Most people may know about accountants, but don’t know what an audit is. On many occasions people have asked “what is an audit?”, others ask more specific questions like “is an audit used to examine the accounts or books of a business?”, or “is an audit for recalculating the earnings of a company?”, and Acclime has always happily answered those queries.

People have asked many questions, and Acclime will answer what an audit is and does while looking at different types of audits and their benefits.

What is an audit?

Audits are impartial reviews of financial accounts. When businesses are audited, they are reviewed by an impartial auditor, whose responsibility is to examine all financial statements to make sure that all financial records are fair, accurate and true. An auditor can be an employee of the business for internal audit or outsourced by a Certified Public Accountant (CPA) firm or an external audit performed by a CPA for statutory audit and compliance purposes.

Audit categories in China

External audit

External audits guarantee that all the necessary laws, regulations and policies are being applied in the financial statements of the business while following strict accounting standards.

External auditors must come from CPA firms as they are all obliged by law to hold a CPA qualification to conduct fair, accurate and true audit reports. As a rule, businesses should outsource auditors as they will not be subjected to bias when reviewing the business’ financial records.

Businesses that conduct an external audit effectively receive assurances that their operations are not at risk legally and confirm that the internal controls are working correctly. If there are issues, competent auditors will provide practical solutions to make sure the business is following the proper laws and regulations.

Internal audit

An internal audit is used to analyse and evaluate the internal structures and procedures of a business affecting the efficiency of its operations and risk management capabilities. While it is possible to have an employee of the business conduct the internal audit, here, too is recommended to outsource the auditor to remove any bias and or to have an external second opinion.

Typically internal audits are used to offer the managers, directors and stakeholders an overview of the business’s internal controls and how they can improve on them to reduce risks such as fraud or compliance with the law. Such audits can also be focused on a particular aspect of the business that managers are unsure of how to tackle practical solutions for them.

Government audit

Government audits refer to the inspection, examination and supervision of the State authorities, administrative institutions and state-owned enterprises in the implementation of government budgetary income, expenditure and accounting materials following relevant laws and regulations.

In addition to special audit institutions (such as the National Audit Office), government audit institutions also include financial, tax, customs, the people’s bank or professional banks and other professional audit institutions.

Common questions regarding external audits

Why is an external audit report required?

1. All the public listed firms have to get their accounts audited by an independent auditor before they declare their results for any quarter.
2. For the Industry and Commerce Annual Inspection, some companies must provide a financial audit report. For example, companies which are:
   • With losses and a long history
   • Financial, Securities and Futures Companies
   • Limited liability, joint stock limited, or foreign-invested companies
   • All foreign invested businesses in China

3. When there are significant economic activities in the enterprises, such as restructuring, mergers and acquisitions, liquidation and so on, the company must provide a financial audit report to the related government department.
4. There are also some other conditions required audit report, for public bidding, financing, internal control management, etc.

What are the responsibilities of an independent auditor?

1. Auditors need to count and certify the inventory and fixed assets
2. Visit the production facility or workshop and construction site
3. Have interviews and or conduct verification with the main customers, suppliers, accountants, bank and lawyers etc.
4. Inspect large amounts of materials, such as vouchers, invoices, accounting books, contracts or agreements, any certificates etc.
5. Understand the operational processes of the client
6. Provide necessary or suggested adjustments to the accounts based upon findings after investigating any significant fluctuations or non-compliance with regulations

Key takeaways

Audits are a means of finding and removing misleading financial reporting and giving decision-makers peace of mind. An audit exam can uncover problems that businesses might not be aware of. Generally, internal and external audits are the primary tools which businesses can use.

Auditors put enormous effort into their accounting work which is mixed with all kinds of investigative work, and they explain their findings in addition to examining and preparing financial documentation and writing reports.

Acclime specialises in assurance services (improving the quality or context of information for decision-makers) or risk management (determining the probability of a misstatement on financial documentation), or internal controls (improving the compliance and effectiveness of adopted rules, procedures, and policies).

To answer more questions or to enquire about what audit is needed for your business, please send your enquiry to infochina@acclime.com.