What does an audit of financial statements involve?
The purpose of an audit is to verify the accuracy of your company’s financial statements which involves looking in-depth at the underlying accounting records. The auditor will be looking for any errors or omissions that could affect the financial statements and will work with you to rectify any issues before reporting the results of the audit to the shareholders (which may also be the directors of the business).
An audit must be carried out by a qualified accountant who holds statutory auditor status. Quite often this may be the firm you have appointed to support you with your tax and VAT compliance, i.e. a firm that knows your business / sector. However, the independent auditor must remain independent and so it is unlikely that the same team preparing your accounts and tax work will carry out the audit of your company’s accounts.
When does a UK company need to have a financial audit?
If your business meets two of the following criteria, then you must appoint an external auditor:
- an annual turnover of more than £10.2 million
- total assets worth more than £5.1 million
- an average of 50 or more employees during the financial year.
Furthermore, you’ll need to get an audit if:
- your articles of association say you must or,
- any of your shareholders owning 10% or more number of shares or value of shares in the company, ask for one.
Develop a good rapport with your auditor
Your auditor will more than likely be spending a lot of time with you at your business premises and will need access to all of your company’s financial information, records and statements in order to review and spot any errors or omissions. Audits can usually take a few weeks depending on the size of your company (including any subsidiaries), and on the state of your financial records!
With this in mind, it is important to get to know your auditors beforehand and to build a rapport with them. The auditor is there to help you, so while he / she / they are on your premises, be as cooperative as possible.
It is also important to be honest with your auditor - even if you have to provide details of something that you are not proud of.
Having an amicable relationship with your auditor works both ways - you should feel comfortable asking any questions if you do not understand something that the auditor is requesting or conducting, and your auditor should be absolutely happy to explain it to you.
Advice on preparing for a successful financial audit
Having your auditors on your premises needn’t be a stressful or worrying time if you are prepared. Here are some useful tips on ensuring a smooth and swift audit process:
- Have a year-end file in place and ready
This will be a file that backs up the numbers in the draft financial statements, and includes bank statements, loan agreements, fixed asset invoices, trade debtor / creditors list etc.
- Document all of your financial procedures
This includes documenting how you account for your financial transactions and will help the auditor to understand how your financial records are created and how the systems work that create those records.
- Allow access to your financial systems
It is easier for the auditor to do their job if they can have easy access to the accounting system and any other systems that generate information for the financial statements. This could be by having one person in your team working alongside the auditor who is able to access and provide the information being requested on demand, or perhaps setting up the auditor with their own username and / or password to your systems. Either way, it means the auditor doesn’t have to ask for information all the time and this helps to speed up the audit process.
- Be prepared to answer questions
The auditor will likely have a lot of questions about your financial records. Be prepared to answer these questions in as clear and concise manner as possible. In some cases, the auditor may ask you to confirm some of your responses to them in writing – this is known as a ‘written representation’ and is standard procedure during the audit.
- Learn more about the auditing process
There are a number of books and online reading materials that can help you understand the auditing process. At LWA, our very own audit and technical director, Steve Collings is a globally recognised expert on International Standards on Auditing (UK) and has been commissioned to write another book for the Bloomsbury Professional publishing house. An Auditor’s Guide to Auditing Financial Statements in the UK has been written to help business owners and financial professionals that are involved with auditors, or those who may be auditing company accounts, and who’d like to know more about how they carry out their work.
Whether you’re looking to appoint an auditor for the first time, or you are considering replacing your current auditors, our Accountancy and Auditing team at LWA are here to offer you a no-obligation review of your needs. Please contact Steve Collings or Matt Jones on 0161 905 1801 in Sale, South Manchester, or on 01925 830 830 in Warrington, or you can email us via email@example.com.