How does a financial statements audit work?

[yngmind]

Some countries, like Cyprus and Hong Kong, have mandatory financial audits.

How does it work exactly? Has anyone had any experience?

Will they check your Xero and how everything is reconciled, as well as the attached invoices?

I have found a PWC article about the financial audit - https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf

Kinda scary of audits, lol.

 

[daniels27]

Have you prepared your financial statements already?

In short yes, they check if statements are proper and if there are any obvious mistakes.

 

[yngmind]

Have you prepared your financial statements already?

In short yes, they check if statements are proper and if there are any obvious mistakes.

Yeah, my accountant did. So far, I haven't had any experience with the audit. I just avoided those countries with the audit requirements.

I think it's a good idea just to hire an auditor to check my statements.

 

[JohnLocke]

When it comes to audited financial statements that you're talking about, and they need to be carried out correctly where the auditor vouches for what's in the accounts, they review EVERYTHING concerning the company. If there's the slightest suspicion that something doesn't match or you're withholding information, you'll be asked to present it. If they still think you're withholding information, they will not create an audited financial statement, and you'll receive an auditor's remark. In certain countries, there are very strict rules for audited financial statements.

Therefore, they are also more credible, and for the same reason, in some countries, some banks will require audited financial statements before they grant, for example, a credit for a larger amount to the company.

At the same time, many auditors will not create audited financial statements if they have even the slightest suspicion that something is amiss in the company.

 

[yngmind]

When it comes to audited financial statements that you're talking about, and they need to be carried out correctly where the auditor vouches for what's in the accounts, they review EVERYTHING concerning the company. If there's the slightest suspicion that something doesn't match or you're withholding information, you'll be asked to present it. If they still think you're withholding information, they will not create an audited financial statement, and you'll receive an auditor's remark. In certain countries, there are very strict rules for audited financial statements.

Therefore, they are also more credible, and for the same reason, in some countries, some banks will require audited financial statements before they grant, for example, a credit for a larger amount to the company.

At the same time, many auditors will not create audited financial statements if they have even the slightest suspicion that something is amiss in the company.

It sounds scary, I'll be honest.

 

[JohnLocke]

That is only the case if you do not disclose everything about what the company owns, and you do not have complete control over your bookkeeping. If you have a handle on this, there is nothing to fear.

 

[Sols]

I think audits are great. They give you peace of mind. Even if you trust your accountants, it doesn't hurt to have a second opinion. As long as your accountants have done a good job and as long as you have good reporting available, the audit will be a smooth.

Audited financials are also something you can give to banks/PSPs/government as a very strong SOF/SOW documentation.

Everywhere I've done it, the cost of an audit has been a valid business expense, so it doesn't hurt your bottomline much.

Avoid Big Four (Deloitte, KPMG, PWC, EY) unless you have a very good reason to pay multiples of the normal cost of an audit just to have their name attached to your financials. An audit for a simple ecommerce business in Cyprus, Malta, or Hong Kong doesn't cost more than a few thousand EUR/USD in most cases.

 

[cryptodefi]

I think audits are great. They give you peace of mind. Even if you trust your accountants, it doesn't hurt to have a second opinion. As long as your accountants have done a good job and as long as you have good reporting available, the audit will be a smooth.

Audited financials are also something you can give to banks/PSPs/government as a very strong SOF/SOW documentation.

Everywhere I've done it, the cost of an audit has been a valid business expense, so it doesn't hurt your bottomline much.

Avoid Big Four (Deloitte, KPMG, PWC, EY) unless you have a very good reason to pay multiples of the normal cost of an audit just to have their name attached to your financials. An audit for a simple ecommerce business in Cyprus, Malta, or Hong Kong doesn't cost more than a few thousand EUR/USD in most cases.

What about the details of invoices, do they usually check proof of work? I'm asking because crypto is quite a grey area, and it can be problematic even if someone is doing a legitimate business.

The Financial Statement may not be a problem, but I'm afraid things can scale, from an audit to scrutiny, require a license, hella compliance e.g. not just KYC but also the source of funds of your clients (very invasive to be done), etc

 

[Sols]

What about the details of invoices, do they usually check proof of work? I'm asking because crypto is quite a grey area, and it can be problematic even if someone is doing a legitimate business.

Auditors very rarely ask about that. As long as invoices, agreements, and payslips match incoming and outgoing transactions, you'll pass the audit without too much hassle.

They'll only care about minute details if things don't add up and/or start looking suspicious, in which case the auditor is at risk in case you're later found to be engaged in for example tax fraud.

 

[cryptodefi]

ty for the answer again @Sols

Also, not looking to go off-topic, but I've made my accounting in-house.

But as I want to prepare for an audit I want to hire an accounting firm, I was asked 5,000 for one year of accounting, which is ~500 transactions of inflow and outflow.

Not investment, no debts or liabilities, no other asset in the balance sheet.
No tax filling
Basically: Payments for services, and payments to contractors.

I have a feeling they are over charging, or it is the standard price range

 

[daniels27]

But as I want to prepare for an audit I want to hire an accounting firm, I was asked 5,000 for one year of accounting, which is ~500 transactions of inflow and outflow.

What country? Hong Kong and 5000 HKD sounds quite cheap.

 

[Sols]

ty for the answer again @Sols

Also, not looking to go off-topic, but I've made my accounting in-house.

But as I want to prepare for an audit I want to hire an accounting firm, I was asked 5,000 for one year of accounting, which is ~500 transactions of inflow and outflow.

Hard to say. Depends on location. Shop around for more quotes to see what the market rates are. If you can present the data in a very convenient format for the auditor, they might be willing to reduce their fee. Sometimes reconciling 500 disparate transactions takes more time than reconciling 500,000 well structured transactions.

If those are 500 crypto transactions, there is still a large knowledge gap in auditing (and accounting in general) which is an opportunity for those with the knowledge the charge more. I know how easy and obvious crypto is if you're in it. But it's still sci-fi to a lot of people, and breaks accounting norms.

 

[daniels27]

You know which jurisdiction? Maybe, we can recommend you somebody. But if it includes preparation of annual statements, I would say 5000 USD is probably around standard for normal qualifies persons. But there will be cheaper options. ACCA accountants on Fiverr will do it for substantially less, while in Hong Kong already the audit will be around 2500 for that amount of transactions with the cheaper ones, while you can easily pay more.

 

[cryptodefi]

Oh ok, I don't want to go further in this topic. Highly appreciate the answers!

 

[justlavra]

Regarding Hong Kong, the audit process is more of a formality than a rigorous scrutiny that leads to punishment. It is also a good practice to have your company audited annually as it adds credibility to your business.

As long as you provide bank statements and invoices for both income and expenses, you are safe.

The audit process involves the following steps:

1. The accountant creates an Excel table with all the transactions and categorizes them accordingly.

2. In case of any mismatches, the accountant will seek clarifications, and you can provide updated invoices if needed.

3. The accountant finalizes the table and prepares the necessary documents for signature.

The audit fees depend on the number of transactions and overall volume. You can work with an accountant directly or through your consultants who can set up the company and take care of all the issues.

In a company where I work, we charge a fee of USD 2400 if the turnover is under USD 120k per year and under 100 transactions. For turnover under USD 500k and under 100 transactions, the fee is USD 3600.

Overall, the audit process in Hong Kong is not a major concern if you have good consultants and accountants. You can easily let the experts handle the audit processand focus on making your business better and increasing your revenue

 

[baio12]

Some countries, like Cyprus and Hong Kong, have mandatory financial audits.

They want financial audit every year or only when they request?

What are other countries that have mandatory audit every year?

 

[JohnnyDoe]

One of the keys of financial success is having flexible and creative accountants/auditors on your payroll.

 

[baio12]

One of the keys of financial success is having flexible and creative accountants/auditors on your payroll.

Its not different firms you have to hire to do accounting and auditing one firm doing both?

 

[daniels27]

They want financial audit every year or only when they request?

Every year.

What are other countries that have mandatory audit every year?

Bahrain, etc. Most countries have mandatory audits but only with a certain number of employees, turnover or balance sheet totals.

Its not different firms you have to hire to do accounting and auditing one firm doing both?

For an audit, you normally need another independent company. There is another term "certified accounts" which is for example used in Guernsey and requires the accounts to be prepared and signed by certified accountants.

 

[JohnnyDoe]

Its not different firms you have to hire to do accounting and auditing one firm doing both?

It depends on your needs. If your company is big enough or you have regular filings to do (eg VAT), then you need an accountant.