What audit means
An audit is somebody independent checking that the accounts tell the truth.
Directors prepare the financial statements. An auditor, who must be independent of the company, examines them and the records behind them and expresses an opinion on whether they give a true and fair view.
That opinion is the product. An unqualified opinion says the accounts are fine. A qualified opinion flags a specific problem. An adverse opinion says the accounts are materially wrong. A disclaimer says the auditor could not obtain enough evidence to form a view at all.
What an audit is not is a guarantee against fraud. It is designed to give reasonable assurance that the financial statements as a whole are free from material misstatement, which is a narrower thing than it sounds and is regularly misunderstood by shareholders reading a clean opinion.
How it is used
Where an audit is required, the sequence runs with the financial year.
The company keeps proper accounting records through the year. After the year end, the directors prepare financial statements. Auditors are appointed, and where the company holds an annual general meeting, they are appointed or reappointed there and their remuneration is fixed.
The auditor examines the records, tests balances, confirms them with third parties where necessary, and reports to the members.
The audited accounts then serve several purposes at once. They are laid before members. They support the annual return filed at the CAC. They support tax filings. And they are what a bank, an investor or a buyer will ask for.
That last point is the practical one. Even where a company is exempt, audited accounts are frequently requested. A business seeking a bank facility, taking investment, tendering for a large contract or preparing for sale will be asked for them, and producing three years of audited accounts on demand is much easier than producing them retrospectively.
Key features
- An independent examination of financial statements and the records behind them
- Produces an opinion on whether the accounts give a true and fair view
- Required for companies above the CAMA small company thresholds
- Auditors are appointed by the members and must be independent
- Small companies are exempt under CAMA 2020
- Banks, investors and buyers commonly require audited accounts regardless
How this works in Nigeria
CAMA 2020 introduced an audit exemption that a great many Nigerian founders have never heard of.
A company is exempt from the requirement to have its accounts audited for a financial year where it has not carried on business since incorporation, or where its turnover is not more than one hundred and twenty million naira and its balance sheet total is not more than sixty million naira. Companies engaged in specified regulated activities such as insurance and banking are outside the exemption.
That removes a real cost from small companies. It does not remove the obligation to keep proper accounting records, to prepare financial statements, or to file annual returns at the CAC.
Public companies face more. They must have an audit committee, and the Financial Reporting Council oversees financial reporting and auditing standards for public interest entities.
The practical Nigerian point is about timing rather than obligation. A company that never had accounts audited and then needs three years of them, because an investor or a bank has asked, faces a slow and expensive exercise reconstructing records. A growing business is usually better off having accounts audited voluntarily well before somebody demands them.
Auditor independence also matters. The person who prepared your books should not be the person auditing them, and investors notice when they are.
Audit vs bookkeeping vs a tax filing
Three financial functions businesses run together and should not.
Bookkeeping records transactions as they happen. It is continuous, it is internal, and it produces the raw material everything else depends on.
Accounts preparation turns those records into financial statements at the year end. It is the directors' responsibility, and it can be outsourced to an accountant.
An audit is an independent examination of those statements by somebody who did not prepare them. Its product is an opinion, and independence is what gives that opinion value.
A tax filing is a separate return to the tax authority, based on the accounts but adjusted under tax rules, which differ from accounting rules.
A Nigerian small company can lawfully do the first two, skip the third under the exemption, and still must do the fourth. Confusing the exemption from audit with an exemption from record keeping or filing is the mistake that produces penalties.
Limits and risks
An audit gives reasonable assurance, not certainty. It is designed to detect material misstatement, not to find every error or every fraud, and a clean opinion is not a guarantee that nothing is wrong.
It is also historic. It reports on a period that has ended, and a company can deteriorate considerably between the year end and the date anybody reads the report.
Cost and disruption are real for a small business, which is why the exemption exists.
And independence can be compromised in practice. Where the same firm prepares the books and audits them, or where the fee makes the client commercially important to the auditor, the value of the opinion falls, whatever the paperwork says.
Worth knowing
Do not read the CAMA small company audit exemption as an exemption from keeping records or filing. Accounts must still be prepared, annual returns still filed and tax still returned, and a company that stopped doing all of it is the one that cannot produce anything when an investor asks.
Questions people ask
Does my Nigerian company need an audit?
Not if it qualifies for the CAMA 2020 exemption: turnover not more than one hundred and twenty million naira and balance sheet total not more than sixty million naira, or no business carried on since incorporation. Regulated sectors are outside the exemption.
What does an auditor actually do?
Examines the financial statements and the records behind them independently and expresses an opinion on whether they give a true and fair view. The opinion is the product, and independence is what gives it value.
Does an audit detect fraud?
It gives reasonable assurance that the accounts are free from material misstatement. It is not designed to find every error or every fraud, and a clean opinion should not be read as a guarantee.
If we are exempt, do we still prepare accounts?
Yes. The exemption is from audit only. Proper accounting records must still be kept, financial statements prepared, annual returns filed at the CAC and tax returns made.
Why would an exempt company still get audited?
Because banks, investors, large customers and buyers ask for audited accounts. Producing three years on demand is far easier than reconstructing them retrospectively when somebody requires them.
Can my accountant audit the books they prepared?
They should not. Independence is what gives an audit opinion its value, and investors and lenders notice when the preparer and the auditor are the same firm.