How to prepare your business for an audit

by | Dec 23, 2024

An audit examines your accounts, tax records and financial decisions to verify accuracy. Proper preparation strengthens your business while making the process more efficient.

Whether you’re required to conduct an audit by law or choose one voluntarily, understanding what’s involved can help you get the maximum value from the process.

This guide outlines the key requirements to prepare your business for an audit, the essential documentation, and practical steps that ensure a thorough and valuable audit.

When do you need an audit and why? 

The law requires some organisations to have an audit – but many businesses choose to get audited for other reasons. A voluntary audit is usually needed when seeking investment, preparing for sale, or during mergers and acquisitions, as investors and buyers often want transparent assurance about their financial position.

Some businesses also get audited to identify problems or strengthen financial controls and decision-making.

In terms of when you’re legally required to conduct an audit, there are a few key scenarios:

  • Private companies need an audit if they meet two of: £10.2m turnover, £5.1m balance sheet, or 50+ employees
  • Charities require an audit if their income exceeds £1 million
  • Public companies and financial services firms always need an audit
  • Subsidiaries of larger groups typically need an audit
  • Any company where 10% of shareholders request one

Now that we understand when you need an audit let’s look at how to prepare for one effectively.

Planning your audit 

Successful audits need careful planning. Preparation involves gathering documents, reviewing your processes, and addressing potential issues before the auditors arrive.

The foundations of your audit documentation include the following:

  • Full financial statements and supporting ledgers
  • Bank statements and reconciliations for all accounts
  • Board minutes and major contract documentation
  • Evidence of internal controls and procedures
  • Tax returns and computations
  • Fixed asset and stock records

These records form the foundation of your audit and provide the evidence auditors need to form their opinions.

Record-keeping throughout the year makes a significant difference to your audit experience.

Internal controls and systems

Auditors examine the exact rules and processes your business uses to handle money. They’ll check your written procedures and then test whether people follow them.

A robust purchase system means having documented rules about who can spend what – from petty cash to major investments. Every purchase should leave a clear paper trail of approval emails, signed purchase orders, delivery notes, and matching invoices.

The same applies to money coming in. Every sale must have a matching invoice, and all payments should be tied to your bank statements. The connections between processes should be rock solid.

Charities have extra duties here. For example, they must show how every restricted donation stays separate from general funds.

Stock and fixed assets

If you hold stock, this is one of the first things auditors will analyse. They’ll want evidence that the stock value in your accounts matches what you have.

Before the audit, ensure your stocktake process is watertight – document who counts what, when they do it, how they record it, and who checks their work. Keep clear records of any damaged or obsolete stock, as this affects its value.

For fixed assets like machinery, vehicles and equipment, prepare a complete list of everything above your capitalisation threshold. For each item, gather:

  • Purchase documentation showing the original cost
  • Details of how you calculate depreciation
  • Records showing the current location and condition
  • Full paperwork for any disposals or sales

Make sure you can explain and justify your valuation methods for both stock and fixed assets. Auditors will want to know how you arrived at the figures in your accounts.

Revenue recognition

The audit analyses when and how you record income, as mistakes here directly affect your profit figures. Auditors pay particularly close attention because this area is prone to errors and can be manipulated to make results look better than they are.

When you start to prepare your business for an audit, gather documentation that proves your revenue is recorded in the right periods. Here’s what auditors typically examine:

  • Project income and long-term contracts – gather your client sign-offs, timesheets, and progress reports to prove each stage of work completed. Auditors check these against invoices to ensure you’re not booking income too early or late
  • Prepaid customer income – collect contracts showing delivery dates and payment terms. Your records must demonstrate how prepaid work is earned over time rather than booked immediately
  • Service contracts – keep paperwork showing service delivery periods, ongoing obligations, and how you track partial completion

How Cottons supports your audit

Preparing for an audit takes time and expertise. At Cottons, our team works closely with your staff to prepare thoroughly and efficiently. We’ll tackle practical tasks like preparing audit files and schedules while ensuring you understand what the auditors need and why.

Many of our clients use us for more than just audit support. Beyond helping with the nuts and bolts of preparation, we identify opportunities to improve your systems and processes.

Need to know how to prepare your business for an audit? Talk to our team at Cottons. We’ll ensure you’re properly prepared and guide you through the process.

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