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A guide to a company audit

In this article, we will explore the main aspects of conducting a company audit, covering topics such as the purpose and importance of audits, the different types of audits, key steps involved in the audit process and best practices for ensuring accuracy and compliance.

What is an audit?

An audit is a detailed review of processes or information. It can look at the financial statements of a company to make sure they’re accurate and compliant with regulations. Or they can delve deeper into the inner workings of an organisation to make sure rules are being followed. Audits can be internal and conducted within the organisation or external and carried out by a third party.

The importance of an audit

Audits can bring light to problems which may not have been found otherwise. For example, financial inaccuracies can be serious, possibly even malicious. Thus, finding these is important for any organisation.

What are the different types of audit?

Internal audit

This is when a business or organisation makes sure their internal staff are following rules and regulations. Sometimes somebody from a different branch of the business will come in and conduct the audit. However, this type of audit can’t be seen by anyone outside of the organisation.

The report presents any changes or issues which need acting upon. This may be looking at finance, specific regulations, or a particular area within the organisation

External audit

Often, regulatory bodies from outside of an organisation conduct these. An example may be the Food Standards Agency going into a coffee shop to make sure it’s following health and safety. If any problems are picked up during an external audit, they must be fixed quickly.  Regular auditing by a third party is done in industries like science, food, and finance.

Financial audit

These are mainly internal and usually conducted on a regular basis. They investigate that the financial situation of the business is how it should be. It looks at a company’s records to see if they’re accurate and presented correctly. During a financial audit, one or more of the following may be looked at: income statements, balance sheets and cash flow statements.

Those are the three main types of audits, but there’re also a few others…

Payroll audit

This is a subpart of a financial audit and focuses on payrolls being correct. These should be done at least once a year.

Compliance audit

This investigates if an organisation is following rules and regulations, most commonly conducted in financial industries. This might involve looking at adherence to anti-money laundering (AML) laws and consumer protection regulations.

These are mainly done externally on behalf of the government, but some businesses carry-out internal audits like these regularly.

Data audit

There’re specific rules on how businesses hold client’s data. Due to this, the Information Commissioner’s office regularly carry-out audits to make sure this is being done how it’s meant to be. Fines for getting this wrong can cost up to millions of pounds depending on the severity of violation.

Tax audits

Tax audits are external checks usually done by government bodies like HMRC. Outcomes can include being repaid if you’ve had too much tax taken or being asked to pay more if you’re deemed to owe more than was stated.

When are audits required?

Audits are required once a year

If your business isn’t exempt from having an audit (we’ll get onto that later) then you should be doing one once a year. This should be done after the financial year end date. Of course, you can do more if wanted.

Your business is taking a loan from the bank

When this is done, financial statements which are audited are usually needed. This is also the same when taking a loan from a third-party lender. It shows your company’s current position.

A Government body may request one

If your business receives funds from the government, an audit will probably be needed at some point. This shows the government that their money is being used appropriately.

You’re buying or selling a business

This proves that the business is financially sound to the buyer. It’s also good for the seller as it gives evidence and reason for someone to buy the business.

You may want to do a voluntary audit

For example, you may want to carry out a financial review. This may be for reassurance or if something doesn’t seem quite right.

Who are exempt from audits? 

You may be qualified for exemption from an audit if you have at least two of these:

You have a small business

This can be defined as having less than 50 employees in your business. In some sectors, an audit may still be required, like food standards being checked.

Your annual turnover is less than £10.2 million

Organisations who have a turnover less than this may be exempt.

Your balance sheet total is less than £5.1 million

If your business assets are less than this then you may be exempt.

Benefits of having an audit 

They can create reassurance

If you know your financial statements are how they should be, this can give peace of mind and stakeholders confidence. It can also show that your business is running correctly, by following rules and regulations.

Problems can be found-out

Financial errors can be a big problem if not discovered – finding them can stop fines and the issue reoccurring. By making sure their accounting processes are correct, they can review the data as and when they need to. If they’re errors in how the business itself is being run, these can be looked at and changed too. Furthermore, risks can be highlighted too through a risk assessment.

Business owners can be educated

As an owner of a business, you need to know the ins and outs of how everything works. External audits when done by someone outside of the organisation can bring light to a problem in the company which had gone unnoticed. Furthermore, having a second opinion can be really helpful. If you can learn what mistakes were being made, these can be avoided in future.

An audit may find fraud

We all hope that fraud isn’t taking place behind the scenes, but if it is, an audit may find this.

It can present the positives

As well as bringing up any problems, it can also show what’s going right. If you know what’s helping your business run smoothly, you can continue to do it.

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