DIY audits: good practice in SME businesses of all kinds

By Colleen Hosking, Director of Allworths Assurance & Advisory

Last updated: 18/02/21

At Allworths Assurance & Advisory, we work with SMEs and large enterprises to provide external audit services for compliance and due diligence purposes.

This article is about audits, when they’re generally needed or used (more than you may expect) and how you might go about a “DIY” audit. Whether or not you need an audit right now, these tips will help you integrate good practice into your everyday business housekeeping.

Before we get to our tips, some facts on when audits are needed:

• Audits are  required by both regulators and often banks seeking to check on the financial health of their debtors.
• Companies meeting two of three tests set by ASIC for a large proprietary limited company are required to conduct an external audit annually and lodge with ASIC:
  • Annual turnover ($50M+)
  • Total assets ($25M+)
  • Employees (100+)
• Listed companies and disclosing entities require an audit under the Corporations Act 2001 and Listing Rules.
• Medium and large charities reporting to the Australian Charities and Not-For-Profits Commission Act must submit financial reports that have either been reviewed or audited. Medium charities are those with annual revenue between $250K and $1M. A large charity, with annual revenue of more than $1M, requires an audit and submission of Special Purpose Financial Statements (if not a reporting entity) or General Purpose Financial Statements – Reduced Disclosure Requirements (Tier 2) or General Purpose Financial Statements – Full (Tier 1).
• Miscellaneous audits of accounting, real estate and legal trust accounts also require an annual audit, in addition to Associations of NSW, entities under NSW Fair Trading and  public or private ancillary funds.
• More recently, the ATO has also enacted legislation that a subsidiary of a significant global entity (group revenue of $1B+), even if small in Australia, must provide General Purpose Financial Statements (GPFS) for each income year to the Commissioner of Taxation, unless it has already been provided to ASIC. The Commissioner must give a copy of the GPFS to ASIC. This copy appears on ASIC’s register and will be available to the public.

However, an audit is not just a commodity required  by legislation to achieve good compliance and good corporate governance. There are many examples of where an audit is useful and we have listed 5 below:

1. You may have an investment in a start-up company e.g. in IT, mobile apps, research or any new interesting entrepreneurial activity. The company may not be large enough to require an audit but for peace of mind of the investors, an audit may be carried out.
2. You may have a shareholding of more than 5% in a small private company which does not require an audit for ASIC purposes but for good governance, you may want to consider an audit, particularly if you are the only local signing director.
3. You may be thinking of divesting your business in 2-3 years and want to self-audit your business or appoint an auditor for at least the last 2 years before selling. External audits can be undertaken in preparation for the sale of a business. Having 3 years’ worth of audited financial statements can help get negotiations off to the best possible start on transparent terms.
4. The larger a business grows, the more important it is to keep track of who is accountable for what. This is especially true when shareholders are on board and accountability is a demand. Managers need to ensure they are keeping up to date with providing accurate reports as far as they can, but there is no substitute for an independent audit of financial statements to crosscheck performance.
5. The tax office, financial institutions, and management can all benefit from seeing audited financial statements. With an independent financial audit, tax officials can rely on the accuracy of the information you provide for their own calculations and decisions. Another considerable benefit of reliable financial statements is that management can use the audit information to tighten up and inform their own audits and reports.

5 tips we recommend  for a do-it-yourself audit are:

1. Think of it as necessary housekeeping. Your products and services look after your customers, your profits look after your business, and your scrutiny looks after the creditors, lenders, and financial investors.
2. Review of systems and procedures in place – a DIY audit will help provide ways to improve internal controls for an organisation, in order to lower the chances of there being an opportunity for fraudulent activity, or of human errors going undetected. We recommend running an “audit trail report” to IT users every month, so that you can see what changes were made to standing data in your accounting system in that month. Changes in supplier or employee bank account details are quite sensitive and should be tracked monthly in order to lower the chance of there being a ghost account.
3. Spotting mechanical errors: a fresh set of eyes always helps in picking up mechanical errors in either data entry or even in fundamental accounting principles that are being applied to produce a set of financials.
4. Running a small cash business: if you are a small business which is looking to grow, it’s  important to implement tight procedures early in your business’ age, so that you have no issues in the future and have accurate records available on hand to overcome any legislative requirements.
5. Review of accrual accounting should be done, to ensure it is applied correctly, and that the most accurate representation of the business is displayed in its accounts, for users of these accounts to make well informed decisions to ensure accountability, to provide reliability to the tax office and financial institutions and to provide a complete report. For example, do you encourage staff to take leave regularly to avoid a large build-up of employee annual leave and long service leave entitlements?

For US subsidiaries operating in Australia:

Allworths Assurance & Advisory Pty Limited has been registered with the Public Company Accounting Oversight Board (PCAOB) since 22 September 2016. This registration brings exciting opportunities for our team, as we are one of only a handful of Sydney-based PCAOB non-US registered firms, meaning we can offer to carry out audits of US subsidiaries in Australia where the partner entity is listed in the US.

For more detailed information on a DIY audit, we provide a link to the Good Practice Checklist for Small Business by CPA Australia, which includes a financial task checklist and a strategic financial task checklist.

If you have further questions regarding audits or Allworths Assurance & Advisory, please don’t hesitate to contact us and ask for Colleen.