Audit basics: what is an audit and how do you know you need one?

Audits tend to be confusing and shadowed by a layer of jargon that can make business owners doubtful about their usefulness.

It doesn’t help that the audit process is, by design, rather complex, and some auditors aren’t great at explaining what they are doing and how their job is worth the time and stress to add value to a business.

That’s why, as auditors, we’ve committed ourselves to transparency and education so you can understand everything you need to know about audits.


What is an audit and what happens during one?

An audit is principally the examination of the financial report of an organisation by someone who is wholly independent of it.

They do that by taking a holistic view of an organisation, looking at everything from balance sheets and income statements.

The purpose is to give you an idea of what works well in your organisation and what you might need to change to increase efficiency and value.

Some audits go beyond financial statements, however, and include scrutiny of the wider business, including its working systems and operations.

An audit starts with a series of meetings with the auditor so they can better understand your organisation and how they can tailor their work to you.

During the audit itself, the auditor will be present in your organisation, reviewing your financial information, books and records to ensure you’re following the best practices and complying with the relevant regulations.

They can also take a look at the practical side of your business, like your IT projects, systems and how technology is integrated into your everyday activities.

That can be obtrusive for some businesses, which is why most auditors try to work as discreetly and efficiently as possible.


Benefits of audits

There are a range of reasons why you might want to get an auditor in (although in some cases, audits are compulsory).

For instance, they act as a great opportunity to make sure you’re doing everything right, and improving things that aren’t going so well. You might also be able to cut off a potential problem before it ever arises.

As auditors are independent from the organisations they audit, their suggestions and reports are unbiased so you can get a true picture of your organisation and how to increase your value.

Audits are also a great way to give yourself that peace of mind that your business is working as well as you can make it.

They are also a great way to assure your shareholders that you’re doing a good job and their investment is a good one.

Meanwhile, a lot of bank loans and grants require an audit to provide assurance to the lender or funder that the business is a good custodian of these funds.


Who is required to get an audit?

Typically, people think of businesses, particularly limited companies, as the ones having to undergo an audit, but charities often have to have one, too.

Your business will require an audit for financial years that begin on or after 1 January 2016 if it meets at least two of the following criteria:

  • an annual turnover of no more than £10.2 million
  • assets worth no more than £5.1 million
  • 50 or fewer employees on average.

Audits are also compulsory for companies that meet two of three limits relating to revenue, assets and the number of employees they have(audit criteria), or certain entities that are registered with the FCA. There are also small companies which are part of larger UK or overseas Groups that require audits.

You will also have to undergo an audit, even if you are exempt, if shareholders who own at least 10% of shares (by number or value) ask you to or if your articles of association say you must conduct an audit.

A charitable company will only require an audit under the Companies Act if it exceeds the Companies Act audit threshold.

For charities, for accounting periods ending on or after 31 March 2015, the following audit thresholds apply:

  • gross income exceeds £1 million
  • gross assets exceed £3.26m and gross income exceeds £250,000.


Get an auditor

At Nicholas Peters & Co, we’re certified auditors who work with all the due diligence and care that makes an audit successful.

Talk to us to make sure you understand when you need an audit and for more information about auditing.

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