Accounting is a comprehensive process that requires you to maintain a proper track record of all the financial transactions that take place in your business. This process is undertaken in order to keep a track of the profits made by the business, to decide what future financial decisions have to be made and to comply with the tax laws. Since this process of record keeping has multiple transactions, mistakes tend to happen. Some mistakes can be costly and you may even end up paying the wrong amount of tax. Therefore, to avoid such discrepancies, a financial audit is created.
Types of Financial Audit
A financial audit can be defined as the process of analyzing your bookkeeping records to verify if the information provided is valid with regards to the statutory compliance. This process is conducted by professionals and is thoroughly done to find any minute mismatch in the bookkeeping. Before you move on to understand more about the purpose of conducting a financial audit, let us understand the different types of the financial audit that exist in Canada.
1. Statutory Audit
A statutory audit is conducted for a business by an external auditor. A statutory audit is mandatory under the law for a company that earns a certain revenue. The need for a statutory audit is mainly in large firms where the ownership of the company and the financial affairs handling is separate. A statutory audit confirms if proper regulations are being followed not only for the government but also to the higher authorities within the company.
2. Operational Audit
An operational audit is also known as an internal audit. It is an initiative taken by the business itself to monitor if their financial records are proper and compliant. This audit is conducted by the employees of the company. The auditor is decided by the board of directors.
3. Public Sector Audit
Public sector audit, as the name suggests, is an audit that is specifically conducted for business and institutes that are owned by the government. This audit is conducted by the auditor general to ensure that these public companies are following a proper financial affair.
4. Forensic Audit
Forensic audits are external audits with legal implications. These audits are conducted by the legal authorities when a business is supposedly indulging malpractices. Situations that generally cause a forensic audit include money laundering, tax evasion, insurance claim fraud, accounting negligence such as entering incorrect entries, etc.
Types of Auditors
Since an audit is an in-depth analysis of your financial statements, it is essential that an expert performs the task. There are three types of auditors you will come across when performing an audit.
1. Internal Auditor
An internal auditor is an experienced accountant assigned from within the company to perform the task of analyzing the financial records internally from time to time. Internal audits help a business to ensure that their financial records are updated and error-free.
2. Independent Auditor
An independent auditor is also known as an external auditor. These are professionals who only work as auditors for different organizations. They conduct the financial audit for different clients with an unbiased opinion.
3. Government Auditor
Government auditors are of two types, a general government auditor and a forensic auditor. A general government auditor performs an external audit for businesses to identify if the company is following all the tax regulations. Forensic auditor, on the other hand, performs an external audit in order to identify if the company is involved in any financial malpractice.
Purpose of Financial Audits
1. Identification of Miscalculation
A company has several transactions to record every day. Your accountant may take care of making a note of every single transaction. However, there are times when you may miss out on a receipt and end up not adding the record to your transaction list at all. When such miscalculation takes place, the business does not get a clear idea of the profit or loss it is making. With the help of a financial audit, such mistakes are caught and rectified.
2. Prevention of Fraudulent Practices
A business owner never handles their own books of accounts. Either the in-house team of accountants manages it, or an accounting agency to whom the process of accounting has been outsourced. Since the owner does not record every transaction that takes place in the business, there are chances that the owner may get fooled by the person handling the accounts. In the end, if a fraud is committed, the business owner will be penalized. To avoid such situations from happening, internal financial audits are conducted at least once a year.
3. Realization of Company’s Worth
There is a huge difference between a financial audit and general bookkeeping. In bookkeeping, you record the monetary transactions that take place in your business. A financial audit, on the other hand, does the complete analysis of your existing records. Regular recording of transactions does not give you significant information about your business. A financial audit gives you details of how your business is performing, and the report generated works as a good credit rating for your prospective investors.
4. Compliance of Taxes
A financial audit is done with the idea to catch discrepancies that were not noticed the first time. One major discrepancy that businesses can end up making is not complying with the tax rules unknowingly. You may miss out on something forgetfully, but the CRA won’t consider it to be a small mistake. So having a financial audit helps you to double check if you have filed your taxes properly. Sometimes, it also helps you to claim some tax deductions you may have not noticed before.
Financial audits do the job of rectifying some serious mistakes. Not conducting an audit could be the reason why you will end up being flagged by the CRA for the wrong reasons. So do not wait for a notice from the CRA for an audit and take the assistance of an experienced accountant for error-free bookkeeping process.