Liquidation Audit

Liquidation is a crucial process for gradually closing down a business’s activities while handling its assets. This method closely manages the business’s affairs and converts its property into money. The liquidator, who has the responsibility for overseeing the process of liquidation, would subsequently file an application to the relevant authorities, such as the Federal Tax Authority, in order to have the firm legally eliminated from the register. The FTA may initiate the process of liquidation audit.

The business’s final liquidation signifies the finish of its legal existence. Following liquidation, the earnings from the sale of assets will be utilized to pay off pending dues, with any leftover cash sent to shareholders and creditors in accordance with specified preferences. The primary purpose of a liquidation audit is to ensure that the firm achieves its financial responsibilities, boosts the worth of its property, as well as protects its stakeholders’ interests. After an accomplished liquidation audit, the corporation is no more legally recognized. Liquidation experts like Farahat and co will help you in audit.

What is a Liquidation Audit?

  1. A liquidation audit is a comprehensive examination of every single financial transaction that occurred through the business’s liquidation procedure.
  2. It involves verifying the validity and correctness of the transactional activities. This type of auditing deals with several issues, including the expenditures involved in property dissolution, money generated from sales of assets, as well as the fair sharing of sale profits.
  3. A Liquidation Audit is conducted during the liquidation process to ensure transparency, accountability, and conformity to existing laws and legislation.
  4. The liquidation audit report provides assurance that the business’s property is used properly to meet responsibilities and that the cash is distributed equally among stakeholders, creditors, and the various involved persons by thorough examination of the accounting books and financial transactions.

Reasons Behind Liquidation

A liquidation procedure could be initiated for a variety of reasons. The most prevalent reasons are listed below; 

  1. Deficiency of cash due to a lack of cash flow management.
  2. Your firm is not registered as a private or public organization.
  3. One year after formation, there is no commercial activity. 
  4. The total loan and duty value exceeds the value of the assets.
  5. Consistent losses in corporate activities
  6. Bankruptcy of a firm

Tax authorities, on the other hand, also have the authority to drive a firm into liquidation for a variety of causes. The most crucial of these is when the corporate body no longer has enough cash available to continue its everyday activities, when the firm has lost its capacity to satisfy its commitments with creditors, or, in the most dire circumstances, the business violates the tax legislation of the country it operates in.

Liquidation Type 1 Liquidation Type 2
Voluntary  Mandatory
Initiated by business owner Mandated by authority

Reasons Behind Liquidation Audit

If a business shuts down its offices or revokes its licenses in the United Arab Emirates or its free zones, such as Dubai Silicon Oasis (DSO), Dubai Multi Commodities Centre (DMCC), Dubai Economic Department (DED), Jebel Ali Free Zone Authority (JAFZA), or Dubai Airport Free Zone Authority (DAFZA), a liquidation audit is required by UAE law. Each of the authorities mentioned above wherein a corporation is situated will call for a liquidation audit.

Other territories, such as the Hamariyah free zone, Saif free zone, Sharjah, and Abu Dhabi have separate regulatory bodies that monitor liquidation activities in the areas that they govern. You can hire liquidation audit services from an approved audit company to discover the precise requirements of a certain location.

Liquidation Audit Requirements for Freezone Businesses

The following documents can be required for the purposes of liquidation audit in a free zone;

  1. Bank closure letters
  2. If the business previously took loans from a bank then it will be required to obtain a no liability certificate to give evidence that all debts have been settled.
  3. The firm must provide a stamped No Liability Certificate imprinted on its business letterhead
  4. The trial balance provides every transaction up until the day of liquidation. This file, along with all other essential accounting records at the time of the business’s dissolution, must be provided.
  5. An Excel spreadsheet with up-to-date transaction records can be used in place of a trial balance.
  6. The business shareholders have to send a letter on the business’s letterhead declaring that the auditing company has been designated as a liquidator. The document needs to be stamped and signed by all shareholders.
  7. A NOC, or no-objection certificate, needs to be obtained from the DEWA or Dubai Electricity and Water Authority and DU or Etisalat for utility approval of the business, as required.

Who Performs Liquidation Audit in UAE?

Only businesses that have been legally certified and recognized by the UAE government’s financial institutions are permitted to undertake liquidation audits in the country’s mainland and related freezone areas. Government officials inside a free zone also provide permission to specific auditing companies to perform audits of businesses based in separate zones. To stay on the Freezones’ listing of authorized companies, auditing firms must be competent and remain up-to-date with Global Audit Standards.

Conclusively, a liquidation audit makes the process of liquidating your business way easier only if the audit report comes out with positive results. The chances of conducting a liquidation audit without making errors increase if you hire company liquidation services.

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