James Hadfield – Audit Partner
An audit is defined as an official inspection of an organisation’s accounts, typically by an independent body. Many companies within the UK are likely to require an audit, but are unsure what an audit is and when is it needed.
So when does an entity require an audit?
A company is legally required to have an audit if they breach two of the following thresholds:
- Turnover greater than £10.2m;
- Total assets greater than £5.1m; or
- Greater than 50 employees.
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Even if a company is below these thresholds it will be required to have an audit if it is part of a group which breaches certain size thresholds. Additionally, sometimes the company’s articles or the shareholders will require an audit. Therefore, even small companies can be required to have an audit.
The objective of an audit
The objective of an audit is to form an independent opinion on the financial statements of the audited entity. The opinion includes whether the financial statements show a true and fair view, and have been properly prepared in accordance with accounting standards.
A misconception is that auditors are required to identify all misstatements. However, they are responsible for identifying material misstatements, not all misstatements.
What does an audit involve?
An audit must be performed by a registered auditor and must comply with certain standards. It involves performing procedures on the numbers disclosed in the financial statements. These procedures are designed to identify material misstatements and regularly involve testing a sample of transactions and balances.
Additionally, the auditor performs a detailed review of the financial statements, including disclosures, to check they comply with accounting standards and company law.
After all the work has been completed the audit opinion is communicated in a standard report which is included in the financial statements of the audited entity. Any weaknesses the auditor has identified in internal controls will also be communicated to management.
More Audit FAQs
More about Menzies audit and compliance services
As well as meeting your statutory reporting obligations, Menzies’ audit and compliance services are the proactive way to reduce risk and drive forward your business strategy. Our pragmatic, hands-on approach helps you improve your business performance – by challenging assumptions and resolving commercial issues that could be holding your business back.
Our audit and compliance team will help you to:
- Add value to your business by using the audit as a basis to identify and resolve commercial issues and to improve your business processes.
- Use the understanding and insight gained from the audit as a basis for helping you develop strategies to drive your business forward.
- Reduce risk and improve your organisational performance by challenging existing assumptions and practices.
- Secure peace of mind from knowing your statutory obligations are met, accounts are true and potential problems have been identified early on.
Contact Menzies Audit & Compliance team
To speak to a partner or for more information about the audit and compliance services we offer please contact one of the Menzies LLP offices or complete our contact from below.
FAQs
Auditing, or a financial audit, is an official examination and verification of a business's financial records. The main goal of auditing is to make sure that a company's financial statements are accurate and are following regulatory guidelines.
What is the main purpose of an audit? ›
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date, for example: Are details of what is owned and what the organisation owes properly recorded in the balance sheet?
What are 3 types of audits? ›
There are three main types of audits: external audits, internal audits, and Internal Revenue Service audits. External audits are commonly performed by Certified Public Accounting firms and result in an auditor's opinion which is included in the audit report.
What happens if you get audited? ›
When you're audited, you have to mail in information or meet with the auditor in an IRS office or at your home or office. The auditor reviews the information on your federal tax return and asks for documents to support your claims. Consequences can include a tax refund, a tax bill, or tax audit penalties.
What is an audit example? ›
Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts. Some companies will perform continuous audits to ensure stability.
What does auditing involve? ›
Audits are retrospective, independent checks on an organisation's financial situation. They are often a legal requirement and are usually carried out as part of a team at the client's premises. An auditor will assess the client's systems and records for accuracy, honesty and risk.
What are the 3 C's of auditing? ›
By identifying these issues, manufacturers are better able to prepare for external audits. However, internal audits are only valuable tools if companies can incorporate the 3 C's of Internal Auditing: Communication, Culture, and Coordination.
Which type of audits are mandatory? ›
Private limited companies must conduct statutory audit, internal audit, and cost audit, as per Companies Act 2013. Audits ensure accurate financial reporting. Auditors must be appointed for audits. Various ROC forms must be filed for compliance.
What are the most common audits? ›
A financial audit is one of the most common types of audit. Most types of financial audits are external. During a financial audit, the auditor analyzes the fairness and accuracy of a business's financial statements. Auditors review transactions, procedures, and balances to conduct a financial audit.
Should I be worried if I get audited? ›
Audits can be bad and can result in a significant tax bill. But remember – you shouldn't panic. There are different kinds of audits, some minor and some extensive, and they all follow a set of defined rules. If you know what to expect and follow a few best practices, your audit may turn out to be “not so bad.”
Who Gets Audited the Most?
| Adjusted Gross Income | Audit Rate |
|---|
| $100,000-$200,000 | 0.1% |
| $200,000-$500,000 | 0.2% |
| $500,000-$1,000,000 | 0.4% |
| 1,000,000-$5,000,000 | 0.4% |
7 more rowsThe two groups most likely to get audited are those earning more than $10 million and taxpayers who claim the Earned Income Tax Credit, who tend to be low- or middle-income workers.
How do you explain auditing to a child? ›
An audit is an examination of the records and reports of an enterprise by accounting specialists other than those responsible for their preparation. Public auditing by independent accountants is common in large firms.
What is auditing for dummies? ›
Auditing is the process of investigating information that's prepared by someone else — such as a company's financial statements — to determine whether the information is fairly stated and free of material misstatement.
What is audit definition for kids? ›
An audit is an evaluation or examination of something by a person or group of people. They can be made to a person, to a company, to buildings, to systems, to documents and many other things that are used by people.
