Annual or Statutory Audit - Blogs

How will my audited financial statements look like?

1. An audit report / audited financial statements of a typical manufacturing concern audited by us will look like the attached format: (A sample audit report / audited financial statements of a typical trading concern audited by us can be emailed to you. We are in the process of uploading it and will do it shortly.)
2. The audited financial statements usually contain the following details:
   • Director’s Report
   • Independent Auditor’s Report
   • Statement of Profit or Loss and Other Comprehensive Income
   • Statement of Financial Position
   • Statement of Changes in Equity
   • Statement of Cash Flows
   • Notes to the Financial Statements
     1. Legal status and business activities
     2. Basis of preparation
     3. Summary of significant accounting policies adopted and consistently applied
     4. Business model elaborated and explained for special organisations
     5. Lists of accounts and items, with adequate disclosures and explanation
     6. Related party accounts
     7. Purchase commitments
     8. Contingent liabilities
     9. Approval
3. Companies design the contents of their financial statements in a manner best suitable for the nature of their business and the scale of their operations

How is the audit report of Prudential Auditing DIFFERENT or BETTER from other audit reports?

The half dozen main reasons why our report is better than our peers in the industry:

1. Manager's Report, with a Performance Graph and more Contents, like Public Companies
2. Company Logo on each page
3. Point-wise Notes (instead of lengthy paragraphs) on Significant Accounting Policies Adopted and Consistently Applied
4. Elaborate Revenue, Receivables and other notes
5. Double sided printing and use of recycled paper, at your discretion, to be eco-friendly
6. Complimentary services like scanning, submission to the authorities (sometimes), etc.

For a detailed description, Read More.

What DISCLOSURES will the audited financial statements have?

1. The information that is disclosed in the audit report is governed by IFRS, the Commercial Companies Law, specific governing regulations, local business practices and the nature of business and scale of its operations
2. Typically, the following will be disclosed in a well designed audited financial statement:
   • Name, address, licensed activity, principal activity, Partners, violation of law, penalties levied by authorities and other statutory information
   • Revenue or sales: geographical distribution, currency exposure, concentration (few customers exposed to large volume of sales), quantitative details and significant ratios
   • Receivables: geographical distribution, currency exposure, concentration (few customers with large outstanding balances), ageing, subsequent recoveries and significant ratios
   • Inventories: ageing, insurance, movement, quantitative details, subsequent impairment and key ratios
   • Assets: position, insurance, physical condition, subsequent impairment or enhancement, lien (if any), purchase commitments made (if any) and key information
   • Loans: detailed segregation, repayment schedule, security, currency exposure and other significant information
3. Depending on the nature of activity and several other parameters, additional details will be disclosed

Why do auditors ask SO MANY QUESTIONS?

1. The auditor’s product is your audit report; your audit report is your representative that goes to any third party; the quality of that audit report casts its first and lasting impression on the reader; the auditor asks you information to enhance the quality of this report; this ultimately benefits you - you should not accept a report that discloses incomplete information because it affects the quality of your report
2. The auditor assures the reader of your report that the information provided by you in that report is fair; the reader takes decisions on the basis of this assurance; if the reader suffers a loss he is free to sue the auditor for a false assurance; the auditor protects himself from accidental liability of approving incorrect information - you are paying him to do a job, let him do it properly for your benefit

How does one RECOGNISE GOOD QUALITY financial statements (colloquially referred as the audit report)?

1. The audited financial statements disclose performance (mainly: revenue, cost of revenue and administrative cost) and financial position (mainly: property, plant and equipment, non-current financial assets, inventories, receivables, cash & cash equivalents, borrowings, payables and purchase commitments). Financial statements that disclose these with adequate explanation instead of a single line or with little or no explanation are considered as better financial statements.
2. The disclosures for some of the main heads can be as follows:
   • Revenue: products, concentration, geographical distribution, currency classification, related party sales, whether these are required to be routed through a particular bank account as a condition for borrowing of funds (click here to see sample 1) (click here to see sample 2)
   • Cost of revenue: products, detailed listing and segregation of costs to separate storage and handling – or such major elements of cost, concentration, geographical classification, related party purchases
   • Administrative expenses: period costs, changes in salaries and rent, one-time costs that are not expected to recur, management and related party costs
   • Property, plant and equipment: Classification between operating and administrative assets, location, insurance, segregation of damaged items, hypothecation for borrowed funds
   • Non-current financial assets: currency, location, realisability, pledge against borrowed funds or specified purposes
   • Inventories: location, insurance, ageing, slow moving goods, whether pledged for borrowing of funds
   • Receivables: impairment, ageing, subsequent recoveries, realisability of overdue debts, concentration, geographical or currency classification, insurance, whether pledged for borrowing funds (click here to see sample 1) (click here to see sample 2)
   • Cash & cash equivalents: currency classification, exposure to exchange fluctuation, geographical distribution, insurance
   • Borrowings: Security, payment or maturity schedule
   • Payables: location, currency, maturity schedule
   • Purchase commitments: for ongoing projects – the amount yet to be spent for the project to be completed and to commence commercial operations
3. The meaning of some of these disclosures:
   • Ageing: besides the amount disclosed, the reader needs to know how this receivable or payable accumulated over time – it also indicates whether the company is receiving or paying amounts on time
   • Currency classification: this indicates the possibility of fluctuation that can be expected
   • Concentration: when a company trades exclusively or mainly with one or few customers or suppliers, if this one dealing stops, it can threaten the existence of the company – and the same goes for default from a customer with concentration of receivable – and this is a vital indicator for a reader
   • Payment schedule: when ageing is given for a receivable and payment schedule given for a payable – creditor or borrowing – it becomes easy for the reader to gauge the short term liquidity of the company; and when combined with revenue and cost of revenue it indicates long term liquidity
   • Geographical distribution: in the present times of political turmoil, it becomes all the more important to classify these transactions – whether for revenue or receivables
   • Changes in administrative costs: some of these changes, like rents and salaries, do not affect revenue immediately but do so in the next reporting period but affect the profits during the current period, hence disclosing their effect clears the doubts on the present profitability and generates an anticipation for future reporting periods – without this clarification, the reader would not necessarily correlate these trends
4. Other factors: There are many subtle factors like the font used, the frequency of grammatical errors, the language, the consistency of line and paragraph spacing, using bold and underlines in appropriate places, using single underline and double underline in appropriate places, page headings, continuity indicators and other editorial aspects in the financial statements that enhance the quality - readability - of the same
5. Finally, consider that just like a driver does not know how to manufacture a car yet knows how to recognise a good car, how a person may not be a good cook but can recognise tasty cuisine, similarly the reader need not be an accountant or auditor but still comes to know when he sees a good report.
6. Should one pay for a good report? Why not? If one pays for good clothes (because they make you look better), good cars (because they show that you are successful), good houses (because they improve your status in the society) and everything else that’s good, then surely, a good report (which carries your image to - and enhances it - with your bankers, customers, suppliers and employees) is a good investment.

What does the auditor do with YOUR INFORMATION?

1. The auditor retains your information for 5 to 10 years, depending on the regulations of the country in which they operate.
2. The working papers prepared in conjunction with your audit are the property of our firm, constitute confidential information and will be retained by us in accordance with our policies and procedures.
3. To obtain the summary text of our confidentiality and non-disclosure clause, which is a part of our standard letter of engagement, click here.
4. For example, Article 247 of the UAE Federal Law No 2 of 2015 on Commercial Companies (CCL) specifies (verbatim): “The auditor shall keep the confidentiality of the particulars of the company inspected by him by way of performing the duties of his job with the company. The auditor may not disclose such particulars to third parties or to the shareholders other than during the General Assembly, failing which the auditor shall be dismissed, without prejudice to the civil and penal liability, as applicable.”
5. At the same time, however, Article 249 (1) of the UAE Federal Law No 2 of 2015 on Commercial Companies (CCL) specifies (verbatim): “The auditor shall notify the Authority in connection with any violations of the provisions of this Law or any contraventions that constitute a crime detected upon performance of his duties at the company, within 10 (ten) days from the date of detecting the contravention.” Article 249 (2) further provides penal provisions on the Auditor for contravening the above.
6. It is important to note that the auditor is appointed by you, provides service to you, but is responsible (for the matters on which his report gives – or fails to give – an opinion) to anyone and everyone who reads your report and relies on it to take his business decisions.

WHO SHOULD ideally get their statutory audit done from Prudential Auditing?

1. We call it the crash test. Does your audit pass the crash test? We derived this term from the crash tests that are performed on automobiles. There are ‘some’ cars that are more economical to own and operate than ‘other’ cars. However, in the event of an accident (mishap / collision) in which of these cars are you more likely to survive and buy another car? It’s the same with audit reports. If the economic environment or the action of any of your creditors or shareholders were to cause a question being raised on the financial information of your company, how likely is the report to stand an external test? Will the report withstand an investigation or will it cause the company to crash, because financial misrepresentation may lead to hefty penalties or imprisonment? It’s always better to be safe, than sorry.
2. Shareholders of companies who wish to have a genuine audit of their books of accounts.
3. Management of companies whose books are audited by the Big 4 or Big 20 audit firms, who want to ensure that the auditors of those firms spend the least time performing their audits and find the least problems, should enlist our services. This will enable them to save on the relatively costlier ‘scope creep’ fees of the large audit firms.
4. Since we do not have an elaborate marketing team that lobbies with bankers to enlist us in their approved lists, those companies who do not seek banking facilities exceeding USD 5 million, should avail our services. They save on fees but receive the same professional service as the large firms.
5. Tiny companies who go to audit firms charging very low fees that issue reports without verifying the information being audited should, instead, get their books audited from us. We have a CSR Initiative wherein every year, we audit the books of 200 tiny companies at fairly low fees. Although these fees might be higher, the amount is negligible as compared to the total expenditure incurred by the management during the year. And paying a slightly higher fee and receiving excellent service is any time better than paying low fees and receiving no service.
6. We will be updating this section with more pertinent examples.

Who should NOT get their statutory audit done from Prudential Auditing?

1. Quite simply put, we do not issue unqualified audit reports on fabricated financial statements. We are a medium sized audit firm without the patronage of a huge insurance cover. Our staff and partners firmly believe that our reputation and personal & professional ethics are far more important than the ephemeral gains that can be made by following practices that are not worthy of our position in society.
2. Companies run by managers who have misused their authority and expecting the auditor to ignore pilferage or routing of funds that did not relate to the business of the company should not approach us for audit. Not only will we issue qualified audit reports but we will also report the infringement of law to the authorities.
3. Companies whose management wants us to certify inflated financial results are advised not to approach us. We are not in the practice of falsifying records.
4. We will be updating this section with more pertinent examples.