Among other things, the success of a business depends on profitable business operations, effective internal controls and processes, and the dissemination of credible information to investors, shareholders, governing bodies and regulators.
It means any material misstatement or error in your business process can affect the overall organisational functionalities. An auditor saves you from these difficult times by identifying risks and areas of improvement beforehand.
This guide will help organisations know the need for an auditor and when to employ them.
Table of contents
What is an auditor?
It is not always true that auditors are individuals responsible only for examining financial records to form an opinion about the fairness presented within the organisation’s financial statements. Audits, in a broader sense, is a process of making an opinion or giving a conclusion to business processes, transactions, or other information compared to a specific standard or criteria.
Types of auditors
There are mainly two types of auditors:
● Internal auditors
These individuals are usually employees of your company, and as a part of their duty, they must audit specific processes and controls within the company.
● External auditors
These are independent auditors offering professional audit services when asked by the board of directors, shareholders, investors and regulators. The opinion and recommendations of the external auditors are highly valued as they have no personal or financial connection with the company and can offer unbiased reports.
How do auditors assess and manage risks in business?
Internal auditors check whether internal controls are effective, and sufficient to manage material risks.
The evidence on file should help another professional internal auditor to examine your processes and arrive at the same conclusions and opinions. When an external auditor walks into your business, you must hand over the internal auditor reports and findings for their understanding.
Performing audit risk assessments
The key to a successful audit is not just to depend on checklists but to adopt risk assessment approaches. The external auditor must understand your business risks, determine the audit plan, and then conduct appropriate tests for risk assessment.
The latest technologies have automated the risk assessment process, finding low to high-level business risks and helping the auditor prioritise high-risk areas.
For risk assessment, auditors need to understand the complexity and scope of the audit, the government regulations and Industry standards related to the organisation, financial implications, and future plans.
The risk assessment process is conducted by discussing with the management, reviewing and analysing budgets and proposed internal systems, and systematically evolving risk factors within the organisation. Depending upon the result of the risk analysis, a proposed audit plan is presented by the auditor to the senior management team for review and approval.
The role of auditors in an organisation includes comparing their findings with the documents presented to ensure you abide by the correct processes and policies.
Auditors consider the nature of control, whether this is manual or automated, and if the internal controls are dependent upon the skills and expertise of a particular individual(s). Over-reliance on individuals may result in key person risk to the operation. Therefore the auditors consider whether the organisation has taken proper steps to mitigate additional risk factors.
The audit fieldwork includes reviewing job responsibilities, validating supporting documents, testing transactions, verifying and confirming balances, evaluating the efficiency of business operations, and more. After the audit test procedures are completed, the auditor can develop opinions and recommendations.
The scope and procedures of the audit, a summary of the auditor’s findings, associated risks, recommendations for improvements, management responses to the findings, and proposed action plans are all drafted on a final audit report. A preliminary copy of the report is submitted to the higher management for reviewing and signing before issuing them.
You can request a quality assurance program to validate the audit reports. Assurance programs improve business credibility, ensure your internal controls and processes are in place, follow government regulations and industry standards, and are free from material misstatement, fraud, and error.
However, auditors responsible for assessing risk management processes should not play a role in developing these processes. Similarly, when they are responsible for providing assurance on risk management, they should not be involved in deciding whether these assurances are adequate.
When do I need an auditor?
Most businesses operating in the UK need to do an external or statutory audit on their annual company accounts every year unless they are eligible for exemption.
Companies obliged to have an audit include:
● A public company, unless it is dormant
● A subsidiary company, unless it is part of a large group qualifying for an exception
● An authorised insurance company or an organisation carrying out insurance market activity
● Businesses involved in banking or issuing electronic money.
● A MiFID investment firm (Markets in Financial Instruments Directive) and UCITS management company (Undertakings for Collective Investment in Transferable Securities)
● A corporate body trades its share on a regulated market in a European state.
Additionally, any company that doesn’t comply with two of the following thresholds must do an audit.
● An annual turnover of £10.2 million or less
● Net asset worth of £5.1 million or less
● The total employee working is 50 or less
If you are a small company but are part of a large organisation that isn’t eligible for audit exemption, you are not as well, even after complying with two of the above thresholds.
Any company exempted from the audit may need to perform audit processes if asked by their company’s Article of Association, shareholders, investors, and regulators.
Under all these situations, you must employ an auditor for a high-quality audit service.
An audit is a systematic process of examining your financial records, business processes, and company accounts. They check all relevant documents to find evidence for validating the numbers mentioned on your financial statements.
During these tests, auditors, with their knowledge and expertise, can easily identify frauds and potential risks in business. Audits may sound daunting, but when properly and regularly done in business keeps you free from material misstatement, errors, financial uncertainties, and fraudulent activities.