ABSTRACT
In the Due Diligence (DD) process, professionals performing various kinds of DD request the results of an Audit of Historical Financial Statements, or commonly referred to as a Statutory Audit. A statutory audit is a legally required review of a company’s financial statements and records, conducted by an independent external auditor to determine whether an organization provides a fair and accurate picture of its financial position. This mandatory audit must be conducted annually. Based on the audit methodology, the stages of a mandatory corporate audit include preliminary examination, risk assessment, risk response, audit completion and reporting. The end result of a statutory audit usually refers to a formal document in the form of an Independent Auditor’s Report and Management Letter, which the auditor must provide to the audited entity.
In a professional corporate action, the Due Diligence (DD) process is an integrated part that must be carried out to secure the interests of both the Buyer and the Seller. DD can be in the form of Financial Due Diligence (FDD), Tax Due Diligence (TDD), Legal Due Diligence (LDD), Sustainability Due Diligence (SDD) or even other due diligence such as Information Technology Due Diligence (IT DD) in businesses that rely on the integration of Information Technology.
In the Due Diligence process, the professionals implementing various types of DD request the results of the Audit of Historical Financial Statements, or generally called the Statutory Audit.
A statutory audit is a legally required review of a company’s or government’s financial statements and records, conducted by an independent external auditor to determine whether an organization provides a fair and accurate view of its financial position. This type of audit is mandated by law for certain types of companies, such as public limited company, and aims to improve governance, transparency, and confidence in reported financials.
This statutory audit is a legal requirement and must be conducted annually. The purpose is to provide transparency and accuracy of financial information to stakeholders. Companies are required to undergo an annual audit prescribed by law unless they qualify for an audit exemption.
Compliance is one of the primary reasons why companies undergo statutory audits. Understanding changes in regulations can be very time-consuming, and with the increasing number of regulations and regulatory requirements, poor compliance can result in significant risks to your business. External auditors can identify areas of weakness and irregularities, offering guidance ahead of potential changes in accounting requirements. Evaluation of internal systems and controls gives auditors a better understanding of your business processes, as a foundation for efficiency and transparency.
Another advantage of audits is that they ensure accountability of workers who are responsible for maintaining financial integrity within the company. Audits can uncover irregularities and cconsequently act as a potential deterrent to fraud.
Audits are an important form of advice for business owners because they can provide important information about how the financial side of the business is being run and what can be improved. Auditors can also provide professional advice on potential accounting issues, ensuring compliance with future requirements.
The credibility of financial statements is also an important aspect of an audit. The auditor independently verifies that an organization’s financial statements show a true and fair view of the company’s financial position as at the year-end date and the results for the year then ended. This provides credibility to clients, shareholders, lenders, and potential buyers, although the auditor has sole responsibility to the shareholders and is not responsible for reliance placed by any party on the financial statements.
Statutory audits are usually conducted by an independent (external) auditors appointed by the company or relevant institution. These auditors are usually members of a public accounting firm (KAP) or audit firm that has professional qualifications. Auditors examine financial statements and documents for errors, fraud, and inconsistencies.
This process also includes an assessment of the company’s internal controls and procedures. The independent auditor is responsible for providing an independent opinion on the accuracy and truthfulness of the company’s financial statements.
Based on the audit methodology, the Company’s mandatory audit stages are as follows:
1. Preliminary Engagement
Before the auditor determines the nature and extent of testing to be performed, the auditor must understand conditions or situations that, if they occur during the early stages of an audit, could hinder the auditor’s ability to plan and carry out the audit effectively, thereby making it impossible to reduce the risk to an acceptable level
2. Risk Assessment
The auditor must obtain an understanding of the entity and its environment, including the entity’s internal controls, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement level and the assertion level.
3. Risk Response
The auditor must obtain sufficient and appropriate audit evidence related to the assessed risks of material misstatement, through the design and implementation of appropriate responses to those risks.
4. Audit Completion
The auditor must ensure that there is an adequate basis to draw conclusions regarding the achievement of the overall audit objectives and that the audit has been conducted in accordance with the Professional Standards for Public Accountants (SPAP) as well as the applicable laws and regulations.
5. Reporting
The final stage in the audit process, where the auditor prepares the audit report. The auditor must form an opinion on the financial statements based on the evaluation of conclusions drawn from the audit evidence obtained
SW Indonesia operates the Public Accounting Firm (KAP) Suharli, Sugiharto & Rekan. KAP Suharli, Sugiharto & Rekan provides audit services for historical financial statements (statutory audit). The primary benefits of using statutory audit services for companies include ensuring the reliability and credibility of financial statements, fulfilling regulatory requirements, enhancing the company’s reputation, and assisting in identifying potential issues.
Independent auditors evaluate financial statements and provide opinions, which increases the confidence level of intended users of financial statements such as investors and creditors.
The final result of a statutory audit usually refers to the formal document or output that the auditor must provide to the audited entity or the relevant authorities, in accordance with applicable laws and regulations. The final results provided by SW Indonesia in a statutory audit are:
- Independent Auditor’s Report: in the form of opinion on financial statements such as unqualified opinion, qualified opinion, adverse opinion, and disclaimer of opinion.
- Management Letter: contains non-material audit findings, internal control weaknesses, and recommendations for improvement.
Historical Financial Statement Audit is a crucial part of the Due Diligence process in business transactions involving corporate actions (such as mergers, acquisitions, initial public offerings, or major investments), for the following reasons:
1. Provide a Reliable Financial Overview
The audit ensures that the financial statements have been prepared in accordance with applicable accounting standards. This gives confidence to buyers, investors, or regulators that the company’s financial condition is fairly presented.
2. Identify Financial and Operational Risks
The audit helps uncover potential issues such as misstatements of assets and liabilities, uncollectible receivables, errors, fraud, or legal violations. By identifying these risks, stakeholders can assess whether the transaction price is fair or needs adjustment.
3. Assess Performance and Historical Trends
Investors or buyers need a strong basis to evaluate a company’s profitability, operational efficiency, and growth over time. Audited financial statements provide a valid basis for comparison
4. Support Fair Value Assessment
Audit strengthens the integrity of the data used in the company valuation model so that the valuation results are more credible.
5. Regulatory Compliance
In corporate actions, audited historical financial statements are a mandatory requirement from regulators to protect the interests of the public and investors
6. Increase Third-Party Trust
Audited financial statements signal that the company is transparent and professionally managed. This is important to attract strategic investors, business partners, or external funding.
Auditing historical financial statements is not merely a formality, but a crucial tool to mitigate risks, strengthen trust, and ensure business transactions are conducted based on accurate and reliable information. In the context of corporate actions, it serves as a foundational element that cannot be overlooked in Due Diligence.
