Why small businesses need an auditor?

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Anyone running a small business knows there’s more to it than just thinking of ideas and ranking in cash.  

For a small business, it is also important to have a handle on the numbers and to make smart financial steps.

Though doing numbers yourself sometimes end up in penalties.

So, in some cases, it is a better decision to get the help of auditors and accountants in more complex financials.

Audited financial statements carry a higher degree of credibility among investors and lenders. Some companies, by law, are required to audit their accounts, and others do voluntarily to increase the credibility and reliability of the data.  

There are many audit types, like external audit, internal audit, tax audit, forensic audit, compliance audit,  value for money audit. However, in this blog post, we will be focusing on the External audit, popularly known as a statutory audit. You can check our blog post Business Audits – a Guide for Your Business

This blog post is divided into the following sections

Who is an auditor?
Why your small businesses need an auditor?
Are there any benefits of having an audit?
What do auditors provide after the audit?
Types of audit opinion
What should your small business do with the audited accounts?
Is an auditor only concerned with a small business’s annual accounts?
Can my accountant be my auditor?
What and who are recognised supervisory bodies?

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Who is an auditor?

Generally, an auditor is an individual appointed by a business for an independent analysis of their financial statements and accounting records and issues a report about the reliability and accuracy of financial statements on the basis of laws and regulations.

The report submitted by an auditor will say whether the company’s accounts give a fair and true view.

The auditor will also check if the information provided in the company director’s report is consistent with the annual accounts.

And if, in the perspective of the auditor, the director’s report or accounts does not comply with the Companies Act, then the auditor will say so in the report.

Why your small businesses need an auditor?

Two questions arise at this time,

1. Must all businesses need to be audited?
The short answer is no! Why?

Because there are several exceptions and if a small business qualifies for the exemption and want to take advantage of it.

Several dormant companies, micro and small businesses, do not have to have their accounts audited.

However, the following companies are by law required to have an audit.

● public company 
● a subsidiary company (unless it exempt)
● an insurance company or a company carrying out insurance market activity
● banking company
● electronic money (e-money) issuer
● MiFID (Markets in Financial Instruments Directive) investment firm
● UCITS management company
● its shares traded on a regulated market
● funder of a master trust pensions scheme
● special register body
● pensions or labour relations body

2. Are all types of small business eligible for the exemption?

To qualify for the exception, your business must meet 2 out of the 3 requirements, applying either net or gross thresholds.

RequirementNet ThresholdGross Threshold
Turnover≤ £10.2 million≤ £12.2 million
Balance Sheet Total (Total Assets)≤ £5.1 million≤ £6.1 million
Number of Employees≤ 50 employees≤ 50 employees

Even if your company is exempt from an audit, shareholders holding 10%) or more shares, jointly or individually, can demand an audit.

Are there any benefits of having an audit?

Once your business meets specific criteria, it is a legal requirement to have your business accounts audited.

Improves control environment
One part of audit procedures is to rely on the management’s internal control regarding finance function. Auditors can identify gaps and improvement in the overall control environment.

Identification of fraud
While performing an audit, a small business auditor might encounter fraudulent situations.

In such cases, an auditor may be helpful to identify some offence equivalent to the fraud that has been committed against your small business.

However, external auditors are not responsible for detecting and preventing fraud in an organisation.

Help in optimising business processes
By conducting audits, your auditors show areas in which your small business is able to prove its processes and streamline them.

Fewer steps mean less room for error. Thus by removing an error with the help of an auditor during an audit, you can improve productivity.

Ensure the accuracy of financial statements
Actually, an audit can be favourable to your business.

By conducting an audit, an auditor assures investors that all the books are accurate and that you’re doing everything you should be.

This is how Investors both will feel more confident about their investment and their chances at growing and recouping their investment.

What do auditors provide after the audit?

An auditor provides an audit opinion in their report regarding your business’s financial statements to its shareholders. Financial statements typically include the balance sheet, the income statement (or profit and loss account/ statement of comprehensive income), cash flow statement, statement of changes in equity and notes to the accounts.

The report provided by an auditor can enhance the credibility of the financial statements as it provides reasonable assurance that the financial statements are showing fair information of the company’s state of affairs and are free from material misstatements.

Further, this assures that the report has been prepared by auditors by taking into account the accounting and auditing standards.

Here is how a typical audit report looks like for an entity preparing its financial statements under the International Financial Reporting Standards (IFRS).

Types of audit opinion

There are four types of audit opinions.

Unqualified opinion- clean report
The unqualified opinion is the one that concludes that a business’s financial statements present its affairs fairly in almost all the important aspects.

Also, it states that your small business complies with all the necessary statutory requirements and Generally Accepted Accounting Principles (GAAPs).

Qualified opinion
On the other hand, a qualified opinion concludes that your small business has dealt with most issues except for the few ones, and under this, auditors give an adverse opinion related to the business’s financial statements.

Auditors give such an opinion when they are unable to provide an unqualified opinion about a specific topic, say, for example, the value of inventories, or lacking disclosures. Investors can see the negative report with suspicion; however, it depends on the reason. A qualified opinion is usually accompanied by its reasons and details

Disclaimer of opinion
This means the auditors are distancing themselves from providing any opinion at all. It is not the usual type of opinion and will undoubtedly raise eyebrows among the users of the financial statements.

Adverse opinion
This is where auditors believe that the financial statements are not free from material misstatements. Adverse opinions are rare as they put the business in a negative light and raise a big red flag regarding its financial affairs.

What should your small business do with the audited accounts?

Audited accounts of your small business must be sent to Companies House annually.

Companies House publishes audited accounts publically so that the stakeholders of your business, including other businesses with which your company trades, can decide whether they wish to do business with you or not.

Is an auditor only concerned with a small business’s annual accounts?

The short answer is yes!

Though, you can hire an auditor for other purposes, such as for keeping your small business books or compiling your tax return, provided your tax auditor does not take part in the management of the business.

Can my accountant be my auditor?

An auditor must not be part of the management of your small business, and that’s why an individual cannot be appointed as an auditor if:

● They are  an employee or officer of your business or an associated company
● They are a partner in the business

If the accountant does not fall into any of the categories mentioned above and if they have a current audit-practising certificate issued by a recognised supervisory body, then they may act as the company’s auditor.

Are you a small business owner? Do you think you need an accountant – confused!! No worries, check our blog post, “Do I need an accountant for my small business” to clear the confusion.

What and who are recognised supervisory bodies?

Below are the bodies recognised by the Secretary of State as having the rules designed to make sure that auditors are of the highest professional competence.

Each body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The 5 recognised bodies are:

● The Institute of Chartered Accountants in England and Wales (ICAEW)
● The Association of Authorised Public Accountants (AAPA)
● The Institute of Chartered Accountants of Scotland (ICAS)
● The Association of Chartered Certified Accountants (ACCA)
● The Institute of Chartered Accountants in Ireland (ICAI)

Hire an Auditor For Small Business

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

Final thought

Small business owners usually cringe at the mention of an audit. Regular auditing of internal controls is the only way to make sure that all the financial statements are accurate and that there are not any discrepancies. And that’s why having an auditor for a small business is most beneficial.