Do you need an audit?

Some businesses must have an annual audit of their financial statements by law - but at what point does that become a requirement?

The qualifying criteria are that any two of these three circumstances have applied over the past two years:

  • £10.2M or more in annual turnover
  • £5.1M in assets
  • More than 50 staff

An audit involves a much more detailed level of independent scrutiny of the financial statements than a standard accountants report. An audit report will give assurance that the financial statements show a 'true and fair view' which is a positive affirmation and therefore involves much more work on the auditors part to ensure that is the case:

  • An audit will involve more detailed checks of bank transactions and invoices.
  • Where stock is involved a stocktake will also be involved (which has been a nightmare for audits due to be carried out during lockdown).
  • An audit must follow the International Standards for Auditing.
  • An audit follows a very strict code of ethics.
  • Not just any accountant can undertake an audit. An auditor must be registered as such with a recognised regulatory body.

The auditor will also review the director's assessment of the company's ability to continue as a going concern. This is will involve reviewing cash flows forecasts and management reports to confirm that the directors assessment that the company can continue to trade for at least 12 months from the date of signing the report is reasonable.

The auditor's role is to give assurance to the shareholders of a company that the directors are doing their duty. Any shareholder with a 10% or more shareholding can request an audit, even if the company doesn't meet the criteria.

Needless to say that the cost of an audit is around five times more than a normal set of accounts, simply because it's labour intensive and takes time. However, despite this, some companies do request that an audit is done to demonstrate to shareholders, suppliers and potential customers that they are operating ethically - and healthily!

If you ever require an audit please let us know if we can assist.