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Is Financial Audit Mandatory for SME companies registered in UAE?

Audit of accounts is mandatory for some forms of entities in the free zone like the free zone companies (FZCO) and free zone establishments (FZE). In order to finalize the audit, it is obvious that the accounting records and documents must be available and well-maintained.

In UAE the general requirement for businesses is to maintain their records for no less than five years. The Commercial Companies Law states that the audit of accounts is necessary for all companies on the mainland.

The minds of most of the owners of the “Small and Medium” businesses in the UAE are filled with a lot of confusion and questions like… Is audit mandatory or not in the UAE? Should the books of accounts be audited every year or not? Whether financial reports to be submitted to any authority or not? etc. As per the new UAE Commercial Companies Law, Federal Law No. 2 of 2015, Article 27, Chapter 2, every company shall appoint auditors for auditing their books of accounts by a licensed auditor registered under the Ministry of Economy in the UAE. But many companies do not follow this requirement. As per the laws prevailing in the UAE, all companies are required to keep their books of accounts for a period of 5 years and do the annual audit, and keep these records in hand. In general, companies belonging to the SME category get their books of accounts audited in the following circumstances.

Some free zones, particularly in the northern emirates do not require the submission of audited accounts for certain companies; one needs to bear in mind that this waiver is only for the submission of the audit report to the authorities however the preparation of audit report for the entity itself cannot be overlooked. The maintenance of accounting records has become more important for nearly all kinds of entities in the UAE in light of the VAT in 2018. Companies have generally a time period between 3 to 6 months after the close of their financial year/period to complete the audit report and submit it to the general assembly. Maintenance of accounting records and audit of same also assists the management to understand the performance of the company and areas which need more attention.

1.Legal Requirements.
  • Free Zone companies: Some of the Free Zones Authorities made it mandatory to submit the audited financial statements  to the authority for renewing the trade licenses of the companies registered under them. Such free zones include; Dubai Airport Free Zone (DAFZA), Dubai World Central (DWC), Jebel Ali Free Zone (JAFZA),Dubai International Financial Center (DIFC),Dubai Silicon Oasis (DSO), Creative City – Fujairah etc.
  • Branch of Foreign Companies: It is mandatory for foreign companies to submit the audited financial statements of the branch of foreign companies registered in UAE in every year.
  • Liquidation of the Company : Audited financial statements of Companies under liquidation is one of the most important documents for a liquidator to prepare the liquidator’s Report.
  • Other Government Authorities such as Municipality, various Ministerial Departments, Insurance Authorities, etc. also demand the companies to submit their audited financial statements as and when it is required for the authorities.
2.For Management purpose.
  • To understand the financial position, to evaluate the performance of the entity, to assess the progress of the business, also to get guidance from professional financial experts, some of the SME companies get their books of accounts audited. In the SME sector; the small companies normally cannot afford the service of full time CFO’s or experienced management accountants under their payroll to get professional guidance in decision making.
  • Sometimes, the small companies employ only a book keeper to update their day to day activities. They expect the auditor to finalize the books of accounts and provide the necessary inputs for management decision making on financial matters.Such business owners even take advice from the external auditor as to whether it is feasible to withdraw part of the profit or should it be retained in the business.
  • The owners even seek advice on the net worth of the business to know if selling part of the shares to prospective owners (partners or shareholders) at a premium is a prudent proposition. At the same time, majority of the SME companies, managed properly are getting their books audited in every year.
3.Third Party Requirements.
  • Lenders such as bank sand/or other non- banking financial institutions insist companies to get their books of accounts audited by an audit firm which are listed by them as approved auditors.
  • Suppliers or other dealers/institutions also ask the SME companies to submit their audited financial statements to ensure the credentials as well as financial credit-worthiness of the companies to deal with them.

Every company registered under UAE Commercial Company law must amend their Memorandum of Association (MOA) on or before 30th June 2017 to be in line with the provisions of the new UAE Commercial Company law issued in 2015. As per the provisions of the Law, it is mandatory to get the books of accounts audited every year. Hence with effect from 1st July 2017, every company registered under the law should get their accounts audited by a registered auditor.

Auditing Benefits

Anyone whose business has a number of staff, functions, office locations or technical systems that she/he is not personally and solely operating may run the risk of errors or irregularities occurring in their business. It is also desirable to check and deter fraud by carrying out a regular audit.

  • An audit helps to identify weaknesses in the accounting systems and enables us to suggest improvements. The process keeps our partners informed of areas/situations where advice is useful
  • An audit assures directors not involved in the accounting functions on a day-to-day basis that the business is running in accordance with the information they are receiving, and helps reduce the scope for fraud and poor accounting
  • An audit facilitates the provision of advice that can have real financial benefits for a business, including how the business is running, what margins can be expected and how these can be achieved. Advice can cover anything from the tightening of internal controls, to reducing the risk of fraud or tax planning
  • An audit will enhance the credibility and reliability of the figures being submitted to prospective purchasers. If an owner manager is planning on selling in the next 3 years, it may be beneficial to carry out regular audits
  • An audit may be advantageous if a company is growing and likely to exceed the turnover threshold in the near future, in order to avoid having to revisit the previous years’ figures, once the threshold has been reached
  • An audit adds credibility to published information for employees, customers, suppliers, investors and tax authorities:
    • Credit ratings may be affected by not having an audit. Suppliers may not be prepared to give appropriate credit limits. Banks and trade suppliers rely in part on credit rating agencies’ assessment of the company, and will look more favorably on companies that have an audit
    • In the event of insurance claims, loss adjusters often have more faith in audited accounts
  • An audit provides assurance to shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view.

ALYA Auditors | Your Professional Audit Provider

Professionals at ALYA understand the crux of the business establishment process. We follow the International Financial Reporting Standards (IFRS) to main the professionalism in our deliverables making us one of the best audit firms in Dubai. Our team experts are members of Institute of Chartered Accountant of India (ICAI) and hold high industry experience in the field of Finance, Auditing, and Financial Advisory Services and Company Formation/Business Setup Services in Dubai thus making you leaders of your sector of business.To initiate the audit process, do contact us today – we’d be happy to assist you.

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Alya Al Marzooqi Auditing Chartered Accountants is the one. Leading CA Firms in Dubai,With its head office at Business Bay & a branch in SAIF Zone.Approved in all the major free zones including DMCC,SAIF,JAFZA,DWC,Maydan etc providing professional services in the field of Auditing , Accounting ,VAT Consultation , Company Formation & CFO services etc. For More Details Contact Us @ Tel : +971 4 876 9377, Mob: +971 52 975 0690, +971 52 475 4007

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