With the fiscal year end coming near, one of the most important activities of any business is the financial statement preparation for the year-end audit (Annual Audit).
It also serves to obtain a clear picture of your company’s financial situation, win stakeholders’ trust and avoid penalties.
You need accurate and well-documented financial statements.
This article will walk you through the steps and requirements in being audit-ready in Nepal, making the process much simpler and easier.
Understanding the Rules: Who Makes Them?
Before preparing your financial statements, you should be aware of who makes the rules and under which rules you need to play in Nepal. Below are the key figures and rulebooks that govern the audit and reporting process in Nepal:
- Nepal Financial Reporting Standards (NFRS): Think of it as the “rulebook” for financial reporting by Nepali businesses. Issued by the Institute of Chartered Accountants of Nepal (ICAN), the NFRS will ensure your statements are accurate, consistent and comparable on an international level.
- Nepal Standards on Auditing (NSA): They are the official guidelines auditors follow while auditing your books. They assist in ensuring the audits are conducted fairly and thoroughly.
- Office of the Auditor General (OAG) Directives: OAG provides specific directives so that audits are aligned with international standards and best practices, especially for government agencies and projects.
These standards don’t just impact big businesses—they impact any company operating businesses in Nepal’s grounds.
Steps For The Year-End Audit of Financial Statements:
Step 1: Maintain Accurate and Detailed Records
- Record any money transaction throughout the duration of the fiscal year.
- Sales and revenue records: Document all sources of revenue.
- Documentation of Expenses: Keep receipts and invoices of all the expenses.
- Bank Statements: Maintain bank statements along with the respective records.
- Inventory Records: Maintain current inventory records.
Step 2: Comply with all applicable Accounting Standards
Based upon the size and type of your business:
- Small and Medium Enterprises (SMEs): Apply the Model Financial Statements under NFRS for SMEs released by ICAN.
- Other Entities: Implement the complete NFRS where necessary.
Step 3: Prepare Core Financial Statements
- Balance Sheet: Shows assets, liabilities and equities
- Income Statement: Shows revenues and expenses
- Cash Flow Statement: Accounts for cash receipts and payments.
- Statement of Changes in Equity: Represents the movement of the ownership interest.
- Provide additional information as necessary.
Step 4: Perform internal reviews
Before the external audit,
- Verify Accounts: Ensure that all accounts are balanced.
- Verify Supporting Documents: Check invoices, receipts and agreements
- Assess compliance: Verify compliance with the applicable accounting principles/rules.
Step 5: Meet with Your External Auditors
- Provide Essential Documents: Submit all the necessary documents to the auditors.
- Address questions and requests of the auditor.
- Listen to the auditor’s suggestions to improve.
Who Is Responsible for Annual Audit Preparation?
The Annual Audit Report is a crucial process that must be supported by the whole team. However, the responsibility primarily falls upon:
- Chief Financial Officer (CFO)
- Accounting Manager
- Internal Auditors(if available)
Common Mistakes in Annual Audit Preparation
- Mixing Personal and Business Finances:
This can cause inaccurate finance report for the audit.
- Not Updating Records Regularly:
Waiting until the fiscal year-end to update financial records increases the risk of errors and misclassified transactions.
- VAT & Tax Inaccuracies:
Errors in VAT filings or failure to match financial statements with tax payments can affect the audit validity or even cause penalties.