What is an audit?
An audit is an independent evaluation of your organisation's financial statements. The objective of an audit is to form an independent opinion on the financial statements of the audited entity.
Auditor’s report on the ‘truth and fairness’ of your financial statements, playing an important role in upholding confidence in your financial reporting. With an ever increasing number of organisations falling outside the audit thresholds, following the increase in such thresholds, an audit can provide credibility, greater confidence and transparency to your shareholders and investors.
What does an audit involve?
An audit can be conducted externally or internally. For a full external audit, you must first appoint a registered statutory auditor to conduct the audit impartially. It is important that the auditor is completely independent of your business.
The auditor will conduct a series of prescribed procedures on your financial statements to identify any material misstatements. ‘Material’ refers to inaccurate or potentially misleading statements that are significant enough to influence decisions made by the users of the financial statements. Due to practical constraints, an auditor typically takes a sample of transactions for testing and will issue an informed opinion on whether the accounts are free of material misstatement and represent a true and fair view of the organisation’s financial affairs. The auditor will also assess whether, in all material respects, your financial statements are prepared in accordance with applicable accounting standards and legal regulatory requirements.
What are the results of an audit?
On completion of their audit work, the auditor produces a standard report, which should be included with the financial statements of the audited entity. The report contains the opinion of the auditor, which can be one of four types: unqualified, qualified, adverse and disclaimer of opinion.
An unqualified report means that the financial statements in the auditor’s opinion give a true and fair view and are properly prepared in accordance with applicable accounting standards.
A qualified report indicates the financial statements have a material error or omission which is not pervasive (it is confined to one element or portion of the financial statements) and therefore only a part of the financial statements are affected.
This is also known as an ‘except for’ opinion, in which the financial statements give a true and fair view, except for the issue described in the notes to the financial statements.
An adverse report indicates the financial statements contain a material error or omission which is pervasive (not restricted to a particular part of the financial statements). This is also known as a negative opinion, as the errors influence the whole of the financial statements.
4) Disclaimer of opinion
If an auditor issues a disclaimer of opinion the financial statements lack sufficient and appropriate audit evidence due to an inability to obtain this and therefore an opinion is not given.
Can an audit be conducted internally?
An internal audit assesses the key risks your organisation faces and the effectiveness of how such risks are managed through the control processes that management have implemented. Internal audits are primarily utilised to assess the effectiveness of internal controls. The scope of such audits are often defined by management and the internal auditor will issue recommendations for improvements in the organisation’s systems and controls. There is significant overlap between the work of internal and external auditors, though only independent auditors can issue a statutory opinion.
Does my company need an audit?
The need for an audit can be determined by legal requirements and stakeholder demands, as well as basic prudence. In terms of the law, a company is required to have an audit when two of the following three conditions are met:
- Annual turnover greater than £10.2m
- Total assets greater than £5.1m
- Greater than 50 employees
However, even for entities who do not meet the above thresholds, shareholders may request an audit for financial assurance. You may also choose to conduct an audit to avert employee theft or resolve allegations of misconduct. An audit can potentially help to highlight unusual transactions so that early action can be taken.
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