As a business, there are a few different types of audit you may be required to go through.
While audits provide assurance, there are different methods and processes for the ways they are carried out.
The type of audit you decide on will vary depending on how you work, the amount of time you have for the process, and how your business is structured.
Here is a guide to the different types of audits your business may undergo.
Internal audits
An internal audit is a way for your business to have an independent check to ensure employees are following the correct procedures and evaluate the effectiveness of your risk management, control and governance processes.
These audits give your directors and shareholders an in-depth understanding of the business culture and processes and check to see if your business’s goals are being met and on track.
Think of it as a health check. It’s good to know things are running smoothly and on the right path. If any issues arise, you have insight into how to solve the problems before they become a more significant challenge.
External audits
External audits are a process where an independent body examines the financial statements prepared by a business. These are mainly a legal requirement to check the condition of a business and its operations during specific periods.
There are specific criteria a limited company must meet before it requires an audit, as some can be exempt.
For financial years that began on or after 1 January 2016, a company will require an audit if it has at least two of the following:
- an annual turnover more than £10.2 million
- assets worth more than £5.1 million
- fifty or employees on average.
External audits will be carried out by a registered firm of accountants and consider the year end financial statements.
If the audited business is working according to the correct practices, this will add value and credibility to the business and its operations. As these audits are independent, they will provide greater transparency to the shareholders, lenders and investors.
Group audits
At the end of a financial year, the directors of a parent company will be required to prepare the group accounts, according to the Companies Act 2006 if the group as a whole meets the criteria above.
A group audit is similar to external audit except for the entire group of companies and involves both group and component auditors.
Because scrutinising group financial statements increases the workload, it becomes a longer process and requires additional resources and coordination to carry it out.
Group audits can include a range of different audits. One could involve a team focusing on the handling of one type of business activity, for example. And multinational companies with several locations may have more than one team conducting the group audit.
Grant audits
If your business has applied for and been awarded grants from the Government or a foundation, you may find yourself needing a grant audit.
A grant audit is carried out during or towards the end of a grant period. These are done to ensure the grant money is spent as agreed by the awarding body.
The auditor will check records such as allowable costs and legitimacy of an expense paid for with grant money and compliance with any other grant conditions by the company.
These audits aren’t always necessary and will only be required if the funding agreement requires one. If the Government provides the grant, audits are more likely to be required.
Expert advice
At Nicholas Peters & Co, we have years of experience working with businesses like yours to help you through the auditing process.
We can also help with accounts preparation and management accounts to ensure everything is in order before an audit, and it continues that way once the audit is complete.