Audit – Is it essential to get your books Audited in UAE

audit img 1 Audit - Is it essential to get your books Audited in UAE

Auditing of Books of accounts has its importance as it provides the assurance required through an independent opinion, whether the information presented in the financial reports is free from material misstatement, truly prepared and fairly presented by following a uniform accounting and financial reporting standards and applicable laws of the country. Also, every business owner wants to know the health of his business. A proper audit also can add significant value through internal controls assessment and findings and recommendation reporting that can establish preventive control for the omission, misstatement and fraud, which is the XB4 audit approach.

If we particularly talk about auditing requirements in the UAE; as per article 236 of Federal Law No. 2 of 2015 on commercial companies, onshore/mainland companies must get books of accounts audited within 4 (four) months from the end of the financial year of the company.

And as per Article 331 of the aforesaid law, foreign companies or their branches other than representative offices mandatorily need to appoint a local auditor and get their books of accounts audited as prescribed in law.

For UAE Free zone companies Auditing requirement depends upon Free zone Authority. In some Free zones like; Jebel Ali Free Zone (JAFZA), Creative City – Fujairah, Dubai Silicon Oasis (DSO), Dubai World Central (DWC), Dubai International Financial Center (DIFC), etc., it is mandatory to submit the Audit report to renew the trade license.

In our experience, UAE based companies also required to get their books of accounts audited in the following scenarios:

Company Liquidation: The liquidation report is a mandatory requirement for liquidation of the company and to prepare the liquidation report audited financial statements is the foremost important document.

The requirement from Local Government Authorities: Local Government Authorities such as Municipality, Ministry of Finance (MOF), Federal Tax Authority (FTA), Insurance Authorities, UAE Court, and Police Department, etc. may require audited financial statements or Audit Report as and when it is required for a different purpose.

Management Requirement: As financial statements show the overall health of the business, it becomes essential to get it audited to present an accurate and fair view of financial statements to the management. Management can rely on audited financial statements to make financial decisions such as business expansion, withdrawal of profit or retention of benefit in business, cost-cutting, etc. Also, sometimes management wants to evaluate the work of an accountant and needs an expert opinion from auditors on their books of accounts.

External Party Requirement:

Financial Institutions: Lending institutions such as Banks, Finance Houses, private lenders, etc. requires audited financial statements or audit reports from the companies seeking financial assistance or funding for business purposes.  

Potential Customers: Some leading companies or business houses in the UAE also require the audit report to list the company with them as a registered supplier.

Potential Investors/Buyers: If business owners decided to sell the existing company as a going concern, in that case, potential buyers might ask for the audited financial statements or audit report to check the net worth of the company. In the same way, any potential investor can also ask for the audited financial statements or audit report for investment decision making.

Internal Auditors: Internal auditors of the current financial year may ask for audited financial statements of the previous year to verify the opening balances and to check the findings of the previous auditor. 

Information System/IT Auditors: Information system auditors may perform their duties in conjunction with audited financial statement/audit reports, Internal Audit or other attestation from the financial auditor.

What documents/records required for financial Audit?

As per article 26 Federal Law No. 2 of 2015 on commercial companies, every company shall keep accounting records showing all transactions accurately and make enable the partners or shareholders of the companies to confirm that books of accounts of the company are kept adequately as required in the law.

And as per article 27 of the law described above, every company shall appoint an auditor every year and shall prepare annual financial statements including balance sheet and profit and loss account as per the international accounting standards and practices.

Generally, the following records are required to conduct the financial Audit:

  • Trial Balance
  • Profit and Loss Account
  • Balance Sheet
  • Cash Flow Statement
  • Fixed Assets Register
  • Bank Statements
  • Cash Book / Petty Cash Details
  • Inventory Register
  • Payable Report
  • Receivables Report
  • Statutory Dues/tax reports
  • Related Party Transactions
  • Unsecured loans or advance details.

What documents/records required for VAT/Tax Audit?

As per the VAT law, VAT registrant shall maintain and retain the following records for at least five years after the end of the tax period to which they relate:

  • Records of all inward & outwards supplies, including records of goods and services imported and exported, along with custom declaration and other supporting documents of import/export.
  • Tax Invoices issues or received for inward and outward supplies, respectively.
  • Tax Credit Notes and Tax Debit Notes or alternative documents received or issued.
  • Records related to the disposal of goods or services or used for non-business matters, showing the taxes paid on them
  • Records of adjustments and corrections (if any) made into tax records or tax invoices or accounts.
  • Record of expenses or purchases on which input tax not claimed.
  • Other records and documents as per the FTA requirement during the Audit.

No, there is no such requirement of income tax audit as UAE has no income tax or direct tax in place, but the government or the Federal Tax Authority (FTA) can conduct tax audit at any time as per their discretion as there is a corporate tax on oil companies and foreign banks, Excise tax on some specific goods such as tobacco products, energy drinks, etc. and Value Added Tax (VAT) on a majority of goods and services.

There is no mandatory/yearly submission of tax audit report unlikely in other countries with the tax system. However, the Federal Tax Authority (FTA) can conduct tax audit at any time as per their discretion to check whether all due taxes paid or not and other tax compliances as prescribed in tax law. To avoid penalties and last-minute rush, the company can hire local auditor/tax professionals to conduct tax audit reviews or internal audits of the tax system.  

In UAE, apart from the government and Federal Tax Authority (FTA), only locally registered auditors/audit companies having valid trade license to carry out the auditing activities are allowed to conduct the Audit.

In general, the following types of an audit conducted to investigate an existing system, records or entity:

  1. Financial Audit:
    • External Audit: This the most common Audit conducted by the external auditor (an independent body) to analyze and form an opinion on fairness and trueness of information contained in the financial statement.
    • Internal Audit: Internal Audit may be conducted by the internal staff of the company or external auditor to make sure that the company complies with all internal policies and applicable laws.
  2. Tax Audit: Tax audit is an examination of financial records related to tax such as tax returns, calculation of input and output tax, etc. and other related tax compliance.
  3. Forensic/investigative Audit: To derive to the evidence to produce in the court of law or to start a legal proceeding, a forensic auditor specialized in forensic Audit conducts the examination and evaluation of financial records, it covers the wide range of investigating activities.
  4. Operational Audit: Operational Audits is different from normal audits, in operational audits auditor examines organizations policies, procedures and the manner of operating business. The objective of operational audits is to increase the efficiency and effectiveness of organizations’ performance.
  5. Information System/IT Audit: An examination of the management controls within an information technology environment is called an information system or IT Audit. The major objective of the information system audits is evaluating the information system and checking whether information systems maintaining data integrity, safeguarding the assets and operating in a manner to achieve the organization’s goal and objective.
  6. Compliance Audit: In compliance audit, auditors review whether the company complying with local laws, external regulations, internal regulations, rules, policies, decisions and procedures.
  7. Construction Audit: Generally construction audit conducts by the construction companies either by the management or by the stakeholders or government authorities in case of public projects. The objective of construction audits is to review the various aspects of the projects and to check whether they are meeting the performance guidelines as described in the construction contracts.
  8. Special Purpose Audit: In such types of audits, auditors required to report on specific financial information for a specific purpose. For example partners or shareholders in a company not clear on their profit/loss share, then they can appoint an auditor to conduct audits to determine their true and fair profit/loss share from the company.

Following are the major difference between external and Internal Audit:

#

External Audit

Internal Audit

Purpose

To determine whether the company’s financial statements providing true and fair views or not.

To evaluate the company’s internal controls, identifying the issues and correcting the same before they will be discovered in an external audit.

Auditors

Conducted by the independent external auditor.

It can be conducted by the company’s employees or by external auditors in the capacity of the internal auditor.

Scope

The scope will be decided by the governing authority.

The scope will be decided by the management of the company.

Users

Members, Shareholders, the public at large in case of a public company, government department/authorities, third parties.

Management of the company.

VAT audit is an examination of financial records related to Vat such as VAT returns, calculation of input and output VAT, etc. and other related VAT compliances. So far, there is no compulsory VAT audit requirement, but the Federal Tax Authority (FTA) can conduct audits at any time as per their discretion.

Pros/Advantages of Audit: Audit assures the stakeholders, shareholders, owners, etc. regarding the accuracy of their books of accounts. Auditing helps in minimizing the risk of errors and frauds. The Audit also provides a moral check of the employees as they will be under the impression that an independent auditor will audit there work. Another advantage of an audit is that it will increase the confidence of stakeholders and creditability of financial statements.

Cons/Limitations of Audit: Some audit limitations are cost factor, the time factor, a difference of opinions, inconclusive evidence, etc.

As a concern of independence, the auditor does not take responsibility for financial statements on which they form an opinion. It is the responsibility of the management to prepare the financial statement. Auditors also provide accounting services, but they will not audit financial statements prepared by them. 

As per the article 28 of Federal Law No. 2 of 2015 on commercial companies, every company shall have a financial year as determined in its Article of Association (AOA), the first financial year of the company shall not exceed 18 months but at least 6 months, to be calculated from the date of company registration. Subsequently, the financial year will be of 12 months, starting from the end of the previous financial year.

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