Managing risk through audit services

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Audits for most companies operating in the UK are a must unless you qualify for an exemption. It may sound daunting, but audit has numerous benefits, and risk identification and management are notable.

Risk is inevitable in any business, but the more aware and prepared you are, the better opportunities you get to minimise the detrimental and costly outcomes. Audit plays a supporting role in your management team in risk mitigation and fraud detection. This article will guide you on risk management with audit services.

Table of contents

●  What is an audit?
●  When does my company need an audit?
●  How to manage risk with audit services?
●  Conclusion

What is an audit?

The word audit is derived from the Latin  Audiere, meaning “to hear”.  In ancient times, auditors used to report on data accuracy based on oral representations. This role has evolved over the centuries. Modern 21st-century auditors typically report on both verbal and written data.  

Depending upon the type of audit, the external audit’s primary purpose is to verify the underlying transactions and events to express an audit opinion. In contrast, an internal audit concerns the entity’s internal controls.  

Auditors offer a broader range of audit-related services using specialisations, financial knowledge, and analytical techniques to get an in-depth understanding of your company and its operations.

An external audit reassures shareholders and investors that the financial statements are materially correct. They look for weaknesses in the accounting processes and recommend your team improve in particular areas to generate revenue and eliminate potential risks. Additionally, they inform you of any changes in government regulations and accounting standards to ensure you are prepared beforehand.

For some lenders, an audit is essential and improves your chance of getting a loan sanctioned. Such reports assure consumers and suppliers that your finances are in order.

An audit ensures the following:

●  Enabling regular and thorough risk monitoring
●  Helping businesses and the boards to comprehend different risks an organisation can face and their impact scale
●  Allowing company owners to decide which risk mitigation action to prioritise
●  Enhanced control over risk management plans and possible threats
●  Constant enhancement of the risk mitigation programs
●  Offers an ability to make sound business decisions with a thorough understanding of the potential risks.

When does my company need an audit?

The company determines the frequency of the internal audit. Whereas external audits are performed once a year.

All UK-based companies are legally bound to audit their company accounts annually unless you are eligible for exemption. To qualify for audit exemption, you need to fulfil any two of the following conditions:

●  Annual turnover is £10.2 million or less
●  Gross asset worth is £5.1 million or less
●  The net employee working in the company is 50 or less

However, if your company is part of a large group that doesn’t meet any two of the above thresholds, you must take an audit.

Furthermore, it is necessary if shareholders, regulators, or investors ask you to submit an audit report.

An audit is compulsory for the following companies:

●  A public company (that is operational)
●  A subsidiary company within a group which is not small or qualifies for an exemption
●  An authorised insurance company or conducting Insurance market activity
●  The company involved in banking or issuing e-money
●  A MiFID investment firm (Markets in Financial Instruments Directive) or UCITS management company (Undertakings for Collective Investment in Transferable Securities)
●  Any corporate body whose shares have been traded on a regulated market in a European state

How to manage risk with audit services?

Risk management refers to identifying, assessing and controlling threats to your business, capital and earnings. It can arise from financial uncertainties, legal liabilities, strategic management errors, technology issues, fraudulent activities, etc.

Therefore, instead of considering only the monetary significance, management and auditors must focus on the company’s reporting, operations, legal and regulatory compliance and reputation impacts.

Often the internal audit report can have biased outcomes. Therefore, consider inviting a third-party auditing service London for a better understanding of the risks and threats to your organisation.

An auditor performs different tasks, including identifying and preventing material misstatement, examining business operations and finding improvements, determining compliance with government regulations and industry standards, detecting information systems and security issues, etc.

The prioritising risk with a risk matrix
You must prepare a risk assessment matrix in the company to manage risks once reported by the auditor. It includes

●  Identifying risk
●  Assessing the likelihood and significance
●  Checking for red flags
●  Design preventive controls
●  Controls effectiveness assessment
●  Residual risks
●  Risk response

Design an effective risk matrix that illustrates situational awareness and drives corrective action wherever needed.

Implementing a risk-based internal auditing approach
Risk management in an organisation ensures strong corporate governance. With growing pressure to keep businesses safe from fraud and compliance, legal, financial, or business risks, you must have adequate internal controls. It is the best way to prevent undesirable impacts on the business and leverage improvement opportunities.

Risk-based auditing addresses your highest priority risks and reports their insights to the senior management team to make well-informed decisions for the future.

Benefits of risk-based internal auditing

●  Greater risk compliance
Frequently doing financial services audit and considering other risky business areas ensure filling the knowledge gaps and educating staff members to manage risks and control frauds. Furthermore, regular reporting keeps risk compliance constantly on the mind rather than a one-time yearly exercise.

●  Increased knowledge of risk levels
Audits, when framed within a risk management framework, is easy to determine the prioritisation of risks using indicators like risk severity. It helps businesses to understand the level of risks and their impacts and identify areas of improvement to mitigate the risks.

●  Increased adaptability to uncertainty
A change in the economy can force organisations to adjust without warning. Risk-based audits are essential in allowing businesses to adapt consistently to changing conditions and manage risk during such times of uncertainty. It enables you to forecast emerging risks and stay prepared to handle them.

Conclusion

Audits play a vital role in successful businesses as it ensures risks are managed, and financial data is free from material misstatements. It helps build trust and reputation in the market, manage risks before they harm your goodwill, and numerous other benefits. Speak to an expert if you are unsure how audit is vital for your business and how to get it done.