An audit is a set of checks carried out by an independent third party to gain reasonable assurance that a company’s financial statements do not contain significant errors or misstatements, whether caused by fraud or simple mistakes. In effect, this means that an audit serves as a check on the accounts of the entity, to reasonably assure that the accounts do not contain large mistakes. 

It could be said that most entities procure an audit for their financial statements solely due to the legal requirements. However, the benefits of an audit may far outweigh the simple ticking of a box. 

Legal requirements

At a national level, statutory audit obligations are governed by the Companies Act (Cap. 386 of the Laws of Malta). The Act establishes the circumstances under which a company is required to appoint an auditor and have its financial statements audited annually. It also sets out the duties, responsibilities, and independence requirements applicable to auditors. These provisions apply to the majority of limited liability companies incorporated in Malta, subject to specific size-based exemptions.

Not all entities are subject to a statutory audit. Legal notice 139/2025 that came into effect starting on 1 January 2025, has created an exemption for certain types of small companies to not be legally required to pursue an audit for the yearly financial statements. The exemption is primarily for small companies that meet specific thresholds related to turnover, balance sheet total, and number of employees. While these exemptions reduce the regulatory burden for smaller entities, directors remain fully responsible for the accuracy and completeness of the financial statements. In many cases, companies that are exempt from a statutory audit still opt for an audit or other assurance engagements to improve credibility with banks and investors in order to obtain financing.

What does an audit involve?

Audit procedures are designed to provide reasonable assurance that a company’s financial statements are free from material misstatement and have been prepared in accordance with applicable accounting standards. The audit process begins with careful planning, during which the auditor develops an understanding of the company’s business activities, operating environment and internal controls. This risk-based approach allows the audit to focus on areas where errors or misstatements are more likely to arise.

Based on this assessment, the auditor performs a combination of substantive testing and analytical procedures. These may include examining supporting documentation, testing transactions and balances and assessing the appropriateness of accounting estimates and judgements made by management. The nature and extent of these procedures vary depending on the size, complexity and risk profile of the business, ensuring that the audit is tailored rather than standardised.

Throughout the process, auditors apply professional judgement and maintain professional scepticism as to critically evaluate the evidence obtained. Audit procedures are intended to obtain sufficient and appropriate evidence to support the audit and not to verify every transaction. In doing so, the audit provides independent assurance to directors and stakeholders on the reliability of the company’s financial reporting.

Other benefits arising from audits

One of the key outcomes of an audit is the identification of weaknesses in internal controls and business processes. Auditors often highlight issues such as inadequate segregation of duties, reliance on manual processes, or insufficient documentation. Addressing these findings can reduce the risk of error or fraud, improve operational efficiency, and strengthen the overall control environment, supporting more reliable financial reporting.

Audited financial statements also play a crucial role in building credibility with stakeholders. Banks, investors, regulators, and business partners rely on audited information when assessing financial stability and risk. For companies operating in or from Malta, particularly those engaged in cross-border activities, a robust audit improves confidence in your undertaking which can facilitate access to finance, investment as well as other commercial opportunities.

While an audit is inherently focused on historical financial information, its value is not limited to the past. Audit findings and recommendations can inform better decision-making and enhance the awareness of potential risks to the businesses. This would aid in the strategic planning of the future direction of the enterprise. Additionally, an audit may serve to detect oversights such as unpaid creditors, uncollected debts from debtors. In effect an audit serves as an extra set of eyes on the business. In this sense, audit serves as a forward-looking tool that contributes to stronger governance, improved resilience, and long-term business sustainability.

Beyond compliance, an audit delivers tangible business benefits. Ultimately, an audit should not be viewed as a regulatory burden or a box-ticking exercise, but as an investment in transparency and accountability. When approached constructively, the audit provides valuable insights that can help your business navigate risk, build trust and position itself themselves for sustainable and consistent growth.