What are the key features of a good audit?
“Often, an audit is just seen as a statutory requirement, and so companies have an audit carried out in order to tick a regulatory box and go about the process ‘to comply’ – without seeking to reap the good benefits for their business,” says Thomas Galea. “An audit should be an exercise where shareholders, directors and management obtain further insights into their business, on their processes and practices, and how they could be doing things differently.”
Mr Galea says that this becomes especially important when the stewardship function in a company is substantive. “Broadly speaking, we encounter two set-ups: companies in which the shareholder, directors and management roles are all vested in the same group of persons, or a set-up where each position is occupied by different people, and these need to be approached differently.”
“In the first scenario, an audit could provide a different perspective to the way you’re currently going about certain processes, which could profoundly improve your business, while in the second scenario, the audit gives additional comfort to the shareholders of what’s taking place at the level of management,” says Mr Galea.
Mr Galea adds that the business owner can also leverage on the experience of the auditor and the firm. “Behind each and every KPMG leader there is the global firm that has extensive exposure to all industries. Being part of a global firm with offices in 155 countries and working with experienced professionals, the auditor can help the business owner leverage extensive insight.”
What further value can an audit offer in the age of COVID-19?
Setting aside the statutory and legal requirements of a company audit, Mr Galea says that, at a critical time like this, an audit can provide added value to business owners. “Part of our audit involves considering impairment assessments. If last December someone had suggested an improbable scenario where, for six months or so, a company would have zero revenue from an annual revenue of a few million euros, it would be dismissed as a joke. But, unfortunately, this became a reality, which got us thinking that we now really need to understand how a company and management can preserve value.”
Preservation of value, Mr Galea adds, is the only thing that can get companies out of this period alive, which means businesses should rethink everything – their processes, procedures, and business rationale. To this end, an audit can help a business owner understand what they could do differently.
“An audit is a rigorous and often an intrusive exercise, but through that, one can gain invaluable insight on how things can be done differently, and now more than ever, doing things differently might be the critical factor between those companies who survive the impact of COVID-19 and those who don’t. Previously, doing things differently could have just improved your processes with limited perceived bottom-line impact. In the world we are living in today, doing things differently may mean survival.”
Do you distinguish between small and large businesses when it comes to carrying out audits?
“Firstly, one needs to understand what the characteristics of small businesses are and how they differ from large businesses,” says Kevin Mifsud. “In the case of small businesses, there’s an expectation to guide them more in certain areas because they might lack the expertise to tackle new areas that they hadn’t encountered before. They also have less resources to deal with the audit – very often, we deal with the CFO who has various responsibilities and is involved in many aspects of the company’s finances.”
In terms of the quality of an audit of a smaller business, Mr Mifsud asserts that there should be no difference, “and there cannot be a difference because the risk is the same. The risk here is of getting the audit opinion wrong, and you cannot get that wrong because there are stakeholders relying on your opinion.”
When carrying out an audit on a small business, Mr Mifsud says that an auditor will need to adopt a more informal approach. “They expect more meetings, less emails and less reports. From an audit process, we focus more on detailed testing. When it comes to guidance, for that to work, ideally you get to know the client before you start the audit so that the CFO has sufficient time to gather the information required, therefore there needs to be a longer preparation period.”
With less resources at their disposal, Mr Mifsud adds that the auditor will need to be more focused when working with a smaller business. “The expectation is that you are out of their premises in a matter of a few weeks as they wouldn’t want the audit process to be disruptive, so the way to address that is to send a skilled team that knows the business, processes and controls very well.”
How do you evaluate a good audit?
“Depending on the needs of the different businesses, one delivers a good audit if it meets the demands of the customers and addresses the key audit matters – identifying them, addressing them and reporting them in the audit report for the users of the financial statement to understand and get a view of the opinion itself,” says Mr Mifsud.
“For a small business, considering their specific characteristics, I would say one evaluates a good audit not only based on quality, but also on the extent to which one delivered those value-added services, such as solutions to challenges the client would have discussed with you,” Mr Mifsud explains. “This kind of value-added service is very important, which small businesses really appreciate.”
What should a business owner look out for when choosing a good and reliable auditor?
Choosing an auditor is not a straightforward decision and, whatever the size and type of the company, whether listed or regulated or a smaller entity, there are many factors to consider to come up with the best choice of the auditor, says Norbert Bugeja.
“The obvious factors are that the auditor is qualified and is a registered auditor, independent and of high integrity. But there are other factors that must be considered. One factor is reputation, as the company’s officials must have confidence in the people carrying out the audit,” he says, highlighting expertise as another crucial factor.
“If the auditor has experience in that industry it will typically translate into a more efficient audit and avoid generic questions which will be a waste of the company’s time. Besides it will be beneficial to the Company as an experienced auditor will provide more meaningful input in a management letter point.”
Understanding the quality assurance processes that the audit firm has is another factor to look out for; aspects, such as firm policies on training covering both core and professional topics are imperative to ensure that the quality of the professionals is truly of the calibre to meet the ever-increasing requirements brought about by the more complex business landscape.
Mr Bugeja adds. “Relationship is important too. We are all humans with different characters but, in the end, it is a question of chemistry between the company’s people and the auditor. Healthy professional relationships augur for openness and transparency and would not compromise the quality of the audit.”
Mr Bugeja suggests that, before the auditor is chosen, the company meets not only the partner who will lead the engagement but also the people who will be managing and doing the fieldwork. “Transparency and effective and timely communication are key and ultimately, all these will affect cost. Cost is also an important factor in the decision; however, it shouldn’t be the only decisive factor as there are other factors likewise important as mentioned earlier.”
What is the value of an independent audit for a business owner?
While an audit is unavoidable ‘to comply’ with statutory requirements, other benefits of an audit are the improvement of systems and controls, and credibility with stakeholders.
“Through an independent audit, the financial statements will gain enhanced value – both for a bank, where audited financial statements help in the assessment of credit when advancing or renewing a facility, and also for creditors, who tend to use audited financial statements to make their assessment on whether to extend credit terms.”
What are the key steps involved in an audit that businesses should know about?
As Justin Axiaq explains, an audit proceeds through a number of phases and, prior to commencing, the audit firm will look into the nature of the client’s business and its complexity, and conduct an assessment of the potential risks and the resources needed.
Following this, the auditors meet the client’s audit committee or management to discuss the audit plan. “The examination of financial records forms the bulk of the audit work – analysis, testing and verification of the statements. Materials examined include the company’s accounting books, transaction records and other relevant documents and activities. During the process, auditors gather a deep understanding of the business and its industry, and may benchmark the company’s financial data and records against general industry patterns to identify anything out of line.”
Additionally, auditors often assess the effectiveness of a company’s internal control over financial reporting, to ensure that the company has established effective procedures to reduce the chances of errors or fraud. “As an audit nears completion, the audit firm will meet those charged with governance to discuss any questions of judgement that have arisen, beyond the validation of the numbers. Finally, the auditor issues its audit opinion based on its evaluation of the evidence gathered and audit findings.”
In the current business climate, what added benefits may an independent audit offer?
“Businesses around the world are responding to a period of unprecedented change. Technology and other market forces are disrupting business models, blurring the lines between industries, and requiring an entirely new way of thinking and developing business strategies. Change is now a given, but some things remain constant. One is the vital role audit plays in the trust and confidence of investors in the capital markets,” says Mr Axiaq. He asserts that the users of financial statements need high-quality financial information and relevant disclosures to allow stakeholders to make well-informed decisions, and it is the objective scrutiny that auditors bring which gives the business community confidence in the numbers.
But there is additional business value: “companies can gain valuable insight into how their business is performing. Auditors challenge assumptions and unlock valuable insights based on a thorough understanding of an organisation’s business and industry,” says Mr Axiaq. “Audits are much more than ‘rear view mirror’ reports on the business, as they can also help companies plan better for the future.”