An audit is an independent examination of the financial report of an entity – including balance sheet, income, equity and cash flow – to form a view on whether the information presents a true and fair view of the financial results and position of the entity and whether it is in compliance with the relevant financial reporting standards and any applicable rules and regulations.
Having your financial statements verified by an external auditor enhances the reliability of the financial statements that are produced by management of the company and provides more credibility in the business marketplace. Providing audited accounts offers assurance to shareholders, lenders, creditors and potential investors, making you more likely to be successful in achieving your goals.
Five key regulatory reasons as to why an audit may be necessary for a UAE-based entity are as follows:
- Free Zone Licensing Authority – Most of the major UAE Free Zone authorities have made it mandatory for licensed entities to submit audited financial statements to the authorities at the time of their trade licence renewal. Other licensing authorities have made specific provision in their company regulations regarding the requirement for the preparation of annual audited accounts. Companies therefore risk their licences being blocked or not renewed if annual audit reports are not prepared and submitted to the relevant authorities.
- Federal Commercial Companies Law – The UAE Federal Law No. 2 of 2015 on Commercial Companies applies to all entities undertaking any kind of economic activity on the Mainland UAE, unless specifically exempted. Article 27 specifies that each Joint Stock Company or Limited Liability Company must have one or more auditors to audit annually the books of accounts. The company must apply the International Accounting Standards and Practices upon preparing its periodical and annual accounts, to give a clear and accurate view of the profits and losses of the company.
- Federal VAT Law – The UAE Federal Decree-Law No. 8 of 2017 on Value Added Tax makes it mandatory for every taxable person to maintain books of accounts. If a taxable person is subject to a tax audit, the Federal Tax Authority (FTA) can request additional documents, such as annual accounts, general ledger, purchase day book, invoices issued, invoices received, credit notes, debit notes, VAT ledger etc. These books of accounts and records must be maintained for five years. Annual audited accounts are highly recommended to corroborate the accuracy of your VAT filings and represent strong supporting documentation.
- Federal Economic Substance Regulations (ESR) – The regulations require UAE onshore and free zone companies, as well as certain other business forms that carry out any of the defined ‘Relevant Activities', to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (Economic Substance Test). The annual Substance Report requires specific/numerical data about any entity that falls within the ESR scope (including branches). It also requests certain documentation to be submitted, such as financial statements for the reporting period, evidence of management and control etc. Annual audited accounts are highly recommended to corroborate the accuracy of your ESR filings and represent strong supporting documentation.
- Federal Bankruptcy Law – Issued under Federal Decree No 9 of 2016, the Federal Bankruptcy Law applies to companies established under the Commercial Companies Law and to companies and institutions established in free zones that are not governed by existing bankruptcy laws. The Law applies a ‘balance sheet' to determine if the assets of a business are sufficient to cover its liabilities, which is favourable in encouraging debtors facing difficulties to reach out for help to restructure at an early stage. Directors of a company facing insolvency have to decide either to continue to trade or to wind up the company. They also have a responsibility to consider the interests of creditors, shareholders and other stakeholders. Access to regularly audited financial statements enables directors to determine the risks of insolvency more swiftly and reliably, which may assist in avoiding liability for wrongful trading or a misfeasance claim.
Sovereign Corporate Services works with carefully-vetted local and international audit firms and will match our clients to an audit firm based on their particular requirements and budget. We can also provide full support during the audit process by liaising with auditors, preparing necessary schedules, confirmation letters and answering queries on behalf of clients. Our in-house qualified and experienced chartered accountants can further provide clients with complete bookkeeping and accounting services.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.