According to the UK government, businesses operating in the UK are responsible for preparing annual financial statements with valuable insights into the company’s operating results and financial position to HMRC.
These financial statements are not only presented to the regulators but to shareholders, investors and the public if needed, but there can be a lack of credibility or hard-to-believe numbers.
To eliminate trust issues, limit frauds and potential risks, and ensure financial transparency, auditing in business is helpful.
Internal auditors can perform audits, but the reports produced by external auditors hold more value, and under certain conditions hiring them for your audit is a must. This article reveals the importance of an independent auditor for your business.
Table of contents
● When do I need an external auditor?
● What is an independent auditor?
● How do independent external auditors ensure financial transparency?
● What are the benefits of an independent auditor?
● Conclusion
When do I need an external auditor?
External audits are essential for UK-based businesses with an annual turnover of more than £10.2 million, a net asset value of above £5.1 million, and employees above 50.
There’s an exception to the rule; when a company breaks two of these thresholds, they get an audit exemption. These are performed by external auditors.
Additionally, if your company is part of a large company legally bound to do an audit, you must also get it done.
At other times, an external auditor is hired in the company when the management team, shareholders or investors, and your article of association asks for an audit.
What is an independent auditor?
Auditor independence refers to their impartiality and objectivity in performing business audits, which is free from conflicts of interest and biases. An independent audit produces unbiased reports that build public trust and reputation.
An independent auditor has no personal or financial interest in your business or is not connected to someone who can take advantage of an audit. They are more experienced and knowledgeable than internal auditors in most cases.
Rules followed by independent external auditors
● Meet ethical standards to ensure impartiality and objectivity in the audit process.
● Have no financial interest in the company they are auditing
● Avoid any close relationship with business clients that can compromise quality and impartiality
● Avoid situations that might raise doubt about the auditor’s integrity
● Must follow professional standards to maintain their independence
Responsibilities of an independent auditor
● Examining financial statements to find material misstatements, frauds or errors
● Performing an audit on business processes, operations, and accounts
● Reporting on their audit findings, giving opinions and recommending improvement
● Plan effective auditing processes
● Inspection of Internal procedures and controls
● Assess risk mitigation programs
How do independent external auditors ensure financial transparency?
External auditors are responsible for independently assessing your business financial statements and disclosures. They perform procedures to gather enough evidence to express an opinion.
● Planning the audit
An external auditor can speak with you and your team to clearly understand your business operations and look out for areas that require an audit. Depending on their understanding, they draft a thorough plan on where and how to conduct the audit, mainly focusing on the company’s financial statements.
● Performing audit procedures
The auditor must perform numerous processes to identify the risk of material misstatement or fraud in the company. It includes reviewing financial statements, company accounts, past reports, tax returns, accounting systems, and a few other necessary documents. By doing these, they reduce the dependence on inaccurate or incomplete information.
● Evaluating audit findings
Independent auditors will access the internal controls and processes to identify if they can mitigate the potential risks or aren’t working properly and need improvement. Auditors look into the evidence supporting transactions, controls and related information on a test basis and draft a result based on the evidence obtained on a judgement basis.
● Creating reports
Auditors must communicate their findings, observations and recommendations and prepare an unbiased audit report. These can be submitted to shareholders, investors and regulators.
As an independent auditor has no personal interest in your company, they can conclude the real financial scenario of your business without any manipulations.
Their reports clearly state any issues, deviations from accounting policies or material misstatements within an organisation, measures taken to mitigate risk, and whether the internal controls and functions work. Additionally, their opinion can help you make a better business plan, win investor trust, look into the loopholes and find ways to mend the gaps in the system.
What are the benefits of an independent auditor?
As listed below, there are numerous benefits of hiring an independent auditor for your annual audits.
● Ensure high-quality financial reporting
The external auditor examines your financial reports and validates the number by considering necessary financial documents. They ensure your financial statements are free from material misstatement and give an accurate and fair view of your business financials. Thus it increases confidence in the financial reporting process and allows shareholders to make informed decisions.
● Protect your potential investors
The audit reports help investors get a deep insight into the accurate view of your business’s financial health, helping investors make sound decisions and prevent financial crimes. In return, it increases your chance of getting financial support.
● Adds credibility to financial statements
Independent auditors have no personal or financial interest in your company, and the audit reports will have no way to impact them otherwise. Therefore, they can prepare unbiased reports that add credibility to the financial statements, helping you access capital markets and secure funding.
● Increase public confidence
The independent audit report assures the public that your financial process is transparent and trustworthy. Thus it helps in maintaining public confidence and building a reputation.
● Ensure regulation compliance
Government regulations and industry standards keep changing regularly, making it difficult for companies to cope with these changes, and they are highly exposed to compliance risks. However, external audit reports help you comply with these regulations and ensure financial information quality and reliability.
Conclusion
Auditors find it challenging to examine every transaction due to a lack of time or making the process expensive. Therefore, the audit reports offer a reasonable assurance and are not absolute; there remains a chance of material misstatement.
But, in most cases, they ensure financial transparency and effectively execute quality audits that contribute to increased reliability in your business.