Audit: What it means in finance and accounting, 3 main types

Audits are unavoidable tasks for a business when HMRC orders. It can be a choice for others who want to stay compliant with government regulations and maintain accuracy in business accounts and finance. Therefore, every business, irrespective of size and type, must understand audits or look for professional advice before conducting their first-ever audits.

This comprehensive guide will cover everything about the audit in business, its importance in finance and accounting, and its types.

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Table of contents

●  What is audit in finance and accounting?
●  What do auditors do?
●  Difference between internal and external audits
●  7 main types of audits
●  Conclusion

What is audit in finance and accounting?

An external audit in a business is the examination of a company’s financial statements and accounting books, checking for compliance with the company’s accounting policies, government regulations and accounting standards.

For example, an auditor may walk into your business and check your financial statements that reflect the organisation’s financial position. Are the details on what is owned and owed by the organisation recorded correctly in the balance sheet? Or are the profits and losses properly assessed?

However, you don’t need to perform an external or statutory audit in a business that follows either two of the following there criteria for exemption.

●  Annual turnover is £10.2 million or less
●  Gross assets worth are £5.1 million or less
●  The number of employees is 50 or less

But, if the investors and stakeholders ask for an audit, you must conduct one.

Audits can be performed by your business employee, known as internal audits. However, there are specific audits that HMRC mandates the need for an external auditor.

What do auditors do?

Auditors discuss with the directors or owners of a company the scope of the audit work and if additional procedures are required. External auditors refrain from having any relation with the organisation and prepare an unbiased report.

●  They can ask various questions to determine the type and scope of the audit procedures they need to perform.
●  They examine financial and accounting records, other documents and tangible items like equipment to determine risks and identify internal control measures.
●  They make judgments on significant estimates or assumptions depending on the financial report the management produces.
●  They may obtain written confirmations on some issues, like asking a debtor to confirm the number of their debts with the company.
●  They test some of the internal controls established by your company to assess their effectiveness and operation
●  They observe different processes and procedures performed in your organisation
●  And finally, they issue an audit opinion

Difference between internal and external audits

An employee of your business with auditing skills and relevant experience can perform internal audits. such audits are usually process or department specific and more concerned with compliance with internal controls.

Statutory or external auditors perform external audits. These are statutory requirements and are mandatory for certain companies, like banks, insurance companies, listed companies, etc. Certain investors, stakeholders, and regulators trust an external auditor’s report rather than internal control reports. It is because such auditing firms or individuals work independently and have no personal relationship with the organisation, thus offering unbiased, accurate reports.

The 7 main types of audits performed in the UK are:

●  Financial audit
It refers to evaluating the company’s financial accounts and statements to ensure that the accounts have been appropriately prepared, follow accounting standards and present a fair representation of the company’s financial position.

●  Compliance Audit
It refers to the detailed reviewing of business and organisation’s processes and systems to check if they comply with specific regulatory guidelines.

●  Operational Audit
It refers to the evaluation of how an organisation conducts its business, aiming to improve the efficiency and effectiveness of an organisation’s procedures.

Other types of audits include:

●  Tax audit
It checks if all information on your tax return and the amount of tax paid to HMRC is correct.

●  Construction audit
It is performed for specific construction projects to analyse different financial aspects, including the price paid, overhead costs, reimbursements amounts, etc., to ensure the cost incurred in the project is reasonable.

●  Information system audit
It refers to examining the controls over software development, data processing and access to computer systems to spot issues that can impact the abilities of IT systems to provide accurate information to users.

●  Forensic audit
It refers to investigating an area where the auditor suspects an inappropriate activity or fraud—for example, an audit to ascertain whether any bribes were given to secure commercial contracts.

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Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 983 8100
Monday to Friday 9am – 4:30pm

Conclusion

It is always good for companies to perform audits once every year, even when they are exempt from auditing. And if the audit notice is from HMRC, you can never avoid it or pay heavy penalties.

Auditing may seem complex and time-consuming, but it ensures your business complies with industry standards and government regulations. Plus, you can look out for potential risks and make better plans with the feedback obtained from the evaluation. However, an experienced auditor can help you get through the process and complete them early.

Experlu Editorial Team
The editorial team at Experlu is comprised of seasoned financial professionals dedicated to providing high-quality content on accounting and finance. With a wealth of experience and diverse expertise, the team produces insightful articles that have established the Experlu blog as the UK's leading financial and accounting resource. The team includes accountants, auditors, and business advisors who stay updated with the latest industry developments. Their commitment to excellence ensures that Experlu remains a trusted source of information, helping readers stay informed about audit, business, finance, and tax matters.