Auditing done as it should be

If there is one thing that business owners, FDs and CFOs have in common it is that they are always trying to save time and money. Let’s start off with some basics about auditing, so we are all on the same page.

What is an audit?

Simply put, an audit is a statutory requirement for companies meeting certain criteria, which involves an inspection of their financial records and reporting. Companies not meeting the statutory requirements may decide to voluntarily have an audit to add credibility and robustness to their financial reporting,

To audit or not to audit

You may find yourself wondering if your company/SME really needs an audit. As a business grows, it may reach the minimum requirements for a statutory audit.

A statutory audit is a legal obligation that must be conducted by an independent and qualified auditor. UK companies need to be aware of statutory audit requirements and exemptions.

Compliance with these regulations is crucial to avoid legal issues. It is essential to seek professional assistance to ensure compliance and proper financial statement preparation.

Statutory audit criteria

In the UK, the Companies Act 2006 outlines the eligibility criteria for a statutory audit. A company requires a statutory audit if it meets any two of the following criteria:-

• Turnover of more than £10.2 million

• Balance sheet total of more than £5.1 million

• More than 50 employees

The Government has recently announced its proposals to increase the monetary thresholds noted above by approximately 50 per cent, which is expected to be finalised this summer.

While some UK companies are exempt from the audit due to not breaching these thresholds, certain UK subsidiaries of foreign parent companies may still require an audit. This is because the group that the UK company is part of is assessed against the size criteria too, and this also means that some UK subsidiaries will be liable even if they are below the limits on a standalone basis.

In such cases, it is crucial for the company to seek professional assistance to ensure compliance with all necessary audit and reporting requirements.

If you are running a company that is backed by investors or Private Equity, those investors should understand the inherent risk in startup investment. However, a voluntarily audit report has its benefits. A voluntary independent audit can provide clarity and assurance that funding is being well spent. In addition, it could help garner further investment from existing or new sources.

Additionally, a voluntary audit will also provide regular documentation to reduce ad hoc queries into budgets and spend and allow your business to pursue its primary objective.

Internal audit vs. Statutory audit

An internal audit is voluntary and part of good governance. It is conducted by a company’s own employees to identify potential risks and areas for improvement.

A statutory audit is a legal requirement. It must be undertaken by a qualified independent auditor and provides an opinion on whether financial statements are free from material misstatements.

Selecting an auditor

To perform a statutory audit, an auditor must be certified by the recognised regulatory body, the Institute of Chartered Accountants in England and Wales (ICAEW) and be a chartered accountant.

So, what does a good audit look like?

Three ‘simple things’ distinguish a good audit from a poor one:-

1. Quality: A quality auditor will be able to demonstrate their experience and a track record of robust audits. They will challenge their clients to ensure that the output is of a high quality and independent. Ideally, to ensure a smooth audit you should look for a firm that has experience working with companies of a comparable size, complexity, and sector expertise. Ask for references or testimonials to find out what it’s like to work with the team that is being proposed.

2. Methodology: Ask your auditor what their audit approach and methodology is. Check that it is streamlined and tailored to work with and for your business. Transparency and collaboration are key. For example, at Evelyn Partners we tailor our audit preparedness for each client because one size does not fit all.

3. Project management: This refers to our own processes and timelines to ensure that we are staying on track with your audit. A strong project management team that includes a senior member of the firm and further experienced managers with defined roles and responsibilities will result in a streamlined and effective audit that completes to an agreed deadline.

Preparing for Audit

Preparing for an audit takes time and attention, but it can be a smooth and informative process. Typically, fee quotes are based on the number of hours that a given audit is expected to require. To reduce the risk of increasing cost to your business there are steps you can take before and during your audit. These tips are as relevant to SMEs as they are to large businesses.

1. Good housekeeping: You need to have good working practices, for example, ensuring that all supporting documents are correctly filed and available. Having robust controls and processes in place will result in a much smoother audit as well.

2. Data Collection: In good time and per the timelines agreed, collect all financial documents and information requested by the auditors. If you are unclear on anything that’s required, ensure you have an early conversation with your auditors to clarify what is needed.

3. Resolve problems: It’s not uncommon for issues or extraordinary matters to arise throughout the year. Ensure that you discuss these with your auditors as they happen or as soon as they are discovered. Do not leave problems to remedy later.

4. Clear plan: Have early meetings with your team and your auditors so that everyone understands their roles, responsibilities and the timelines involved.

5. Timing is key: Set out a schedule with your auditor and follow timelines.

6. Keep things clear: Maintain communication and transparency between your team and the external audit team. If problems do arise then inform your team and auditor quickly. Communicate issues or discrepancies in advance so they can be addressed and resolved early.

Ultimately, the firm you choose and how engaged and prepared your team are for the audit process will determine what kind of experience you have, the quality of the audit report and your final fee.

It has long been my belief that the time a client spends preparing for audit is time well spent. I don’t want to bill clients for avoidable overruns.

At Evelyn Partners our professional services colleagues have a depth of knowledge that can scale to support businesses at any stage of their journey. Coupled with access to the wider business that has niche expertise means that we are in a strong position to help business owners and C-Suite executives to execute their long-term strategy. We would welcome you reaching out to discuss how we can advise you.

• You can email Mark Prince, Partner, Evelyn Partners LLP at: mark.prince@evelyn.com