Auditing financial statements may be a familiar concept and term for businesses, but not all companies are aware of the benefits it brings and how to leverage it in business management.
1. What is a financial statement audit?
According to Articles 3 and 29 of the 2015 Accounting Law:
“Article 3. Interpretation of terms
Financial statements are a system of economic and financial information of an accounting entity, presented according to the forms prescribed in accounting standards and accounting regulations."
Article 29. Financial statements of accounting units
The financial statements of an accounting entity are used to summarize and explain the financial situation and operating results of the accounting entity. The financial statements of an accounting entity include:
- Financial statement report;
- Report on operational results;
- Cash flow statement;
- Explanatory notes to the financial statements;
- Other reports as required by law.”
Accordingly, financial statements include reports on the assets, equity, and liabilities of a business, as well as its financial situation and business results for the period. In other words, financial accounting reports are a means of presenting the profitability and financial status of a business to interested parties (business owners, investors, lenders, tax authorities, and other regulatory agencies, etc.).
2. Why do businesses need to have their financial statements audited?
1.1. Because they are subject to mandatory financial statement audits.
Most businesses conduct financial statement audits because they are subject to auditing requirements under the Auditing Law and because they are required to submit audited financial statements to the relevant authorities. The reason is that businesses often focus their attention on indicators such as increasing revenue and reducing costs, maximizing profits, and therefore do not pay attention to the overall picture: their financial statements. Auditing financial statements is often done merely to comply with legal regulations and has not been applied to business management, failing to fully exploit the benefits of auditing.
1.2. Because we want to evaluate financial data objectively.
In contrast to businesses that only undergo audits out of obligation and do not use financial statements for management purposes, there are businesses that desire audits to objectively evaluate their financial reports. These businesses are increasingly numerous, encompassing both those that are required to audit and those that are not. The owners and management of these businesses understand financial reporting well, and therefore recognize that audits provide an objective assessment. This leads them to make changes in their business management practices to achieve better financial results, obtain a comprehensive report rather than just for tax purposes, and mitigate financial, accounting, and tax risks.
1.3. Because the mindset regarding effective business management has changed.
Business owners must constantly adapt to changes in society, consumer tastes, and the economy. These changes are accelerating, requiring business owners and managers to make quick and accurate decisions. The foundation for these decisions lies in having financial reports that are verified for accuracy and fairness, as well as an accounting system that consistently provides timely data.
1.4. For the purpose of mergers, investments, and capital contributions.
The demand for mergers and acquisitions (M&A), fundraising, and investment is increasingly widespread. Vietnam is becoming a major market attracting foreign investment, driven by the strong growth of mature businesses. Furthermore, the positive impact of startups with many innovative and promising business ideas also creates a channel for attracting investment from both domestic and foreign funds. Therefore, when businesses face M&A or fundraising decisions, the first thing they need is transparent and reliable financial reporting. Achieving this through regular audits, timely addressing internal control issues, and building a strong financial and accounting system is crucial.
2. Benefits of auditing financial statements
- It helps businesses comply with the law and regulations requiring them to undergo audits and submit audited financial statements.
- Auditing financial statements helps businesses understand how third parties will evaluate the preparation and presentation of their financial statements. Through this process, businesses can review whether the information presented in their current financial statements is truly accurate. They can also identify any information or data presentation that might be misleading to readers.
- Transparency and clarity in financial reports have made them a successful tool for enhancing a company's reputation in the market. A financial report with complete and accurate information always instills confidence and trust in readers and investors.
- In addition to the above purposes, auditing financial statements also helps businesses review gaps in their internal controls and accounting practices. Based on this, businesses can make timely adjustments, corrections, and changes to their work processes to reduce risks and errors, and achieve better results.
- The greatest value that financial statement audits bring to businesses is timeliness. Timely detection of material errors, timely advice on corrective actions, and timely adjustments enable businesses to have transparent financial reports, understand their actual business situation, provide timely information to investors, and make timely decisions.
With rapid changes in everything from technology and business models to business practices, businesses need to develop a proper and accurate understanding of the importance of having clearly prepared and presented financial reports that comply with current regulations. To achieve this, financial statement auditing is the quickest and most reliable way to maximize benefits for businesses.
For any issues requiring support and advice, please contact EXPERTIS's Consulting Department for assistance.