You don’t need to panic if you come across the word ‘audit’. Generally, an audit is considered a threat to a business, but it isn’t always bad. Regular audits are performed for maintenance purposes rather than a penalty invitation. Let’s find out what is an audit.
The audit is an on-site verification process where an auditor or auditing firm inspects the business’ accounts. It is typically performed by a third-party auditor. Many of the businesses in the UK need an audit, but many of them might not know what is an audit and when it is required. Read on to learn more about it.
When an Entity needs Audit?
Established company needs to have an audit to boost their credibility and to attract more shareholders. An audit helps to improve the internal controls and systems of the company. If a company meets two of the following thresholds, it’d be classed as large company and it would qualify for an audit:
- More than £10.2m annual turnover
- Holding total assets over £5.1
- Have more than 50 employees
If a company doesn’t fall within these thresholds, it may still need to have an audit if it is part of a group. In addition, sometimes the articles of the company or the shareholders need an audit. It means that even smaller companies may also require to have an audit. Moreover, if more than 10% of the shareholders request an audit then it must be done.
However, few companies must have an audit. These are:
- A public company
- An authorised insurance company
- A company that performs banking services
- A company whose shares are traded in a European state
Why an Audit is Needed?
An audit is required to form an independent analysis of the accuracy and fairness of the financial statements of the company that is being audited. It also inspects whether the financial statements are prepared as per the accounting standards or not. Auditors do not identify all the misstatements rather, they’re only responsible for identifying the material misstatements.
Importance of Audit
An audit provides recognition to a company by inspecting its financial statements and providing assurance to the shareholders and investors that the accounts are accurate and fair. It also plays an important role in enhancing the internal system and controls of a company.
What does it involve?
Audit needs to be done by auditor who is registered and must follow certain standards. It includes working on the financial statements for identifying material misstatements and reviewing and testing the transactions and balances of these statements.
Auditors also check whether the statements are as per the accounting standards and company laws or not.
After completing the audit, a report is constructed as per the audit results that includes the financial statement of the company. Any lacking found by the auditor in the internal controls is also informed to the management for improvements.
Quick Sum Up
To sum up, we have discussed what is an audit, when it is needed, why it’s important and what does in involves. After going through this information, we can say that audit exempted companies might also need an audit to boost their confidence and business credibility. It is advisable to have an audit if you’re planning to sell your business to get the maximum price.
You may contact our professional for the maintenance and accuracy of your financial statement before an audit to avoid penalties.
Disclaimer: This blog is just for general information on audits.