External audit of companies in UAE

1. External audit of companies in UAE April 10, 2020 An external audit of companies in UAE is undertaken by independent auditors who express their opinion on financial statements prepared by an organization. It is also known as a statutory audit. Statutory auditors in their audit report opine if the financial statements represent the true & fair view of the state of affairs and profitability of an organization. Companies appoint external auditors as per the statutory requirements, and such auditors carry professional qualifications like CA, CPA, or ACCA. Statutory auditors maintain their independence, and they refrain from connecting with the organization under audit. Features of Statutory audit  An external audit ensures the correctness and accuracy of the accounting records. Auditors make a critical examination of the accounting records and internal controls and apply auditing procedures to satisfy themselves as to the correctness and accuracy thereof.

2.  A statutory audit answers the question of whether the company’s financial statements represent a true and fair view, and they are prepared in accordance with the statutory requirements.  External auditors are independent auditors meaning they don’t have any financial interest in the company under audit. External Audit Process

3.  Appointment The shareholders of the company appoint the external auditor at the annual general meeting. Auditors are generally appointed based on their reputation and competence.  Acceptance of engagement

4. In this step, the external auditor confirms the engagement. He refuses to engage if he finds by virtue of his financial interest in the company that his independence could be compromised. At this stage, the mutually convenient audit date is also discussed and finalized.  Audit requirements In this step, the external auditor requests the auditee to provide information about several aspects concerning the company. It may include the company’s memorandum of association, articles of association, past audit reports, internal audit reports, policies, and procedures, etc. This information helps him in gaining knowledge about the company and audit planning. He also requests the company to keep books-of-accounts up to date and verified and make sure that supporting evidence is readily available.  Audit planning The auditor makes an audit plan after undertaking risk assessment and deciding about the analytical procedures he wants to apply. He also understands the regulatory requirements applicable to the entity and decides about the nature, timing, and extent of audit procedures to perform. He formulates his audit strategy based on the characteristics of audit, reporting objectives, work efforts required, past experience, and resource availability. He then goes on to prepare the audit program and defines audit objectives for each area under audit and a guideline for his staff to carry out the audit work. He decides about areas requiring detailed checks and test checks. Based on his evaluation of the internal control framework of the organization, he also decides on special procedures to be applied.  Audit execution In this stage, the actual audit work starts. Based on the audit execution plan, risks and controls are evaluated, and the auditor satisfies himself as to whether the internal controls are operating as intended. The external auditor also looks for evidence supporting the transactions under audit and checks overall compliance of the accounting records with accounting standards and statutory requirements. Based on his findings, a preliminary audit report is prepared and issued to the client, and the client has an option to make his representations. Based on the preliminary report, the draft audit report is prepared, and on its approval, the final report is made and issued to the client.  Audit follow-up

5. Finally, the external auditor follows up with the client as to the specific recommendations made in the audit report and verifies the corrective measures taken. Advantages of external audit  External auditors are independent auditors having no financial interest in the company. External auditors do not engage with the company in any other way than performing the audit, and hence they maintain their independence and impartiality. Internal auditors are employees of the company, and hence their independence is always questioned.  Since outsiders conduct the audit, they bring their own insights into the functioning of the company, its accounting processes, and corporate governance, which is useful to several stakeholders, including shareholders, creditors, directors, etc. It helps to identify internal control weaknesses and achieve higher operational efficiencies.  It provides assurance to banks and financial institutions, and it helps to secure funds for the company.  It provides more credibility to financial statements and helps a business maintain its reputation and brand image.  The external auditors provide unbiased recommendations that can help a business improve upon several areas and grow.  The external audit helps to do a comparative analysis of financial statements with the previous years. Check out Statutory audit and its significance in today’s world to know more about the relevance of an external audit. External audit V/s Internal audit: Differences The purpose, procedure, and conclusion, all are entirely different in both types of auditing. Therefore, it is necessary to have a quick overview of the differences between statutory audit and internal audit.

6. 1. Who appoints an auditor? In the case of a statutory audit, the auditor is appointed by the shareholders, whereas, in case of internal audit, company management is responsible for auditor’s appointment.  When is the audit conducted? The external audit or statutory audit is conducted after the preparation of final accounts. However, the internal audit is a continuous process as per the requirements of the company.  What is the aim of both the audits? Statutory audit is used as legal proof that the company finances are true and fair. It also helps the company to earn the reputation and trust of shareholders as per the auditor’s opinion. The internal audit has a completely different aim, and its scope is limited to the management. Companies conduct an internal audit to improve operational efficiency.  Who conducts the audits? An external audit must be conducted by an audit firm or an external auditor. But, employees of the company or an outside audit firm can conduct an internal audit of the company.  Are there any compliance rules for the audit reports? There are certain standards which external audit report needs to follow. However, there are no such rules for the internal report as the scope is limited to the management. Further, an internal audit report is used by the management, whereas stakeholders use the external audit report. Types of opinion provided by the statutory auditor The external auditor expresses his opinion in the audit report based on his verification of accounting records of the company. The opinion holds high importance for the stakeholders, potential investors, and the statutory authorities. Unqualified Opinion An unqualified opinion is expressed by the auditor when he finds financial statements of the company true and fair, and there is no need for any modification. It is also called an unmodified or a clear opinion. When this opinion is provided, it builds credibility as the company is performing transparently.

7. Qualified Opinion After conducting a statutory audit of companies, qualified opinion is provided when the auditor concludes that an unqualified opinion can not be issued, but misstatements are not material enough to issue an adverse or disclaimer of opinion. Adverse Opinion An adverse opinion is provided when there are major misstatements found in the company’s financial statements. In case if an external auditor provides an adverse opinion, it may even lead to the shutting down of the company or its management may get change. If any fraud is detected, the auditor is obliged to report this to government authorities. Disclaimer of Opinion The auditor expresses a Disclaimer of Opinion when the company doesn’t provide him all the required information. Because of this, he won’t be able to draw a conclusion, and thus, the exact picture of the company can’t be delivered. Disclaimer of opinion has a negative impact on the company’s reputation. Shareholders may not find it suitable to continue with the company if the actual financial image is not obtained. FAQs 1. What is a misstatement? A misstatement is an incorrect treatment of item(s) in the financial statement. It occurs due to incorrect application of financial reporting standards. Say, recognition of incorrect amount, classification, presentation, or disclosure. 2. What is audit evidence? Audit evidence is facts in some form obtained during the audit. It is source documents supporting the accounting transactions. Auditors apply various methods including inquiry, physical verification, third-party confirmation, analytical procedures, recalculation, and reperformance, to obtain complete, valid, and accurate audit evidence.

8. It enables an auditor to conclude if financial statements are free from material misstatements. Audit evidence becomes part of the auditor’s working papers. 3. What is audit risk? Audit risk is the risk that when the financial statements are materially misstated, the auditor expresses an inappropriate opinion. Audit risks are of three types viz., control risk, detection risk, and inherent risk. Our external audit service N R Doshi and Partners is an independent auditing firm in Dubai, providing external audit services. Our approach goes beyond ensuring that your business is compliant with statutory requirements, and we provide you with actionable insight to help you sustain and grow. Check how we conducted a statutory audit for a company and helped it transition to IFRS. We provide you a clear picture of your accounting processes and provide specific recommendations to help you improve. We adopt a client-centric approach where we agree on the scope of auditing work in advance and provide you with a comprehensive audit plan to help you organize better. Our external auditors are well qualified and experienced, and they help you in risk assessment, compliance, and keeping your business on the growth track. We are also a top internal audit firm in Dubai. Contact us now to know how our audit & assurance service can add value to your business.