Audits can be an intimidating process for young businesses. But the UK government mandates every company to do an audit unless they are eligible for exemption. Organisations need to prepare for an independent audit of their financial records every year to verify the accuracy of those records and ensure a fair representation of the business’s state.
If you are planning for a smoother process with less stress, preparation is the key to a successful audit. This comprehensive guide will help you with the audit preparation; read on.
Table of contents
What is an audit?
An audit refers to evaluating your business records to ensure the financial statements show a true and fair view and the accounting processes meet government regulations.
You are bound to prepare for an audit if you breach two of the following thresholds:
● Company turnover is £10.2m or less
● Net asset worth is £5.1m or less
● The number of employees working is 50 or less
Even if your company is below these thresholds, it needs to prepare for an audit if it is part of a group which breaks two of the above thresholds. Additionally, sometimes the company’s article of association or the shareholders, investors and regulators will require an audit. Therefore, even small companies eligible for exemption may require an audit.
There are mainly two types of audits companies operating in the UK perform: internal audit and external audit. An independent external auditor or an audit firm executes external audits. They offer unbiased feedback and reports, as no conflicts of interest exist.
Then comes internal audits, which employees of the company being audited perform. Their reports are rarely used externally and are mainly used for internal purposes.
Lastly, there is the HMRC audit, where HMRC focuses mainly on a tax audit on your business when they find certain inconsistencies in tax payments or on tax returns. They ask for an audit to ensure the prepared financial statements don’t misrepresent the company’s finances. Therefore, you must know how to prepare tax audits or hire tax advisors to handle them.
What is the importance of an audit?
An audit can be daunting but essential for companies who want to maintain transparency, trust and efficiency within their market. Without auditing, there remains a chance of misstatement in financial records making your business appear more profitable or successful than it is and triggering HMRC investigations.
Additionally, investors and stakeholders use an audit report to decide whether your business runs according to accounting standards. The stakeholder decides whether to engage with your company depending on the financial statement information.
When external auditors look into your financial records and potential risks, internal auditors may have a broader view of your business processes and consider your financial reporting and compliance-related processes. The overall auditing process examines whether you are correctly handling sensitive data and identifies issues that can affect your productivity.
How to prepare for an audit
As a company owner, keeping an eye on raising capital, generating revenue and scaling the business is mandatory, and a financial audit may be the farthest thing in their mind. Eventually, however, many organisations must prepare for an audit as soon as they reach the abovementioned audit thresholds. Here’s how to prepare an audit for the first time.
1. Plan ahead
The most important step to preparing for an audit is planning ahead. It can take from weeks to even months to plan properly, depending on the complexity of the financial records. It includes
● Allocate additional resources to the audit planning process
● Try to keep your records updated throughout the fiscal year to elevate pressure during an audit
● Review the list of auditors’ requirements
● Assign responsibilities to capable team members and give them a due date.
● Prepare all your paperwork.
● Organise the data for the auditor’s arrival to finish the process quickly with minimum disruptions.
2. Understand your accounting standards.
Accounting standards, including legal and regulatory requirements, constantly change, affecting organisation processes and year-end audits. The government updates them anytime; therefore, businesses and their relevant team members must familiarise themselves with the change. Staying on top of new industry standards saves time and effort, ensuring your financial records are compliant.
3. Reconcile all accounts for the year.
Before an audit, ensure all your accounts are clear, which involves paying bills, due employee expenses, and collecting invoices. It gives you accurate projections and analysis during the investigation.
Prepare documents that are mainly needed for audits, like
● Basic accounting records
● Representation of structure and ownership of the company
● All year-end bank statements and reconciliations present for that period
● List of creditors and debtors
● Balance sheet breakdown with invoices to prove items, including prepayments, accruals and fixed asset additions
● Payroll records
● Hiring, purchasing and leasing agreement
● Stock report
● VAT returns and workings
● Copies of any meeting held during the assessed year
● Any modified information in share ownership
4. Identify changes in business
A few questions need to be answered before the year-end audit, like how the business’s financial situation changed from the previous year. Is there more revenue coming into the business? Have your company received grants or government support over the last 12 months?
You must also consider any non-financial changes in the company, like, Have your business’s internal control systems been altered or new processes introduced? You must be aware of all these things that can directly or indirectly affect the financial findings for the year.
5. Be proactive
If the auditor requests a list of items to review that you don’t understand, ask them beforehand to avoid unnecessary delays once the audit starts. Talk with professionals like accountants or those you rely on for specific details to complete the audit process.
If you are stuck with business core activities and preparing for an audit is getting complicated, look for accountants to handle your company’s accounting taxes and financial reports. They can take over the paperwork, cross-check data, submit annual reports, pay correct taxes, etc. These professionals ensure your auditing process gets over faster and smoothly. Plus, you don’t have to waste valuable time preparing for audits.