Everything you need to know about audit procedures
Audits are done to protect the capital markets. They assure and provide confidence to investors and potential investors in an organization’s accounts. Moreover, audits validate the true performance and wealth of a company. Audits provide transparency about a business’ accounts. Without them, investors can question the integrity of an organization’s reported financial results and withdraw their investments, in turn causing the financial markets of the world to collapse.
The Companies Act 1985 offers limited liability to organizations. However, it also demands something from the companies in exchange of this privilege. One of its demands is the requirement of audits.
The primary function of audits is to protect the shareholders of the company. If an organization is small and is eligible for an audit exemption, still the shareholders can ask for an audit. Shareholders who own atleast 10% of an organization’s shares can demand, in writing, for an audit of the accounts, prior to 28 days of the relevant year ending date. In such a case, directors of the company cannot benefit from the available provisions of audit exemption.
Small organizations that meet both the following eligibility criteria are qualified for an audit exemption.
· Have a turnover below £5.6 million
· Have a balance sheet below £2.8 million
If any of these eligibility criteria is exceeded then the audit exemption right is withdrawn.
Organizations that are registered as charities are subject to a lower threshold for audit exemption. Additionally, there are various entities that need an audit, but they do not come under the Companies Act 1985, like Industrial and Provident Societies, unincorporated charities, and pension schemes.
For a lot of public sector companies, audits are necessary and unavoidable. Since, an annual audit is a necessity, it is normal to forget the several advantages of audits to an organization. Although every company is unique, the actual audit procedure is mostly the same, no matter what the size of the organization is or which sector it operates in.
A company’s financial records are examined annually by the financial auditors and then they determine how these financial records are used. Our step-by-step guide will make you aware about the whole auditing process, so that you have a better understanding of it.
The planning stage is one of the most significant parts of the audit procedure. Before the financial auditors visit an organization, they want to fully understand the organization. Knowing a lot of things about the company makes it easier for them to perform auditing. You should be ready to provide all the essential information about your business to the auditors, which includes information about the:
· People - the employees, the management, suppliers, as well as the customers
· Corporate structure - the history of the company, market share, and locations
· Finances– accounts, financial statements, stock, and cash levels
· Operations – products, processes, and services
· Industry insights - risk analysis and competitors
With a detailed overview of the company’s information, the financial auditors can identify potential issues and problems in the beginning.
You should create a detailed schedule that should outline what all needs to be done, by what time, and by whom. Before starting with the auditing procedure, the financial auditor must discuss and approve this timetable. A proper schedule ensures that all your company’s financial requirements are met. Moreover, it gives you sufficient time to organize everything, for instance, having discussions about the review with your staff, informing the staff of any appropriate actions that they should take, ensuring all the paperwork is updated, etc.
Normally, there are four main areas where controls are examined, including stock, cash, payables, and receivables. An actual audit performs a thorough examination and reviews the company’s financial statements and accounting systems in main locations. This includes testing details, reviewing the main control account reconciliations, and verifying balances with third-party sources.
Correct assessment of a company’s controls dictates the amount of testing. If they are satisfactory, the testing is restricted; if not, a comprehensive inspection is done.
Each and every transaction in a company goes through auditing. The controls are inspected to check if they are effective and that they are not superseded. The team of financial auditors performs tests to make sure that everything is incorporated; not just the paperwork, but also to check that transactions and assets are legitimate and authentic.
Throughout the auditing process, regular informal discussions are held. These debates offer a mutual feedback depending on the investigation, analysis, and documentation assessed during the audit procedure and to emphasize the areas for improvement.
The concluding statement reveals the relevant factors for a comprehensive understanding of the financial statements. It will be showed to, and discussed with, the organization’s audit committee and board. The main purpose of this step is to get confirmation for a financial auditor that the organization’s accounts illustrate a fair and true picture.
BHATIA & CO, INC, CPAs