When does a company need an audit?
When does a company need an audit?
Small business owners do not usually need to worry themselves with an audit, but if your company is growing and becoming increasingly successful, it may only be a matter of time before an audit is required. The idea of an audit can be quite daunting, especially when you’re not sure what to expect or know what’s really going on, so this article will clarify when a company needs an audit, demystify the process, and provide guidance on ways you can prepare for a smooth audit.
What is an audit?
An audit is an independent review of your company’s accounts to ensure that the business has been maintaining proper financial records and completing its financial reporting requirements accurately, following approved standards. This is usually needed as, the larger a company gets, the more difficult it can be to see transparently if any mistakes have been made and so an audit can help bring this to light.
What is the purpose of an audit?
The primary purpose of an audit it to comply with legal regulations which seek to ensure companies are operating legitimately. Instructing for regular audits can therefore not only uncover financial fraud such as embezzlement but can also deter such criminal activities from occurring. Over recent years, there has been much media attention surrounding the failings of auditors to uncover improper financial conduct within large corporations and so the discussions around the topic of audits have been met with fierce criticism.
However, the purpose of an audit can also bring about many benefits when carried out appropriately. An audit can impart confidence amongst investors or shareholders where it confirms that the company has been operating compliantly and is financially stable. Audits are powerful tools to help businesses improve their operations by highlighting weaknesses in procedures, giving directors the opportunity to correct and implement stronger processes. They can also show warning signs of financial vulnerabilities as well as opportunities that can be capitalised on to help the business grow. All in all, the purpose of an audit can be seen to be a robust check of a company and help it stand the test of time for business survival and growth.
Who needs an audit?
Most limited companies will need to complete an external audit once they meet any of the two following criteria:
- Their turnover is more than £10.2 million
- They have total assets totally over £5.1 million
- They have more than 50 employees in the business
There are also certain industries which are more strictly regulated and so will be expected to carry out audits regardless of whether they fall within the above guidelines. This mostly impacts companies in the financial and insurance sectors.
Even if your company does not need to complete an audit, it must do so where shareholders who own at least 10% (either in number of shares or value of shares in the company) make a request in writing to the limited company’s registered address within at least 1 month before the financial year end that the audit is being asked for.
Who is exempt from audit?
All sole traders and general partnerships, no matter the size of their turnover, are exempt from completing an audit. Some charities may also be exempt from an audit and can have their accounts independently examined instead. For most limited companies however (unless they are dormant), they will need to qualify as a small company and then apply for audit exemption. A small company, as defined by the Companies Act 2006, is one which satisfies at least two of the following conditions:
- Their turnover is less than £10.2 million
- They have total assets of under £5.1 million
- They have less than 50 employees in the business
Limited companies are able to follow these guidelines for their first year of trading. For subsequent years, you are allowed a one-year grace period should you fall outside the qualifying conditions. This means that, should you no longer qualify as a small company for two years in a row, you must complete an audit in the second financial year that you do not qualify as small. The size thresholds apply to companies with a 12-month accounting period, and so if your company has a shorter accounting period, you will need to adjust the threshold proportionately.
How to apply for an audit exemption
Small, limited companies are not automatically exempt from audit and must apply in writing. To apply for an audit exemption the company must include the following statement:
“For the year ending [insert year end date] the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.
The members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476.
The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.
These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies’ regime.”
The statement should be included on the balance sheet above the authorising signature when annual accounts are submitted.
When does a company need to carry out an audit?
If your company is not exempt from audits, you will need to carry one out once your financial year end date has passed. You will then have 9 months to complete an audit which is due to be submitted to HMRC and Companies House at the same time as your annual accounts filing deadline. For example, if your company’s financial year end is 30 September, you can begin an audit from 1 October, and it must be completed and submitted by 30 June.
How often does a company need to carry out an audit?
A company must carry out a statutory audit once a year for every year they are not exempt. If in one year the company becomes a small company and would be ordinarily exempt from audits, they will still need to continue to complete an audit. If in the following year the company remains as a small company, then they may apply for exemption by using the exemption statement on their balance sheet.
What happens during an audit?
Every audit will be different depending on the individual company; however, most statutory audits take similar steps. An audit can only commence once your company has completed its usual annual accounts which have been reviewed and approved by the company director(s). Only then will auditors come into the picture:
- Request general information
The auditors will start by meeting with key stakeholders of the company to request general information in order to gain an understanding of the main business activities and operational procedures.
- Determine parameters for the audit
An audit cannot examine every financial transaction and so the auditors will determine specific areas of the business which have the potential to majorly impact the company’s financial position such as revenue, purchases, stock, major assets, or payroll. From the identified areas, they will also evaluate the level of risk for inaccuracies and assess internal controls your company has put in place to mitigate such risks.
- Devise an audit plan
The auditors create an audit plan based on the areas they’ve identified as potential risk and design various tests that will be conducted on data that your company is obliged to supply them.
- Conduct fieldwork
Fieldwork is a common term that auditors will use, and it means to carry out the tests. One of the ways they will do this is to take a proportionate sample of your financial documents and check what internal reviews on them have been done. They may look for approval signatures, date stamps or other check marks as indications that the company is or has taken appropriate measures to keep robust financial records.
- Discuss audit results
When the testing is complete, the auditors will discuss their findings with the company. This may include the need for further testing or recommendations of remedial action that needs to be implemented by the company where issues are found.
- Produce the audit report
A formal audit report is then produced by the auditor which is presented to the company director(s) for approval. It is then submitted to HMRC and Companies House.
Get help for an audit
Audits can seem invasive but finding the right auditors can make the process more transparent and less imposing. Whether it’s your first year requiring an audit, or you need to change auditors so that your audit reports remain impartial, we’re able to help provide a comprehensive audit service. Please use the online form to get in touch and arrange a consultation to discuss your requirements.
Stay up to date
Looking for some help?
You can find out more about our Audit service.