To download a PDF version of this document, click here
Date of publication: January 2012
What is an audit?
The objective of an audit is to allow the auditors to form an opinion on the financial statements of a company. The audit does not relieve the directors of any of their responsibilities as they are still responsible for the preparation and presentation of the financial statements. It is not the auditors' function to prevent fraud and/or error, this is the responsibility of the directors.
In order to reach an audit opinion the auditors will:
- Carry out procedures to obtain audit evidence to provide them with reasonable assurance that the financial statements are free of material misstatement.
- Ensure that the financial statements have been prepared in accordance with the relevant legislation and accounting standards.
The auditors of a company:
- Have a right of access at all times to the company's books, accounts and vouchers (in whatever form they are held), and
- May require an officer or employee, or anyone accountable for any of the company's books, to provide information or explanations as are thought necessary for the performance of the auditors' duties.
Who needs an audit?
A company's annual accounts for a financial year must be audited unless the company:-
- Is exempt from audit being either a small or dormant company, or
- Is exempt from the requirements as a non profit making company subject to a public sector audit.
In order to qualify as a small company the following conditions must be met:-
- The company must qualify as small under the Companies Act 2006 (CA 2006 s382);
- Turnover of the Group must be less than £6.5 million (£7.8 million if including turnover with Group Companies);
- Gross assets (fixed assets plus current assets) of the Group must be less than £3.26 million (£3.9 million if including balances with group companies);
- The company must not be ineligible for any part of the year (PLCs, banking and insurance companies, etc listed under CA 2006 s384);
- The company must not be part of a group that does not qualify as it includes ineligible companies under the previous point.
Even if a company is exempt due to the above an audit may be required if members with 10% of a class of shares request an audit.
How to prepare for a cost effective audit?
There are a number of things that can be done to ensure that an audit runs as efficiently as possible.
Firstly, make sure that all accounting staff are available during the time that the auditors are on site with you.
Secondly, below is a summary of some of the main documents that should be prepared in advance of the audit. If the documents are all readily available this will minimise the disruption to your staff members during the audit.
- All primary accounting records
- Diagram showing the structure and ownership of the company/ group of companies
- Year end bank reconciliation and statements available for the entire period for all bank accounts
- Breakdown of all balance sheet amounts with invoices to evidence items such as fixed asset additions, prepayments and accruals
- Aged debtors' and creditors' listing
- Wages records and P11D returns
- Stock reports
- All hire purchase and leasing agreements
- VAT returns and workings
- Copies of all meeting minutes held during the year and details of any changes in share ownership