IFRS compliance is a critical part of external audit preparation in Saudi Arabia. A company may have a complete trial balance and organised accounting records but still face significant audit issues if transactions have not been recognised, measured, presented or disclosed under the applicable financial reporting requirements.
Saudi Companies Law requires companies to prepare their financial statements in accordance with accounting standards approved in the Kingdom. SOCPA provides the local framework for endorsed international accounting standards, related amendments and technical guidance. Businesses should therefore evaluate IFRS compliance before audit fieldwork begins rather than relying on the external auditor to identify and correct financial reporting gaps.
Audit Services KSA helps businesses in Riyadh and across Saudi Arabia review high-risk IFRS areas, reconcile financial statement balances and prepare supporting documentation before the statutory audit begins.
Why Is IFRS Compliance Important Before an External Audit?
Effective IFRS compliance improves the accuracy of financial statements and reduces the likelihood of material audit adjustments. It also helps management respond to audit requests efficiently, complete reporting within the required timetable and provide reliable information to shareholders, banks, investors and regulators.
Early compliance work is particularly important where the company has complex contracts, long-term leases, overdue receivables, significant accounting estimates or unusual transactions. These areas normally require management judgement and supporting evidence that cannot be prepared reliably at the last minute.
What Are the Main IFRS Compliance Challenges Before an External Audit?
The most common IFRS compliance challenges relate to revenue recognition, lease accounting, expected credit losses, fair value measurement, financial statement disclosures, accounting estimates, internal controls and audit documentation.
These issues can affect several financial statement balances simultaneously. A revenue error, for example, may also misstate trade receivables, contract assets, contract liabilities, tax balances and related disclosures.
1. Revenue Recognition Problems Under IFRS 15
Revenue recognition becomes a significant audit issue when income is recorded according to invoice dates, payment receipts or internal billing schedules without analysing the underlying customer contract. IFRS 15 requires companies to determine the performance obligations in a contract, establish the transaction price and recognise revenue when or as the promised goods or services are transferred to the customer.
Before the external audit, management should review material contracts involving multiple services, variable consideration, discounts, penalties, advance payments or contract modifications. Auditors commonly examine delivery documents, project completion certificates, customer approvals and subsequent credit notes. Unsupported unbilled revenue, incorrect cut-off and advance payments recognised prematurely as income are frequent sources of audit adjustments.
2. Common IFRS 16 Lease Accounting Errors
Lease accounting errors often arise because property, warehouse, vehicle or equipment agreements are not included in a complete lease register. Problems also occur when renewals, rent-free periods, payment changes, terminations and lease modifications are not reflected in the right-of-use asset and lease liability calculations.
IFRS 16 generally requires lessees to recognise assets and liabilities arising from leases, subject to specified exemptions. Before the audit, companies should reconcile rental expenses with the lease register and confirm that all active contracts have been assessed. Auditors will normally review lease terms, discount rates, payment schedules and renewal options. An incomplete register can understate both assets and liabilities and may require extensive retrospective corrections.
3. Expected Credit Loss Issues Under IFRS 9
Expected credit loss calculations become unreliable when companies apply one general provision percentage to all trade receivables. Such an approach may not reflect differences in customer risk, overdue periods, dispute status, historical write-offs or current economic conditions.
Under IFRS 9, the impairment assessment for relevant financial assets is based on expected rather than only incurred credit losses. Management should reconcile the receivable ageing report with the general ledger, separate customers with different risk characteristics and review subsequent collections. Auditors will challenge models that produce a minimal allowance despite significant overdue or disputed balances. The methodology, assumptions, historical loss rates and forward-looking adjustments should be clearly documented before fieldwork begins.
4. Fair Value Measurement Challenges Under IFRS 13
Fair value measurements require particular attention where quoted market prices are unavailable. Investment properties, unquoted investments, financial instruments and assets acquired through business combinations may depend on valuation techniques involving market comparisons, cash-flow forecasts or significant unobservable assumptions.
IFRS 13 establishes the framework for measuring fair value when another accounting standard requires or permits such measurement. Before the audit, management should obtain current valuation reports and verify that the amounts agree with the financial records. Auditors may assess the valuation method, market data, discount rates, rental yields and the competence and objectivity of the valuer. A report without adequate evidence supporting its assumptions may not provide sufficient audit support.
5. Missing IFRS Financial Statement Disclosures
Financial statements may contain correctly recorded balances and still fail to meet IFRS reporting requirements because the accompanying disclosures are incomplete. This frequently occurs when prior-year notes are reused without considering changes in contracts, estimates, financing, related parties or business risks.
Management should complete a disclosure review before submitting the first draft to the auditor. Particular attention should be given to significant judgements, estimation uncertainty, related-party transactions, financial risks, lease commitments, revenue balances, fair value information and events after the reporting period. Auditors compare the notes with contracts, board minutes, accounting calculations and the trial balance. Generic wording that does not reflect the company’s circumstances can lead to repeated revisions and reporting delays.
6. Accounting Estimate and Impairment Testing Errors
Accounting estimates are often challenged when they are based on arbitrary percentages, outdated forecasts or undocumented management judgement. High-risk areas include inventory obsolescence, asset useful lives, warranty obligations, legal claims, employee-related liabilities and impairment of non-financial assets.
IAS 36 requires an asset to be reduced when its carrying amount exceeds its recoverable amount, while IAS 37 addresses provisions and contingent liabilities. Before the audit, management should document the calculation method, key assumptions, source data, sensitivity and approval process for each material estimate. Auditors are likely to compare forecasts with historical performance and investigate assumptions that appear inconsistent with current business conditions.
7. Weak Internal Controls Over Financial Reporting
Weak internal controls increase the risk that accounting errors remain undetected until the external audit. Common problems include journal entries posted without approval, late bank reconciliations, inadequate segregation of duties, uncontrolled master-data changes and supporting schedules that are prepared but not independently reviewed.
Before fieldwork, management should confirm that every material reconciliation has an identified preparer and reviewer. Evidence of review should be retained rather than assumed from verbal approval. Weak controls may require the external auditor to perform additional substantive procedures and test larger samples. For listed companies, CMA Corporate Governance Regulations place specific emphasis on internal control systems, financial reporting oversight and the responsibilities of the audit committee.
8. SOCPA-Endorsed IFRS Compliance Issues
Finance teams may create compliance gaps when they rely exclusively on international IFRS material without confirming the standards and amendments endorsed for implementation in Saudi Arabia. The financial statements should accurately describe the reporting framework applicable to the company rather than referring generally to international accounting principles.
SOCPA publishes documents covering the endorsement of international standards, endorsed accounting standards, amendments, updates and relevant national technical guidance. Companies should maintain an annual standards register identifying which requirements apply to the reporting period and whether any accounting policies or disclosures must change. This review is especially important for first-time adoption, new transactions and standards approaching their effective dates.
9. Insufficient Audit Documentation and Supporting Evidence
An accounting treatment may be technically reasonable but still result in an audit finding when management cannot provide evidence supporting the conclusion. General ledger entries alone are rarely sufficient for material or judgemental balances.
Before the audit, companies should organise contracts, invoices, board approvals, bank records, valuation reports, legal correspondence, inventory count records, impairment models and accounting calculations in a structured file. Each document should be linked to the relevant ledger account and financial statement note. ZATCA also emphasises the importance of detailed reporting audit trails that reconcile with accounting records, reinforcing the need for reliable record management across financial and tax reporting processes.
10. Last-Minute IFRS Adjustments Before the Audit
Last-minute adjustments arise when technical accounting reviews are postponed until the external auditor begins fieldwork. Management may continue changing the trial balance while supporting schedules and draft financial statements are already under audit.
This creates version-control problems and may cause previously completed audit work to be repeated. Late entries commonly relate to leases, revenue cut-off, expected credit losses, inventory provisions, impairment, employee obligations and related-party balances. Before submitting the audit package, management should approve a final trial balance and control subsequent entries through an adjustment log. Any revised balance should be updated consistently in the ledger, supporting schedule and financial statement notes.
Which IFRS Issues Create the Highest External Audit Risk?
Some IFRS issues create greater audit risk because they affect profit, financial position and disclosures at the same time.
| Common audit finding | Main financial reporting risk |
| Revenue recognised in the wrong period | Revenue and profit may be misstated |
| Lease contracts omitted from the register | Assets and liabilities may be understated |
| Unsupported ECL calculation | Trade receivables may be overstated |
| Incomplete related-party information | Transactions and disclosures may be incomplete |
| Unsupported impairment assumptions | Assets may be carried above recoverable amounts |
| Missing financial statement disclosures | The reporting package may be non-compliant |
| Unreconciled accounting balances | Material errors may remain unidentified |
| Missing supporting documentation | Audit testing may be delayed |
The eventual effect depends on the size and nature of the misstatement, whether it is pervasive and whether management corrects it before the auditor’s report is issued.
How Can Businesses Improve IFRS Compliance Before an External Audit?
Step 1: Conduct an IFRS Gap Assessment
The company should compare its current accounting practices with the reporting requirements applicable to the year under audit. The review should prioritise material transactions, unusual contracts, new financing arrangements and balances involving significant judgement.
Step 2: Review High-Risk Accounting Areas
Revenue, leases, expected credit losses, inventory, impairment, provisions and related-party balances should be reviewed before routine accounts. Resolving one material issue early can prevent corrections across several financial statement notes and schedules.
Step 3: Reconcile the Final Trial Balance
Every material balance should agree with the relevant subsidiary ledger, supporting calculation and third-party evidence. Unexplained differences should be investigated rather than transferred to temporary or suspense accounts.
Step 4: Complete the Financial Statements Before Fieldwork
Management should provide a complete financial statement draft rather than only a trial balance. Preparing the notes early allows disclosure gaps and inconsistencies to be identified before they disrupt the audit timetable.
Step 5: Organise the Audit Evidence
Supporting documents should be indexed by audit area, clearly named and connected to the relevant balance. A structured file allows both the finance team and external auditor to identify missing information quickly.
Step 6: Perform a Pre-Audit Compliance Review
An independent pre-audit review can challenge accounting treatments, calculations and disclosures before the statutory auditor starts testing. This gives management time to correct errors while retaining responsibility for all financial reporting decisions.
IFRS Compliance Checklist Before an External Audit
Confirm the Applicable Accounting Framework
Management should confirm whether the company applies full SOCPA-endorsed IFRS, the IFRS for SMEs framework or another permitted reporting basis. The applicable standards and amendments should be determined according to the reporting period rather than the date on which the audit begins.
Review Material Customer Contracts
Customer agreements should be evaluated for performance obligations, variable consideration, contract modifications and revenue-recognition timing. Recorded revenue should agree with delivery records, project certificates and customer acceptance evidence.
Update the Complete Lease Register
The lease register should include all property, vehicle, warehouse and equipment arrangements. New agreements, renewals, payment changes, terminations and reassessments should be reflected in the IFRS 16 calculations and general ledger.
Recalculate Expected Credit Losses
Receivable ageing should be reconciled with the accounting system before applying loss rates. High-risk, disputed and individually significant balances should receive separate consideration, supported by collection history and subsequent receipts.
Review Estimates, Provisions and Impairment
Management should update assumptions for inventory obsolescence, employee obligations, legal matters, asset useful lives and impairment indicators. Material estimates should be supported by a written calculation and documented approval.
Complete Financial Statement Disclosures
The notes should reflect current-year transactions and conditions. Related parties, judgements, estimates, financial risks, leases, revenue, commitments and subsequent events should be reviewed against the supporting records.
Reconcile ZATCA and Accounting Records
VAT, Zakat and tax-related balances should be reconciled with the general ledger and financial statements. Differences between IFRS accounting treatment and tax treatment should be documented rather than forced into one reporting basis.
Prepare Complete Audit Evidence
Contracts, confirmations, invoices, valuations, board approvals, reconciliations and working papers should be available before fieldwork. Each material balance should have a clear audit trail from the financial statements to the source documents.
Common IFRS Audit Findings in Saudi Arabia
| Audit finding | Typical audit impact |
| Revenue cut-off errors | Proposed adjustment to revenue and profit |
| Incomplete lease accounting | Recognition of omitted assets and liabilities |
| Unsupported credit-loss allowance | Adjustment to receivables and impairment expense |
| Weak accounting estimates | Additional testing and management challenge |
| Missing related-party disclosures | Revision of financial statement notes |
| Unreconciled tax and accounting records | Additional reconciliation work |
| Incomplete supporting evidence | Repeated audit requests and delays |
| Late financial statement revisions | Extended reporting timetable |
What Should Saudi Companies Consider in 2026?
Saudi businesses should continue monitoring new and amended standards through SOCPA’s official accounting standards resources. The review should determine whether each development is currently effective, available for early adoption or relevant only to a future reporting period.
A significant transition consideration is IFRS 18, which replaces IAS 1 and introduces new presentation and disclosure requirements. SOCPA has adopted IFRS 18 for implementation in Saudi Arabia and allows early adoption. Internationally, the standard applies to annual reporting periods beginning on or after 1 January 2027. Companies not applying it early should use 2026 to assess the effect on their chart of accounts, income statement presentation, comparative information and management-defined performance measures.
The Saudi Companies Law requirement to prepare financial statements under standards approved in the Kingdom remains central to statutory reporting. Listed entities must also consider the applicable CMA financial reporting, governance, disclosure and external audit requirements.
Frequently Asked Questions
What Is IFRS Compliance in Saudi Arabia?
IFRS compliance means preparing financial statements in accordance with the accounting framework applicable to the company in Saudi Arabia. This includes the correct recognition, measurement, classification, presentation and disclosure of transactions—not merely stating that IFRS has been followed.
Is IFRS Mandatory for Companies in Saudi Arabia?
Saudi Companies Law requires financial statements to be prepared under accounting standards approved in the Kingdom. The specific framework applicable to an entity may depend on factors such as public accountability, company type and eligibility to apply an alternative reporting framework.
What Is SOCPA’s Role in IFRS Implementation?
SOCPA reviews and endorses international accounting standards for implementation in Saudi Arabia. It also publishes endorsed standards, amendments, updates and national technical guidance relevant to financial reporting in the Kingdom.
What Documents Are Required Before an External Audit?
Typical documents include the final trial balance, general ledger, bank reconciliations, customer contracts, lease agreements, receivable ageing, inventory records, fixed-asset schedules, valuation reports, loan agreements, tax reconciliations, board minutes and draft financial statements.
What Are the Most Common IFRS Audit Findings?
The most common findings involve revenue recognition, incomplete lease accounting, unsupported expected credit losses, weak estimates, missing disclosures, unreconciled accounts and insufficient supporting documentation.
How Early Should a Company Prepare for an External Audit?
Material contracts and judgemental accounting matters should be reviewed before year-end where possible. The complete pre-audit review should be finished before the final trial balance and draft financial statements are submitted to the external auditor.
How Can Pre-Audit Services Improve IFRS Compliance?
Pre-audit services help management identify technical accounting gaps, complete reconciliations, review financial statement disclosures and organise audit evidence. This can reduce avoidable adjustments and make communication with the external auditor more efficient.