Company audits

The Essential Role of Company Audits in Governance

Audits serve a vital governance function providing independent assurance over company finances, controls and compliance. Annual audits bring discipline, transparency and integrity to corporate reporting. For public companies, audits are a mandatory obligation. But all organisations benefit from high quality company audits upholding stakeholder trust.

Types of Company Audits

While the financial statement audit is most common, various company audits exist:

Financial statement audit – Examines accuracy and compliance of annual financial statements.

Internal controls audit – Assesses effectiveness of internal financial control systems.

Compliance audit – Reviews conformance with regulations, policies and legal requirements.

Operational audit – Evaluates functional areas to identify process improvements.

Culture audit – Assesses alignment of culture and behaviors to company values.

Forensic audit – Investigates potential breaches, misconduct or fraud based on red flags.

Royalties audit – Validates payments for intellectual property usage are accurate.

Environmental audit – Verifies conformance to environmental management standards.

Data analytics audit – Identifies reporting anomalies and risks by mining company data.

IT security audit – Tests resilience of information security controls.

Boards determine the optimal combination of audits to provide assurance tailored to the company’s profile and industry.

What Is the Importance of the Financial Statement in Audits?

The financial statement audit is foundational, aimed at assuring shareholders and stakeholders that financial reports fairly present company performance and position. Conducted annually by external auditors, key elements include:

• Assessing compliance with accounting standards and regulations.
• Testing key transactions and account balances on a sample basis.
• Evaluating the reasonableness of management estimates and judgments.
• Ensuring disclosures are adequate and transparent.
• Forming an opinion on whether financial statements are free from material misstatement.

Robust financial audits are vital for capital market trust and access.

What is the Board's Role in the Oversight of Audits?

While auditors perform the detailed work, the board carries responsibility for oversight of audits. Oversight actions include:

• Reviewing auditor credentials, skills, independence and fees.
• Discussing the audit plan scope, timelines and materiality thresholds.
• Receiving auditor updates during audit fieldwork.
• Issuing representation letters confirming information provided.
• Evaluating audit conclusions, key findings and control recommendations.
• Assessing quality of communications from auditors.
• Monitoring and addressing any unresolved auditor-management disagreements.
• Cultivating open dialogue with auditors during reporting sessions.

Effective oversight relies on transparency from auditors and management responsiveness.

What is the Role of the Audit Committee?

Audit committees assist boards by assuming detailed governance over audit activities. Responsibilities cover:

• Managing external auditor appointments and compensation.
• Approving terms of engagement and scope of audit work.
• Overseeing audit execution and resolving any audit issues.
• Monitoring independence and objectivity of auditors.
• Assessing audit quality through structured evaluations.
• Reviewing external audit findings and management responses.
• Coordinating internal audits based on key risks.

Audit committees enable more diligent oversight of audit functions.

What are Some Signs of a Quality Audit?

Directors scrutinise audits for quality indicators including:

• Thorough risk assessment shaping audit strategy and testing.
• Insightful identification of audit focus areas and materiality thresholds.
• Evidence of professional skepticism instead of blind trust.
• Specialist involvement to audit complex areas like tax, technology or valuations.
• Appropriate seniority and expertise of audit team members.
• Sufficient time investment to enable diligent work.
• Few major post-audit adjustments implying sound audit execution.
• Clear, open communication of issues identified and conclusions reached.

Well-executed, value-adding audits build director confidence in reported information used for oversight and decision making.

What is an Internal Audit?

While external auditors operate independently, internal audit provides management assurance on internal controls, risk management and governance. Key integration practices include:

• Aligning internal audit plan with external audit focus areas for efficiency.
• Sharing internal audit reports to inform external audit risk assessments.
• Assigning complementary audit scopes to minimise overlaps.
• Maintaining open communication channels on issues identified.
• Comparing internal and external audit conclusions for consistency.
• Joint meetings to coordinate planning, execution and reporting.

Close collaboration amplifies benefits from audit resources.

How to Drive Continuous Audit Improvement

Beyond mandated requirements, boards proactively raise audit quality by:

• Allocating sufficient audit time and resources.
• Regularly rotating audit firm partners to refresh perspectives.
• Seeking multiple audit firm quotes to compare quality and cost.
• Asking auditors to highlight innovative assurance methods and data analytics used.
• Meeting privately with auditors to encourage transparency about management cooperation.
• Debriefing after each audit cycle to identify lessons learned.
• Surveying management for audit effectiveness feedback.
• Implementing recommendations to enhance internal controls and compliance.

Ongoing improvements lead to more robust assurance underpinning governance.

Conclusion

Audits provide independent validation of critical governance foundations - reliable financial reporting, strong internal controls and compliance. While requiring investment, high quality audits build stakeholder trust in the integrity of reported information and processes. Boards thus play an important role overseeing audit functions as pillars of overall good governance.