Who Needs Audited Financial Statements and Why It Matters for Your Business

Understanding who needs audited financial statements can save your business from penalties and compliance issues. New Zealand has over 700,000 registered companies, and knowing whether your organization falls under audit requirements is crucial to stay compliant.

The regulations are clear. Companies with assets exceeding $66 million or revenue above $33 million must prepare audited financial statements [-4]. All public companies require independent audits annually. The stakes are high. Non-compliance can result in fines up to $50,000 for both the company and each director.

This piece will walk you through who is required to have audited financial statements and why these financial reports matter for your business. We’ll also guide you through the audit process.

Understanding Audited Financial Statements

What audited financial statements are

Audited financial statements are financial reports that an independent certified public accountant has examined and verified for accuracy. Companies produce these statements to provide information about their financial position and performance. The main goal is to boost the confidence of intended users in the financial statements.

An audit provides reasonable assurance that the financial statements are free from material misstatement, but not absolute assurance. This difference matters because audits are based on sampling rather than testing every single transaction. The auditor examines the income statement, balance sheet, cash flow statement, and statement of changes in equity to assess financial performance and the reliability of management’s representations.

The audit process explained

The audit process follows several phases that work together to create a complete examination. Auditors gather information about your entity and identify potential risks through questions to the core team while reviewing previous years’ results in the planning phase. The risk assessment has understanding your business drivers, internal controls, and potential areas of concern.

Auditors perform walkthroughs of significant business processes once planning concludes to ensure your entity operates as documented. This has questioning personnel, observing specific controls, and inspecting documents. The auditor then spends time performing substantive tests, analytical procedures, and getting confirmations from third parties such as banks and suppliers.

The auditor issues one of several opinion types at the audit’s conclusion. An unqualified opinion shows the financial statements present fairly in all material respects. A qualified opinion means the statements are materially fair except for a specific exception. An adverse opinion signals the statements are materially incorrect, while a disclaimer means the auditor couldn’t get sufficient evidence to form an opinion.

Regulatory bodies and compliance requirements

ASIC regulates compliance with financial reporting and auditing requirements for entities subject to the Corporations Act. Our active monitoring contributes to market integrity and investor confidence. The FMA oversees auditor regulation and maintains audit quality standards in New Zealand.

Licensed auditors must carry out audits that follow applicable auditing and assurance standards. The International Standards on Auditing issued by the International Auditing and Assurance Standards Board serves as the standard for audit processes around the world.

Who Is Required to Prepare Audited Financial Statements

Public companies and listed entities

All public companies must undergo independent audits annually. This requirement applies to companies not classified as disclosing entities or limited by guarantee, which must prepare financial reports audited and lodged with ASIC within four months of financial year end. FMC reporting entities, including credit unions and building societies, must lodge audited financial statements each year within four months of their balance date.

Private companies and business circumstances

Large private companies face mandatory audit requirements based on specific thresholds. A New Zealand company becomes ‘large’ when total assets exceed $112.57 million or revenue surpasses $56.29 million at balance date for two consecutive accounting periods. Overseas companies carrying on business in New Zealand require audits if assets exceed $37.52 million or revenue exceeds $18.76 million correspondingly.

Private companies with 10 or more shareholders need audited financial statements by default, though 95% of voting shareholders can approve an opt-out. Smaller private businesses have no legal obligation, but lenders and insurance companies may require audited statements before extending loans or certain policies.

Retirement plans and employee benefit funds

Federal law requires employee benefit plans with 100 or more participants to submit audited plan financial statements when filing Form 5500. Participant counts are determined based solely on the number with account balances at the start of the plan year during plan years beginning on or after January 1, 2023.

Non-profit organizations and charities

Charities must have audits by qualified auditors if total operating expenditure exceeded $1.88 million for each of the previous two years. Medium-sized charities spending between $938,085.65 and $1.88 million can choose between a review or audit. Federal audit requirements apply when nonprofits expend $1,279,207.70 or more in federal funds annually.

Other entities with audit obligations

Certain entities have audit requirements embedded in their governing rules or trust deeds. Community funders often require audits whatever the legal thresholds to demonstrate accountability and transparency of spending.

Why Audited Financial Statements Matter for Your Business

Building credibility with investors and lenders

Financial institutions need verification before committing capital. Banks require audited statements before approving large loans or lines of credit. Independent auditors bridge the trust gap between companies and stakeholders when they review the books. Lenders use these documents to assess creditworthiness. This can lead to more favorable loan terms and increased access to credit.

Investors seek businesses that demonstrate resilient financial management. Audited statements serve as validation of reported earnings, margins and cash flow. Bonding companies may require them for construction or public-sector contracts. Small businesses with audited financials tend to have better access to capital and stronger financial controls.

Meeting regulatory and legal requirements

Companies listed on the share market must present a report from the auditor to investors in their annual report. The auditor expresses an opinion on whether financial statements comply with accepted accounting principles and are free from material misstatement. Businesses can avoid penalties and build positive relationships with regulatory bodies by meeting these standards.

Improving internal controls and financial accuracy

The audit process helps identify weaknesses in internal controls. Organizations can strengthen their financial management systems this way. Auditors assess potential risks within financial statements, which helps in taking pre-emptive action to alleviate these risks. A solid system of internal controls translates into more reliable financial reporting and can help companies prevent, detect and correct financial misstatements.

Supporting business growth and transactions

Audited financial statements are a great way to get confidence for businesses looking to expand, merge or sell. Many middle-market companies revolve around tax returns for financial reporting, but buyers, lenders and investors often expect or just need audited statements prepared under GAAP. Clean, audited financials give buyers confidence by telling a consistent and reliable story. This often translates into stronger valuations.

How to Choose an Independent Auditor

Selecting the right auditor requires careful evaluation beyond choosing the lowest bid. Directors should lead this selection process rather than delegating it to management.

Evaluating auditor credentials and experience

Auditors must hold the right licenses and maintain independence. FMC reporting entities in New Zealand require registered audit firms. Verify credentials through professional registers and confirm accreditation with recognized bodies.

Industry experience affects audit quality and efficiency. Potential auditors should tell you how many clients they serve in your sector and their years of experience within your specific industry. Auditors familiar with your industry understand unique risks, transactions, and accounting standards relevant to your business. Check their involvement with trade associations and participation in industry events.

Reputation assessment means reviewing client testimonials, checking peer reviews, and requesting references from companies of similar size. Audit firms should show strong quality control processes and have the right specialists available.

Understanding audit costs and engagement scope

Audit fees are calculated based on hours worked multiplied by hourly rates, not on financial aspects of the business. Factors that influence costs include organization size, complexity, risk profile, and industry. Poor quality financial statements or major errors lead to additional fees.

Price should not drive auditor selection. Directors must ensure fees provide sufficient resources for compliant audits. Audit scope defines what auditors examine and, just as important, what sits outside their responsibility.

Questions to ask potential auditors

Potential auditors should explain their typical audit timelines, meeting cadence, and experience with companies at your stage. Their approach to risk assessment and familiarity with your technology systems matters.

Conclusion

Understanding your audit requirements protects your business from serious penalties and builds credibility with investors and lenders. You need to know when audited financial statements become necessary if you’re a public company, large private entity or nonprofit. This knowledge helps you stay compliant and competitive.

Review your circumstances against the thresholds we’ve outlined here. Choose an auditor with industry experience. View the audit process as a chance to strengthen your financial controls rather than just a compliance exercise.

FAQs

Q1. Which organizations are legally required to have audited financial statements?

Public companies and listed entities must undergo independent audits annually. Large private companies with assets exceeding $112.57 million or revenue surpassing $56.29 million for two consecutive years require audits. Additionally, charities with operating expenditure over $1.88 million for two consecutive years, employee benefit plans with 100+ participants, and FMC reporting entities like credit unions must prepare audited financial statements.

Q2. Do small businesses need to get their accounts audited?

Small private businesses generally have no legal obligation to prepare audited financial statements. However, they may still need audits if requested by lenders before approving loans, insurance companies for certain policies, or community funders to demonstrate accountability. Private companies with 10 or more shareholders also require audits unless 95% of voting shareholders approve an opt-out.

Q3. Why do lenders and investors require audited financial statements?

Lenders and investors require audited statements to verify the accuracy of financial information before committing capital. Banks use these documents to assess creditworthiness, which can lead to more favorable loan terms and increased access to credit. Independent auditor verification bridges the trust gap and validates reported earnings, margins, and cash flow, giving stakeholders confidence in the business’s financial health.

Q4. What are the consequences of not complying with audit requirements?

Non-compliance with audit requirements can result in significant penalties, including fines up to $50,000 for both the company and each director. Beyond financial penalties, failing to meet audit obligations can damage relationships with regulatory bodies, limit access to capital, and harm the company’s reputation with investors and lenders.