In today’s fast-paced and complex business environment, audits have become an integral part of ensuring the stability, sustainability, and growth of a business. Audits play a critical role in providing stakeholders with assurance that a company’s financial statements are accurate, reliable, and comply with applicable accounting and regulatory standards.
The purpose of an audit is to provide an independent and objective assessment of a company’s financial position, performance, and regulatory compliance. It involves an in-depth review of a company’s financial records, systems, and processes to identify material errors, omissions, or discrepancies that may exist.
Audits are particularly important for businesses operating in the United Kingdom because of the stringent financial reporting regulations. The Companies Act 2006, for example, requires all UK companies to prepare annual financial statements that must be audited if the company meets certain size criteria. The Financial Reporting Council (FRC) is responsible for setting auditing and accounting standards in the UK and oversees the work of auditors.
What are the benefits of an Audit?
Audits provide several benefits for businesses. First and foremost, they provide assurance to stakeholders that a company’s financial statements are accurate and reliable. This includes shareholders, creditors, lenders, employees and potential investors who rely on the financial statements to make investment decisions. An audit report can enhance a company’s reputation and increase stakeholder confidence in the business.
Audits can also help identify areas where a business can improve its financial reporting processes and internal controls. By identifying weaknesses or deficiencies, businesses can take corrective action to address them and strengthen their financial reporting practices. This can help prevent errors or fraud in the future, something which can be costly to the business and its reputation.
The FRC requires all auditors to follow a strict code of ethics and adhere to auditing standards. This ensures that audits are conducted in a consistent and objective manner, which helps maintain the integrity of the financial reporting process.
Overall, audits are a vital tool for businesses operating in the United Kingdom. They provide assurance to stakeholders, help identify areas for improvement, and ensure compliance with legal and regulatory requirements. By investing in an audit, businesses can improve their financial reporting practices, enhance their reputation, and ultimately drive long-term success.
Criteria for businesses Audits
The criteria for businesses that require an audit is determined by the Companies Act 2006, which sets out the thresholds for determining whether a company is exempt from audit.
A company that meets at least two of the following criteria is required to be audited:
- Turnover of more than £10.2 million
- Assets worth more than £5.1 million
- More than 50 employees on average
Certain types of businesses are not exempt from audit, regardless of their size or turnover. These include:
- Public limited companies (PLCs)
- Companies that are subsidiaries of a public limited company
- Financial services companies, such as banks and insurance companies
- Charities and other non-profit organizations that meet certain size thresholds
Voluntary Audits
It is important to note that even if a business is exempt from an audit, it may still choose to have an audit voluntarily. There are various reasons why audits are undertaken, such as enhancing the company’s reputation, providing additional comfort to customers and suppliers regarding its financial standing or to to become a preferred supplier, whilst also leading to greater confidence by investors and financial institutions.
FRC to be replaced by ARGA
Following accounting irregularities at companies such as Carillion, Patisserie Valerie and BHS, the UK government set out plans for a new regulatory body to replace the FRC. TheAudit Reporting and Governance Authority (ARGA)was expected to be fully implemented by April 2023, but is currently delayed without a clear timetable of when it will be operational.
It’s always advisable to seek professional advice from a qualified accountant or auditor to determine whether a business is exempt from audit or other reviews, as the rules and regulations can be complex and subject to change.
For detailed advice and guidance on any Audit & Assurance matters, please get in touch with our Audit team on 0121 633 2000.
