covers trust accounts, and charities are under the ACNC Act.

However, there are other reasons why your company may require an audit:

  • The constitution of your entity may require an audit
  • If you have bank facilities, then your bank may want you to get an audit
  • Stakeholders such as owners/directors/investors may want an audit done of their organisation to know that their money is being properly managed
  • You may be a company looking to expand and grow, and/or
  • You may be a company that wants to issue some sort of prospectus or start an IPO process.

What types of audits do we do at William Buck?

  1. External audits of financial statements

This is the most common type of audit we do. For many entities the requirement to have an audit is driven by legislation. Set out below is a summary of the most common financial statement audit requirements:

  • ASX Listed companies are required under the ASX listing rules to have half year reports reviewed and annual reports audited and lodged with the ASX.
  • Large private (proprietary) companies are required to prepare financial reports which are audited (unless ASIC grants relief). The definition of a large proprietary company changed as at 1 July 2019. Any company that has at least two of the following is considered to be large:
    • Revenue for the company and its controlled entities totals $50m or more
    • Gross assets for the company and its controlled entities total $25m or more
    • Total number of staff for the company and its controlled entities totals 100 or more.

This was a doubling of the previous threshold.

There are circumstances which might require small companies to be audited. For example, if you are small but foreign controlled or small but have one or more crowd-sourced funding shareholder at any time during the year.

  • Significant global entities – these entities are part of a large, worldwide group with more than AUD$1billion in turnover. These entities are required to have general purpose financial statements as per the ATO.

While the ATO points out that if the only reason you are preparing general purpose financial statements is for them then they don’t have to be audited, it is considered best practice (by us and by the ATO) to do so.

  • Clubs – in Queensland many clubs are companies limited by guarantee, requiring an audit for the members if the revenue is more than $1million. Entities under $1million can elect to have a review instead of an audit. This is required by ASIC.
  • Associations – in Queensland where either your assets or revenue equate to more than $100,000, you are required to have an audit under the Associations Incorporation Act 1981.
  • Charities and NFP’s registered with the ACNC are similar to associations in that they are categorised as either small, medium or large. Medium charities can either be audited or reviewed. Large charities must be audited. A large charity is currently any entity with revenue over $1million. A medium charity has a yearly revenue between $250k and $1million.
  • Public companies – those not listed most likely require an audit, however there are exceptions.
  • AFSL licence holders – any entities holding a licence require the financial statements to be audited and lodged, along with having their compliance with their AFSL requirements audited.
  • Entities contemplating an IPO/Prospectus – if you are contemplating going down this path you may wish to have these done, as you are required to prepare three financial reports (normally three full financial years). It’s usually more difficult to do this retrospectively.
  1. QBCC MFR (Audits and Reviews)

Building and construction companies can potentially require audit work where an MFR (Minimum Financial Requirements) Report is required. The goal of an MFR is to have an independent person attest that a builder has sufficient net assets for the revenue they intend to earn. The more revenue you want to earn, the more net assets you are required to have. QBCC are trying to avoid large building collapses leaving people with half a home or building. QBCC can and will suspend or cancel licences.

An audit is required in five scenarios typically:

  • Licence application
  • To increase the amount of revenue you are allowed to earn based on your size (depending on the size of revenue the organisation is attempting to earn, it may require an audit or a review (larger builders will require an audit))
  • Change in company directors
  • Other changes advised to QBCC
  • When requested by QBCC.
  1. Trust account audits

These audits are generally carried out for lawyers/legal practices and real estate agents (anyone required to operate a trust account). Real estate agents are governed by the Office of Fair Trading, as are motor dealers, letting agents, auctioneers and debt collectors. Legal trust accounts are governed by the Queensland Law Society.

The goal of a trust account audit is to make sure that operators of the account are dealing with, receiving, holding and paying from the trust account in accordance with the relevant legislation. You are required to have specific items on the receipt. Every month you are required to reconcile your account and there are certain rules that you must follow with payments. One of the key elements of a trust account is that you can’t overdraw it – be it individual clients or the account in total.

As auditors, we check trust accounts to ensure that any money held in trust is there for a specific purpose and can only be distributed for that purpose. Sadly, there are many examples of lawyers/real estate agents stealing from trust accounts and generally doing the wrong thing.

  1. Outgoings audits

These are audits that are required by the Retails Shop Leases Act or by the commercial lease between owner/property manager and tenants. The objective is to check outgoings charged by owner to tenant. Outgoing that can be charged to the tenant are outlined in the lease and include rates, water, security, repairs and maintenance.

As a tenant, you will pay outgoings each month based on your budget. Come year end, the actual outgoings that the owner paid are determined and audited. Then any adjustment between what was paid and what should have been paid is determined.  The tenant will then be required to either pay more outgoings or they will receive a credit/refund for paying too much.

In an outgoings audit, we are looking out for are such things as assessing whether an expense is for repairs (which are outgoings) or capital items (which are not outgoings). Many of the outgoings are recurring, such as rates that are due every quarter or maintenance due each month. We check to see that the tenant is picking up that recurring charge properly.

  1. Government grant/acquittals audits

These are governed by the agreement that the business has with a State or Commonwealth government department. What you will find is that the agreement will outline that the business is to receive $x, to spend on a particular project or activity. As the project progresses, the business will be updating the relevant government body. On completion, the project will require an audit. For example, this year I have seen grants to install CCTV cameras, to conduct indigenous support programs and to provide community housing.

Typically, the agreement will dictate that on completion an independent auditor needs to verify that you have spent all the money in accordance with the agreement. If expenditure is found that is not within the parameters set by the agreement, the business may be required to repay the money. So, as auditors, we are looking at the evidence of what you spent the money on – does it line up with how you have agreed to spend it?

  1. Agreed upon procedures/specific engagements

This is where you – as a director/manager – can have a specific audit/procedure done, sometimes in addition to a full audit. Other times where you may not have any legislative requirement to have a full audit, you may choose a specific area or procedure of your organisation to undergo some audit procedures.

Some examples of different areas in which we have undertaken agreed specific audit steps include:

  • Attending a full stocktake, checking both the counting performed by staff and the procedures used in the count and making any improvements for recommendations.
  • Audits of key cycles in your organisation. This involves checking controls and procedures used in your organisation, and making any recommendations for improvements such as in regards to payroll (from recruitment, payroll setup and payment, through to termination/resignation), purchases (from supplier setup, purchase order and invoice authorisation, through to payment) and revenue (customer setup, sales orders, delivery and invoicing, receipt of payment).
  • Medical practices’ billing records, including checking the recording of revenue between your medical administration system and your accounting system. Additionally, reviewing your medical administration software to determine if there are additional reports or procedures that can be implemented to assist your practice.
  • Reviewing employee and supplier Masterfile data, changes in records, fraud examinations, checking for duplicate payments of invoices and checking that employee bank details match that of suppliers.

What is the difference between an audit and a review?

Some associations, companies (limited by guarantee) and charities that are medium-sized entities have the option of having their financial statements reviewed instead of audited.

A review takes less time and is cheaper than an audit. However, given that the procedures involved in a review are far less comprehensive than in an audit, you are less likely to have an issue detected. This results in only limited assurance (comfort). The reviewer will simply state that they do or do not know of anything to suggest your entity’s financial report is non-compliant. A review is a lower level of assurance than an audit.

What else can we help with?

William Buck has also been engaged to undertake the following:

  • Prepare compliant financial statements for organisations, ensuring they have all necessary disclosures.
  • Prepare or assist in preparing accounting advice or position papers, in particular advice on the implementation of new accounting standards or where you are changing accounting policies and outlining the impact of these changes.

Beyond compliance requirement – why should you consider an audit?

This article mostly discusses audit from the perspective of being required to complete the audit for compliancy. However, it’s valuable to consider the audit from the perspective of someone who is putting money into the organisation. If that’s you, you would like to have some confidence that your investment is justified and the figures you’re seeing have been checked by an independent auditor.

Therefore, all our listed clients get audited, and audits should be considered for all types of organisations. There are so many ways in which an audit can contribute to an individual stakeholder’s confidence. When you are getting a builder to do work, you’d hope there is a system in place to make sure that they are financially sound to complete the job. If you are giving your money to sit in someone’s trust account for a certain purpose, you’d want there to be processes in place so that it isn’t misused. As a tenant, you pay outgoings all year and want to make sure that you have been paying the appropriate amount. When government bodies hand out grant funds to spend on certain things, they want some assurance that you haven’t just pocketed the money, that you have indeed spent the funding in line with your agreed initiatives.

In these ways, an audit can significantly contribute to the security and stability of a business.

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