Statutory audit is a legal requirement mandated by the government and regulatory bodies to ensure that a company’s financial statements and records are independently audited by a certified external auditor. These audits are conducted in accordance with International Standards on Auditing (ISA) or similar local equivalents.  The primary objective is to express an audit opinion on whether the company’s financial statements provide a true and fair view of the company’s financial position and performance, are prepared in accordance with applicable accounting standards and are free from material misstatement.

As part of this process, auditors often identify observations which highlight deficiencies in a company’s financial reporting, internal control or key processes. Below are some of the most common audit findings encountered in statutory audits, along with practical guidance on how to avoid them:
 

  1. Inadequate documentation

Every transaction should be supported by appropriate documentation, including the basis used for estimates and calculations related to prepayments, accruals, deferred income, etc.  Establish a clear referencing system to link each transaction to its supporting documents, thereby increasing efficiency in providing audit documentation if requested.
 

  1. Weak internal controls

Focus on developing and implementing clear policies and procedures that address segregation of duties, monitoring and oversight.  Ensure roles and accountabilities are well-defined within the organisational structure to prevent exploitation or oversight.
 

  1. Revenue recognition errors

Revenue recognition must adhere to the applicable accounting standards. There must be a clear understanding of the performance obligations and the timing of revenue recognition (over time or at a point in time). The timing of issuing invoices may also affect the accounting entries, so this must be considered as well.
 

  1. Misclassification of Expenses

The company must have a clear policy to determine if expenditures are capital or operating in nature, in line with the accounting standards. There must also be adequate monitoring of prepayments and accruals to ensure that the expenses are recorded in the correct accounting period.
 

  1. Unrecorded of Misstated Liabilities

Record expenses in the period they are incurred, regardless of when payment or invoices are received. The company must have reliable data for accruing liabilities (e.g., utilities, employee benefits, rent, interest, subscriptions, etc), and these estimates must be supported by documentation.
 

  1. Inventory and Fixed Asset Issues

Make sure to maintain an up-to-date fixed asset register and apply depreciation rates accurately. There must also be proper monitoring and reconciliation when fixed assets are carried at fair value, making sure that information on the historical costs is easily available and verifiable. Establish a clear capitalisation policy to determine if expenditures are capitalised or expensed outright. For inventory, ensure that there are proper stocktake procedures and policies to determine which stocks should be written off (e.g. obsolete). There must also be a policy on the valuation method used for inventory, with an adequate audit trail. Furthermore, implement strong controls to prevent theft or misappropriation of assets.
 

  1. Non-compliance with Laws and Regulations

Identify all applicable laws and regulations, and seek expert advice where needed (lawyers, tax practitioners, compliance experts, etc). There must be clear accountability on which employees are tasked to keep up to date on these areas to ensure that the company is compliant. Information should be easily accessible within the organisation and the importance of adherence to these laws and regulations must be highlighted, with necessary disciplinary actions due to non-compliance.
 

  1. Inadequate Financial Reporting and Disclosures

The company must be fully aware of the applicable accounting standards from the accounting framework it is using. Training and professional development must be undertaken to ensure that the knowledge of accounting standards is up to date. Utilising tools such as IFRS disclosure checklists can also help determine the accuracy and sufficiency of the disclosures.
 

  1. Reconciliation Failures

Reconciliations must be performed in a timely manner (e.g. cash and bank, payroll, VAT reconciliations, etc). Define responsibilities and processes clearly, and ensure staff are competent and well-trained. The frequency of the reconciliation can also be revisited if the current frequency results in material discrepancies being consistently noted. 
 

  1. Governance and Oversight Deficiencies

Those charged with governance (typically the Board of Directors or different committees of the organisation) should actively participate in strategic and financial oversight. This includes overseeing the financial reporting process, internal controls and audit activities.  They must be clear with their objectives and communicate them properly within the company. They must avoid overreliance on management by promoting independent review and accountability.

While the above findings are commonly encountered across industries, certain sectors may face unique challenges based on their specific operations or regulatory environments. As auditors, it is crucial to identify, communicate, and help address these findings with professionalism and clarity. In this way, our clients will find added value in our service as auditors, which in turn is beneficial to everyone involved.
 

Article written by Audit Team at RSM Malta