In the business world, a company that is going to carry out a merger or acquisition needs to carry out a legal audit.
This allows the company will be checked in the aspect of compliance and ensure each document and inventory has legal status.
To better understand what a legal audit is, this article will go deeper into its purpose, process, and when it is needed.
Understanding The Legal Audit
Legal audit is a legal examination of a company that includes testing data and facts.
This allows auditor. will review the company's overall operations from legal aspects, such as to ensure the level of auditee compliance with the law.
In addition, legal audit also produces a foundation to provide legal opinions on the legal status and various situations of a company.
As for a legal auditor will not only conduct due diligence, but more on a legal examination of an entity/ institution.
So that the understanding of legal audit will be different from due diligence which can only be used for companies or entities. Because legal audits make it possible to scrutinize legislative, executive, and judicial bodies.
Objectives and benefits of Legal Audit
In general, the purpose of legal audits is to test the level of compliance and security against legal aspects and risks that could potentially endanger the company's wealth.
As for the specifics, legal audits have various objectives based on the needs of the company. Here are some of the objectives of the process of examining legal aspects in general:
- To obtain legal status of the documents reviewed during the audit process
- To test the legality of a legal entity or business
- To test compliance with a legal entity or business
- To provide a legal opinion on a policy or decision made by a company
The following are some of the benefits of conducting a legal audit are:
- Reduce legal risk by reviewing and addressing potential legal issues
- Optimizing compliance with the law by ensuring a company complies with applicable laws and regulations related
- Maximizing company performance
- Reduce potential losses due to violation of relevant laws and regulations
- Growing trust in the company
- Improve the good name of the company in front of stakeholders
Read Also: Audit Risk: definition, types, examples, and how to determine
Legal Documents Audit
In achieving audit results that can improve the company's compliance with the law and reduce the risk of problems related to the law, the auditor needs to make an initial identification of some documents.
Here are some of the documents required in this legal audit process:
- Articles of association, which includes the company deed, organizational structure, company Capital Income data Records, and articles of association adapted to law No.1 year 1995 with PT.
- Company asset documents, which contains land certificates, documents proof of vehicle ownership, share ownership data, agreements with suppliers, and so forth
- Company agreements with third parties, which includes agreements made and signed such as cooperation agreements, shareholders ' agreements, accounts payable agreements, and others.
- Company licensing and approval documents, which includes a letter of domicile of the company, licensing and approval from government agencies, and so forth.
- Personnel documents, which includes company regulations, Labor Social Security documents, foreign labor permits, documents regarding workers ' wages, labor agreements, and others.
- Company insurance documents, in the form of company Tin documents, building land tax documents, and so on.
- Dispute documents, which are documents relating to the existence of claims or disputes over the company from internal or external courts.
In addition to identifying these documents, auditors conduct a review process on certain areas and objects directly to ensure their validity.
Then the auditor can also further examine other documents related to the company or auditee.
Next is the legal audit process in identifying several other sources of information, such as courts, financial statements, and others.
Legal Audit Implementation Process
1. Develop a planning framework
In this stage, the auditor will develop a planning framework to ensure the process runs optimally.
This includes the purpose of the auditor's assignment, the scope of the auditor's duties, compliance test materials related to related laws and regulations, managerial classification and division of tasks based on expertise, infrastructure and budget, as well as work schedules.
2. Develop the scope of implementation
The preparation of the scope that has been stated in the letter of assignment is made in the working paper in accordance with the request of the auditee.
3. Collecting related regulations
In this stage, the auditor needs to ensure that the rules used are in accordance with those in the assignment letter.
The regulations that have been compiled will then be verified and grouped based on applicable laws in Indonesia, especially law No. 12 of 2011.
4. Determine audit materials
The Auditor at this stage will collect objects that include documentation and observations to be identified for compliance with applicable law based on the letter of assignment.
5. Establish audit work team
Audit work team formed based on knowledge and experience will perform managerial classification and each member will get the responsibility in the task of preparation of infrastructure.
6. Determining the implementation schedule
This stage allows the auditor to set an implementation schedule that is tailored to the needs, where the more difficult and complicated the task, the longer the processing time.
7. Determining the cost budget
Budget setting is also very different in its implementation. It depends on its level of difficulty, resources, scope of work and assignment.
8. Prepare audit report
The Auditor will prepare an audit report or commonly called a working paper with a systematic and structured. Starting from the introduction, the purpose of the assignment, the identity of the auditor and the auditor's work team.
Next is the identity of the recipient of the report, the identity of the auditee, the basis or reason for appointment as legal auditor, the purpose of the audit assignment, the contents of the audit materials, and the summary of the implementation of the auditor.
Then followed by points of assumptions and qualifications, executive summary, audit results, legal opinion, and conclusion.
Read Also: Get to know what the Audit cycle is, stages, and types!
Examples Of Legal Audits
Some cases that can be handled by conducting legal audits are generally used to ensure that the relevant company has complied with applicable regulations and is free from legal risks.
Here is an example of a legal audit in the company:
- IPO or Initial Public Offering that will do a company
- Merger, acquisition, or consolidation to be carried out by the company
- Syndicated loan transactions by a company
- Companies that will be sold and already have a prospective buyer
Conclusion
Legal audit allows the auditor to provide legal opinions and suggestions of legal steps that can be taken by the auditee against the institution or company concerned.
That's why an auditor in the legal audit process must be able to describe what happens to the company to the client.
If you need audit services for your company, Audithink is here to make the audit process easier. Please schedule demo application and describe the audit you need, or just contact contact us for more info!
