26 September 2023
By Sam Alex
Companies must be audited worldwide, but each jurisdiction has different obligations. Companies in the United Arab Emirates (UAE) must be audited, with the exception of those that are based in free zones. The need for auditing in free zones depends on the regulatory guidelines and regulating legislative framework put in place by the authorities.
Although auditing is not technically needed for businesses, it is still advised. This proactive measure helps ensure that the company doesn't have any hidden issues that could prove unfavourable It's important to remember that only licenced audit firms are allowed to do audits for your company. Therefore, it's essential to engage the services of one of the top authorized audit firms for your auditing needs.
As per the Commercial Companies Federal Law, No. 32 of 2021, all mainland UAE companies are mandated to undergo financial account auditing. In order to comply with legal requirements, these businesses must also keep their financial records for a minimum of five years.
Companies located in UAE free zones, on the other hand, are normally exempt from mandatory auditing and are not required to submit audit reports. Free Zone Companies (FZCO) and Free Zone Establishments (FZE), for example, may still be required to submit to mandatory auditing.
Free zone businesses must still create audit reports for their internal records even though they are not required to submit them. In the future, such reports might be required for immigration-related reasons.
Companies are realising more and more the value of maintaining accurate accounting records and performing audits as the UAE's tax system becomes more active. This procedure offers insightful information about areas of the business that may need attention and provides guidance for upcoming improvement efforts.
To fully understand the Audit requirements in UAE, it's essential to distinguish between the mainland and free zone setups. The mainland refers to areas outside of free zones, where businesses are categorized as onshore companies. The Department of Economic Development or other relevant UAE government ministries provide licences to mainland enterprises, enabling them to operate both inside the UAE and on the local market.
Nevertheless, despite the benefits of conducting business on the mainland, foreigners must find a local sponsor who is a citizen of the UAE. This regional sponsor is expected to own a minimum of 51% of the company.
The UAE's free zones operate according to their own laws and rules. Businesses located in free zones are allowed to conduct operations locally as well as globally. Starting a company in a free zone has the obvious advantage that international entrepreneurs can keep 100% ownership without the need for a local sponsor. In addition, the UAE is home to free zones designed specifically for the needs of diverse industries.
Although free zone businesses are not required to provide audit reports to the government, having such reports is vital for verifying that tax laws are being followed.
Many auditing companies in the UAE, especially in Dubai, help businesses prepare their audit reports. Auditing is an essential phase in determining whether a company's operational, financial, and strategic goals are in line with accepted standards, making it a crucial procedure for analysing and optimising a company's aims and operations.
Is auditing necessary for companies in the UAE?
Even though Free Zone Companies (FZCO) and Free Zone Establishments (FZE) are required to have their accounts audited, certain domestic and international businesses may not be. However, maintaining precise accounting records and documentation is still essential to all businesses in order to be ready for audits.
Accounts must be audited by mainland businesses in accordance with the Commercial Companies Law. The audit of a company's financial records must be carried out by an authorised and licenced auditor, as required by law. It's important to note that not all businesses are obligated to follow these guidelines to the letter.
Several Free Zone companies, including but not limited to Dubai Multi Commodities Centre (DMCC), Dubai World Central (DWC), Dubai Airport Free Zone (DAFZA), Jebel Ali Free Zone (JAFZA), Dubai Silicon Oasis (DSO), and Dubai International Financial Center (DIFC), have a mandatory requirement for submitting audited financial statements to the respective authorities.
Additionally, foreign businesses operating in the UAE must provide audit reports and audited financial statements for their UAE-based offices.
The preparation of audited financial accounts in cases of enterprises going through liquidation is essential for facilitating the drafting of the liquidator's audit report.
Additionally, a number of government entities, such as ministerial divisions, municipalities, and insurance agencies, require businesses to submit their audited financial statements as part of their regulatory compliance.
As part of the loan process, lenders, including banks and non-banking financial institutions, have strict requirements for businesses to submit to audits performed by reliable auditors.
Similar to consumers, dealers and suppliers regularly ask businesses for audited financial accounts to determine their financial soundness and creditworthiness before to doing business with them.
Financial audits are chosen by businesses in the UAE for a wide range of management needs. These audits are an essential tool for understanding the company's financial situation, monitoring business development, and evaluating overall entity performance.
However, auditors play an important role in closing the financial books and providing crucial information for wise management decisions. In other cases, companies can recruit bookkeepers to do basic daily financial work.
Additionally, business owners frequently ask for advice regarding the company's net worth. In order to get a clear picture of the company's financial health that can be properly presented to shareholders, they conduct annual audits.
It is clear that the mainland of the UAE and several free zone zones require the auditing of financial statements and books of accounts. For this purpose, companies are required to hire licenced auditors, and failing to deliver audit reports may result in fines from the authorities.