Definition of Annual Audit:
As per the Cambridge Dictionary, audited accounts are company’s financial records that have been officially examined to check for their accuracy and an annual audit or financial audit is done to ensure that the financial records or the statements are as per the specified criteria and in order to give an opinion regarding the accuracy of the financial statements, the auditor checks the records and gathers the evidence to see if the statements have any material errors or other misstatements. In the United Kingdom, the audit of the government expenditure is carried out by the National Audit Office.
In financial language, an audit is a detailed examination, review and analysis of financial records and bank accounts of the company. Apart from examining the financial books, it also takes complete stock of all assets of the company and is also considered as an excellent way to keep the Her Majesty’s Revenue and Customs and the investors timely informed regarding the well maintained accounts and to show how well you are running the business. Although it is the auditor(s) who do the annual audit, but it is the role and responsibility of the director(s) of the company to prepare and present the financial records and the statements and to ensure that there is no error or fraud in the same. As an auditor your role is to look at the accuracy of the numbers and the processes and let the company know if internal control measures need to be taken in order to help and protect the company against any possible fraud.
As an auditor, you have the access to all the financial records such as vouchers, accounts, company books etc, in the form they are held and if needed, you can ask for the help of an officer or employee from the company to provide information or explanations as and when needed so that you can perform auditor’s duty with precision and accuracy. It will not be wrong to say that image of the company in the eyes of investors stays good if the annual audit of the company finishes with minimum or zero (in ideal case) errors or frauds.
Types of Companies in the United Kingdom
As per the Companies Act, companies can be classified as either profit companies or non-profit companies, and with regard to profit companies, there are broadly four types of companies, namely:
- Private Companies Ltd: A private limited company cannot offer its shares to the public and for it to start with trading; it must issue shares of worth £50,000.
- Personal Liability Companies: A personal liability company is the one in which the directors and the company are jointly responsible for any debts or liabilities of the company.
- State Owned Companies: A state owned company is a legal entity which is created by the government in order to participate in commercial activities on its behalf.
- Public Companies Ltd: A public limited company has the option to offer its shares to the public, however this is not a mandatory term to start one.
Which Companies are Exempted From the Audit?
Companies which are qualified as small companies under Companies Act 2006 are normally exempted from the audit and to qualify your company as a small company it should meet below mentioned criteria, such as:
However, even if a company meets all the above criteria to be classified as a small company, it still has to do the annual audit in case 10% of its shareholders demand for the same. In this case the shareholders, who need an annual audit, must make their request in writing and send the same to the company’s registered office address. Apart from this, they (10% of shareholders) need to ensure that their request reach the office at least one month prior to the end of the financial year for which the audit has been asked for. Also, in case a small company will have to go through the annual audit in case of below mentioned conditions.
Companies That Must Have An Audit:
- Companies which are involved in industries like insurance etc will always need and have to go through the annual audit process;
- Unless the whole group is small or the parent company has got a statutory guarantee, the members have to follow the annual audit process.
- Companies which are governed by certain regulations in which annual audit is an indispensable part, such as FCA.
- A public company, unless it is dormant;
- A subsidiary company, unless falls under the exempted list;
- Companies which are involved in banking or issuing e-money;
- A Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company;
- A corporate body and its shares have been traded on a regulated market in a European State.
Is Having A Voluntary Audit A Good Idea?
A company which falls under exempted list of companies for annual audit can still go ahead for the same in case it wish so. Most of the companies opt for having an annual audit because of the following reasons:
How to Prepare For a Cost-Effective Audit?
An annual audit, though sounds easy, can turn out to be a nerve-wrecking process in case you haven’t prepared for the same well in advance. An auditor, in order to have a thorough audit, has to delve deep into the financial records, accounts and company books and might come out with a long list of demands at the end of each annual audit. However, you can save yourself from the hassle of running from post to pillar in order to save yourself and the company from any possible fraud or error by following the below mentioned steps, such as:
- Perform year-round reconciliations: If you leave everything for the last minute, you for sure will be in trouble during the annual audit. So, it is always better to have the reconciliations every month or at least once in a quarter so that the financial records are in order.
- Address potential complications throughout the year: It is always better to keep your auditor well informed about any new or unusual transaction which your company has done. It also helps to keep your documentation ready for the annual audit. This way you save yourself from giving explanations at the end of the financial year.
- Ask for the prepared-by-client list in advance: It is a normal practice that just before an annual audit, your auditor will give you list of prepared-by-list, also called as PBC which has details of the documentation required by him for conducting the annual audit. This list is quite extensive and has documents such as trial balance, bank statements etc and to prepare and compile the same is a time taking process. In order to save yourself from working through the list at the last moment, you can ask for this list well in advance and prepare better for the annual audit process.
- Plan for the audit: You need to sit through the process and forecast what all could be required for a seamless and effortless audit and plan your resources well in advance to avoid any end minute hassles. It calls for the measures like all of your key staff are available during the audit and your finance team hasn’t planned their time-off during the audit period.
- Go digital: There are a lot of accounting and invoice software which are available today to ensure that your financial records are correct and in order. Most of them are automated and thus saves you from doing manual effort. You also have an option to scan and save your documents in digital format.
- Don’t leave anything to chance: It is always better to do your homework well in advance and ask questions rather than leaving things to chance or for the last minute.
Frequently Asked Questions:
Q1: What is an annual audit?
Ans1: An annual audit is a process which is conducted at the end of every financial year to examine the financial statements of a company, such as accounts, records and vouchers, company’s books for any possible fraud or error.
Q2: Who conducts the annual audit?
Ans2: It is duty of the auditor to conduct the annual audit. He needs to inform the company regarding the date on which annual audit will be conducted.
Q3: Is it the duty of the auditor to prevent any error or fraud in the financial statements of the company?
Ans3: No it is not the duty of the auditor to prevent any error or fraud in the financial statements of the company. It is rather the duty of the directors to do so.
Q4: Which all companies are exempted from having an annual audit?
Ans4: Companies which fall under small company, under Companies Act 2006, are normally exempted from having an annual audit. However there are certain companies which have to do the annual audit as per the laid regulations.