2022 Guide for Audit Committees in Singapore
With increasing uncertainties in the market due to Covid-19, there have been opportunities for fraud arising from remote working arrangements. Companies in financial distress may falsify financial statements or apply inappropriate accounting treatments to access capital markets. This is where we see how crucial trust and transparency are, not only for the smooth functioning of capital markets but also for brand reputation, customer relationships, and the well-being of employees. Amidst the disruption in the modern era, the directors must expand their roles beyond governance. In fact, the audit committee’s role has never been more essential and challenging.
The directors should pay due care and diligence while reviewing the content and form of the financial statements and ensure that they are complete and consistent with their understanding of the company. They should consider the following areas while reviewing financial statements:-
- Revenue recognition
- One-off transactions
- Valuation of assets
- Recognition of assets
- Completeness of liabilities
- Fair value measurement
- Going concern
Directors should apply professional scepticism while reviewing the companies’ financial statements. Moreover, they should oversee the fraud risk programmes adopted by the company. The programme includes risk assessments and formalised responses to risk.
What Should Audit Committees Look Out For in Audit Adjustment?
With the increased complexity of businesses and financial reporting standards, it has become essential for the companies’ finance teams to have the adequate expertise and capabilities for preparing high-quality, error-free financial statements. The audit adjustments proposed and passed by the auditors reveal much about the company’s state of financial reporting.
In this regard, the Accounting and Corporate Regulatory Authority (ACRA) of Singapore published a report based on a study of the proposed audit adjustments on the financial statements of listed companies in Singapore in 2021. According to the report, 85% of proposed audit adjustments were made to correct factual errors in the financial statements. This clearly suggests a weakness in the preparation process of financial statements.
What Does This Mean for the Audit Committee?
Members of the audit committee should:-
- Identify and address the causes of audit adjustments. Discuss the potential areas of adjustment with the auditors and how to address them before closing the books.
- Have a conversation with the Head of Finance and auditors regarding the scale and characteristics of audit adjustments. Carefully review all the audit adjustments passed by the auditors in the previous year, especially those that are recurrent and those adjustments which were not passed to prevent the repetition of similar issues in the current financial year.
- Equip the finance team with appropriate resources so that the auditors do not have to rely upon the last line of defence before the issue of financial statements. This involves improving competencies, processes, and controls of the functions and providing training for technical areas that cause warnings or errors in the financial statements.
- Set appropriate targets of improvement for the finance team. In setting goals for 2022, consider the lessons learnt in 2021. Analyse the processes and controls that worked well in 2021 and identify opportunities that might increase the company’s efficiency in 2022.
- Engage with a specialist to address matters that require complex accounting treatments.
To know more about the roles of the audit committee in Singapore, you can visit the DataTracks blog.