Getting value from your audit, by Stewart Russell
Large entities are required by law to have their financial statements audited by an independent auditor, usually a Chartered Accountant. Some smaller entities may also require an audit including charities with annual expenditure exceeding $1 million or those required to have an audit due to their constitution.
The main purpose of an audit is to give an independent opinion to the entity’s members, beneficiaries, funders or other interest parties as to whether the financial statements fairly reflect the true financial position.
Auditors are governed by a set of international audit standards and guidelines which are universally adopted. This means that the audit of a small charity in the Far North must be conducted with the same base audit regulations as a large company in Auckland.
The key question is, if you are required to have an audit or an independent review, how can you make the most of it? What additional value can you gain from your audit?
Most auditors will work for many organisations and have the luxury of seeing how many different businesses operate. We see a diverse range of systems and controls operating in different businesses and therefore know which ones work best.
A good audit will focus on the risk areas of the organisation, ascertain where there may be a problem either with the financial statements, or with the systems that the organisation operate.
If the governing body or members of an organisation have any concerns with an area of the financials, or are unhappy with some of the systems, they should discuss these with the auditor.
The auditor should be able to focus on these areas, provide the comfort the governing body require and more importantly suggest ways of improving the systems.
After each audit or review, a letter will be sent to the governing body with suggestions for improvement. Sometimes these letters are ignored as the points are seen as nit-picking. In some cases, this may be true, however a good audit letter is a valuable guide.
A good audit letter will include recommendations and provide some constructive points as to how the organisation can improve its systems or procedures. It will include items of best practice.
When drafting these letters, we focus on the important issues first, which we believe will be beneficial to the organisation. We still include those points which are not critical but should nevertheless be adopted. A good example of this is a recommendation that all meeting minutes are approved and signed.
Trusts and community organsations play a major part in our Far North region. It is difficult enough for these organisations to find willing trustees, without them having to struggle with understanding complexities of a financial audit.
If there is no legal requirement for an audit, a review engagement is another option. This type of review is still a form of independent assurance but is not as detailed as an audit.
The review engagement is a lower cost option as it is providing a lower level of assurance. The review provides a conclusion as to whether anything has come to reviewer’s attention that the financial statements may be materially misstated.
It may be a good time to review your constitution and consider whether a review engagement would be more suited to your organisation.
If the board/trustees agree that a lower level of assurance is acceptable for their organisation then they can make an amendment to the constitution to allow for a review engagement rather than an audit.
For more information, please contact me or visit our website www.pkffa.co.nz