Financial audits are considered to be one of the most important and primitive phenomena from the perspective of the company. This is primarily because of the fact that information that is presented in the audit report is put forth in front of the investors, as well as external stakeholders. There are two different types of audits that are conducted by auditors pertaining to financial year-ends.
Types of Audits
There are two types of audits that are undertaken by companies. These types are as follows:
- Statutory Audit: Statutory Audit is conducted by independent auditors to the entity’s financial statements in accordance with the local law that the company complies under. This is required under the law of most countries, in order to protect the rights of the external stakeholders of said corporations.
- Non-Statutory Audit: Non-Statutory Audit can be defined as the audit of financial statements that are not required by law. The main premise of non-statutory audits is to ensure that companies are able to identify the shortcomings in the existing financial statements (and operational management) so that these issues are curtailed in the longer run.
Non-Statutory Audit – Definition
As mentioned earlier, a non-statutory audit can be defined as the audit of financial statements that is not required by law. In fact, it is conducted by organizations at their own discretion. It is considered to be different from a statutory audit in the sense that it requires the entity to engage with different audit firms in order to perform the review of financial statements, despite being obliged to do so. Unlike statutory audits, where the auditors are engaged under a contractual basis across a given number of years, non-statutory audit requires contracting independent auditors on an ad-hoc basis, if required.
The main premise behind conducting non-statutory audits is to check the efficiency and the effectiveness pertaining to the operational efficiency of the organization. This type of audit helps companies to identify areas that need attention in order to ensure that financial statements are properly prepared, and are correctly representative of the actual financial position of the company.
Objectives of Non-Statutory Audits
The primitive objective of non-statutory audits is considered an assessment of the financial statements that are prepared with a framework of recognized and generally accepted accounting policies. Therefore, these types of audits help organizations present the true and fair value of the financial statements to different users of the business, before they are published, or before they are made available to the general public.
In this regard, it is important to note the fact that non-statutory audits help serve various different areas pertaining to the financial statements prepared by organizations. These objectives are as follows:
- Detection and prevention of errors: Non-statutory audits before the actual audit itself help companies detect and prevent errors before the financial statements are published and/or statutory audits are conducted.
- Detection and prevention of frauds: Since non-statutory audits are resourceful in assessing the level of internal control within the organization, it helps organizations prevent any chance of fraud or embezzlement within the financial statements.
- Clerical errors: Clerical errors are a common occurrence when financial statements are prepared. Non-statutory audits help identify and subsequently fix these errors before the final year-end audit.
Importance of Non-Statutory Audits
Non-Statutory Audits hold tantamount importance from the perspective of companies, on several different grounds. The importance of non-statutory audits can be broadly categorized into two branches:
- Importance from the perspective of the company
From the perspective of the organization that gets a non-statutory audit conducted, the following advantages come into play. These advantages are as follows:
- Auditors work along with the management in order to review the systems and operations pertaining to the audit process. This helps the management to learn, and rectify their errors so that the financial statements are free from any material misstatements.
- Non-statutory audits reduce organizational risks and help organizations to achieve their objectives. It identifies areas that lack operational efficiency, which can help companies achieve their objectives.
- It helps companies maintain a reliable and integral financial and operational system from the perspective of the company.
- It helps companies to safeguard their assets since non-statutory audits help companies identify areas pertaining to asset protection, as well as steps that need to be undertaken by companies to ensure a better outlook in the longer run.
- The auditor recommendations that are put forth as a result of a non-statutory audit provide assurance to the shareholders, regulators, as well as employees of the company.
- Non-Statutory audits mitigate the risk associated with external audits. This is because non-statutory audits indicate that the financial statements have already been audited by the company.
- Non-statutory audits might not solely be restricted to report making. They can also include several other non-financial components of the business. Therefore, non-statutory audits help companies to take a deeper insight into their operations, and what should be done to improve higher efficiency in the company.
- Importance from the perspective of external stakeholders
From the perspective of outsiders, and external stakeholders, non-statutory audits are considered to be added proof of the functioning of the company. It further validates the operations of the company and the fact that they are free from any malpractices in the company.
Limitations of a Non-Statutory Audit
Regardless of the fact that a non-statutory audit is considered a resourceful tool for organizations working towards attaining a higher degree of efficiency within the organization, it can be seen that their certain limitations pertaining to non-statutory audits that need to be kept in mind. These limitations are as follows:
- The non-statutory audit comes at an added cost from the perspective of the company. Given the fact that it is not entirely necessary for the company to execute this particular audit, in the case where the company chooses to move forward with this particular audit, it forms an added cost from the perspective of the company.
- If non-statutory audits are not executed by professionals, it might lead to wastage of resources, as well as incorrect information being communicated to the higher management of the company.
- Additional resources are also occupied in the form of managerial cooperation to facilitate the audit. This might result in management deviating from the core function of the business.
- Non-statutory audits do not necessarily imply that all issues will be identified, and subsequently solved by the company. In fact, non-statutory audits only gather reasonable evidence to the extent that the management readily cooperates with them. If management does not cooperate, it might not render the required results from the perspective of the company. Hence, non-statutory audits are effective only till the point where the management cooperates.
However, these limitations do not imply that non-statutory audits should not be conducted altogether. In fact, the management, along with the auditors should make a foolproof plan pertaining to the audit process, and how subsequent value can be added in the audit process to mitigate these risks altogether. In other words, proper planning is the key to ensuring that the audit process derives the required results in an effective time span.