A way companies give confidence to their shareholders is by auditing their financial statements.
In Indonesia, it is required for Limited Liability Companies to be audited by a registered public accountant. These accountants will then provide accounting and auditing services.
Why Company Audits Are Important
An audit is an independent and systematic assessment of statutory records, financial documents of an organisation and book of accounts. They are to be conducted based on the Indonesian Financial Accounting Standards (SAK) which is set by the Financial Accounting Standards Board (DSAK IAI) and the Indonesian Sharia Accounting Standards Board (DSAS IAI), for sharia-based companies.
It is performed to determine the extent the financial statements as well as its non-financial disclosure present a proper representation of the company’s financial status. In doing so, It provides credibility to the set of financial statements and confirms that it is true and fair.
This results in a boost of confidence and continued support by the shareholders or investors. Additionally, it helps to improve a company’s internal controls and system.
Analysis of Material and Misstatement Risks
Other than analysing the credibility of the financial statements, audits also analyse the material misstatement risks that are present within them.
Here are some differences between an audited and unaudited companies are listed below:
Able to create reliable financial reports, for internal or external purposes
Able to determine the proper allocation of its resources or the different levels of productivity of each product sold by the company
Able to manage financial affairs because they would not be able to analyse the status of their assets and liabilities
Reliable in the marketplace due to an inability to consistently produce and distribute high-quality goods and services
Unable to create reliable financial reports, for internal or external purposes
Unable to determine the proper allocation of its resources or the different levels of productivity of each product sold by the company
Unable to manage financial affairs because they would not be able to analyse the status of their assets and liabilities
Unreliable in the marketplace due to an inability to consistently produce and distribute high-quality goods and services
Fraud Prevention and Detection
Audits assist companies in the prevention and detection of fraud.
With the use of audit, the company’s operations and internal control systems will be evaluated regularly, this allows the detection of various forms of fraud as well as preventing any other accounting irregularities.
By undergoing audit, the company would be able to facilitate fraud prevention and a company with the reputation of being frequently and properly audited will be less likely to have an employee or vendor attempt a scheme to defraud the company.
How Can Audits Reduce Risks
One way that auditors can reduce the levels of risk is by increasing the number of audit procedures. Auditors usually follow a risk-based approach and analyse the risks related to client’s business, transactions and internal control systems that could lead to misstatements in the financial statements.
Following that, they will narrow their focus and tests to the areas with more risks. A few of those are:
Those related to information
Material misstatement in financial reporting
Misappropriation of assets
Mismanagement caused by insufficient information on the part of those in charge of the company
Which Companies in Indonesia Must Be Audited
In Indonesia, it is only mandatory for the financial statements of a limited liability company to be audited by a registered public accountant if they meet one of the following criteria:
Companies with assets exceeding 50 billion rupiah (US$3.6 million);
Companies that issue debt instruments;
The company is a state-owned enterprise; or
The company collects or manages public funds (such as banks and insurance companies)
Companies are required to keep its accounting records and books for at least ten years from the end of its reporting period.
Consequences of a Lack of Auditing
There are consequences for companies who did not conduct their audits – whether internal, which is conducted by their employees, or external, which is conducted by third-party auditors.
Reduced business performance as there is no identification of underperforming areas
Lack of action taken to solve the underlying issues within the company
Lack of initiation of new policies to address process-driven issues
Possible loss of income due to legal issues
May experience lawsuits or press criminal charges
Advice: It is advised to have a third-party auditor than an internal as they are seen to be more credible, furthermore service providers have the benefit of being client base and extensive training.
How to Respond to an Audit
When a Company undergoes an audit, there are a few ways they should respond to it:
1. Address Concerns
Not every business must comply with the recommendations provided by the auditing team. However, a company must always ensure that it remains legally compliant, and it can do this through the use of information provided by audits.
2. Appeal to the Authorities
If your company lacks the necessary resources required to fulfil the recommendations, you can proceed to appeal this recommendation and request for an extension if necessary. Failure to comply with the recommendations may be regarded as a breach of conduct protocol and companies can face severe penalties.
3. Open Audits
Companies which are subject to open audits are especially recommended to comply with proposals stated in the audit report because the general public will know more about the details of the company in question.
Starting a Business in Indonesia
If you require assistance with your accounting or audit, we at Paul Hype Page are able to assist and serve your needs in this area. Our accountants and auditors will work with you to ensure that your company are in compliance with the regulations and ensure that your company is in peak financial condition.
Thinking of setting up your company in Indonesia? Reach out to us for free consultation on company incorporation and other corporate services like auditing today!
The Singapore Companies Act states that every company, including a private company, must have its financial statements and accounting records audited at least once every year. Only companies which fulfill the criteria for audit exemptions do not have to be audited.
Do foreign companies in Singapore have to be audited?Paul Hype Page2021-11-09T16:50:45+08:00