To Audit or not to Audit, that is the question!

To Audit or not to Audit, that is the question!

For many business owners, the decision to audit their company accounts is not optional. It is a statutory obligation when:

a) the entity does not meet the requirements to qualify as a “small” company. To qualify as “small” the company must meet 2 out of the 3 following conditions: turnover less than £10.2m, gross assets less than £5.1m, 50 employees or less)

b) the entity, although qualifying as a small company, is a member of a group that does not qualify as a small group (there are some possible exemptions here and if in doubt, advice should be taken)

c) the entity is a public company, an authorised insurance company or falls within some of the other specific sets of entities that are specifically excluded from taking audit exemption.

[Note that there are different requirements that apply for charities and, indeed, even within that there are different requirements depending on whether the charity is registered in Scotland or England/Wales. If in doubt then advice should be sought]

Taking an audit exemption incorrectly and filing unaudited accounts when audited accounts should have been prepared and filed can have serious consequences for the directors.

However, beyond all the statutory requirements, many business owners make the voluntary decision to have their accounts audited. Why would they bother, you may well ask, when this comes with potentially high costs, investment of time and inconvenience?

Audit partner, Craig Hunter, answers some key questions to help understand why this is something you might consider:

Q: Craig, you’ve worked in audit for over 25 years and seen many businesses through this often quite challenging process. Can you share from your perspective when business owners should start considering whether to undertake a voluntary audit?

Craig: Firstly, it’s worth mentioning that aside from the statutory requirements for audit, care needs to be taken that there are no audit requirements imposed on the business by other means. For example, it may be that the business has some borrowings, and the lender requires audited accounts. These things can often be overlooked.

Secondly, an audit can provide credibility to a set of financial statements. This can be important for example if the business is looking to approach lenders to borrow money or indeed in tendering for new work where the potential customer has asked to see your financial information.

Thirdly, an audit gives the shareholders the confidence that the financial statements present a true and fair view. This can be particularly important where there are shareholders in the business who are not involved in the day to day running of the business.

Finally, and importantly, an audit should not just be seen as a tick box exercise to provide comfort that the accounts present a true and fair view. An audit should provide added value to any business with recommendations made by the audit team where improvements can be made, particularly around the controls/processes in place within the business. Having a sound system of internal controls/processes typically means more accurate financial reporting by the business throughout the year resulting in management having accurate and up to date financial information to help them make decisions that are appropriate for the business. Not only that but it allows management to focus their time on what is important to them which is running a successful business.

Q: If there are so many benefits, why do so few companies not choose this route. What are the barriers to this?

Craig: One of the key barriers to this is the cost of an audit. Over the years, the regulations surrounding audit have increased hugely, such that the cost of performing an audit has risen considerably.

Unfortunately, many business owners do not see the value that an audit can bring in relation to these increased costs. However, if an audit is performed well then there should be added value for any business that still outweighs the cost, not least for some of the reasons I have already mentioned above. At Haines Watts, my team is focused on ensuring that we deliver real value, and our growing number of audit clients is testament to this.

We see many instances where a business has grown quite rapidly over a relatively short period of time and all of a sudden there is a statutory requirement for an audit to be performed. When that point arises it is very often the case that the audit team, in that first year of audit, find a number of issues where things have not been done correctly and there are errors that need corrected. This can result in the auditor having to restate the prior year numbers or perhaps even having to modify their audit opinion, which can have adverse impact on the business’s credibility and perhaps credit score. These matters could be avoided if a voluntary audit had been performed in earlier years.

Q: So what’s involved? (Time / money / people)

Craig: An audit is a ‘project’ that needs to be properly planned, performed and controlled both to meet regulatory requirements and indeed to ensure that the audit is carried out efficiently and effectively.

The audit client does not see a lot of what goes on behind the scenes in an audit and perhaps that is one further reason why there is barrier – the cost perhaps does not always equate to the expectations based on what the client sees.

At the planning stage, the audit team are assessing the risks of material misstatement within the financial statements based on their knowledge of the business, the control environment within the business and inherent risk. This can be a tricky and time-consuming process but ultimately leads to the audit team directing their work to the transactions/balances within the financial statements that are most likely to be subject to material misstatement.

With an audit plan in place, the audit team request all the information they will need from the client to be able to perform the audit. This can be a time-consuming process for the client but we like to make things easier for them through the use of some special software where the client can easily upload the information in response to the specific requests made.

Of course, the pandemic has changed the way we work, as it has for many businesses across the country and therefore when it comes to the actual audit fieldwork, we are finding that a mixture of remote and onsite audit work works well.  We have found that our clients like this not least because it allows them to focus on their ‘day job’ rather than have to deal with the audit team being onsite for a whole week or weeks, as was often previously the case.

So, armed with all the information that the audit team requested they will then perform the audit work in accordance with the audit plan. Our audit plan can include a mixture of procedures that we will perform ranging from testing some of the controls in place within the business over the key transaction streams, some analytical procedures where the audit team are seeking explanations and evidence to support movements in numbers from one year to the next and some substantive procedures where the audit team are picking a sample of items within a population of items for testing.

Once the fieldwork has been performed and all the work thoroughly checked and reviewed then it is time to pull everything together and form conclusions. The ‘completion’ stage of the audit process will include a meeting with management of the audit client, a formal written report being provided to the audit client with recommendations for improvement and of course providing the final signed audit opinion/report.

Q: At Haines Watts, you are in the process of building your audit team, due to increase growth from Audit clients. What’s behind that growth?

Craig: As you said at the start, I have been involved in audit for more than 25 years and along that journey you build personal relationships with many business owners and indeed build personal credibility in what you can do.

I joined Haines Watts in 2017 with a goal of building a credible audit function and the two factors above are at the heart of helping me achieve this.  Our success over recent years has arisen because of the personal connections I have built in my career and because those connections know and trust me. They have confidence that when it comes to audit I know how to deliver a high quality service underpinned by high quality work. I am extremely proud of our track record in Scotland and beyond, delivering on expectations time and time again.

We work with some fantastic businesses and word of mouth referrals have been very important and for which I am very grateful. These referrals show no sign of stopping and indeed we also now see a number of audit enquiries through our website indicating that the Haines Watts  audit offering in Scotland is now much more visible and attractive.

Of course though, I am only as good as the team around me and they play as much a part in our success to date as I do. Audit is definitely a team game in my view and we have plans to add more resource to the team in the next 12 months and beyond..

And finally, Craig, how do people best get in touch for more information?

Craig: please feel free to email me or call directly 0131 625 5151. Or check out our website on audit for some more insights. I’m always happy to have a chat and can usually say pretty quickly whether this is a worthwhile route or not. I’m only a phone call away.