Audits play a crucial role in the UAE by ensuring the accuracy, reliability, and transparency of financial records for businesses and organizations. During an audit, auditors scrutinize internal controls, existing systems, and financial statements.
Here’s some context on the importance of audits in the UAE and their benefits:
- Compliance with Regulations
- Financial Accuracy and Reliability
- Risk Identification and Management
- Investor and Creditor Confidence
- Detection and Prevention of Fraud
- Process and Operational Improvements
- Compliance with Tax Laws
- Enhanced Corporate Governance
There are different types of audits in the UAE; some of them are conducted by internal parties, and some are by external audit firms. The Federal Tax Authority (FTA) conducts other sorts of audits, such as tax audits.
Introduction to Audits
An audit is a process through which a systematic and independent check is performed on the books, accounts, documents, and statutory records. This check will then identify the clarity and correction of the presentation of these records, either in financial statements or non-financial disclosures. The purpose of the audit will depend on the nature of the organization as well as on the type that is to perform.
Rules & Regulations in the UAE
As per Article 27 of Federal Law No (2) of 2015 or Commercial Companies Law, businesses retain at least one auditor to audit accounts yearly. Shareholders or partners are also required to get audited financial statements and audit reports from UAE auditors.
Article 236 further requires that a company’s finances for a fiscal year be examined by an independent audit firm in Dubai or DMCC-approved auditors, who would issue an audit report. The audited financial statements are to be provided to the firm’s Board of Directors during the General Assembly four (4) months before the end of a fiscal year. The company shall also provide competent authorities in the UAE e.g., the Federal Tax Authority, copies of audited financial statements and audit reports no more than seven (7) days from the convening of the General Assembly.
Types of Audits in the UAE
Compliance audits is a type of audit that verify whether an organization adheres to applicable laws, regulations, policies, and industry standards. These audits ensure that the organization is meeting legal and regulatory requirements specific to its industry. They assess adherence to areas such as health and safety regulations, environmental standards, and industry-specific compliance obligations. This type of audit is most frequently utilized in regulated businesses or educational institutions.
A construction audit is a cost-benefit assessment of a specific construction project. Activities may include an examination of contracts awarded to contractors, prices paid, overhead charges authorized for reimbursement, modification orders, and completion timeliness. The goal is to guarantee that the project’s expenses were reasonable.
Financial Audit –
A financial audit examines an organization’s financial statements, records, and transactions to ensure accuracy, reliability, and compliance with accounting standards. It consists of checking the completeness and correctness of financial data, evaluating internal controls, and providing a judgement on the fairness of financial statements, which is the most often performed type of audit and is required for all publicly traded firms.
Information Systems Audit
This audit examines the controls over software development, data processing, and computer system access. IT audits evaluate an organization’s IT systems, infrastructure, and data security. These audits assess the effectiveness of IT controls, data integrity, system reliability, and compliance with relevant IT governance frameworks. IT audits help identify vulnerabilities, assess risks, and ensure the protection of sensitive information.
Internal audits are conducted by an organization’s internal audit team or department. They assess the effectiveness of internal controls, risk management processes, and operational procedures.
Although there are several reasons for conducting an internal audit, some prevalent ones are as follows:
- Propose improvements
- Monitor effectiveness
- Make sure your business is compliant with laws and regulations.
- Review and verify financial information
- Evaluate risk management policies and procedures
- Examine operation processes
When there is a suspicion of improper or fraudulent behaviour, an investigative audit is conducted on a specific area or individual. The goal is to find and correct control violations while also gathering evidence in case charges are filed against someone.
Operational audits assess the efficiency and effectiveness of an organization’s operational processes and procedures. These audits examine various aspects such as resource utilization, workflow, productivity, compliance with policies, and achievement of operational objectives. They aim to identify areas for improvement and optimize performance. It is a critical component of every campaign to boost efficiency and save expenses.
Tax audits are conducted by the Federal Tax Authority (FTA) to verify compliance with tax laws and regulations. These audits assess the accuracy and completeness of tax returns, examine supporting documentation, and ensure proper reporting and payment of taxes. If a taxpayer disagrees with the conclusion of a tax audit, he or she can file an appeal, which may reverse the initial decision.
An external audit is conducted by independent audit firms external to the organization. These auditors review the financial statements and records to provide an unbiased assessment of the organization’s financial position. The external audit assures stakeholders, such as investors, creditors, and regulatory bodies, regarding the accuracy and reliability of the financial statements.
An external audit, like internal audits, seeks to assess the correctness of accounting records. Investors and lenders typically require external audits to ensure the business’s financial information and data are accurate and fair.
Value Added Tax (VAT) Audit
VAT audits specifically focus on the organization’s compliance with VAT regulations. They assess the accuracy of VAT reporting, proper calculation of VAT liabilities, and adherence to VAT-related documentation and record-keeping requirements.
Cost audits are applicable in industries where cost regulations exist. These audits verify the accuracy and reasonableness of costs incurred by the organization. They examine cost accounting systems, cost allocation methods, and adherence to cost accounting standards.
Social Responsibility Audit
Social responsibility audits evaluate an organization’s adherence to ethical, social, and sustainability standards. These audits assess factors such as labor practices, human rights, diversity and inclusion, environmental impact, community engagement, and corporate social responsibility initiatives. They help organizations demonstrate their commitment to responsible business practices.
Environmental audits focus on assessing an organization’s environmental impact and compliance with environmental regulations. These audits evaluate practices related to pollution control, waste management, energy consumption, carbon emissions, and sustainability initiatives. They help identify areas for improvement and ensure compliance with environmental obligations.
Quality audits assess compliance with quality management standards and processes. These audits examine an organization’s quality control systems, product or service quality, adherence to industry-specific quality standards, and customer satisfaction. Quality audits aim to identify areas for improvement in quality assurance and ensure consistent delivery of high-quality products or services.
It’s important to note that these audit types may overlap in certain aspects, and organizations may prioritize specific audits based on their industry, legal requirements, and organizational objectives.
Audits in the UAE: Responsibilities & Procedures
Responsibilities and procedures involved in conducting audits in the UAE include:
a) Appointment of Auditors:
As per the Commercial Companies Law in the UAE, businesses are required to appoint at least one auditor to conduct an annual audit of their accounts. The auditor can be an external audit firm or an internal auditor, depending on the size and nature of the organization.
b) Audit Planning:
The auditors, whether internal or external, need to carefully plan the audit process, which involves understanding the business operations, risks, and internal control systems. Audit objectives, scope, and timelines are determined during the planning phase.
c) Internal Control Evaluation:
Auditors assess the adequacy and effectiveness of the organization’s internal control systems. They review policies, procedures, and processes to identify weaknesses or gaps that could lead to errors, fraud, or non-compliance.
d) Substantive Testing:
Auditors perform substantive testing to gather sufficient and appropriate audit evidence, which includes examining financial transactions, analyzing supporting documents, conducting sample testing, and verifying the accuracy and completeness of financial statements.
e) Financial Statement Audit:
Auditors review the organization’s financial statements to ensure they are prepared under applicable accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). They verify the accuracy of the financial information, including balances, disclosures, and presentations.
f) Audit Report:
Upon completion of the audit procedures, auditors prepare an audit report. The report includes their findings, opinions, and conclusions regarding the fairness and reliability of the financial statements. It may also highlight any significant issues or recommendations for improvement.
g) Compliance with Regulatory Requirements:
In addition to financial audits, certain audits in the UAE are conducted to ensure compliance with specific regulations. For example, the Federal Tax Authority (FTA) conducts tax audits to verify compliance with tax laws and regulations.
h) Confidentiality and Professional Ethics:
Auditors are bound by professional standards and ethics, including maintaining the confidentiality of client information and exercising objectivity, integrity, and independence throughout the audit process.
It’s important to note that the specific procedures and responsibilities may vary depending on the nature of the organization, industry-specific requirements, and the auditing standards followed. Professional audit firms in the UAE typically follow internationally recognized standards such as the International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB).
Conclusion – Audits in the UAE, in a Nutshell
Maintaining accurate and reliable records is crucial for businesses and organizations in the UAE, and audits play a significant role in achieving this. By grasping the different types of audits and their specific purposes, organizations can ensure compliance, accuracy, and reliability in their financial records. Whether a compliance audit, financial audit, or tax audit, seeking the expertise of qualified audit service provider is mandidatory to navigate the complex regulatory landscape effectively. Subscribe to Easyfiling today!