Starting a business is challenging, but keeping your business running on the right track under any condition is a struggle. Audits can be one such struggle for any business.
It is a part of the business which can save you from closing your shutters. Auditing is all about reviewing your company accounts to check if the business maintains correct financial records and completes its financial reporting per government regulations.
Small businesses need not worry about audits, but it becomes mandatory as the business expands. Why? The huge transactions and operations in large companies don’t ensure transparency. Thus, it results in overlooking mistakes on tax returns or accounting books and invites investigations.
This blog post will cover everything about audits in a company.
Table of contents
Does my company need an auditor?
Before wondering whether you need an auditor, let’s understand what audits are.
Audits are an auditor’s inspection of accounting records, followed by inventory checking and ensuring financial reporting is compliant. It also ascertains the accuracy of the financial statements offered by your company. Common types of audits include internal and external audits, tax, financial, data, compliance, and payroll audits.
Your company may need mandatory audits under certain conditions. However, many private companies are exempt from audits and can ignore hiring auditors.
Why do I need an audit?
The primary reason to have an audit is to stay compliant with regulations. Even exempt organisations voluntarily look for audits to give an extra layer of confidence in their business procedures and preparing financial statements.
● Imparts confidence among investors or shareholders
An audit can bring confidence among your investors and shareholders, ensuring the company operates according to regulations and is financially stable.
● Improve business operations
When a company receives an audit report in hand that highlights your business procedure weaknesses, you get an opportunity to improve and Implement better processes.
● Signs of risks and opportunities
Auditing shows the warning signs of financial vulnerabilities in your company, along with opportunities that can help your business grow.
Companies that must have an audit at any time in the financial year are
● A public company
● A subsidiary company
● An authorised Insurance Company
● A company carrying out insurance market activity
● Businesses involved in banking
● An issuer of electronic money
● A MiFLD (Markets in Financial Instruments Directive) investment firm
● A UCITS (Undertakings for Collective Investment in Transferable Securities) management company
● A corporate business and its shares have been traded on the regulated market
● A funder of a master trust pensions scheme
● A special register body
● A pensions or labour relations body
If your business turnover is more than £10.2 million, your total asset worth is more than £5.1 million and has more than 50 employees; you must conduct an audit once your financial year-end date crosses.
Read our guide: History of Audit in UK
When do I not need an auditor?
The UK government offers exemption rules for private companies when they don’t need an auditor. However, if articles of association say getting an audit is mandatory, you must do it.
Here is when you don’t need an audit
● If the financial years beginning on or after 1 January 2016
You may qualify for an audit exemption if your business covers at least two of the following:
1. An annual turnover of £10.2 million or less
2. Your assets don’t worth more than £5.1 million
3. You have 50 or fewer employees on average
● If the financial use begins between 1 October 2012 and 31 December 2015
Your company can qualify for an exemption by following at least two of the criteria:
1. Annual turnover of £6.5 million or less
2. Assets must not be above £3.26 million
3. Businesses have 50 or fewer employees on average
● If the financial use begins before 1 October 2012
Your company may qualify for audit exemption if they fulfil both the criteria:
1. Annual turnover not exceeding £6.5 million
2. Assets costing not more than £3.26 million
However, if the shareholders owning at least 10% of your shares ask you to get audits, even when your company is usually exempt, you must get your accounts audited.
Read also: Managing risk through audit services
What does an auditor do in the company?
An auditor uses different processes to find evidence that the financial statements are free from material misstatements and follow relevant regulations and accounting standards.
The auditors in a company have the right to access company books and accounts at all times. They may also ask an officer, employer or someone accountable for explanations while conducting the audit.
Though the auditing process for individual companies is different, statutory audits take a few similar steps.
1. Auditors will first ask for general company information to understand your primary business activities and operational procedures.
2. They determine the areas of business that need extra attention or are more risky, like revenue, purchase, stock, fixed assets, tax, cash, loan accounts, or payroll.
3. They evaluate the inaccuracies in business procedures and assess internal controls to mitigate such risks.
4. Auditors create an audit plan depending on the potential risks and consider various tests conducted on company data.
5. They carry out a range of tests, like taking a sample of your financial documents, checking internal reviews, looking for approved signatures, checking data stamps, and a few others.
6. After completing the tests, the auditors will discuss the results and findings with the company.
7. The auditors produce a formal audit report and present it to the shareholders at the annual general meeting for approval.
8. Finally, you can submit the report to HMRC and Companies House.
Audits can seem daunting; hiring the right auditors in business can make the process more transparent and easily understood. If you are doing audits for the first time or are unhappy with the current auditor, look and compare third-party auditors.