Strategy, Legal & Operations

Business audits made easy: Everything you need to know

Discover everything you need to know about business audits and why an annual audit can help to mitigate any financial errors from occurring.

When running a business, no one wants to create more work for themselves.

And conducting a business audit sounds like a task that takes a lot of time, money and resources.

But the question is, can you really afford not to do one?

Many business owners dread the auditing process, but this isn’t something to fear. A business audit can help you avoid financial mistakes and mishaps that would otherwise go unnoticed and unsolved.

Auditors are there to help you and your business to thrive and do better.

An annual audit can save your business money and help to mitigate financial errors from occurring.

In this article, you’ll find everything you need to know about business audits, including the following:

What is a business audit and do all businesses needs to do one?

A business audit is an examination of your business’s financial reports by an auditor.

It’s usually conducted on an annual basis and analyses whether your financial statements are correct and accurately reflect your company’s financial position at that given time.

Stakeholders and regulatory agencies can see how much money is earned and spent throughout the fiscal year within your company.

Your financial reports include your balance sheet, profit and loss account, cash flow statement, a statement on any changes in equity, and notes on any other significant changes.

It’s important to prioritise a business audit, as it ensures your financial statements are up to date and accurate.

Which businesses need to conduct an audit by law?

Most private companies are only legally required to conduct an audit if they fall within a particular threshold.

If two or more of the following apply to your business, you’ll need to conduct an audit once a year:

  • Your business’ turnover is more than £10.2m
  • Your business has assets totalling in excess of £5.1m
  • Your business employs more than 50 people.

What are the benefits of conducting a business audit?

Although a business audit sounds like a lot of work and might feel intimidating, there are many advantages it can have for you and your business.

These include:

  • Increase profitability: Detect productivity blockers such as employee theft, potential fraud risks, and any inefficiencies. By addressing these issues, you’ll improve profitability.
  • Ensure compliance with policies and regulations: Make sure your company’s practices and financial statements meet accounting standards to avoid any legal implications. Using cloud accounting software can help with this.
  • Improve effectiveness: Spot and correct financial issues early, and discover opportunities to make your business more effective.
  • Increase your credibility to investors and lenders: Audited financial statements make you look more reliable and trustworthy to potential lenders and investors.

What are the different types of audits?

It’s important to note that there are two main types of audit: internal and external.

Here’s a breakdown of each one:

Internal audit

An internal audit is the assessment of your business’s internal controls, such as compliance, security and governance, as well as your accounting processes.

The main purpose of an internal audit is to identify key risks and offer an insight into how the business can effectively manage those risks and improve internal processes.

An internal audit is completed by an internal auditor within your company and can be conducted on a daily, weekly, monthly or annual basis.

This depends on what works best for your business’ needs and availability.

Internal audits can be scheduled in advance to give the necessary departments the time to prepare the required information. However, if any illegal activity is suspected, then an internal audit could be sprung upon departments without notice.

Internal audits are for internal use only and therefore are only reviewed by those within the organisation.

External audit

An external audit is the evaluation of your business’ financial statements to verify that they provide a true and fair reflection of the company’s financial position and that they meet accounting standards.    

It’s conducted by an external auditor who is independent from your company and can provide an objective examination.

External audits are conducted once a year for every year the company is within the legal threshold.

The report made from an external audit is shared with your stakeholders, shareholders, and the board of directors.

Potential investors, lenders and customers can also review your external audit.

An external audit will usually be held at the end of the company’s fiscal year, as this is when all the accounting books are finalised and financial statements for the year are created.

These should be scheduled months in advance to give departments enough time to prepare all the documents.

If your company isn’t currently hitting the threshold but you forecast that it will by your end of year, an external audit should be scheduled.

How do I prepare for an audit?

Preparing for an audit can seem like a daunting task, so here’s a simple breakdown of how to do it:

Internal audit preparation

  1. First, determine the main focus of the audit (identifying risks, compliance issues, etc), as this will affect the steps and procedures you’ll need to use.
  2. Next, create an internal audit plan that lists all the tasks that need to be completed during the agreed period. This list should be prepared with the internal auditor and reviewed by management before it’s signed off.
  3. If it’s a scheduled audit, give the necessary departments enough notice, so they can prepare the materials and documents the auditor will need. These departments will also be responsible for helping to implement any of the suggested changes.
  4. If your company has had previous audits, it can be helpful to review any notes that were made, so you can improve the process and avoid repeating mistakes.

External audit preparation

Preparing for an external audit is slightly more work than an internal audit. Here’s what you need to do:

  1. First, appoint someone in the relevant team to be a main person of contact for the external auditor. This ensures that the process runs smoothly and reduces the chance of miscommunication.
  2. Similarly to an internal audit, prepare all the relevant documents that the auditor will need. You may also receive requests for additional documentation that could be used as supporting evidence on certain transactions in question.
  3. Keep a personal record of all the documents and details you provide to the auditor, as this will help you to stay organised and maintain a good understanding of what’s being evaluated.
  4. Accounting standards and regulations change every year, so make sure your accounting team is up to date on them. This will save you team time, as they won’t have to update current records to comply with regulations.
  5. If your company had an audit last year, review any notes you took that can help you improve the process and avoid mistakes.

How is an audit conducted?

Knowing how an audit is conducted can take away some of the fear and resistance you might have around it.

Here’s a quick breakdown of how they usually happen.

Internal audit process

During an internal audit, the appointed auditor will observe, take notes, review documents, and interview employees of the company.

It’s normal for auditors to test employees on their knowledge of the company’s objectives, compliance rules, training, and safety standards.

Once the auditor is happy with their overall investigation, they’ll relay their findings back to the company’s management.

A formal meeting will then be held where the auditor will reveal the strengths and weakness they found and offer the department recommendations for improvement.

This also gives management the perfect opportunity to open up any disputes and ask the auditor to verify where they have concluded their findings from.

Once all parties are satisfied with the details presented, the internal auditor can finalise their report.

Both the auditor and management will confirm a timeline to resolve any issues found, and once this is agreed, the auditor can officially close their report.

External audit process

During an external audit, the auditor will thoroughly analyse your financial statements and records.

This review will involve checking the accuracy of these records and whether they have been prepared in alignment with the generally accepted principles.

An external auditor will evaluate whether your financial statements correctly represent your company’s financial position.

This process requires the auditor to go through your company’s records and find out how they were used to create each financial statement.

They will then recreate these statements to see if they were correctly created.

An external auditor will also compare your company’s records to others within the same industry to try and spot any differences or inconsistencies.

At the end of the audit, the auditor will prepare and deliver their report to your business.

It will include any discrepancies found in your financial reporting and any non-compliance with rules and regulations relevant to your business.

If you receive any of these issues within your report, you’ll need to correct these errors in your financial records and redo the audit.

The outcome of an external audit can affect the way external parties view your company.

How much will a business audit cost?

The cost of a business audit all depends on the type of audit you are conducting and how complex it will be.

Due to internal audits being performed by someone within your organisation, they usually won’t cost you anything, other than the time they take.

For external audits, you’ll need to find an external company to conduct it and pay for their service. External audits vary in price depending on the size of your company and how much work needs to be done.

For example, in London the fee for a private company will usually start at around £20,000, but this will vary depending on the complexity of the business audit.

Final thoughts

Despite the cost and time implications that a business audit requires, they can have a multitude of advantages for your organisation.

Whether you conduct an internal audit or are visited by an external auditor, you can make your business more productive and profitable by improving your processes and internal controls.

A business audit can help to increase your effectiveness by spotting any blockers, errors or potential risks within your financial records.

Conducting an audit also provides credibility to your company’s financial statements and gives your shareholders the confidence that your accounts accurately reflect the position of your business.

This can also help to attract potential investors and lenders, as well as prospective customers, as they recognise your business is reliable and trustworthy.

It’s important to remember that your company will need to conduct an external business audit by law if you’re within the threshold.

But this process doesn’t need to be stressful if you prepare your team and all the needed documents beforehand.