Understanding the Core Types of Audits and Their Roles in Accounting in Singapore

Are you sure your company’s financial statements can pass ACRA’s checks?

In Singapore’s robust business world, audits serve as a safeguard of trust and compliance. It is an independent review of financial records and internal controls. Hence, understanding your audit requirements is essential for

• Managing risk
• Ensuring compliance with the Singapore Companies Act, and 
• Building confidence with all stakeholders.

What is Auditing? The Foundation of Financial Trust

Auditing is fundamentally about establishing credibility. By bringing an independent, expert perspective, the process transforms raw company data into reliable, trusted information that shareholders, regulators, and management can depend on.

Main Purposes of Auditing

• Assurance: The primary function of an external audit is to provide an independent opinion on whether financial statements are presented fairly, in accordance with Singapore Standards on Auditing (SSA) and applicable accounting standards.
• Compliance: Audits verify a company’s strict adherence to relevant regulations, such as the Singapore Companies Act, and internal policies.
• Risk Management: Auditors play a critical role in identifying and evaluating potential financial, operational, and IT risks that could severely impact the business, helping management mitigate potential losses.

Key Steps in the Audit Process

Every professional audit engagement follows a structured, four-phase process:

1. Planning and Risk Assessment: Understanding the client’s business and environment to find and prioritise the highest risk areas.
2. Testing of Controls: Verifying the effectiveness of the company’s internal control systems.
3. Substantive Procedures: Direct testing of financial transactions, account balances, and disclosures to collect enough evidence.
4. Final Review and Reporting: Issuing the formal audit opinion (e.g., unqualified, qualified, or disclaimer) to the company’s stakeholders.

Main Types of Auditing: Statutory, Internal, and Specialist Compliance

The audit function extends beyond the mandatory annual financial check. Different needs require different types of audits.

1. External (Statutory) Audits: The Legal Mandate

These mandatory audits are driven by the Singapore Companies Act (Cap. 50) for most non-exempt entities to protect shareholders and the public.

• Financial Statement Audit (Statutory): An examination of the financial statements (balance sheet, income statement, cash flow, and equity). It provides an opinion on whether the statements are prepared in accordance with applicable accounting standards.

• Group Company Audit: When a parent company has subsidiaries, a group audit examines the consolidated financial statements. This audit ensures that the overall true and fair view of the financial performance and position of the entire group is presented.
  
• Review Engagement (Limited Assurance): This engagement provides a lower level of assurance compared to a full audit. It involves inquiry and analytical procedures. Moreover, it is also used by companies that are audit-exempt but still require some form of external attestation for specific stakeholders (like banks or parent companies).

2. Internal Audits: Driving Operational Efficiency

Internal audits are often voluntary. They focus on adding value to the organisation by improving governance, risk management, and control processes.

• Operational Audit: This review evaluates business processes for efficiency, effectiveness, and resource utilisation. The goal is simple: to improve operational performance and achieve strategic objectives.  Example: An operational audit could identify that integrating your warehousing and fleet management systems could cut delivery lead times by 20%

• IT/System Audit: As businesses become more reliant on technology, this audit examines the IT infrastructure, systems, and controls. Its purpose is to ensure data integrity, system security, and reliability, protecting the organisation against modern cyber threats and system failures.

3. Regulatory and Investigative Audits

These audits are highly specific, often triggered by governmental bodies or suspicion of misconduct.

• Tax (IRAS) Audit: Conducted by the Inland Revenue Authority of Singapore (IRAS) to examine corporate and individual tax filings. It ensures compliance with tax regulations, accurate reporting of income, and correct claim of deductions.

• GST Audit: A focused review of Goods and Services Tax (GST/VAT) returns filed with IRAS. The aim is to verify that the GST charged, collected, and claimed is accurate and properly documented.

• Forensic Audit: A specialised investigation into potential fraud, embezzlement, or financial misconduct. Unlike a standard audit, its purpose is to gather evidence suitable for legal proceedings and identify the control weaknesses that allowed illicit activities.

4. Specialist Compliance Audits in Singapore

Certain local entities and transactions require tailored audits to meet specific legal frameworks:

• MCST Audit (Management Corporation Strata Title): A statutory requirement for Management Corporations of condominiums. This audit ensures they are properly managing maintenance and sinking funds entrusted by unit owners.
• IPC/Charity Audit (Institution of Public Character): Statutory audits are required for registered charities and IPCs under the Charities Act. They are conducted to verify if the funds are used correctly and responsibly, thereby maintaining public trust.
• GTO/Sales Turnover Audit: Commonly required by landlords for rent calculations based on turnover or by gaming regulators. This audit verifies the accuracy of reported sales turnover for contractual or regulatory obligations.
• Grant Audit: Required to verify that government or institutional grant funds (e.g., from Enterprise Singapore) were used in strict accordance with the funding conditions. As such, it holds companies accountable to the funding body.
• Due Diligence Audit: A comprehensive review of a target company’s financial, operational, and legal position before a major transaction (Mergers & Acquisitions, investment). Its purpose is to assess financial health, identify potential liabilities, and inform the valuation and structuring of the deal.

Statutory Audit Exemptions: The S$10M Small Company Criteria

While the default is that all incorporated companies require a statutory audit, Singapore provides significant exemption criteria for smaller entities to reduce compliance burden.

Audit Exemption Criteria (Small Company Status)

A company is exempt if it meets at least two of the following three criteria for two consecutive financial years:

1. Total annual revenue is not more than S$10 million.
2. Total assets are not more than S$10 million.
3. It has no more than 50 employees.

Important Note: Even if audit-exempt, your company must still prepare its financial statements in full compliance with relevant reporting standards.

Penalties For Non-Compliance

Failure to comply with audit and filing requirements is treated seriously by regulators like ACRA and IRAS. Consequences can include significant Financial Penalties/Fines, a Default Offence under the Companies Act, and even Disqualification of Directors for repeat or serious breaches.

Key Takeaways: How To Prepare For Your Audits

Proactive preparation streamlines the audit process and saves costs:

• Organise Documentation: Ensure all source documents are indexed and readily accessible (ideally digitally).
• Maintain Accurate Records: Reconcile all critical accounts (bank, inventory, assets) promptly and consistently throughout the year.
• Clear Communication: Maintain timely communication with the audit team to resolve queries quickly.
• Review Exemptions Annually: Proactively assess if your company still meets the exemption criteria and engage an external auditor early if thresholds have been crossed.

Next Steps: Ensure Your Compliance Today

Navigating Singapore’s audit landscape requires both technical expertise and proactive planning. Don’t wait until the last minute to prepare for your statutory review or specialist check.

Sources:

• ACRA | Audit Regulation in Singapore 
• ACRA | List of Common Offences 
• aseanbriefing | Audit and Compliance in Singapore: A Guide for Foreign Investors 
• CACJ | Companies Act
• IRAS | Overview of Audits by IRAS 
• IRAS | Penalties for Errors in Tax Returns – Singapore 
• SSAs | Singapore Standards on Auditing
• Singapore Statutes Online | Companies Act 1967