The purpose of an audit
Auditing services are an important investment in your business, so it’s vital that you obtain best value from them. By taking a little time to understand the purpose of an audit, you will put yourself in a stronger position to achieve significant benefits.
Let’s look at how you can do this.
There are two main types of financial audit – a statutory audit and a non-statutory audit. While they have much in common, they also have slightly different purposes.
The main purpose of a statutory audit
A statutory audit is an independent audit that companies of certain types and sizes must undertake each year. (For more details, see Statutory Audit: does my limited company need one?)
The Institute of Chartered Accountants in England and Wales (ICAEW) offers a succinct definition of a statutory audit’s purpose.
Or, to put it more simply, the main purpose of an audit of this kind is to assure shareholders that a company’s financial statements are likely to be free from material misstatement and comply with the law.
The main purpose of a non-statutory audit
As its name suggests, a non-statutory audit is not required by law.
Non-statutory audits are sometimes known as voluntary audits or optional audits. They are normally commissioned by a company’s directors to get independent insights into a company’s financial statements.
There are many reasons why a company might commission a non-statutory audit. For example, a potential funder or lender may want an independent auditor to give the company accounts a precautionary check. Alternatively, the directors may be planning a business exit by selling their stake in the firm. Sometimes there may be more than one purpose of an audit – we’ll look at some additional scenarios later in this article.
Understanding how the two types of audits work
Both statutory and voluntary audits are systematic examinations of your company’s financial statements and accounts. They are conducted by an independent auditor such as THP and provide you with an objective assessment of your business’s financial health. Statutory auditors must be registered. It is also good practice to use a registered auditor for a voluntary audit. Doing so is likely to yield more valuable results.
The two types of audits drill down into your company’s accounts to make sure they are fairly stated. For reference, your accounts should include the following:
- Balance sheet. A snapshot of your assets and liabilities.
- Income statement. Details of your revenue, costs and profits.
- Cashflow statement. Showing your cash inflows and outflows.
- Statement of changes in equity. Details of items like dividends, share issues and buybacks.
- Notes to the accounts. These might include information on items like accounting policies, staff costs, intangible assets, liabilities, property, plant and equipment.
ICAEW has fuller details on how your financial statements should be presented.
Once auditors have examined your accounts, they will provide you with something called an audit error schedule. This contains details of any misstatements. It allows you to make any corrections to your accounts before the auditor issues a final report containing an audit opinion. For statutory audits in particular, you should be aiming for an unqualified opinion – one that confirms that your accounts give a fair and accurate view. You can find out more about audit opinions here.
Benefits of the audit process
While the key purpose of an audit is to confirm that a company’s accounts are free from substantial errors, they also have other purposes and goals. Some benefits of the audit process include:
- Ensuring compliance. Audits verify that your financial statements comply with the correct accounting standards and regulations. This ensures that your financial information is clear, consistent and comparable across different accounting periods and different companies.
- Greater transparency. The audit process provides your company’s stakeholders with a fair view of a company’s financial position. This reassures shareholders and investors that your company is managed responsibly and that there is a low risk of unauthorised transactions or suspicious activities.
- Mitigating risk. Audits identify most potential risks and material misstatements at an early stage, helping your business to take corrective action and put effective risk management strategies in place.
- Improving internal controls. The audit process assesses the effectiveness of your company’s internal control processes, identifying deficiencies in accounting systems or processes. This ensures robust corporate governance, helping to guard against fraud or error.
- Adding value. Beyond compliance, audits offer insights that can lead to operational improvements and better strategic decision-making. For example, by highlighting how each product or department is performing, you can streamline costs or redirect resources into any opportunities that are revealed.
Additional purposes of a non-statutory audit
As we mentioned earlier, a company may commission a non-statutory or voluntary audit for a variety of reasons. This is frequently done by businesses that aren’t legally required to undertake a statutory audit. The purpose of an audit could be any combination of the following:
- Securing finance or funding. If you are seeking finance from lenders or investors, they will often ask for audited financial statements before they make a decision.
- Checking your company is compliant. Even if you don’t have to arrange a statutory audit, you still need to comply with financial and accounting regulations. A voluntary audit will highlight most issues early on, allowing you to take action to correct them.
- Preparing for business exit. This might happen if one or more of your directors want to sell their stake in your company, you face a management buyout or you plan to float your firm as a public company. In all these instances, a voluntary audit is likely to be necessary.
- Managing risk. Fraud and error can happen to any business, regardless of size. You can help protect your company from risks like these with regular non-statutory audits.
- Extra credibility. A key purpose of an audit is to give your company extra credibility. If your accounts are seen to be accurate, transparent and robust, it not only gives you extra credibility with lenders and investors, but also with suppliers, clients and customers.
Another benefit of opting for a voluntary audit is that you can arrange it for a time that suits you. While most modern audit work takes place away from your premises, choosing the timing of a voluntary audit can minimise disruption even further.
What isn’t the purpose of an audit?
Before concluding this article, it’s worth taking a moment to look at what isn’t the purpose of an audit. When you organise either a statutory or voluntary audit, it’s important to remember that auditors are not responsible for the following:
- Preventing fraud. While the audit process can uncover and highlight irregular transactions, it’s not the auditor’s role to detect all instances of fraud or representation. It is up to company directors to use the information provided by auditors to get to the root cause of any irregularities.
- Reviewing every transaction. Auditors will not review every transaction. Indeed, it would be too expensive and time consuming if they did. Instead, auditors tend to focus on areas of particular risk, rather than spend too much time on low-risk parts of your accounts.
- Preparing financial statements. Auditors review your financial statements. They don’t prepare them. If you need help preparing your accounts, get in touch with our accountancy team today. They’ll be delighted to help you.
- Guaranteeing your accounts are free from material misstatement. The UK’s current auditing model means that there is a small risk that auditors will fail to detect a material misstatement during the audit process. However, despite the low risk, auditors can’t guarantee they will spot every issue of this kind. This emphasises the importance to your business of robust internal controls.
Conclusion
The main purpose of an audit is simple: it’s to give you a high level of assurance that your accounts are free from material misstatement.
This is true of both statutory and voluntary financial audits. However, the audit process can also have a number of other purposes. These include giving stakeholders a good reason to have confidence in your business, preparing your company for sale, or reassuring potential lenders and funders. Additionally, a thorough audit can give you valuable insights that help you to improve your accounting, operational and strategic activities.
When you need an audit, it’s important to choose an auditor that takes their responsibilities seriously. This allows you to have confidence in the findings of their audit process and their final report and recommendations.
THP auditors will only put their name to your accounts if they are fully confident in their findings. They also make the audit process as smooth as possible, keeping disruptions to a minimum. Our specialist team works with businesses of all sizes, offering a high level of expertise at a lower cost than most big auditing firms.
Click here to learn more about our audit services, obtain an online quote or to get in touch to discuss your own audit service requirements.
