Back to basics: The importance of the Audit
An audit can bring added value to organisations. Whilst assurance services may not primarily be considered as a service that “adds value”, an audit, whilst a legal requirement in some circumstances, can bring with it added trust and confidence in the organisation and its financial statements.
It can also add other intangible benefits including deterring fraud and providing comfort to external stakeholders such as customers and suppliers, and in the case of some charitable entities, the trust and confidence of the public.
Conducted properly, this compliance exercise is a useful business tool.
Does my company have to have an audit?
Compliance with regulation is only one reason to have an audit. Many exempt organisations will voluntarily seek an audit to add an extra layer of confidence in their financial statements. Organisations may also consider having an audit if they’re planning to sell the business, to help achieve the maximum sale price.
The majority of standard private limited companies (i.e. those having their own legal entity) are subject to an external audit if they meet any two of the following criteria:
- Their turnover is more than £10.2 million
- They have assets totalling in excess of £5.1 million
- They employ more than 50 people.
Some companies that are not legally required to be audited choose to undergo the process for reassurance that their accounts are accurate and their financial reporting is in accordance with Companies House regulations. It may also be the case that key stakeholders require the company to complete an audit to satisfy their own internal criteria. When surveyed, 57% of small businesses say they have been subject of an audit with a further 30% having had their financial statements reviewed.*
So what added value can an audit bring?
An audit can bring many elements of added value such as:
- Identifying weaknesses in internal controls
- Identifying where profitable changes can be made
- It lends credibility to financial statements
- Educates business owners
- It increases stakeholder confidence.
Identifying weaknesses in internal controls is part of the overall audit process, with various audit testing methods adopted to identify any material misrepresentation of the financial information by a business. The results of audit testing can also aid an entity become more efficient if there are inefficiencies throughout their processes.
An externally verified set of financial statements are usually considered more reliable in the market place than those that have not been. Stakeholders such as lenders, potential clients and suppliers will find your organisation a much more attractive proposition when presented with an externally verified set of financial statements, free from material error or fraud!
Why would I want to switch my auditor?
Or course your organisation may have been subject to audit for many years now, and you’re fully aware of the benefits that a good audit can bring to an organisation. So why would you want to upset the apple cart? There are many reasons why you may want to switch auditors:
- Fresh Energy
It can be difficult to make the break, especially if you have developed a strong relationship with your auditor over the years. This in itself can be a reason to make the change - a new firm can inject fresh energy into a company and improve the robustness of the audit. Risk areas are reassessed, and different questions are asked of the management team, as the new advisors get to grips with your company.
Growth may also be a deciding factor. What worked for you as a young company may not be the right fit for you now. You may now need an auditor with specialist industry experience, for example.
- Range of Services
Assessing the balance between non-audit and audit services available from a service provider should be high priority if considering making the leap.
- Legal Requirement
Since the introduction of the EU Audit Reform on 17 June 2016, credit institutions, public interest entities, and larger companies may be required to re-tender for audit every 10 years, and change auditor at least every 20 years. Please contact us for further information regarding this requirement.
If you would like to meet to discuss how our audit service can assist your business, please get in touch.
*Source: ICAEW Report “The 99.9%: Small an Medium Sized Businesses - Who are they and what do they need?”