Auditing in Sri Lanka

Many firms in Sri Lanka treats auditing as a tedious legal requirement but not as an essential tool in ensuring that your organization’s financial statements are on par to the standards set by Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB). Auditing not only could be a way to authenticate your company’s financial records but also to help you track the growth of your company while giving you verified information to aid in decision making of the company.

Auditing is rather a relative term used for examination, review or evaluation of a company’s financial records usually referred to the one performed by an external qualified third person appointed by the business. It is usually to ensure that the financial data are represented truly and fairly which gives confidence to shareholders in the company’s internal management systems & its financial accounts.

Financial statements (usually Income Statement, Balance Sheet & Cash Flow Statements) are periodically prepared internally with a chosen accounting standard to provide valuable information to stakeholders such as shareholders, employees, creditors, partners, banks & financial institutions, government bodies, customers, suppliers, etc. Financial statements represent the operating, cashflow, capital and financing activities of a business accumulated by many transactions. The fact that these documents are prepared internally poses a risk of fraudulent misrepresentation carried out in order to portray that a business is doing better than they actually are or to overvalue the business in the sake of raising funds. Therefore, audits are important in nature since they seek to ensure that the financial statements prepared by the organization accurately reflect the current situation of the business, that the statements are on par with the standards prescribed by the SLAASMB and comply with the legal providences of Sri Lankan Authorities.

Auditing can play a major role in any new business as it can assure you that good fiscal margins are established and maintained, if not it will lead to potential losses and liabilities to any sort of businesses. Specially in a new venture, it is of utmost importance that you have the accurate financial information such as revenue, expenses, profits, valuations, etc. and an audit makes sure all the information that you need to make an informed decision are fair and accurate.

While the audit report is being compiled, Auditors usually consider the following key criteria that are common to almost all the audit processes:

• Whether the financial accounts are in accordance with the Sri Lanka Accounting and Auditing Standards Act, No.15.
• Whether the accounts are consistent with the bookkeeping records.
• Whether the director’s annual report is consistent with the records. 
• Whether the statements of financial position reflect an accurate and fair view of the true state of the company’s transactions at the end of that accounting period and the Profit & Loss statements reflects an accurate and fair view of the result of the period. 
  
  

There are three types of Audits usually performed by three separate parties, so based on each party, their audit may differ in objective and scope.

Internal Audits (First Party Audits) ­– These are the Audits are performed by the internal parties of the company. Usually, the findings from these kinds of audits are not distributed outside the company but rather prepared for the use of the management and other internal stakeholders. The purpose of internal audits is to make sure that the records are to give actionable data to managers so they can improve the decision making within an organization. These audits further help the management to use the results to identify issues and implement corrective decisions before the examination by the external auditors. 

External Audits (Third Party Audits) – These audits are performed by third party professionals who provide an unbiased examination that internal auditors may have missed. External audits are used to determine any errors or misrepresentation of financial information in the official financial documents. These kinds of audits tend to often be much more formal than an internal audit since the decision could have varying effects on stakeholder groups who have influencing power over the company such as customers, government officials, and investors. External audits are very vital to allow multiple stakeholders to be confident about the decisions made by the company. 

Governmental Audits – These are the audits performed by the general government of Sri Lanka to ensure that financial statements are being prepared truthfully and do not misrepresent the actual financial status of the company for fraudulent activities such as Tax Evasion. In Sri Lanka, these audits are performed by the government institute named Inland Revenue Department of Sri Lanka. As often these kinds of audits are to make sure that the organizations are not downplaying their taxable income. If doing so, either intentional or unintentional, will be considered as tax fraud which may result in governmental action against the company. 

Auditing also ensures to establish internal controls within the organization. With the audits, you make sure that proper accounting practices are carried on or take necessary steps to implement such practices to ensure that all transactions are recorded no matter the value or the size of the transaction. By doing so, unwanted expenses could be minimized, assures that no fraudulent activities are taking place and adds on to the overall transparency & the credibility of the company.

Some small businesses may be legally exempted from these requirements, but they may do if they wish to which will authenticate their financial books and solidify the ongoing standards which will enable them to gain further credibility on their performances opening up more and more opportunities such as bank loans and investments opportunities. The companies that are not required to audit their financial statements are often Sole Proprietor, Partnerships, Clubs and Societies. In the case that they do, it is known as a non-statutory audit.

Though it may be daunting to trigger an Auditing process of your company probably for the first time, there are many Audit Firms in Sri Lanka that help organizations no matter the calibre to ease their auditing process with relative ease. The audit fees are generally determined by the size of the business and the risk attached which in turn translate to how many hours the audit will take. A quick google search may help you find the best auditor or auditing firm to suit your company’s needs. 

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Created on Mar 5th 2021 01:12. Viewed 298 times.

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