An independent Audit examines the financial reports of a company in order to form a view of their accuracy and validity.
It provides credibility and assurance that a company’s accounts are a true and fair representation of its financial activities. Or, if issues are found, it highlights them so that they may be addressed.
As companies grow, they become more complex. This makes it hard to identify mistakes or inconsistencies in accounts and financial reports. This is where a qualified independent Auditor comes in.
What are the aims of an Audit?
At its most basic, an Audit is about legal obligations and compliance. It ensures that a company is operating legitimately and that all regulatory and legal obligations are being met.
It can identify signs of potential fraud, embezzlement, or other financial crime. It can also help deter would-be criminals from within the organisation.
An audit can, however, be much more than just compliance. A good independent auditor builds an intimate understanding of your business and can provide meaningful, strategic advice.
The process can help identify inefficiencies or other weaknesses in the financial reports. It can also shine a light on future growth opportunities, as well as potential future risks to the business.
If the auditor issues an incorrect opinion on an organisation’s financial statements, this is known as audit failure.
When does a company need an Audit?
A company may not legally need an Audit if they meet certain criteria. These criteria relate to the turnover, assets, and payroll size of the business being below a defined level.
A company has a statutory audit obligation if they meet two of the following “Medium Company” criteria, as defined in the Companies Act 2006:
- Annual turnover greater than £10.2 million
- Total assets greater than £5.1 million
- More than 50 employees
Read more: When is an audit required for a company?
How often must a company be audited?
Companies have a legal requirement to have their financial statements independently audited for every year they are not exempt.
Which companies are exempt from an annual Audit?
Certain organisations are exempt from audit requirements regardless of their size, turnover, or assets. These are:
- Sole traders
- Partnerships (not LLPs)
- Some charities
If a company meets the “Small Company” criteria, as set out in the Companies Act 2006, they are audit exempt and should include the relevant disclosures in its financial statements to confirm the exemption.
Are small companies automatically exempt from Audit?
A small limited company is NOT automatically exempt from the requirement to audit, even if they meet all the criteria. Disclosures are required in the Company’s annual accounts to confirm the reasons for exemption.
Which company types must be audited?
Some company types must be audited, regardless of turnover, assets, or size. These include, but are not limited to, the following:
- Any public company that is not dormant
- Authorised insurance companies
- Companies trading in regulated markets
- Companies involved in banking
- Companies with shares traded in Europe
- Companies that issue e-money
If you are unsure whether your company must have an audit, always consult a qualified audit or legal professional. For a full list of company types that must have an audit, visit the UK Government website.
What if shareholders request an Audit?
If shareholders owning at least 10% of a company request an audit, the audit is then mandatory. This applies regardless of a company’s turnover, total assets, or the number of employees. This could be an individual shareholder with more than 10% ownership or a group whose combined ownership is greater than 10%.
There are several reasons shareholders may request an audit. They must, however, request it in writing at least one month before the end of the financial year that is to be audited.
The Shorts Audit Promise
Your auditor should have a genuine interest in what your business does now and what your plans are for the future, and they should invest their time and knowledge toward helping you achieve those goals.
And the reason we know this? – because we’ve been doing it for decades.
The Shorts Audit Promise is built around seven key principles, which summarise how we believe an audit should be and, indeed, how every one of our audit engagements is managed.
Matthew Lewis
Matthew is a Senior Audit & Accounts Manager at Shorts. He is a Chartered Certified Accountant with experience with Big 4 and Top 10 firms. His experience includes audit and financial reporting, across a wide range of businesses and sectors.
View my articlesTags: Accountancy Services, Audit
