Which Types of Entities Need a Financial Audit?
Financial audits are an independent evaluation of an organisation's financial records and operations to ensure that they comply with accounting standards, laws, regulations, and internal policies. Not every organisation will need to be audited to comply with regulations, and there are situations when a business or other entity will want to have a financial audit even when not required by law. Also, auditing requirements vary between states and territories in Australia. Here’s a quick overview of the main types of entities and their audit requirements.
Listed companies
Companies listed on the ASX, NSX or other public exchanges must have their financial statements audited per the listing rules to ensure that their financial statements are accurate and reliable. They are required to have their financial statements reviewed each half year as well.
Unlisted Public companies
These companies are public companies that are not listed on a public exchange and are required to have their financial statements audited annually in accordance with the Corporations Act 2001.
Private companies
Certain private companies must have their financial statements audited under the Corporations Act, depending on revenue, assets, activities and other factors. For example, private companies that are wholly owned by foreign corporations need to be audited each year. Large private companies also need to have their financial statements audited each year (under the Corporations Act, ‘large’ is defined as having at least 2 of the following three criteria: revenue greater than $50 million, consolidated assets value over $25 million and more than 100 employees). Companies not meeting these criteria are defined as small and don’t need to be audited to meet compliance requirements.
Private companies with external stakeholders such as lenders, investors, or shareholders may also be required by shareholders or those stakeholders to have their financial statements audited to provide assurance that their financial statements are accurate and reliable.
Australian Financial Services Licence (AFSL)
All companies that hold an AFSL are required to have an audit completed on their financial statements and also on their compliance with the requirements of their AFSL annually. This is a complex area as there are a number of different types of AFSLs and they all have different compliance requirements. LNP is a specialist in this area and currently audit about 100 AFSL holders including some of the largest providers of OTC and CFD products and markets.
Managed Investment Schemes
Managed investment schemes registered with ASIC must have their financial statements audited annually under the Corporations Act. They are also required to have a separate audit of their compliance plan completed annually. In addition, large schemes must have a review of their financial statements completed each half year. Unregistered schemes are not required to be audited under the Corporation Act, however the trust deed or other governing document may request the scheme to be audited.
Not-for-profit organisations (NFPs)
Auditing requirements depend on the size of the organisation. Larger entities registered with the ACNC (Australian Charities and Not-for-profits Commission) require an annual audit of their financial statements in accordance with the ACNC Law. Large is defined as having annual revenue over $3 million. Medium NFPs are defined as having annual revenue less than $3 million but greater than $500,000 in annual revenue. These must be audited or reviewed each year.
A review is cheaper and takes less time than an audit, but it has a lower level of assurance that the NFP is meeting its requirements because the auditor does not complete as many procedures as would be completed with an audit. Small NFPs are defined as having revenue of less than $500,000 annually and are not required to get an audit or review.
Not-for-profit organisations that receive significant funding from the government, foundations, or other sources may require financial audits in accordance with the terms of their funding arrangements to show that their financial management practices are responsible and transparent.
Incorporated Associations (other than ACNC Registered Charities) registered in states and territories are regulated under state and territory legislation.
Government entities
Government entities such as federal, state, and local governments, as well as public institutions such as universities and hospitals, are subject to financial audits to ensure that public funds are used appropriately. These audits are usually completed by State and Commonwealth audit offices.
Pension Funds and Self Managed Superannuation Funds
Pension funds and SMSFs are required to conduct financial audits to ensure that they have appropriate investment and risk management practices in place to protect their members' retirement savings. These audits can only be completed by registered SMSF auditors.
Other times to get a financial audit
There are situations when an entity may require an audit, even if not required by law. These include:
To get a grant or investment
To qualify for a loan or meet lending requirements
Concerning a sale or acquisition
In all these situations, investors, lenders or purchasers may want an assurance that the financial accounts are accurate.
It's worth noting that the above entities are examples, and requirements for financial audits may vary depending on the country, jurisdiction, or specific circumstances.
The auditor must be a Registered Company Auditor (RCA) registered with ASIC and have adequate insurance under the requirements of the Corporations Act. In all cases, the audit must be completed in accordance with Australian Auditing Standards.
Get in touch to discuss your financial audit challenges
LNP Audit and Assurance is one of Australia's largest independent audit and assurance firms. We work with a diverse range of clients – start-ups, SMEs, businesses seeking to list, and small listed groups – in delivering independent audit and assurance services.
If you have questions for your next audit or are looking for quality audit and assurance services, contact LNP Audit and Assurance today.