With the audit exemption threshold expected to rise from its current level – £6.5m turnover, £3.26m gross assets and fewer than 50 employees – to £10.2m turnover and £5.1m gross assets in the near future, it may be considered by many observers that audits simply represent an administrative and financial burden to many small businesses.
However this is very much a misconception. Although audits clearly come at a greater cost than preparing unaudited statutory accounts, there are many added benefits of an audit:
Auditing standards require auditors to identify material misstatements in the financial statements due to non-compliance. This involves an awareness of the laws and regulations which affect the business from Health & Safety and industry specific regulations through to Corporation Tax, VAT, PAYE and National Insurance.
A review of compliance by the auditors should highlight any deficiencies and help avoid costly penalties, fines or inspections. In addition this should also avoid mistakes such as overpayments even where the company has complied with laws and regulations. The cost of avoiding a fine or reclaiming an overpayment alone could go some way to covering the audit fee.
Audited accounts will contain an audit report stating that in the auditor’s opinion the financial statements show a “true and fair view”. The presence of such a report adds credibility to the accounts to potential customers, when obtaining credit from suppliers, obtaining or renegotiating a loan from the bank or when presenting financial statements to prospective buyers.
An auditor is required to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. This will require the auditor to discuss, document and test the controls the directors have in place to prevent and detect fraud.
Where there are weaknesses, the auditors will document these for management and make sensible recommendations to improve these controls. If implemented, this should assist in preventing and detecting fraud.
Value added services
An audit requires a broad understanding of the entity, the environment in which it operates, the regulations with which it must comply, the controls it has in place, the performance and objectives of the business and the motivations and goals of the company’s management team.
This understanding can be used to tailor services to those that most meet the needs of the client, whether this be producing a cash flow or profit forecast for the bank through to assisting management in understanding their monthly management accounts.