Annual Financial Statement Audit

1. What an annual financial statement audit is

An annual financial statement audit is an independent examination of a company's financial statements — the statement of financial position, income statement, statement of changes in equity, cash flow statement and the accompanying notes — carried out by a licensed independent auditor who has no interest in the company being audited.

The purpose is not to re-do the bookkeeping and not to certify that every figure is exact. The auditor gathers sufficient appropriate evidence to form an opinion on whether the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or by error, and whether they are presented fairly in accordance with the applicable financial reporting framework. This is called reasonable assurance: a high, but not absolute, level of assurance.

The value of the audit is that it converts management's own assertions about the business into a statement that a bank, an investor, a shareholder, a lender or a tax authority can rely on. Management remains responsible for preparing the financial statements; the auditor is responsible only for the opinion expressed on them.

2. Who must be audited in the Lao PDR

Under the Law on Independent Audit and the Law on Accounting, an annual independent audit is mandatory for:

• Public interest entities — including commercial banks and other financial institutions, insurance companies and listed companies
• State-owned enterprises and mixed (State-controlled) enterprises
• Enterprises with foreign investment or foreign-owned enterprises operating in the Lao PDR
• Projects financed by external loans or grants, where the funding agreement requires an audit
• Large enterprises meeting the size thresholds set by the Ministry of Finance (commonly total assets above LAK 50 billion)

Other limited liability companies may be audited voluntarily, or because their shareholders, lenders, a licensing authority or a parent company require it. In practice many companies below the threshold still commission an audit, because banks and investors ask for audited figures before extending credit or capital.

3. The rules the audit is performed under

Two separate sets of rules apply, and it is useful to keep them apart.

4. What the Ministry of Finance expects of your records

Several obligations sit with the company rather than the auditor, and weaknesses here are the most common cause of delay and of modified opinions:

• Accounting records must be kept in the Lao language and in Lao kip, unless the Ministry of Finance has authorised otherwise
• Annual financial statements must be completed within two months after the close of the accounting year (1 January to 31 December)
• Financial statements — audited, where an audit is required — must be filed with the Tax Department together with the annual profit tax settlement, generally by 31 March of the following year
• Accounting documents and supporting records must be retained for at least ten years
• Late filing attracts a penalty of 0.1% per day of the tax payable, and under-declaration penalties escalate from 30% to 60% to 100% with repeat offences

5. How the audit runs — five phases

1. 1

   Phase 1 — Acceptance and engagement

   Before accepting the work the auditor performs independence and client acceptance checks, then issues an engagement letter setting out the scope, the reporting framework, the respective responsibilities of management and the auditor, the timetable and the fee. The letter is the contract; nothing should start before it is signed.

2. 2

   Phase 2 — Planning and risk assessment

   The auditor obtains an understanding of the entity, its industry, its regulatory environment and its internal control, sets materiality, and identifies the risks of material misstatement. ISA requires the auditor to presume a risk of fraud in revenue recognition and to address the risk of management override of controls.

3. 3

   Phase 3 — Interim work and controls testing

   Where the auditor intends to rely on internal controls, those controls are tested for design and operating effectiveness. Interim procedures may also cover walkthroughs of the main cycles and attendance at the year-end physical inventory count.

4. 4

   Phase 4 — Substantive procedures (fieldwork)

   This is the main evidence-gathering stage: reconciliation of balances, external confirmations, cut-off testing, verification of fixed assets, testing of provisions and accruals, review of related party transactions, recomputation of tax balances, and analytical procedures. In the Lao context this stage usually also includes reconciling the accounting records to the tax declarations.

5. 5

   Phase 5 — Completion and reporting

   The auditor evaluates uncorrected misstatements, assesses going concern, reviews subsequent events, obtains a written management representation letter, and holds a closing meeting with management and those charged with governance before the report is signed.

6. What you receive

• The independent auditor's report, containing the audit opinion, together with the audited financial statements and notes (ISA 700 / MoF form)
• A management letter setting out internal control deficiencies and accounting weaknesses, with practical recommendations
• A summary of audit adjustments and of uncorrected misstatements
• Where required, the Lao-language set for filing with the Tax Department

The opinion itself takes one of four forms. An unmodified (clean) opinion means the financial statements give a true and fair view. A qualified opinion means there is a material but not pervasive problem. An adverse opinion means the misstatements are both material and pervasive. A disclaimer of opinion means the auditor was unable to obtain sufficient evidence to form any opinion at all.

7. Management's responsibilities

The company is responsible for preparing the financial statements in accordance with the applicable framework, for the internal control necessary to make them free from material misstatement, for the completeness of the records made available, for making staff and documents accessible during fieldwork, and for signing the representation letter. Restricting the auditor's access to information is itself a scope limitation and will be reflected in the opinion.

8. Indicative timeline for a 31 December year end

Small and medium companies with clean records typically require three to six weeks of auditor time in total; groups, banks and first-year audits require longer.

9. How LBO can help

LBO works with the audit from both sides of the table — helping you arrive at the audit ready, and making the audit itself efficient and defensible:

• Readiness review before the audit begins: a diagnostic of your ledgers, reconciliations, fixed asset register, inventory records and tax positions
• Preparation of a complete audit file: lead schedules, reconciliations, supporting analyses and confirmation requests
• Conversion and presentation of your accounts under LFRS for Non-PIEs or IFRS, including the notes
• Reconciliation of the accounting records to the profit tax, VAT and withholding tax declarations
• Acting as your point of contact during fieldwork, resolving auditor queries on a technical basis
• Follow-up on the management letter: turning findings into a remediation plan with owners and deadlines
• Filing support: Lao-language financial statements and annual profit tax settlement within the statutory deadline

Where an independent audit opinion is required, LBO can also assist you in selecting a licensed audit firm and in scoping the engagement — noting that the roles must remain separate: the firm that prepares or advises on the accounts cannot also sign the independent audit opinion on them, under the independence requirements of the Code of Ethics.