Why is auditing important? Lessons to new founders/CEOs

Although often neglected by new founders, financial auditing and assurance services have a significant role in building positive relationships with investors by providing relevant business insights.

Auditing Explained

Auditing usually refers to financial auditing, which is evaluating financial records and statements to determine if they are accurate and reflect the company's transactions correctly. It can also include inventory inspection to make sure it is up to date with the documented records if applicable. Auditing also ensures that the company's financial reports are following accounting standards, regulations, and laws.

Auditing can extend to cover more areas other than finance, like performance management, risk assessment, performance audits and internal control. In these areas, auditing inspects operations against predetermined standards.

There are two main types of auditing internal and external. Auditors who perform internal auditing are employees of the organization who get hired to evaluate and assess internal operations and financial reporting. Their reports are mainly for the use of the management and board of directors to help them identify areas of improvement and enhance their decision-making process.

On the other hand, external auditing is performed via auditors appointed from an independent organization by the shareholders, usually, a Certified Public Accountant Firm (CPA) that provides assurance services, following the law's accounting standards in this area.

External auditors assess the company's performance, ensure the accuracy of all operations, and ensure no bias in the company's financial reports. The law mandates external auditing for all public listed companies and some of non-listed companies to ensure the company complies with the regulations and standards.

External auditors can also help founders make better decisions and avoid information risk through assurance services, including providing reviews to all the transactions and information to provide reliable information and reduce risk. Assurance services can support founders navigate the complexities, risks, and opportunities in their business.

Why is auditing important

for SMEs and Startups? How it can help your business?

Auditing may not seem like a pressing need for the founders of small businesses and startups. However, auditing can have significant value for startups' growth. Since founders are not usually familiar with accounting best practices, external auditing can be a requirement for startups in many cases like:

- Financial Statement Preparation - external auditing firm can prepare for SMEs and startups financial statements for internal use by the management instead of hiring a CFO.

- Raising funds - when a startup starts raising capital from a VC, investor or even a bank loan, an assurance service will probably be required as a part of the due diligence before the capital deployment. A clean audit will facilitate the process and encourage investors

- Pursuing an IPO - financial external audits for the last 2 fiscal years is a requirement for mature startups that plan to apply for an IPO enlisting.

- Avoiding tax problems - external auditing can help founders comply with accounting standards and avoid fraud that can cause tax problems.

- Planning for an exit - founders planning to sell their businesses must ensure a yearly external auditing process, to provide prospective buyers with accurate and reassuring data.

→ READ ALSO How to Appoint an External Auditor according to OECD ?

So, no matter how big the startup is, constant auditing will help maintain the financial statements of the startup accurate, compliant and ready for any upcoming growth opportunity.

Stay tuned for our upcoming article to find out more on how to better prepare for an auditing process and how to choose the right auditing firm in Egypt.

References:
https://www.accountingedu.org/what-is-auditing/
https://corporatefinanceinstitute.com/resources/knowledge/accounting/what-is-an-audit/
https://www.pwc.com/m1/en/services/assurance/what-is-an-audit.html
https://www2.deloitte.com/us/en/pages/audit/articles/preparing-first-time-audit.html
https://www.aicpa.org/content/dam/aicpa/interestareas/privatecompaniespracticesection/qualityservicesdelivery/keepingup/downloadabledocuments/financial-statement-services-guide.pdf
https://fullstackfinance.com/startup-financial-audits-why-when-and-how/
https://www.accru.com/2018/08/how-to-choose-the-right-auditor/