Step by Step for a Successful
Financial Audit in Sri Lanka
An accounting audit is a process of examining the entire financial situation of a company, with a focus on ensuring compliance with relevant reporting standards and promoting adequate policies for cash handling and internal control. Regular audits by outside firms for publicly traded corporations are required in most countries. Small businesses, on the other hand, are not typically subject to a set of reporting standards and controls as rigorous and are therefore often not subject to compulsory audits. Learning how to conduct a core internal accounting audit on your own small business can give you a comprehensive understanding of the financial strengths and weaknesses of your business.
Why Do We Have to Audit?
There are many services the audit firm provides, some of these are outlined below:
ü Compliance Audit (Service Tax Audit, IRD Audit etc.)
ü Due Diligence Audit (to investors)
ü Company Management Audit (To obtain the bank loans)
ü Internal Auditing
ü System Auditing
ü Forensic Auditing
Who can do the company financial audit?
All accounting and audit companies are composed of highly qualified auditors and Chartered accounts. They have all the skills necessary to carry out audits and tasks related to the accounting. The accountants may generate a financial statement that maintains the IFRS standards.
A member of the Institute of Hired Accountants of Sri Lanka who holds a certificate to follow issued by the Institute shall audit the monetary statements of each specified commercial enterprise.
The Act requires auditors to certify that the audit was conducted in accordance with Sri Lanka Auditing Standards that the monetary statements are ready and submitted in accordance with Sri Lanka Accounting Standards in their audit report.
What are the best steps to a successful financial audit of your company?
1. Preparing to Perform a Basic Financial Audit
1. Understand financial audits.
Quite simply, there are financial audits to ensure that the financial information about your business is "true and fair." The main concern for small businesses is that all expenses and revenues are accurate so that the Income Tax Department (IRD)knows the financial status of the business exactly and can confirm all deductions are valid.
ü A formal audit involves an examination of financial statements by a qualified third-party (typically a chartered accountant). With regard to small businesses, audits are typically performed by the Certified audited firms in Sri Lanka to confirm financial information is valid for shareholders, the income tax department of Sri Lanka, Bankers, and third parties.
ü Despite this, you can still "self-audit" your business (or make sure your financial information and procedures are accurate and fair), to improve your business and protect yourself from an income tax department audit.
2. Learn the reasons for a financial audit.
There are several reasons and benefits to regularly audit your finances. While a basic audit can be performed by the business owner (who should be regularly making sure financial information is accurate and procedures are efficient), it is wise to hire a Chartered accountant to do a systematic overview of your finances
ü Financial audits can ensure that information is valid and in line with accounting standards (such as the General Accounting Principles, or IFA).
ü Financial audits ensure compliance with all legal and tax rules that may prevent an audit by the IRD (Income Tax Department) or various legal issues that may arise when fraudulent or incorrect information is made available to the public or investors.
ü They can also provide the business owner with instructions on how their business operates and how it can be improved.
3. Prevent your small business, from triggering by the IRD (Income Tax Department) audit.
A basic accounting audit of your business can be an effective way to avoid an IRD audit which can be stressful and time-consuming. Before looking deeper into your finances, there are several initial tips for improving your financial position and preventing an IRD audit.
ü Ensure that your deductions are realistic and not excessive (especially for business, travel, and entertainment); For example, every day commuting to work at a regular job is not a valid deduction, nor does it claim any personal expenses as a deduction for the business. A good rule is that if the expenditure is necessary to make money then it can be deducted.
ü Be sure to have the correct receipts and records for any deductions.
ü Have sufficient documentation and explanations for any major discrepancies between years. If you contribute more than one year to charity, include an explanation as to why when you submit your return, and include any receipts or other related documents.
2. Creating an Accounting Audit Trail
1. Determine if your company has enough accounting audit trail
An accounting audit trail consists of the paper and electronic sources documenting the history of transactions in a business. Audit trails are used to trace financial data of an enterprise from the general ledger to the transaction/funds source. A robust audit trail provides a comprehensive timeline documenting the steps taken to begin and complete transactions.
ü Determine if your existing accounting practices allow you to track the entire process of a documented financial transaction. If not, your accounting processes need to be strengthened to create an adequate trial of accounting audits. For example, if you buy goods from a supplier, locate the transaction-related documentation (such as an invoice), locate the transaction in the appropriate account (such as the expense or accounts payable account), and identify what type of transaction it was (purchasing goods from a supplier).
ü To create an electronic accounting audit trail for your business use accounting software. Using accounting software to log the financial activities of your business, you'll be able to easily store and analyse accounting data.
2. Review existing record-keeping policies in your small business.
All financial information should be stored in an organized, secure, and reliable manner. All relevant information, such as bank statements, cancelled checks, and cash registry tapes, should be stored by the end of each reporting period at least. Stored and readily accessible this information will help you resolve any problems or discrepancies that may arise.
ü For each transaction, associated documentation should be provided, with relevant explanations for the transactions to be used for deductions. For example, if you spent Rs. 2500 on gas to travel to meet a potential customer, there should not only be receipts (or bank records) for the transaction, but it should also be recorded that the Rs. 2500 expense was to recruit a new customer and thus is a deductible business expense.
3. Examine how financial documents are passed on to accounting personnel.
The first step in the accounting audit of your small business is to collect financial documents, such as invoices, receipts, and bank statements, and hand them over to the accountant or accounting department for processing. If this process is slow or unreliable, the accounting records will become unreliable.
ü If you are self-employed, this step is simplified, and instead, your task is to ensure that you take records of your own financial transactions and process them quickly and regularly to ensure that your records are up to date.
4. Create a system for monitoring internal controls at your company.
Internal controls are provisions that help protect against fraud, theft, and other issues related to internal accounting. They are the procedures your business uses to ensure the safety of your assets and the accuracy of your information.
ü Separate accounting responsibilities as much as reasonable. It is best, for example, not to allow the same person to handle both cash and bookkeeping, as this makes it easier to explain missing cash
ü Safes should be locked when not in use, and company software and computers should be password protected.
ü Camera systems are beneficial for monitoring the execution of internal controls at retail businesses.
ü Reconciliation of accounts, such as reconciling bank statements with the check book, should occur regularly as a means of evaluating financial data.
ü Techniques such as document numbering, such as checks to prevent duplication, are also useful internal control.
5. Consider the accounting and tax laws your business must follow.
You are typically required by law to keep full accounting records for your business for tax purposes. Preparing your accounting records to comply with the law will make it easier to comply with any potential revenue audit.
ü Make audit procedures such as keeping accounting records a part of your accounting process for at least five years. That way you already have the processes in place that are required to respond to IRD and other external parties' external audits.
ü To find out what laws are relevant to you, the www.masassociates.lk website is a very helpful resource. In addition, you can also consult with your accountant or bookkeeper if you have one.
3. Conducting an Internal Accounting Audit
1. Employ industry-accepted audit practices.
Good auditing practices should serve as your first guide for conducting your internal audit. The best way to ensure that your internal accounting audit conforms to generally accepted accounting practices is to use a business accounting software program, a tax agent or a chartered accountant
ü The Auditing Standards are the most common auditing standards used to audit private companies. Consider the Auditing Standards policies when commencing your internal accounting audit.
ü Auditing standards are the fundamental rules and standards used when performing an audit. While these are typically used by professional auditors, consulting these basic principles can provide your own personal audit guidance.
2. Cross-reference the accounting system for every part of your company.
Review each place where accounting information is entered, including the general journal, the general ledger, and the balance of individual accounts. Account balances should be reviewed on a continuous basis, rather than just before the trial balance is prepared at the end of the accounting period
ü Make sure all entries have corresponding entries across your system elements, and any discrepancies are resolved quickly. For example, buying merchandise for sale would require a debit on the inventory account and a credit on your cash account
ü Use the accounting documentation to verify the gross revenue, expenses, and costs of your business.
ü It is appropriate to take a statistical sample to analyse individual transactions if you have a very large number rather than trying to investigate them all.
3. Compare internal accounting records against external records.
By comparing it against external records, check the fidelity of your own bookkeeping. You can, for example, compare your suppliers' purchase receipts against your own purchase records. Note that issues that arise through this process can be due to external errors, such as supplier or customer miscalculations.
ü If you encounter any errors, the correction of the error is important first. Any errors (such as a supplier error) on behalf of external factors should also be corrected by contacting the party involved. Next, documenting the error is important, and asking yourself why the error happened and who is responsible for it. Is that a one-time mistake, or is there a basic policy or procedure problem? You can focus from here on ensuring that the error doesn't repeat.
ü If you have physical products or you are using equipment in your business, you will also need to do physical audits. The inventory or equipment, for example, should be counted and visually inspected.
4. Check internal tax records against your tax returns.
Look through your recent government tax documents and compare them with your internal tax payments and tax liabilities records. In Sri Lanka, you must keep at least five years of company tax documents on hand.
5. Create an accounting audit report.
Compile a list of your findings into a succinct audit report. An audit report is simply a document that summarizes the findings of your audit. It will state problems you found, improvements that were made, and areas that were working well.
ü Since this is your own audit, this does not need to be a formal document, and should simply be a useful document that you can refer to for your own use, or in case your business is audited, you can show the IRD.