Unless you’re running a large company or you get the dreaded letter from HMRC, auditing might not be on your radar. However, auditing could have potential benefits to your business and it’s something to keep in mind when you want to improve and grow. Here are the top questions to ask when thinking about auditing your business.
What is an audit?
An audit is essentially an evaluation of a specific situation and performance. When speaking about an audit, most people are referring to a financial audit, which is an evaluation of the business’ financial statements. During an audit, you examine the financial situation, evaluate it and provide an opinion on the state of affairs. However, it’s possible to examine and evaluate any business area from marketing to customer relations. In this post, we’ll only focus on financial audits.
With auditing, you gain an insight into how your business is performing financially. You learn about the risks surrounding your business and suggestions on how to improve. Indeed, the cornerstone of a good audit is external, fair advice. This means that even if you are conducting a voluntary audit, you want to hire an independent auditor to guarantee you receive impartial advice.
Who should be in charge of the audit?
Before you start thinking about auditing your business, it’s important to remember that your auditor shouldn’t be you. As mentioned above, a good audit is based on external evaluation and the auditor should not have a direct connection to your business.
In terms of mandatory audits required by law, you will always need an impartial and independent auditor. By picking a qualified auditor, you guarantee the opinions you receive as a result of the audit are fair and truthful. In the UK, auditing firms are governed by the Institute of Chartered Accountants in England and Wales (ICAEW).
Does your business need an audit?
Audits tend to happen for two reasons. Either your business has the legal obligation to conduct an audit annually or HMRC wants to audit your business. The latter is perhaps the scarier option, as you could face legal consequences if your books are not in order.
Now, there are usually obvious reasons for why HMRC would want to audit a business. The most common reasons are:
- Someone has reported your business for violating the tax laws – this could be a disgruntled employee, for example.
- Your tax returns regularly contain errors.
- Your numbers fluctuate a lot or your business has been unprofitable for years.
- The figures seem inconsistent with the current economic climate and industry standards.
Aside from being audited by HMRC, certain companies are legally bound to conduct an annual audit. Whilst most privately owned companies don’t have to perform an audit, it is mandatory for some large companies. All listed companies are also legally required to be audited each year. HMRC’s guide on company accounts is a good source for understanding your account keeping requirements. Companies can also conduct voluntary audits.
What are the benefits of auditing your business?
While your company might not have to go through an audit, regular auditing can be a good idea. The benefits of performing an audit include:
- Identifying possible problem areas in the financial statements and the performance of your business.
- Revealing suggestions regarding improvements and the steps you can take to boost business performance.
- Providing your business with credibility and building positive rapport with investors and other stakeholders.
- Boosting confidence among employees and stakeholders.
An audit can simply help business performance in many ways. Since the advice you get is external, you can trust it being impartial. This is helpful in terms of uncovering risks and areas of improvement.
How does the auditing process work?
There are no specific rules for how you organise an audit but it can generally be divided into five steps or stages. These are:
The planning phase – The planning phase is about sorting out a timeline for the audit and identifying goals. You should go through the plan with the external auditor, setting up the teams and communication channels to ensure the process is smooth.
The risk assessment phase – Right at the start, the auditor should identify the main risks from a financial standpoint. During this phase, the objective is to reveal those areas that need the most attention.
The strategy phase – Once you have the specific areas of risk identified, you can create a strategy for testing and addressing those issues. The auditing moves to evaluating the financial statements and their validity.
The evidence-gathering phase – The main work takes place during this phase, as you’ll start gathering evidence and analysing the financial state of your business. Here it’s essential to keep the communication lines open and to ensure the auditor has access to all relevant information.
The finalising phase – At this stage, you’ll be assessing the evidence and concluding whether the financial statements have any problems. The auditor will write about the findings, allowing your business to address any problems that might have been revealed.
How auditors go about the process can vary, with different auditors preferring different operating styles. Many UK businesses use UK Generally Accepted Accounting Policies (UK GAAP) and International Financial Reporting Standards (IFRS) guides as a framework for the auditing procedures. If you want to understand the process a bit better, it’s a good idea to get familiar with those policies.
Talk to us about your auditing needs
In terms of auditing success, you should find a reliable auditor with experience in auditing businesses such as yours. We at Devonshire Green have a team of experts to help small business owners take a critical look at their business. We want to help you gain knowledge and to improve your business. Whether your business is required to perform an audit or you simply want to learn more about its financial performance, contact us for reliable and efficient audit advice.
