Auditing. A word that often brings fear to business owners and managers. But it doesn’t have to be that way. Auditing is feared because it is not well understood so our focus this month is on giving you a quick guide to auditing to dispel that apprehension.
What is an audit about?
An audit is a check of financial records to ensure that they are providing a fair and true statement of an organisation’s financial statements. This can provide reassurance to investors, shareholders, and stakeholders and give them a picture of how the company is performing. It is particularly useful for companies that have grown over time and to give new investors or shareholders coming in a clearer picture of the company’s history and its performance.
Is an audit mandatory?
Not for all companies. For those listed on the stock exchange it is, while for private companies it will be determined by the company’s constitution – in other words the articles of association it has put in place – and certain thresholds. Any organisation can choose to undertake a voluntary audit as a way of identifying areas for improvement or success. Small companies are typically exempt from audits. The thresholds changed in 2016, categorising small companies as those with fewer than 50 employees, and with a turnover of less than £10.2 million and assets of less than £5.1 million.
Who will perform the audit?
An independent auditor will do the work, someone who has no interest in the company – financial or otherwise – and who is a member of the Institute of Chartered Accountants of England and Wales (ICAEW).
The five stages of an audit
Companies will typically prepare their accounts either using the UK Generally Accepted Accounting Policies (UKGAAP) or the International Financial Reporting Standards (IFRS). This way, accounts are relatively standardised. An auditor will use those and identify those entries which are considered to be ‘material’ – in other words, those that would have an influence on decision-makers when acting on the findings of the accounts.
There are five main stages to an audit:
- Planning: This is the first step, where an auditor and client agree to work together, a timetable for the audit is prepared and a programme of work compiled.
- Assessment of risk: The second stage involves identifying those areas where it is considered that there may be risks to the business so that they can form the bulk of the work going forward.
- Audit strategy: With those risk areas identified, the next step is to design the tools and tests that will be used to test them.
- Collection of evidence: The types of evidence that are required will be determined by the tests to be carried out – as identified in the previous step. Should any discrepancies or gaps in accounting be identified, there will be an opportunity to rectify them where possible.
- Conclusions: On completion of the audit, the auditor can make an assessment on whether or not the organisation’s financial statements are true and fair and free from any misstatements or errors.
Still unsure and want to know more? Talk to our accounting experts at Hammonds Accountants – we are sure that we can help. We can be reached on the phone or on email on 020 8249 6328 or for all your accounting questions and needs.