Prepare Financial Statement Audit Before Corporate Tax Commencement

How to Prepare Financial Statement Audit Before Corporate Tax Commence in UAE?

Financial Statement Audits are a type of audit that assesses the financial statements of a company. They form a basis for tax commencing in UAE. They help determine whether a company is fit to commence tax payment and if the financial statements are free of any material misstatement. The Financial Statement Audit, thus, holds immense importance in tax commencement.

It helps a tax authority verify that financial statements are free of material misstatements before tax commensuration and also to decide if tax returns can be commenced or not. In case of any material misstatement found during the financial statement audit, the tax return will not be allowed to be commenced, and the matter would be referred to the income tax team for further action.

However, if a company is unable to complete a financial statement audit before tax commencement due to various reasons like shortage of time, manpower, etc., they may opt for Tax Audit instead. Let’s understand the difference between a financial statement audit and a tax audit and the steps involved in a financial statement audit.

How to Prepare for Financial Statement Audit?

• To prepare for a financial statement audit, businesses must use accounting standards and principles accepted in the UAE such as International Financial Reporting Standards (IFRS).
• These standards require businesses to make a fair and accurate financial statement that provides a true and fair view of the financial position of the business. This is necessary to ensure that businesses are operating within a budget and reporting income as it is earned.
• Maintain books of accounts with complete and accurate records, and create capital in the books to support investments and spending.
• The new corporate income tax law was published on 9 December 2022 and corporations are required to file tax returns every year.
• To stay tax compliant, businesses should seek corporate tax advisory services such as the preparation of annual financial statements and accounts.

Steps Involved in Financial Statement Audit

- A financial statement audit involves a team of auditors who test internal controls, gather evidence, and question the financial statements of a business to assess the accuracy of the information reported.

- The auditor's role involves analyzing financial statements and reporting of a business to ensure they comply with legal requirements such as form, content, presentation, and preparation method.

- This includes verifying income statements, balance sheets, and cash flow statements. When a financial statement audit is conducted, auditors would also check if financial reporting decisions are appropriate and reasonable in light of the company’s financial condition and its business objectives.

- The certified report created by an auditor provides valuable insights for corporate income tax compliance strategies. It provides a detailed overview of a business’s financial statements that help businesses understand their financial performance. It also describes any key areas of concern that may require further investigation or corrective action.

- Financial statement audits help businesses develop strong internal controls and corporate governance practices that can help prevent tax avoidance or tax evasion.

What are common mistakes made during Financial Statement Audit?

A financial statement audit is a process of verifying and validating the financial statements of a business. During the process, it is essential to adhere to the internal control requirements.

This could include testing internal controls for effectiveness and evaluating the financial statements for validity and consistency. But not understanding financial statements may result in making judgment errors or procedural choices that may have a bearing on the financial statements' accuracy.

Thus, it is essential to understand the financial statements properly before embarking on a financial statement audit.

Benefits of Preparing Financial Statement Audit before tax commencement

The financial statement audit process is a vital part of an organization’s internal controls. The objective of the financial statement audit is to ensure that financial statements are free from material misstatements or irregularities. The financial statement audit helps to identify any discrepancies or weaknesses in accounting practices, for example, errors in revenue estimation, income tax compliance, and asset valuation.

The financial statement audit helps to establish an overall opinion on the company’s reporting practices, based on control tests, professional judgments, and evidence. The financial statement audit process ensures compliance with AML and ESR standards.

The auditor provides a report after completing the financial statement audit. The opening balance sheet of the report takes into consideration the arm's length principle. The report also includes a discussion of any significant accounting policies or estimates made by the company during the year.

Things to keep in mind while conducting a Financial Statement Audit

A financial statement audit is a vital process that any financial professional must undergo before providing a financial statement to a client. It ensures the financial statements are free from any errors, fraudulent practices, and financial statements of a similar nature. In order to carry out a successful financial statement audit, it is essential to take note of the following factors.

• Firstly, ensure the financial statements are generally acceptable, understandable, and accurate. This means analyzing the income and expenditure of the business on a consistent basis and mentioning all income as well as expenses in a clear and precise manner.
• Secondly, carry out the entire process of financial statement auditing. This involves analyzing all financial statements from beginning to end and analyzing them for completeness and accuracy.
• Lastly, assess the company’s reporting practices. This involves scrutinizing reports of similar businesses in the same industry to know if there are any issues with corporate governance practices or other issues like material misstatements or omissions of income tax or profit tax etc. 

In conclusion, a financial statement audit is a vital part of financial reporting that should be carried out by professionals before providing a financial statement to their clients.

Difference between Financial Statement Audit and Tax Audit

A financial statement audit is an external examination of a company's financial statements, conducted by an independent party to confirm their accuracy and completeness. The purpose of a financial statement audit is to ensure that a company is reporting its financial performance accurately.

It typically involves reviewing balance sheets, income (profit/loss) statements, cash flow statements, and statements of shareholders’ equity for accuracy and consistency with accounting standards. Financial statement audits help identify any errors or misstatements in financial statements and point out any potential issues that may need to be addressed.

A tax audit, on the other hand, focuses on whether a company’s tax liabilities are accurate and compliant with applicable laws. This includes analyzing corporate tax returns and financial records to verify income tax liabilities as per tax laws. A tax auditor will also check if any income tax deductions were claimed appropriately.

Conclusion

Financial statements are a representation of a company’s financial performance over a certain period of time. They help to indicate the overall financial health and well-being of a business entity. Conducting a financial statement audit is crucial for preparing for tax commencement and ensuring tax compliance for your business. It helps you understand the financial statements better, which allows you to conduct a tax audit more efficiently.

If you want to learn more about corporate tax in the UAE and tax audits, connect with our firm today. We have a team of experts who can guide you through the corporate tax process in the UAE.