A company’s financial statement holds little or no credibility before investors, the government, and the general public in Singapore unless an independent auditing firm evaluates it. A financial audit by an external auditor seeks to ascertain whether a company is indeed truthful and fair in estimating its financial position and performance. In addition, since most public companies are managed by people other than the shareholders or owners, an external evaluation of its financial transactions and documents shows transparency, stewardship, and responsibility on the part of the managers to the shareholders.
Besides, there are generally accepted accounting principles that business establishments must follow in preparing their financial statements. External audits examine whether these principles are followed. It also investigates if the company complies with relevant laws guiding business establishments in Singapore. After this scrutiny, such auditors will give their opinion on the company’s financial position and compliance. For companies in Singapore, let’s consider the statutory requirements for financial auditing.
Statutory Requirements For Financial Auditing in Singapore
According to the Singapore Companies Act, all public companies in Singapore must have their accounting records and financial statements audited annually by an independent auditor. The Accounting and Corporate Regulatory Authority (ACRA) is the body saddled with the enforcement of this Act. The Act mandates that all companies must appoint an external auditor to evaluate their accounting documents and financial statements within three months of their incorporation.
However, based on the amendment to the Act in 2014, which became effective on July 1, 2015, some companies are exempt from this statutory requirement. See below for the criteria for exemption as outlined by ACRA.
Audit Exemption Criteria In Singapore
Suppose a company is privately-owned and meets the exemption requirements, part of which includes having annual revenue of not more than 5 million SGD. In this case, it doesn’t have to audit its financial statements annually. But, as of recently, ACRA’s new small company status is becoming the standard for determining eligibility for exemption. Under this small company exemption arrangement, a company must:
- Be privately owned in the financial year that it is applying.
- In the last two consecutive years, met at least two of these three requirements.
- The total employees’ number is fifty or fewer.
- Annual revenue is 10 million SGD or less.
- The company’s assets are worth 10 million SGD or less.
For a company that is a member of a group to qualify for the exemption, the entire group has to meet the “small company” requirements and satisfy at least two of the three requirements above. In addition, if qualified, the company continues to enjoy the small company status for subsequent financial years unless it becomes disqualified. The conditions for disqualification as a small company include the transition from a private company to a public one and not meeting at least two of the three requirements mentioned earlier.
Types Of Audit
There are three types of audits: internal, external, and Inland Revenue Authority of Singapore (IRAS). The key difference between internal and external financial audits is that In-house or contracted auditors do internal audits, and the report on such an exercise is submitted directly to the board of directors or management. There are times when consultant auditors are contracted for this purpose because the company does not have the resources to carry it out independently. But while this consultant is not a regular staff member of the company, he uses the company’s standards instead of a set of independent standards.
On the other hand, stakeholders in a public company will request external audits, which an independent audit firm carries out. The report of such findings is submitted to the shareholders, and the standard followed differs from those set by the company. As a result, external audits give a company’s financial statements more credibility than internal ones. IRAS also routinely audits a company or individual if it suspects any non-compliance with tax returns or other obligations.
Who Is A Financial Auditor?
A financial auditor is a licensed practitioner working independently or with an auditing firm whose goal is to evaluate a company’s financial statements and accounting details for any misstatement or inaccuracy. Auditors are responsible for applying sound accounting principles in carrying out their jobs. Since they are not on the payroll of the company they are auditing, they can put forth their recommendations or report without any prejudice. Financial auditors typically possess a university degree in Accounting or Finance, along with other professional qualifications. But besides these qualifications, the ethics of this profession forbids unprofessional acts such as receiving incentives to doctor the report.
Benefits of A Financial Audit
A financial audit is one of the requirements that a public company in Singapore must meet. Beginning from the time of your Initial Public Offering (IPO) and further on, if your company hopes to retain the “public” status, it has to present a yearly audit of its financial statements. But beyond just satisfying a regulatory requirement, a financial audit can save your business from fraud. With proper accounting tools and standards, an external auditor can detect any shady deal or financial dealings that can quickly make your company insolvent.
In addition, a public company that expects to fare well on the stock market cannot treat financial audits with levity. Investors will not attribute much seriousness to any financial statement that an external auditor has not appraised. And if such a public company is a non-profit entity, the chances of getting donations from the public will most likely be reduced without an audited financial statement.
The Process of Financial Audit
Financial auditing can take quite some time because of the numerous stages involved. However, these stages can be broadly divided into preparation, fieldwork, and reporting. The preparatory stage involves the external auditor receiving a receipt of the assignment. This receipt tells the auditor what pertinent objective of the company must be considered when performing the audit. The auditor will also perform a risk assessment, determine the audit criteria, choose the audit method, and evaluate the cost of the process.
The second stage is where the auditor is physically present on the ground, asking relevant questions and reviewing your company’s documentation and processes. At this stage, the auditor takes note of all identified cracks or inaccuracies as they review your company’s internal control measures. They also conduct substantive tests and tests of control to evaluate the effectiveness of your internal control measures. This process can take a day or a week, depending on how big your establishment is and the number of auditors handling the procedure.
Once the fieldwork is over, the auditor proceeds to document their findings in a report, which they will present to the stakeholders. In drafting reports, auditors have different styles, and some may first confer with in-house staff, while others may not. The report will, however, contain their findings and recommendations where necessary.
Penalties for Non-Compliance
Since a financial audit is one requirement for maintaining the status of a public company in Singapore, non-compliance means that your company risks losing its legal status under the law. But even before forfeiture of the company’s legal status, the Companies Act prescribes a fine of 5,000 SGD to any company that fails to turn in its audit as requested.
There are chances that stakeholders and some members of the public may even institute lawsuits against such an erring establishment. But, of course, this can distract the company from its objectives.