James Hadfield – Audit Partner
Many companies within the UK require an audit, but what is an audit and when is it needed?
When does an entity require an audit?
A company is legally required to have an audit if they breach two of the following thresholds:
Total assets greater than £5.1m; or
Greater than 50 employees.
Even if a company is below these thresholds it will be required to have an audit if it is part of a group which breaches certain size thresholds. Additionally, sometimes the company’s articles or the shareholders will require an audit. Therefore, even small companies can be required to have an audit.
The objective of an audit
The objective of an audit is to form an independent opinion on the financial statements of the audited entity. The opinion includes whether the financial statements show a true and fair view, and have been properly prepared in accordance with accounting standards.
A misconception is that auditors are required to identify all misstatements. However, they are responsible for identifying material misstatements, not all misstatements.
What does an audit involve?
An audit must be performed by a registered auditor and must comply with certain standards. It involves performing procedures on the numbers disclosed in the financial statements. These procedures are designed to identify material misstatements and regularly involve testing a sample of transactions and balances.
Additionally, the auditor performs a detailed review of the financial statements, including disclosures, to check they comply with accounting standards and company law.
After all the work has been completed the audit opinion is communicated in a standard report which is included in the financial statements of the audited entity. Any weaknesses the auditor has identified in internal controls will also be communicated to management.