Why Audited Profit and Loss Statements Are Required in the UAE
Certified public accountants in the UAE work across several branches of accounting, and auditing is one of them. An audit of a profit and loss statement is a different exercise from a tax audit conducted by the Federal Tax Authority. A tax audit is a selective process initiated by the FTA for specific taxpayers, while a financial statement audit, covering the profit and loss statement and the rest of the financial statements, is a recurring requirement for many UAE companies regardless of whether the FTA has selected them for review. Lenders and banks also frequently require audited financial statements before approving funding or credit facility applications.
Independent Opinion: What an Auditor Actually Reviews
The auditor’s core function is to form an independent opinion on the income and expense items reported in the financial statements, and to state that opinion in a written audit report. The auditor acts as a third-party reviewer of the figures reported for profit and loss, examining supporting evidence rather than simply accepting the figures as presented. Before forming that opinion, the auditor has to test a range of items, from revenue cut-off at year end to the classification of expenses, and gather sufficient evidence to support the conclusion reached.
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Comparability and Consistency: How Auditors Test Profit and Loss Figures
Audited profit and loss statements are examined to confirm that income and expense items are reported completely and are consistent with the underlying transaction documents supplied by the business. The figures are also compared against those of the prior year to check that the same accounting policies and classification methods have been applied. Where the comparison shows an inconsistency between periods, for example a cost that was expensed last year but capitalised this year, the auditor investigates the reason for the change and reports the finding to those charged with governance, either as a note in the audit report or as a matter requiring management’s explanation before the report is finalised.
Who Is Legally Required to Have Audited Financial Statements in the UAE?
The requirement to prepare audited financial statements comes from more than one source, and businesses sometimes assume it applies only where a lender asks for it. Under Federal Law No. 32 of 2021 (the Companies Law), most UAE mainland companies, including LLCs, are required to prepare annual financial statements and, in many cases, have them audited by a licensed auditor. Most UAE free zones separately require an annual audit as a condition of trade licence renewal, though the specific requirement and deadline vary by free zone authority.
Under UAE Corporate Tax, Ministerial Decision No. 84 of 2025 introduced a specific mandatory audit requirement: all Qualifying Free Zone Persons, all businesses with revenue exceeding AED 50 million, and all members of a Tax Group must maintain audited financial statements, regardless of legal form or free zone rules that might otherwise apply. Since taxable income under Corporate Tax is derived from IFRS-based accounting profit, an unaudited or inconsistent profit and loss statement creates direct exposure during an FTA review, not only a lending or licensing issue.
Qualified Expert: What Makes an Auditor Independent
Auditors are certified public accountants who have met the education, examination, and practical experience requirements to perform independent evaluations of financial statements. When examining a UAE company’s profit and loss statement, the auditor applies professional auditing standards and expresses an opinion on whether the statements are fairly presented, not on whether the company’s spending decisions were wise or whether a particular expense was necessary. The audit opinion also does not constitute a legal opinion and does not extend beyond what is covered by generally accepted auditing standards.
Management of Financial Statements: Why Auditors Don’t Prepare Them
An auditor receives the financial statements from the company that prepared them and reviews them as an external party. A CPA performing the audit is not an employee of the company and does not prepare the profit and loss statement or the rest of the financial statements under review. This separation exists specifically to prevent bias, or the appearance of bias, in the opinion the auditor ultimately expresses. An auditor who both prepared and audited the same financial statements would not be independent, and the resulting opinion would not meet professional auditing standards.
See also: Accounting & Bookkeeping Services
Auditor Appointment and Rotation in the UAE
The appointment of an auditor is typically approved by the company’s board of directors, while the auditor’s fee is paid by the company being audited. Where an audit committee exists, it is responsible for overseeing the independence and performance of the appointed auditor and for recommending to the company’s governing body whether the auditor should be reappointed at the annual general meeting. The audit committee also reviews the audit fee to confirm it is sufficient and competitive enough to support a properly resourced, high-quality audit.
When a company changes its auditor, the audit committee, or the board where no formal committee exists, is responsible for recommending whether the appointment should be reassessed and which firms should be considered. This usually involves a competitive tender among several audit and accounting firms. Beyond the company’s own oversight, professional regulators and standard-setting bodies play a role in monitoring audit quality across the profession more broadly.
Audit vs. Review vs. Compilation: What Each Actually Involves
Because a full statutory audit is the most resource-intensive option, some companies consider a review or a compilation instead. These are not interchangeable, and the right choice depends on who the financial statements are for and what level of assurance they need to provide.
| Engagement type | Level of assurance | Typical use case |
|---|---|---|
| Audit | Reasonable assurance, the highest level available; the auditor forms and expresses an opinion | Statutory requirement, Corporate Tax mandatory audit thresholds, lender and investor requirements |
| Review | Limited assurance; the accountant reports whether anything came to their attention suggesting the statements are not fairly presented | Interim reporting, some lender requirements where a full audit is not mandated |
| Compilation | No assurance; the accountant assembles the statements from management-provided data without verifying it | Internal management reporting where no third party requires assurance |
A compilation or review does not satisfy a Corporate Tax mandatory audit requirement under Ministerial Decision No. 84 of 2025, and does not meet most free zone licence renewal conditions where an audit is specified. Downgrading the engagement type to reduce cost is only appropriate where no regulator, lender, or free zone authority actually requires an audit for that entity.
Related: External Audit Services
Worked Example: How an Auditor Catches an Inconsistent Profit and Loss Treatment
A UAE trading company expensed a batch of packaging costs in full during the prior financial year. In the current year, the same category of cost is instead capitalised and depreciated over three years, increasing reported profit for the current period. During the comparability review, the auditor notices the profit and loss statement no longer aligns with the prior year’s treatment for a similar cost. The auditor requests the company’s justification, checks whether the change meets the criteria for a genuine change in accounting policy under IAS 8 rather than a discretionary reclassification designed to improve the current year’s reported profit, and, if the change is not adequately supported, requires the figures to be corrected or discloses the matter in the audit report. This is the practical mechanism behind the comparability testing described above, not an abstract check.
Also check: Audit Services in UAE
What Happens Without a Properly Audited Financial Statement
Where an audit is legally required and a company does not obtain one, the consequences extend beyond simply failing to satisfy a lender. Free zone authorities can withhold trade licence renewal where the required audit has not been submitted. Under Corporate Tax, a business that falls within the Ministerial Decision No. 84 of 2025 mandatory audit thresholds but files its return without properly audited financial statements risks the FTA challenging the taxable income calculation during a review, since that calculation is meant to be derived from audited, IFRS-compliant figures. Companies that are unsure whether they fall within a mandatory audit requirement should confirm their position before the relevant filing or renewal deadline rather than after a regulator has already raised the question.
Frequently Asked Questions on Auditing Profit and Loss Statements in the UAE
What is the purpose of auditing a profit and loss statement?
Is a profit and loss statement audit the same as a tax audit?
Which UAE businesses are required to have audited financial statements?
Can a review or compilation replace a required audit?
Who appoints the auditor and who pays for the audit?
What happens if a UAE company required to have an audit does not obtain one?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. performs statutory and Corporate Tax mandatory audits of profit and loss statements and full financial statements for UAE mainland and free zone companies, and advises on which audit threshold applies to a given business.
Contact Farahat & Co. today to discuss your financial statement audit requirements.
