Category: Audit

Internal controls are the activities that a company would add on its normal operations with the intention of minimising the risks or errors and frauds, protecting its assets, as well as to make sure that it has conducted all operations by adhering to the rules or standards. Also, we can say that internal controls are the activities that business owners (Also see Poor Accounting Practices That Business Owners Should Avoid) need as these controls can help to reduce the types of risks as well as the risk levels that their business may be exposed to. The controls play a significant role in ensuring that the company can generate accurate financial statements (Also see What is a Financial Statement Review?) too.

Despite the advantages that internal controls could bring to a business, it has a significant drawback, that is, the control activities often cause the processes of the business to be slower. As a result, this may lower the overall productivity of the business. Hence, when the company’s management is developing the internal control system, they need to strike a balance between productivity and the reduction of risks. Sometimes, this may cause the management to take a certain level of risk to let the company compete with other competitors more efficiently. However, the company may suffer from some losses occasionally as the management has reduced the controls.

As the company continue to develop and increase in size, its internal control system will typically become more comprehensive too. This is crucial as the founders of the business will not have time to look into every control in all the business operations or processes. If a company chooses to go public, it will need to implement some extra financial controls, particularly if its shares will be listed on the stock exchange. Thus, in most cases, the cost incurred for maintaining the controls will increase as the company grows in size.

The management of a company can implement internal controls in many ways. For example, the board of directors should supervise the entire company and guide the management team. The company should also impose restrictions on the accessibility of computer records. This is to make sure that only the staff who needs those data to complete their tasks can access the information. This helps in minimising the risk of the important data being stolen or altered.

Most companies would hire an accounting firm in Singapore to conduct their annual financial statement audit （Also see Understanding the Differences between Review and Audit) , but do you know that you can conduct internal audits too? Internal audits are one of the most important ways to examine the internal controls that the company has implemented. The internal auditors (Also see The Advantages and Limitations of Statutory Audit) will assess all the processes and determine if there are any problems that the company could amend by improving the existing controls or introducing new controls. Although internal controls help in mitigating risks, it does not mean that the controls can remove the risks entirely. Some incidents will still cause the company to suffer from substantial losses, although it has implemented the necessary internal controls. For example, some unexpected circumstances have occurred, or some employees who want to commit fraud has done something to the controls or the related processes.

Statutory audit is the audit that a company needs to do according to the requirement of law which applies to the company. The primary purpose of having a statutory audit is to let the auditors from an audit firm Johor Bahru collect all related information. Then, the auditors will be able to issue audit opinion about the true and fair view of the financial position of a company on a given date, probably the date on the balance sheet.

The statutory audit aims to let the auditors give his opinion independently, which means the auditors must not be influenced in any manner. He will assess the financial records of the company before delivering his judgment in the audit report. Thus, the stakeholders may depend on the company’s financial statements. Other than shareholders, the stakeholders will also benefit from the audit since they can make decisions by referring to the authentic and audited accounts.

Advantages

– Statutory audit increases the credibility and genuineness of the company’s financial statements as the auditor acts as an independent party that verifies the statements.

– The audit(Also see Advantages of Performing Continuous Audits) makes sure that the management has made an effort when they are carrying out their responsibilities

– The statutory audit will indicate the company’s compliance with non-statutory requirements such as corporate governance and so on.

– The auditor (Also see Audit – Checklist for the Compliance Audit) will give his feedback on the internal control an organisation is implementing as well as perform internal checks in the related areas or departments. He will also tell the management about the weakness of the internal control and the parts that are susceptible to risks. Thus, the company can minimise those risks, and this helps in improving the company’s performance.

Disadvantages

– The company may have to spend a lot on an audit. However, if the firm has engaged in an audit (Also see Audit – The Definition of Audit Assertions?) firm to let the professionals look after their daily tasks, for example, the process of preparing the accounts, then the cost of an audit will be relatively lower when compared to those companies that do not do so.

– Statutory audits may disturb the employees from performing their day to day chores as they may need to answer the query from the auditor or provide the necessary documents to him. As a result, the employees may need more time to complete their work, probably beyond office hours. Also, this can cause the employees to be stressed out at work.

– Audits (Also see How to Reduce Time Required for Audit Cycle?) have some inherent limitations, for example, the internal control of the company, the auditors need to complete it in the time given, and the auditor may have limited power, and so on.

– There are a lot of areas that the auditors (Also see How to Reduce Time Required for Audit Cycle?) can only get the information from the management. This is dangerous since if the management is involved in frauds, then they are going to give manipulated representations to the auditors.

When an audit firm in Johor Bahru is running an audit, the company’s management may be making some audit assertions on its financial statements. These audit assertions are some inherent claims the management makes about the presentation and recognition of various parts of those financial statements.

Typically, audit assertions involve in the procedures (Also see What are the Audit Procedures for Accounts Receivable?) that the auditors would use in the process of testing the policies, financial reporting processes, guidelines and internal controls (Also see A Checklist for Ways to Assess Internal Controls) of a company. When the management of a company is preparing their financial statement, they will make these assertions, which are the implicit or explicit claims and representations.

The disclosures and the correctness of various parts of the financial statements of the company are the main focus of the audit assertions. Sometimes, people would call audit assertions as Management Assertions or Financial Statement Assertions.

Types of Audit Assertions

There are three main types of audit assertions, which are the accounts balances (Also see The Balance Sheet and the Profit & Loss Account) , classes of transactions, as well as the presentation and disclosure.

1. Account Balances

Generally, the audit (Also see Internal Auditors and Their Roles in Consulting) assertions related to account balances are about the balance sheet accounts, for example, liabilities, equity and assets balance at the and of an accounting period.

– Existence: This means that when an accounting period has ended, the balance of the liabilities, equity and assets recorded in the books of the company actually exists. This assertion plays an essential role in the asset accounts as it shows the strength of the business.

– Completeness: This implies that the company has recorded the balances of the liabilities, equity and assets that it should have recognised in its financial statements. Keep in mind that if the company had left out any parts of an account, it might lead to an incorrect representation of the company’s financial health.

– Rights and obligations: This is about the confirmation that the company possesses the right of owning the assets as well as the obligations for its liabilities as recorded in the company’s financial statements.

– Valuation: This has a close relationship with the accurate valuation of the balances of the liabilities, equity and assets. The company must do the valuation of balance sheet items correctly because if it has undervalued or overvalued the accounts, it can lead to an incorrect representation of the company’s financial facts. To show the true and fair financial position of the company, it must ensure that it has done the valuation accurately.

2. Classes of Transactions

Typically, the company would use these assertions for the accounts about the income statements.

– Occurrence: This means that the transactions the company has documented in its financial statements have taken place, and those transactions have to be related to the particular organisation.

– Completeness: This indicates that the company has recorded the transactions it should recognise in its financial statements comprehensively and completely.

– Accuracy: This means that the company has recognised all the transactions correctly at the right amount. As an example, the company has accounted for and reconciled any necessary adjustments in its financial statements.

– Cut-off: This implies that the company has recorded its transactions in the correct accounting period. It has to make sure that in the financial statements, it has recognised the transactions such as accrued and prepaid expenses correctly.

– Classification: This assertion is to make sure that the company has categorised and presented all of its transactions properly in its statements.

3. Presentation and Disclosure

This type of assertions is related to the presentation and disclosure of distinct accounts in the company’s financial statements.

– Occurrence: This indicates that the company has presented all the events and disclosed all the transactions. Also, it should confirm that these events and transactions have occurred and are relevant to itself.

– Completeness: This is about all the balances, transactions, events and other matters that the company should disclose in its financial statements. The company also needs to confirm whether it has disclosed them properly.

– Classification and understandability: This is about the comprehensiveness of the balances, events, transactions and other financial issues the company has disclosed. It ensures that the company has categorised all of them accurately and presented them properly in a way that helps others to understand the information the financial statements carry.

– Accuracy and valuation: This assertion ensures that the company has adequately disclosed the balances, events, transactions as well as other similar financial issues at the correct amounts.

Besides engaging audit firms in Johor Bahru to have financial statement audits, some companies may hire internal auditors to run internal audits to assess its internal controls or other processes to guarantee the efficiency of company’s operations. As an internal auditor, if your managers are complaining that the internal audit (Also see How to Ensure an Efficient Internal Audit?) department is spending too much time on the internal audit projects, you need to look into factors that cause an increase in the time required for audit cycle and ways to solve this problem. It is normal if the auditors want to have ample time for planning, performing and recording the audit project. However, what the management wants is timely information and fast results so that it can take necessary actions as soon as possible.

The Importance of Speed

The processes for internal audits (Also see How to Ensure Your Company’s Audit Process Goes Smoothly?) did not change much in the past few decades. However, as the business risks may increase as time passes, the stakeholders and the management do not want to wait for months before they can get the audit results. If the audits are taking too long, the results may come too late that the management can no longer use them or fail to convey business risks that the company has discovered recently. Also, audit cycles which are longer than usual or necessary may reduce the stakeholders’ satisfaction.

Plan the Audit Project Well

A well-planned audit project may reduce the time taken by an audit cycle effectively. The internal auditors should keep the scope of the audit project within rationality and avoid setting too many or broad audit goals. To achieve this, they need to cooperate with the management to improve the audit objectives and specify the time frame. Besides, the audit managers need to make sure that the skill sets the audit staff possesses align with the audit risks (Also see How to Plan for Internal Audits Schedule Based on the Risks?) , as well as inspect the business risks fully in the areas they audit.

Utilise Information Technology

When the internal audit department is performing the audit projects, the audit staffs need to implement effective methods like data mining to increase their efficiency. They should also make use of information technology and other online tools when they are producing the audit working papers. By using technology, the auditors can significantly boost their productivity and save a lot of time when they conduct the audit and develop the final report.

When the audit staff develop audit reports, they have to increase the efficiency of the editing process as well as quality control so that they can impress the stakeholders. Usually, the auditors will provide preliminary audit results to the key stakeholders and management as soon as they have done the initial audit. However, the stakeholders and management will usually determine the time required for an audit cycle by looking at the time the auditors issue the final audit report.

Request for Feedback The auditors may (Also see Audit – Checklist for Compliance Audit) improve their audit process by asking for feedback from the stakeholders and the management. In fact, besides warning the company when any risks arise, the internal department acts as the internal consultant, which suggest the best practices the company should implement to minimise its exposure to the risks. If the auditors improve the audit process by using the feedback, they could be able to reduce the time taken for an audit cycle, remove counterproductive and unimportant procedures, as well as increase the possibility that the audits can meet the expectations of the stakeholders in the future.

Workplace audits refer to methods of assessing a wide range of procedures and policies in human resources as well as other parts of an entity. Such audits aim to determine areas that an organization needs to improve and help to ensure the business owners (Also see Characteristics of Successful Business Owners) to be following the employment laws and regulations. Typically, the auditors from audit firms in Johor Bahru will perform the workplace audits by using the checklists so that they may ensure that their audits cover the essential points which need attention.

The Process of Hiring

Hiring and orientation are among the first areas that the auditors (Also see Introduction to Audit) should include in the workplace audit. In the hiring process, the employers may need to write a job posting, interview the applicants, conduct pre-employment screenings, assess their skills, carry out drug testing, as well as present the job offer. Also, employers need to regulate the hiring process with equal opportunity and anti-discrimination laws. Auditing (Also see Principles of Auditing) the hiring and orientation process makes sure that the company adheres to the employment laws by checking the advertisements and the questions the employer has asked in the interview.

Compensation

The workplace audits will reveal the areas of opportunity in compensation structures in a company. In some countries, the authority may demand the employers to pay non-exempt employees a minimum wage and one and a half times of their pay rates if they work overtime. A workplace audit identifies whether the salaries, bonuses as well as other benefits that the employees obtain meet the standards. Besides, the auditors will determine whether the workers who perform the same tasks receive the same salary as required by law in the workplace audit.

Performance Evaluation

When the auditors carry out the workplace audit, they need to review the company’s process of performance evaluation. Usually, the employers will issue performance evaluations of their employees yearly. In the audit, the auditors should determine the aspects which are subjected to labour regulations and evaluate them. As an instance, the performance evaluation must adhere to privacy and discrimination laws. This means that the workplace audit should reveal the areas that the process of performance evaluation may violate the rights of the employees regarding their gender, race, religion, disability, or other characteristics.

Termination

A company can hardly exempt itself from employee turnover and termination. Nonetheless, unjustified termination is a critical legal issue. Companies can prevent themselves from committing wrongful termination by engaging with the auditors to perform a workplace audit to assess the termination procedures (Also see Techniques and Procedures of Internal Audits) that it is implementing. By conducting the audit, the auditors will make sure that the company is acting within the scope of the law when it notifies a worker about his or her termination and informs the worker about the benefits that he or she may obtain if there is any.