The Importance of Internal and External Audits for a Small Business

Even as a small business owner running your Hong Kong startup, you are still to comply with the laws to ensure your company has the accurate records in terms of accounting, even on a daily basis your books are being recorded through the use of cloud based software such as Xero accounting. There are different types of audit including internal audit, external audit, IRD tax return audit, compliance audit, financial audit, payroll audit, pay audit, operational audit, and information system audit.

Internal audits would take place in an organization. As owner of your business, you should be the person who initiate the audit while your employee or the outsourced service should conduct the actual auditing work. When your business grows and starts to have multiple shareholders or board members, you may use internal audits as a method to update them on business finance. The most common reasons to conduct an internal audit include proposing improvements, monitoring effectiveness, making sure your business is compliant with regulations, examining operation processes, evaluating risk management policies and procedures, verifying financial information, and more.

An external audit is performed by a third party such as an accountant or a tax agency. The external auditor must have no connection to your business at all. The main goal of an external audit is to determine the accuracy of accounting records of your business. Investment firms and/or angel investors typically would need external audits to ensure the business financial information and data is accurate, before they would actually put money into your business as investment.

What is the role of an auditor? In simple words, professional auditors would perform financial and risk management audits and independent statutory financial audits for commercial and public sector organizations. The financial and risk management audits are regarded as internal audit, and independent statutory audits are seen as external audit. An auditor who works in a large corporate’s accounting or financial department would have to examine the cash going in and out of the organizations, and would make sure all the money activities are recorded and processed accurately.

An auditor may be internal or external. Some examples are: The auditor may work for a professional agency who takes the outsourced auditing work from different client companies. The auditor may work internally as a member of the in-house finance/accounting team. The auditor may work in a large private company, or a charity organization.

One objective of an auditor is to act as an advisor role to recommend possible risk aversion measures and cost savings opportunities. An auditor may involve in all or some of the key activities such as examining company accounts, analyzing spreadsheet data, gauging level of risks for an organization, ensuring company assets are safeguarded, preparing reports and financial statements, identifying processes that are not working, ensuring policies, procedures, regulations and legislation are followed and complied with, and conducting reviews of employee salaries.

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