What is a financial audit? Let's take a look...

Many Kiwi businesses and organisations elect or are required to have annual audits of their financial statements, but often don’t wholly understand what it entails or their preparatory responsibilities. Hawke’s Bay Audit and Assurance Services director Philip Pinckney explains…

Time to read: 6 mins

What is the purpose of an audit?  

An audit follows pre-defined standards to provide an opinion on whether a set of financial statements is materially correct.

It’s financial forensics – understanding and analysing information. As auditors we need what we call Sufficient Appropriate Audit Evidence. We have to apply professional scepticism when completing audits – we cannot operate on trust. We often say to the client, "show me".

Who needs to be audited?

Click here to view entities that require an audit (opens in a new tab)

What are the main benefits?

Audits provide assurance that financial statements are materially correct and give insights into business risks. Audited financial statements are valuable when it comes to listing or selling a business. The purchaser knows they can rely on the financial statements.

What documents should entities prepare beforehand?

We have a generic checklist, but we take out the bits that aren't relevant and tweak a few things to make it specific to the audited entity. They might include balance sheet reconciliations and supporting information, invoices for expenses and asset purchases, the asset register, revenue contracts, payroll information, lease contracts and board minutes among many other things.

Who sees the audit report?

It depends on the entity. Often it's the directors, board, shareholders, bank or government. In some cases, they can be viewed by the general public.

How often do audits take place?

Every financial year, bearing in mind that the year-end varies according to the entity.

How long does it take?

It depends on the size of the entity. It could take anything from six or seven days for a small entity, or there might be a team of people working on a large audit for several weeks from commencing the planning to finalising the audit report.

What are the golden rules when you’re preparing for an audit?

Take time to prepare a robust set of financial statements because, if you rush, you’ll likely make mistakes and may not have all the information to hand. It will then take us longer to complete the audit because we’ll be correcting mistakes and waiting for information. Also make sure you have all your invoices to hand!

What are the golden rules for auditors?

Plan well – understand your client and what they do – and know that we can’t necessarily take things at face value.

Is it the responsibility of auditors to identify fraud?

There’s an old saying, “an auditor is a watchdog, not a bloodhound”. We’re not there to find every fraud. It’s the responsibility of the directors, trustees or governance team to have internal controls in place that prevent fraud and the auditor’s responsibility to verify whether things are right or not. We provide "reasonable assurance", which is a high-level but not absolute assurance that things are right. We do things on a sample basis, so we don’t look at every transaction.

What do entities commonly get wrong in their audit preparation?

Probably the area we make the most adjustments relate to "revenue recognition". It’s where financial details could be manipulated to benefit the entity or a stakeholder.

Other problem areas are any that are open to interpretation or judgement (such as when income is earned from a contract, or judgement regarding what an asset is worth, and so on).

What happens if you find fraud during an audit?

It depends on the situation. Sometimes it comes down to whether the shareholders or directors want to force the issue. Worst-case scenario, offenders could be prosecuted.

Do New Zealand business and organisations understand what an audit entails?

We do find that the "audit expectation gap" is alive and well. Businesses often think the auditors are looking at everything – that an audit extends further than it does or doesn’t cover certain things. For example, if we’re looking at the year to December 2021, we’ll also check the following months to make sure items in there shouldn’t be in 2021. Another misunderstanding is that small entities with fewer transactions might think it won’t take long to tick them off the bank statement, but we’re not just looking at what’s in the accounts, but what should be in them and isn’t – debts that haven’t been paid yet but should still be reflected in the accounts as revenue and debtors – that sort of thing. 

Let’s talk about the auditor – client relationship…

We pride ourselves on delivering high-quality audits and fantastic client service but need to maintain our independence and comply with professional standards. In this case the client is not always right. Good clients respect that and those who don't, and want to influence the result unnecessarily or unfairly, won't be our clients for long.

You’re there to do a job and you’ve got to have mutual respect. The best clients are the ones that want to help us do our job.

Why should you engage us as your auditors?

Our teams are small enough that the partner or the director knows what's going on and is involved and, because we’re part of a larger network, we share knowledge when people are more experienced in a particular area.

We have a reputation for doing good quality audits. Our work is periodically reviewed by external authorities and each other, so quality checks are in place.

… Or you could work for us a graduate or trained auditor!

We provide a great work culture if you want to join the Baker Tilly Staples Rodway team. For me, the job satisfaction is still there in spades. It comes down to client service reputation. We really want our team to succeed, and we support them with training and mentoring. It's in our interest to develop them and when you have a culture like that, you get good people. If they’re happy, then we're happy and so are the clients.

What do Baker Tilly Staples Rodway audit teams offer clients?

  • Financial statement audits
  • AML / CFT (Anti-Money Laundering and Countering the Financing of Terrorism Act 2009) audits
  • Grant audits
  • Reviews (these are an "audit-lite")
  • Agreed upon procedures, which are whatever you and the client agree that they should be (for example, stock has gone missing, so we go in physically to assess the stock and reconcile to the stock ledger).
  • Internal controls reviews, where we help entities ensure that they have appropriate controls in place so that nothing goes wrong or if it does, it will be detected.
  • Wine verifications (in Hawke’s Bay) – we ensure that the winery can trace where grapes and bottles of wine go, along with various other checks
  • Trust account audits (e.g. for real estate trust accounts) to confirm that the money going into and coming out of the trust accounts is accurately recorded and has been spent in accordance with the trust deed appropriately
  • Fraud reviews – checking whether suspected financial fraud exists or determining lost amounts.

Contact your local Baker Tilly Staples Rodway office if you’d like help with any of our auditing services or see our Careers page for current vacancies.


DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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