An audit is an investigation conducted by an independent party into a company’s financial report. The aim of an audit is to provide assurance (different from a guarantee) that the financial statements are true and fair according to the relevant financial reporting framework. There are typically three types including Financial Audit, Compliance Audit, and an Operational Audit.
This is typically the most common type of audit. A financial audit is an evaluation of a company’s financial accounts. This is designed to provide assurance that the accounts have been prepared properly and whether they show a fair representation of the organisation’s financial position. This is normally completed by an external independent, audit firm.
A compliance audit is a detailed review of whether your business or organisation is complying with specific regulatory guidelines.
This is a review of how your organisation conducts its business. The aim of this type of audit is how to improve your organisation’s efficiency and effectiveness.
Is it compulsory to have an audit?
All companies above a certain size are required by the Compliance Act to have a financial audit (known as a statutory audit). However, the following companies must have an audit, irrespective of size:
- A public company (unless it’s dormant)
- A subsidiary company (within a group which is not small)
- An authorised insurance company or carrying out insurance market activity
- Involved in banking or issuing e-money
- A Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
- A corporate body and its shares have been traded on a regulated market in a European state.
For periods commencing on or after 1 January 2016 your company is exempt from an audit if you meet two of the following:
- Annual turnover of no more than £10.2 million
- Gross assets of no more than £5.1 million
- 50 or fewer employees on average
What is the purpose of a financial audit?
The purpose of an audit is for a qualified independent party to examine your financial reports. This an objective evaluation by a professional who will determine if the financial report has been presented fairly according to the accounting framework. In some cases, a clean, unqualified report can enhance your businesses credibility with lenders, creditors, and investors.
The audit process
Every audit is unique but the following is a list of some typical steps that are often taken:
- The company or organisation prepares its financial report in accordance with the appropriate legal and financial requirements.
- The auditor will gain an overview and understanding of the company and consider any external factors that could have impacted the business in the reporting period.
- The auditors will look at the financial information and identify, consider, and assess any risks. They will also investigate the infrastructure of the company to see what protocols they have in place to mitigate those risks.
- Once risks have been identified the auditor will examine the financial report considering these risks to ensure the report is accurate.
- The auditor will use their knowledge of your business and the areas of risk to direct their approach.
- The audit will perform tests of the financial information supporting the financial report and issue an opinion as to where the financial report is accurate.
What are the advantages of an audit?
- Provides reassurance to directors and shareholders and after stakeholders that financial statements are materially correct.
- Identifies weaknesses with the accounting process and recommend ways to improve.
- Auditors will make you aware if there are any changes in accounting standards and tax legislation to make sure you are prepared ahead of time for this.
- For some lenders, an audit can often be a requirement. An audit can sometimes improve your chances of being accepted for a loan application.
- An audit provides reassurance to customers and suppliers that your finances are in order.
How can we help?
An audit can provide your business with numerous benefits. If you are considering having an audit please do get in touch for a free initial meeting or visit our audit page for more information. Hawsons have offices in Sheffield, Doncaster, and Northampton. We have an established reputation for integrity and professional competence of which we are proud and committed to maintain. Our team of audit experts is fully trained on the latest developments in Auditing Standards which is becoming an increasingly specialised area.