Capital and a steady revenue stream are two of the cornerstones of any up and coming or long standing organization. Small organizations in particular need to equip themselves with the resources and skill sets to compete in the evolving markets. A large part of this involves capital and opportunities.
Financial institutions are more inclined to grant funding to organizations that produce audited financials. Although this is not a statutory requirement for all businesses, it does provide a level of assurance over the accounts to which lenders are more receptive. This holds especially true as the reports produced are governed by the International Standards on Auditing (ISAs), thereby providing a benchmark against which a standard can be set. The Caribbean marketplace is dominated by Small and Medium sized Entities (SMEs) that rely on external sources of finance to compete in the regional and, by extension, global markets and the engagement of audit services may just be that starting point. “It’s better to have audited financial statements and not need them than need audited financial statements and not have them” says Vijay Parabdeen, Partner of Aegis & Co.
Audits, though once considered a requirement of only well established large corporate entities, can provide a small business owner or organization with an array of opportunities that may not be available otherwise. In addition to the role they play in acquiring capital, audited financials are a common requirement of most proposals during the tendering process. In a time where the need for professional accountability is heightened and business opportunities are more often being sought through tenders one cannot forfeit on account of being unprepared. To better understand its importance one must first understand what it entails.
The what, the why and the who
An audit is an independent review of the financial reports presented by an organization from which assurance is given on the truth and fairness of the information presented.
The most important term to take note of is independent. In most business arrangements, namely public organizations, the owners are not necessarily those charged with managing operations. Owners usually employ the skills of qualified professionals with the knowledge and business acumen to propel their ideas, vision and operations to levels they would not ordinarily be able to achieve on their own. Even smaller entities employ the help of individuals who have been trained in bookkeeping or have the relevant experience to oversee operations. These agents, as they are known, are granted the authority and means to perform their duties and, as with all employees, their work must be reviewed and monitored to ensure that their performance is consistent with the objectives and best interest of the organization.
Every business, regardless of size, must establish its financial year/ period. This is the twelve-month time frame over which the organization’s financial performance is evaluated. According to the International Financial Reporting Standards for SMEs ‘general purpose financial statements are directed towards the common information needs of a wide range of users’. As such a complete set of financial statements comprise of the statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity and the accompanying notes. These statements are all produced at year end and each serves an important function.
Statement of financial position- this is in essence a snapshot of the business’ position as at the year end. It documents the values of all of the assets acquired and liabilities or debts incurred.
Statement of comprehensive income- this shows the revenue earned from business activities against the expenses incurred to arrive at the profits generated or losses suffered over the period.
Statement of cash flows- a record of the cash received from and used in the day to day operations, investments and financing activities.
Statement of changes in equity- presents all of the changes to owners’ equity; that is, capital investments received and dividends paid, the effects of changes in accounting policies and the correction of errors and the profit or loss for the period.
Most businesses owners are already aware of the benefits that can be gained from having these statements prepared regularly; budgeting, forecasting, investment decisions however, it is the external review of these that is often overlooked.
Furthermore, the independent viewpoint of the auditor can provide immediate tangible benefits to an organization. The review of the financials allows the auditor to identify the strengths, weaknesses or lack of controls in the business processes adding to the growth and efficiency of the operations as a whole. Looking at the business from this perspective allows for comparisons to be made to the practices and performance of others within the industry and the auditor can advise clients and make recommendations accordingly. This is addressed and conveyed through formal communication, that is, the management letter.
To establish a presence and grow in an industry a small organization must first recognize itself as an entity. It must rebuke the notion of size and hold itself to the same standards and esteem as those with which it intends to compete. Therefore small business must not ask themselves why should I have an audit but rather why not.
For more information, visit https://www.aegistt.com/aegis-co