Audits might not be the most exciting part of running a business, but they are vital in ensuring financial clarity and compliance. Whether you’re a business owner, charity trustee, or organisation leader, understanding when you need an audit – or simply when one could be beneficial – can help you stay on top of your financial obligations and maintain trust with stakeholders.
Let’s break it down.
When is an audit required?
In the UK, only certain companies are legally required to have an audit. For most small businesses, audits are optional unless specific circumstances apply. Here’s when an audit becomes a legal requirement:
- Company size: An audit becomes mandatory if your company exceeds two of the following thresholds in a financial year:
- Annual turnover: over £10.2 million.
- Total assets: more than £5.1m.
- Employees: 50 or more on average.
- Charities: Charities must undergo an audit if their gross annual income exceeds £1m or meet other financial thresholds set by the Charity Commission.
- Shareholder request: If shareholders owning at least 10% of the company request an audit, you must arrange one, regardless of the company’s size or turnover.
- Loan or investor agreements: Sometimes, lenders or investors require audited accounts as part of their funding terms.
- Regulatory requirements: Certain industries, like financial services, have stricter audit rules due to the nature of their operations.
The benefits of an audit
Even when an audit isn’t mandatory, it can still be worth considering. Here’s why:
- Improved trust and credibility: Audited accounts provide assurance of financial accuracy and transparency, which can enhance your reputation with investors, lenders, and stakeholders. This added credibility can also be advantageous if you’re looking to secure funding, negotiate better terms with suppliers, or attract potential business partners.
- Enhanced decision-making: A detailed review of your financial records can give you deeper insights into your business’s performance. Armed with accurate, reliable data, you’ll be better equipped to make informed decisions that drive growth and profitability.
- Stronger internal controls: An audit isn’t just about the numbers. Auditors often identify weaknesses or inefficiencies in your financial systems, offering recommendations to streamline processes and reduce risks. This can lead to better operational efficiency and fewer costly errors in the future.
- Future-proofing: If your company is growing, voluntarily undergoing an audit can prepare you for the time when audits become mandatory. Getting systems and processes in place early can save you time and hassle, ensuring a smooth transition when you exceed the statutory thresholds.
- Increased stakeholder confidence: Whether it’s shareholders, board members, or external investors, an audit provides them with peace of mind that your financial statements are reliable. This transparency can foster stronger relationships and a shared confidence in your business’s direction.
- Boosted competitive advantage: In industries where trust and professionalism are paramount, audited accounts can set you apart from competitors. It signals a commitment to high standards and can help build stronger relationships with clients, partners, and suppliers.
Common misconceptions about audits
Many think audits are just about compliance, but that’s only part of the picture. They’re not designed to catch every tiny error, nor are they an investigation into wrongdoing. Instead, auditors aim to ensure that your financial statements give an accurate and fair view of your organisation’s position.
It’s also worth noting that audits don’t have to disrupt your operations. They can be completed efficiently with the proper preparation and support, leaving you free to focus on running your business.
Preparing for an audit
Getting organised early can make the process much smoother if you know an audit is on the horizon. Key steps include:
- Reviewing your records: Make sure all financial documents, including invoices, receipts, and bank statements, are up to date and accurately recorded.
- Understanding the scope: Clarify with your auditors what they’ll review and any specific information they need.
- Communicating with your team: Let your finance staff know about the audit and ensure they can provide the required information.
The value of professional support
Navigating audit requirements and processes can feel daunting, but you don’t have to tackle it alone. Professional accountants can guide you through the regulations, help you prepare, and ensure your financial records are audit-ready.
At Cottons, we’ve supported businesses, charities, and organisations of all sizes with their auditing needs. Whether you want to meet legal obligations or boost financial confidence, we’re here to help.
Let’s make your next audit as straightforward and beneficial as possible.
When do you need an audit? We have teh answers.Get in touch with us to discuss when you need an audit and discover how we can support you.