Audit: The Basics

Frequently asked questions answered by our experts…

Q1. What is an audit?

An audit is the official inspection of an organisation’s accounts and financial reports. The inspection is typically undertaken annually and by a party that is independent of the organisation being audited.

The objective of an audit is to form an independent opinion on whether the financial statements, of the audited entity, represent a true and fair view and have been prepared in accordance with accounting standards.

A common misconception is that auditors are required to detect and correct all errors, however this is not the case.

Q2. What are the responsibilities of an auditor relating to fraud in an audit of financial statements?

The auditor’s responsibility is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

They must then issue an auditor’s report that includes their professional opinion on this matter, amongst others.

Whilst reasonable assurance is a high level of assurance it is not, as some presume, a guarantee that a material misstatement will always be detected.

ISA 240 (Redrafted) states that: ‘The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.’ ISA 240 (Redrafted) paragraph 4.

Consequently, both the entity and the auditors have responsibility for fraud and error. It could be said that management and those charged with governance have the chief responsibility, whilst the responsibility of the auditor is secondary to this.

Q3. How do I know if my company requires an audit?

A company must, by law, be audited if any two of the following conditions apply:-

  • Turnover exceeds £10.2 million;
  • total assets exceed £5.1 million; or
  • the company has in excess of 50 employees.

Even if your company does not breach these thresholds, if your company is part of a wider group that breaches certain size thresholds, then an audit will be necessary.

You may also require an audit if an individual shareholder or a group of shareholders, who own at least 10% of the shares in your company, ask for one to be conducted; if a lender requests one, or if you operate within a regulated sector that necessitates a specialist audit to be carried out (e.g. insurance sector or the financial services sector).

Q4. Which companies are exempt from audit in the UK?

Charities

If you are a charitable organisation with gross income of £1 million or less, for accounting periods ending on or after 31 March 2015 (or £500,000 or less for accounting periods before this), unless both your gross assets exceed £3.26m and your gross income exceeds £250,000, you can opt out of a full audit.

However, if your income is between £25,000 and £1 million you will still be required by the Charities Commission to obtain an alternative assurance service.

‘Small’ companies

Companies that qualify as ‘small companies’ under Companies Act 2006 are usually exempt from audit, unless they are members of a group or are charities and required to follow the charity audit thresholds.

A company is considered to be ‘small’ if for both this year and last year it was not ineligible, and it met two out of three of the following criteria:

For periods beginning on or after 1 January 2016:

  • Turnover was less than £10.2 million;
  • total assets were less than £5.1 million; or
  • the company has less than 50 employees.

Subsidiaries

Subsidiary companies within a group can also be exempt from audit, if they meet certain criteria, and if the parent company provides a guarantee of all outstanding liabilities at the end of the financial year.

Q5. What are the different types of audit?

Statutory

A statutory audit is one that is required in order to comply with the law and, by definition, is as outlined in Q1.

There are some institutions that require a statutory audit, regardless of their size, such as banks, brokerage companies and insurance providers.

If you’re unsure about your audit obligations, under UK GAAP and UK law, you should seek professional advice at the earliest convenience to ensure you are not penalised for failing to comply. This is particularly important as the qualifying criteria for a statutory audit can be subject to change.

Voluntary

Even if you are not legally required to have an audit, you may still opt to have a ‘voluntary’ audit conducted.

A voluntary audit is conducted for the benefit of your business and, as with a statutory audit, provides you with an independent assessment of your financial statements, management and controls.

EU LIFE Grant Audit

In cases where the EU has provided a grant, under the LIFE funding programme, to an organisation based in the UK, a grant audit may be required. The purpose of grant audits is to provide assurance to the funder that the grant has been spent in line with any grant conditions.

Q6. What does an audit involve?

Generally speaking, an independent audit of financial statements and reports involves the following steps:-

  • Planning & Risk Assessment
  • Fieldwork
    • Internal controls testing
    • Substantive procedures, of which there are a number (i.e. analysis, accounts receivable and expenses etc.)
  • Preparation of an audit report
  • Follow-up

For a more detailed insight into each of these stages of an audit (delivered in layman’s terms), you can download our audit process flowchart here.

Q7. Even if I am exempt, should I still consider an audit?

Even if you are an organisation that is exempt from statutory audit, you may still wish to have an audit conducted.

Voluntary audits can be a useful tool for businesses who wish to inspire confidence in the financial statements that they produce, for the benefit of either stakeholders or lenders for example. You may also consider having an audit if you are planning to sell your business, to help you to achieve the maximum sale price.

At the very least, it can give you an invaluable insight into the management of your business, the effectiveness of your internal processes and your financial position.

Q8. How can George Hay’s team of auditors help?

Here at George Hay, our experienced auditors can help you to meet your audit obligations; whether you require a statutory audit in order to comply with UK law, or whether you opt to undergo a voluntary audit for the benefit of your business.

We turn what many business-owners view as a ‘regulatory burden’ into a useful review of your financial statements which, in turn, can be invaluable when it comes to decision-making and forward planning.

We will keep you informed at every stage of the audit process and we will deliver audit reports and management reports designed to help you improve your business and ensure that your internal controls and systems run effectively and efficiently.

For more information about the audit services we provide offer to businesses, throughout Bedfordshire, Cambridgeshire, Hertfordshire and beyond, please contact us.

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