The Importance of Auditing

Auditing is a crucial part of reinforcing a company’s trust and reliability. Whilst not all businesses in the UK require one by law, all companies will likely undergo some form of audit in their lifetime.

In this article, we will discuss the importance of audits, and why they are vital for businesses, customers, and the UK as a whole. We will also look at its advantages and why companies should still commit to audits even when not legally required to.

What is an audit?

An audit is an examination of a business’s financial records and reports in order to assess their accuracy, compliance, and reliability. Audits are conducted by an independent auditor in order to remove any bias when reviewing the business in question.

Audits can be conducted by internal auditors who are part of the organisation or by external auditors who are independent third parties. External audits are often required by regulatory authorities or stakeholders like investors and creditors to provide assurance on the accuracy and reliability of financial information. 

Internal audits, on the other hand, are conducted by internal audit departments to help organisations improve their operations, risk management, and internal controls.

Which businesses are required to have an audit?

Business that meet at least two of the following criteria must undergo an audit for each year they are valid:

• Turnover of more than £10.2 million
• Assets worth more than £5.1 million
• The company has more than 50 employees

Moreover, certain businesses are required to undergo audits, even if they fail to meet the requirements above. This includes the likes of banks, insurance companies, publicly traded businesses, and specific charities.

Stakeholders that own more than 10% of a business can also request an audit. This gives them an accurate depiction of the financial state of the company and allows them to make an informed decision on their shares.

Why are audits important?

Audits are important for a number of reasons, such as:

1. Upholding accuracy and reliability

Financial audits are instrumental in verifying the accuracy and reliability of a company’s financial statements. Through intense examination, auditors can identify errors, irregularities, or discrepancies, either strengthening or weakening the financial claims made by the company in question.

It is imperative, for both the business and any outside parties, to know whether their records are correct. A qualified opinion, meaning the auditor has found inconsistencies, means that the company needs to resolve them in order to maintain their reliability.

2. Compliance with UK regulations

Businesses operate within a complex web of regulations and accounting standards. A financial audit ensures that the company’s financial practices align with regulations and legal requirements, such as the Companies Act 2006.

Compliance not only mitigates legal risks but also enhances the organisation’s credibility in the eyes of regulators and investors. Businesses that receive an unqualified opinion from a third-party auditor are proven to be transparent, honest, and fair with their financial declarations.

3. Fostering trust with stakeholders

Investors, lenders, and other stakeholders rely on accurate and transparent financial information to make informed decisions. Companies with a history of clean audits are more likely to make a better impression on potential investors, as the business has proven to be trustworthy and transparent with its financial records.

A financial audit serves as an independent verification that the company’s financial position is accurately portrayed. This, in turn, boosts confidence among stakeholders and fosters stronger relationships with investors and creditors.

4. Detecting risks

Financial audits help identify and assess various risks that a business may face, including financial, operational, and compliance risks. By uncovering these risks, auditors and management can develop strategies to mitigate potential negative impacts. 

This proactive approach to risk management enhances the overall resilience of the business. It is a great indicator of how well the business model operates and, if there are any potential bottlenecks or threats, how best to deal with them.

5. Strategic decision making

Accurate financial information is essential for strategic decision-making. A financial audit provides management with a clear picture of the company’s financial health, allowing for more informed and effective decision-making. 

When directors and management come together to make plans for the future, most will look at the results of an audit to evaluate their success over the last working year. This is especially crucial during periods of growth, diversification, or when navigating challenging economic conditions, such as recession or, more recently, a pandemic like COVID-19.

Perrys Accountants – placing importance on auditing

Auditing is a necessary procedure that all businesses, regardless of shape or size, will likely need to consider at some point. Smaller businesses may look to undergo an audit to build trust with potential stakeholders and investors, whilst larger businesses are required by law and may want to start planning ahead for growth.

At Perrys Accountants, we’re experienced in handling audits for businesses across a wider variety of industries and sizes. By enlisting our help, we can precisely identify a business’s compliance with regulatory requirements, financial accuracy, and efficiency of internal controls.

Take the first step and reach out today.