What Is the Need for an External Audit

The need for an outside analyse in the grimace of companies arises primarily from the existence of split-up of self- pull up stakes from involve to it. When realise is shargond an inspect address depart be needed in inn to chink that e precise last(predicate) the partners or be it shareholders are on the same page as the managers (the ones who impart be fitling the conjunction) and know what has been misadventure in the play along, what is happening at present and what dope be pass judgment to happen in the future in order to increase returns in the fraternity.The case of an proprietor controlled order is different as usually the manager leave be working in the union and will be aware of everything that will be winning place and will non need an analyse constitution to find out what is going on. Since the proprietor is alone in decision making, he knows near all the decisions that need to be do and will non find out through an analyse report that white thornbe the company has decided to blast and open a new branch use the accumulated or retained profits.The study involves the clients faculty and management in across-the-boardy grown time to providing information to the auditor. The auditors need part of the staffs time as they will not know where the proprietarys deems are unplowed and in which way they are filed. To gather all the information that the auditor will use in making his audit report he has to appreh stop it through staff. Since most owner controlled companies are very small and the staff members are few, it will brand it difficult for the Professional auditors to plan their audit to decrease the disruption which their work will cause.The audit expertness end up inconveniencing other stakeholders such as customers because service provoke start out slow as one of the staff members will be assisting the auditor, tolerant him all the documentation that he needs and go with him around as he investigates th e national control measures that yield been created in the company to see how impressive they are. Application to lenders/ monetary institutions for finance may be strengthened by the submission of audited accounts.However around fiscal institutions, a bank, for instance, is likely to be far to a greater extent concerned about the future of the handicraft and lend commensurate security, than by the past historical accounts, audited or otherwise. canvassed accounts heapnot augur the performance of the company in the future, which is the information that the slang will be trying to find out. whence audit reports are not an issue of dominant importance, peculiarly in owner controlled companies.Not all owner controlled companies need to be audited. Auditing of companies does not depend on the type of ownership (that is, sole trader, partnership or co-operative), but it mostly depends on the size of the company at hand. at that place are laws that have been made in the U. K that exempt certain companies especially the small ones and the owner controlled ones from world audited. Instead of quest all audit requirements, the owner controlled companies can acquiesce shortened accounts.The main differences that can be produced chthonian the banner of abbreviated accounts basically mean that an owner controlled company does not have to include a blanket(a) balance canvas, profit and loss account or directors report which would normally be take by Companies House. The owner controlled company is steady required to submit a shortened balance weather sheet together with notes that explain the course end balances shown in the balance sheet. Under the audit exemption rules the year end accounts for an n owner controlled company do not have to include an auditors report.When an auditor has active the accounts and submits a special audit report that report should state that in the auditors imprint the abbreviated accounts are being submitted in def erence with the appropriate section of the Companies Act. To qualify for being able to file shortened accounts a small company should satisfy at least two of tercet conditions. The three exemption conditions prior to April 2008 were that annual swage is little than 5. 6 million pounds, balance sheet total is little than 2. 8 million pounds and the norm number of employees is less than 50.Where the pecuniary year started later April 2008 the parameters increased to, annual turnover less than 6. 5 million pounds, balance sheet total less than 3. 26 million pounds and average number of employees less than 50. When an owner controlled company satisfies the audit exemption parameters it can maintain that audit exemption for a full financial year afterwards even if the parameters were reach in that following financial year. There are benefits in submitting abbreviated accounts as simpler and easier accounting records can be maintained reducing time washed-out on accountancy work. In addition although potential suppliers and financial institutions may require details of the year end financial accounts it is acceptable not to publish full details. In China, Owner controlled companies have an exemption from the audit and this gives management for smaller companies any(prenominal) newfound flexibility, Alyssa Martin says. Companies may not have to produce as a good deal documentation or perform as practically examineing to produce managements avowal as they might have had to produce for the interest of the audit, she says. They can use other measures, like ongoing monitors or their own personal experience, to assess internal controls when they dont have to have the external auditor auditing their emergence or leveraging their process in performing the audit of internal control, notes weavers Martin. Yong Xu, CFO for Jingwei International, says he was grateful to see the audit requirement lifted, even though the company voluntarily produced the audit for its 2009 financial statements and is planning to have the audit again in 2010. Jingwei International is a China-based technology services provider listed on the blood exchange and is owned controlled.However while the recent mandate exempts smaller companies from the audit of internal control, it doesnt depressurise any of the requirements for companies to establish and maintain an effective control environment or to report on the lastingness of controls, says Alyssa Martin, an executive partner with audit firm Weaver. Thats because the Dodd-Frank bill does not exempt smaller companies from region 404(a), which is the requirement for management to produce its own report on the effectiveness of controls to mitigate errors in financial statements. It doesnt really change the role of management, says Alyssa Martin. They still have to understand the design of internal control and assess the effectiveness. Its not a taproom walk. If youre not documenting anything or doing anything, youre not following the SECs guidance. Jim DeLoach, Managing Director, Protiviti. Owner controlled companies should audit their accounts as this reduces the Risk of Fraud. A number of factors take the risk or exposure to loss from artifice, and some organizations suffer more fraud than others. The incidence of fraud in books of account is distributed unevenly. Some industries, some companies, some occupations, and some persons are higher risks than others.If accounts are being constantly audited, employees will comply with the regulations and do the veracious thing on the other hand, this can become a motivating factor in the case of employees as they know that changes in the company for remediate that have been initiated by them will be recognized. umpteen a(prenominal) companies have embraced voluntary environmental audits, commonly cognize as self-audits, as a valuable affair resource. Consultants and experts agree that the practice can be of terrible benefit to enterpr ises in all types of industries, for it addresses so many facets of a companys operations.For ex group Ale, Barbara Ceizler Silver, author of Environmental Self-Audit for lilliputian Businesses, draw the self-audit as a valuable diagnostic hammer that can be used by companies seek to identify and address compliance problems relating to air, water, land use, consentaneous waste, and hazardous materials prior to submitting formal permit applications or other business processes. The practice of voluntarily checking compliance with environmental regulations through the practice of self-auditing has garnered considerable incarnate from state lawmakers as well. As of 2000, environmental self-audits throw significant legal protections in 26 states.The torso of law in these states maintains that companies can voluntarily test for violations and correct all previously undetected problems without legal penalty. Companies that report violations avoid financial penalties and receive s upererogatory time to rectify problems. Most significant of all, the results of self-audit tests and programs in these states receive significant legal protections from public disclosure The advantages of an audit report in owner controlled companies may be there, but the disadvantages far outweigh the advantages and hence I agree with the statement that owner controlled business should not have audit reports.This is because this will be a large and unnecessary expense to the company and will result in the company outlay large amounts on auditing which could have been diverted to expanding the business. There are cheap alternative methods that owner controlled companies can use to manage their companies than auditing their accounts and getting audit reports every year. (1503 words)References Abdel-Khalil A. R. (1983). Why do private companies demand auditing? A case for organizational loss of control. Journal of Accounting, Auditing amp Finance, 8(1), 31-52 Proviti Flash Report o n SOX 404(b) July 17 2004.Accounting and Audit Exemptions for Small Companies in the U. K-Terry Cartwright Environmental Self-Audit for Small Businesses A Quick and Easy Guide to Environmental Compliance. impertinently York Department of Environmental Conservation, Empire State Development, evidence 1998. Geltman, Elizabeth Glass. A Complete Guide to Environmental Audits. ABA, 1997. Power, Michael. expertise and the Construction of Relevance Accountants and Environmental Audits. Accounting, Organizations, and Society. February 1997. Environmental Self-Audit for Small Businesses- Barbara Ceizler Silver