5 reasons manufacturers may consider an external audit and reap the benefits

A commonly accepted key document for gathering information about a business is a manufacturer’s financial statement. 

These set out the financial position of the company, the assets it owns and the liabilities it owes. They also set out revenues, expenses, profitability, and cash flows, which are metrics used to judge the financial performance of a business.

Manufacturers may often only consider external audits of their financial statements as a mandatory statutory reporting requirement. However, a well-performed external audit can provide a range of insights to improve your internal controls environment, streamline business operations, and identify business and financial risks that may not be obvious. 

Reason one - Credibility 

The purpose of an external audit is for your auditor to provide reasonable assurance that your financial statements are not materially misstated. For those companies who don’t have a statutory audit requirement, this may mean that no one else is looking at your books. By having audited financial statements available, you can reduce bias from financial results presented by management. 

You may find that other companies may wish to transact with your business more frequently, and there may be increased opportunities for cross-collaboration across the sector, with assurance from an independent auditor. 

Reason two - Comparability

In Australia, unless you are a large company, manufacturers may be able to apply special-purpose reporting frameworks in preparing their financial statements. This means that similar manufacturers may apply different accounting policies in the preparation of financial statements, which may result in differing and incomparable outcomes. 

An audit completed under Australian Accounting Standards ensures material compliance with those standards, which in turn means that you can then compare results and disclosures from manufacturer to manufacturer. 
First-time audits under Australian Accounting Standards often find a range of accounting treatments that do not comply. Accounting policies such as business combinations, equity accounting, consolidation, leases, financial instruments, revenue and fair value measurement are often at risk of differing treatment. 

Reason three - Capital raising, mergers and IPOs

With interest rates and inflation at high levels, capital raising may be challenging when markets are tight. As such lenders and investors may seek additional assurance on your financial statements to show that your company is a solid investment.  

If you are anticipating a merger or sale, having audited financial statements may put your business in a strong starting position for negotiation. By having an audit completed by a well-known audit provider, potential buyers often have a higher regard for manufacturers with audited financial statements compared to those without an audit. This may provide the competitive advantage of securing your deal. 

There are several requirements for listing your company on the Australian Stock Exchange. While requirements between ASIC and the ASX differ, companies should be prepared that they may need to provide audited financial statements for the last 3 full financial years. Having these audits completed over time before becoming a mandatory requirement can lessen any time restriction burdens on having multiple years of financial statements being audited at once. 

Reason four - Systems and process improvements 

Auditors are great at pointing out process improvements throughout your internal control environment and also ensuring that there is adequate segregation of duties and safeguards along the way. Implementing streamlined procedures can save your business time and money and ensure that information flows in a logical and consistent manner. Another advantage is that by strengthening your internal controls, you can also make your business less prone to fraud or error. While often auditors will have a comprehensive list of recommendations using the knowledge gained from a diverse range of clients in the manufacturing sector, management can choose to adopt recommendations and implement them over time. 

Reason five - Inventory management lessons

If you hold material levels of inventory, an audit can provide great insights into your inventory management practices. Areas of focus or outcomes may include: 

• Determining whether accurate stock levels are maintained through attendance at inventory counts. This can also identify obsolete or slow-moving stock
• Provide an independent assessment of inventory count instructions and compliance with staff performing inventory counts to identify deviations from expected processes.
• Provide insights into the operational efficiency of stock levels, warehouse configurations and storage facilities.
• Fraud prevention by staff knowing that someone external is watching
• Enabling better-informed decision-making and customer service, knowing that stock records are accurate.  

Combined with the points above, an external audit brings peace of mind and confidence that you can use your financials to make well-informed decisions in the future.  
 

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.