What is a business audit and how should you do one?
If you’re a business owner, you might feel daunted at the thought of your first audit. But it doesn’t need to be stressful and, if done correctly, it can be beneficial to your business.
This guide will take you through each step of carrying out an audit on your business.
What is a business audit?
A business audit examines your company’s financial records at the end of each year to make sure they’re accurate. It’s a way of making sure you know exactly how much money your business is earning and how it’s earning it.
It also lets HMRC know your accounts all in check and your business transactions are above board.
Under the Companies Act 2006, all businesses in the UK are required by law to have their annual accounts audited by an external firm unless they are exempt. We’ll go into the conditions you’ll need to meet for an exemption a little later.
Some audits, however, are voluntary. These are undertaken solely for the benefit of your business, for example, to understand your finances better.
What happens in an audit?
It all depends upon the type of audit, but broadly speaking auditors will do the following during a business audit:
- Follow procedures to gather financial evidence about your business. You must make sure any statements and documents are accurate before you hand them over to be audited.
- Verify the financial statements have been prepared according to Companies House and HM Revenue & Customs (HMRC) rules.
An auditor must legally make a report to your business based on the information you have produced and their findings. If you’re a public limited company, these reports are usually presented in a general meeting.
There are lots of firms in the UK that can carry out audits on your business, but only a few of them audit large publicly listed companies, including those on the Financial Times-Stock Exchange 350 share index (FTSE 350).
These large, high-profile auditors are part of an international network of firms. Audit firms in these networks are experienced at working together to provide international companies with effective service across the globe. This means if your business had multiple sites in different countries, you’d still probably only need to appoint one auditor.
Are there different types of audits?
There are a few different types of audits. Some may be carried out by an internal auditor, while others will require an external firm. The main types of audits are:
A financial audit
A financial audit focuses on the fairness of financial statements within your company. It is conducted by an outside auditor independent of your company. A financial audit is the most common type and is required for all businesses each year (unless exempt).
A compliance audit
This type of audit looks at the policies of your business to make sure it is compliant with HMRC and Companies Law. This audit is most used in regulated industries and the education sector.
A construction audit
A construction audit looks at the costs of a specific building project you might be having. There will usually be an analysis of the contracts drawn up, overhead costs, the price, reimbursement, and the timeliness of completion. The goal is to make sure costs were reasonable.
A tax audit
This type of audit is an analysis of tax returns submitted by your business. The aim is to make sure your tax information is correct.
An operational audit
An operational audit looks at goals, planning processes, and results of the operations of a business. The audit can be conducted internally or by an external auditor.
An investigative audit
An investigative audit is an investigation of a specific business area or individual when there could be scope for fraudulent activity.
An informational systems audit
An information systems audit reviews software development, data processing, and business computer systems. The focus is to spot any issues that could impair IT systems and affect customers.
What is the difference between an internal and external audit?
An internal auditor is someone within your company whose job is to make sure everything is above board. They usually take a look at how your entire business is run, paying attention to any possible risks as well as the types of control systems you use — (these are just the procedures and processes you use as a company). Internal auditors usually deal with non-financial information.
An external auditor will usually look at the accuracy of business accounts and your company’s financial condition. They’ll usually focus more on your business’ compliance with UK laws and regulations.
Does my business need an audit?
It depends. You might be eligible for a small company audit exemption. Many private limited businesses in the UK can benefit from this but there are certain conditions you must meet.
You won’t need to go through a yearly audit if you meet two of the following three conditions:
- Your assets are worth less than £5.1 million
- You have an annual turnover of less than £10.2 million
- You have less than 50 employees
If your company is a part of a bigger group or you have multiple sites or shops, you must meet all of the above conditions to get an exemption.
For example, if you own a coffee shop and have several cafes across the country, you’ll need to add up the money you make from all your cafes and consider staff numbers as a total.
If you’re not eligible for an exemption because you don’t meet the requirements, then your company will have to be audited yearly.
It’s important to note that even if your business is exempt from an audit, any shareholder who owns more than 10% of the company can still request an audit if they choose.
What are the responsibilities of an auditor?
When the time comes for your audit, the auditors will need to see your business records for the last financial year. The auditor will need access to your business books, financial statements, and any relevant accounts.
By law, auditors are required to produce the following:
- Any document findings, audit tests and completed audit work papers
- Control and audit reports that have been written up through analysing, collecting and summarising your business trends
- A compilation of your company’s liabilities and assets
- Finished audit questionnaires
- Proof of your company's compliance with internal control processes through examining reports, records, documentation and operating practices
What is my responsibility as a business owner?
As a business owner, you are solely responsible for making sure all the information you give the auditor is correct and factual.
While auditors have responsibilities to produce their findings, it isn’t their job to prevent error or fraud, that is up to you as a business owner. They can only work with what you give them.
You should take time to prepare and make sure all information and records are up to date and accurate, this includes any documents and files they will need. It’s good practice to gather these documents and keep them somewhere safe throughout the year. That way you’ll be prepared for their visit and won't need to rush around to find all your statements just before the audit.
Some companies employ someone specifically to oversee company finances and books. This person is then responsible for collecting all the information needed for an audit and keeping on top of preparation.
How do I plan my first audit?
To make sure your company audit process runs smoothly, there are a few proactive steps you can take:
- Do your research
Before you do anything, it helps to research online or speak to other businesses about their own experiences of audits.
If it’s your first audit, read lots of guides to find out what information you need to collect, what to expect and how you can minimise disruption to your staff and business.
2. Keep all relevant documents together throughout the year
It’s useful to get into the habit of collecting relevant information for an audit throughout the year. Having a designated drawer and folder for all your records will make it less stressful when you come to hand it over to your auditor. The process will run a lot smoother this way.
3. Speak to your auditor
Communication is key, especially if it’s your first audit. Speak to your auditor and decide on a high priority list for tasks and work out a viable timeframe. Remember, they’re not looking to trip you up, so don’t treat them with suspicion.
Find out when they will need each piece of company information and in what order they’d like your records to be available. Being transparent from the start will make the process less stressful for you. It also ensures the auditor has a fair amount of time with your accounts.
Set up an ‘auditor’ file to keep agency correspondence separate, and make copies of any documents relating to:
- Leasing arrangements
- Asset additions and disposals
- Company debt
- Any ongoing or past lawsuits
- Technology modifications
- Complex transactions
- Your major customers
4. Choose a staff contact
It’s a good idea to keep your staff in the loop, so everyone is clear about the audit process and what it entails. It’s also good practice to choose a staff member to act as a point of contact for the auditor, then there will be no confusion and you’ll avoid mixed messages or wrong information being passed on.
When setting up meetings with your staff point of contact and the auditor, avoid scheduling clashes, like holidays and annual leave.
5. Check the information carefully
Check with your auditor to find out what information they need and have the following to hand:
- Representation of structure and ownership of the company
- All year-end bank statements for the entire period for all bank accounts
- All hire purchase and leasing agreements
- Stock reports
- Aged creditors and debtors’ listing
- Wage records for your staff and P11D returns
- Accounting records
- VAT returns
- Copies of all meeting minutes held during the year
- Balance sheet breakdown with invoices
- Evidence for things like prepayments, accruals and fixed asset additions
- Information about any changes in shares or company ownership
6. Set deadlines
Make sure you put clear deadlines in place to complete each planning and audit stage. This will ensure you know what needs to be given to the auditor and help the process run smoothly.
How can my business benefit from an audit?
Although it might seem like a pain, an audit can offer your business some invaluable benefits, such as:
- Peace of mind that financial statements are free from error
- Reassurance to potential investors
- Greater credibility to banks, customers, suppliers and HMRC
- Improvement in the credit rating of your business
How much does an audit cost?
Because all businesses are different, the cost of an audit can vary significantly. There is a ‘base cost’ of delivering a statutory audit. In London, the fee for an individual company audit usually starts at around £20,000. The price goes up if the audit is more complex.
Certain things might cause the price to increase, such as:
- If the auditor needs to prepare consolidated group financial statements
- If there are overseas subsidiaries
- If other auditors need to be involved
- If your company has complex activities
- If your company has complex contracts with customers
How long does it take to do an audit?
For a ‘typical’ company with no financial problems or prior issues, the planning side should take you and your team a few weeks, depending on how familiar you are with the process.
The actual audit will take around three to four months. It’s a proactive move to dedicate enough time before the actual audit to really plan well. This will make things easier for both you and your auditor.
The weeks before the audit usually consist of:
- An audit team planning meeting
- Discussions between your business and the auditor
- Updating the permanent file
- Reviewing and updating engagement letters
- Building planning notes Performing initial analytical procedures
- Developing the audit plan
- Detailed fieldwork
Keep in mind that if this is your first audit, this process will probably take longer. This is because the auditor will need to get to know how your business works and see the opening balances.
Has covid changed the audit process?
Covid has altered the way we all work, so the auditing process may have changed slightly in the wake of the pandemic.
- Remote auditing
As businesses continue to recover from the pandemic, many companies are still choosing to work remotely or implement a hybrid work structure. Auditors can still perform their roles remotely, but this is something to keep in mind and to expect when you arrange your audit.
2. More flexibility
Auditors have had to become more flexible over the last year or so. They’ve had to adapt to each business and understand that businesses might operate differently post-pandemic. Flexibility is key when carrying out audits.
3. More reliance on technology
Because more auditors are working remotely and being more flexible, they are relying a lot more on technology. This means things like cloud accounting software have become more popular.
How Bionic can help you cut down on business admin?
You should now be a lot clearer on business audits, know whether your business needs one and, if so, how to go about arranging one.
A business audit is another on the list of annoying admin tasks all business owners have to face. But it doesn’t have to be a hassle, planning is the most important thing when preparing for your audit, whether it’s your first time or not.
And although we can’t help with your audit, the tech-enabled team at Bionic can help you cut down on other annoying bits of business admin.