Importance of an Audit
A lot of business owners think audits are much of a muchness, however their quality can vary significantly. In some instances, the client relationships formed and the process itself can have a lasting impact; which enables the business to make choices which could lead them to a much more profitable future.
The annual audit is occasionally considered as a commodity purchase. Business owners might take the view that if they must have an audit, it being as efficient and hassle-free as possible, will be beneficial to both parties. While this approach is understandable, it’s important that decision makers don’t underestimate the value that a well-executed audit can bring.
At a time when it is especially important that ethical standards are followed as the audit profession is facing intense study from regulators, politicians and the media. In addition to maintaining their ‘independence’ so to give a fair view of any audited accounts, the auditor should make sure they are questioning the information they are given and apply some ‘professional scepticism’ to the audit process whilst also seeking corroborating evidence at the appropriate time.
Financial reporting council FRC)
The FRC is planning to tighten its ethical standards further to improve audit quality. Even so care is needed in the implementation of any changes to ensure SMEs are not the victims of unintended consequences, this has been given a cautious welcome by some auditors.
From the business owner’s perspective, the audit process can be viewed as an opportunity to gain insights and information about the business that may not have been obvious. Currently, much of this value comes from post-audit feedback, which might cover the efficiency of controls or systems, expectations for the future or business performance. Valuable feedback in these areas could support management teams when benchmarking business performance or alternatively open the door to new market opportunities.
The key to driving value from the audit process is enhancing the overall experience. The objective between auditors and clients should be to establish open channels of communication, so that important information can be shared, and issues can be raised. If an auditor’s only point of contact within the business is a financial manager without direct access to senior-level decision makers, issues are more likely to become longer-lasting which only lengthen the audit process.
The planning phase
A common complaint about the audit process is the time it takes and the tendency for agreed timings to overrun. This can be an area of frustration for the audit team and for clients alike. If a realistic timeline is set at the start, this can allow for an open channel of communication to be established, which should make it possible to avoid situations where deadlines, whether Companies House or otherwise, are at risk of being missed.
More than just setting timelines, it is important to prepare a clear and concise plan to guide the audit team’s progress. To facilitate this, the auditor should start by asking the right questions in order to scope the audit process as precisely as possible. A well-managed audit will involve an auditor who spends some time getting to know the way the business works, its processes, systems and controls.
keep to the game plan
Once the audit has started, this planned approach should be followed. The audit team should provide a ‘request list’ to the finance team well ahead of each visit, so the applicable documentation can be made available. Working in this way will help to prevent last minute surprises and streamline processes, whilst ensuring relevant information is highlighted at the right time, to the right people.
Getting the right people for the job
Assigning the right auditor is a significant consideration for many SMEs. Choosing a firm that has worked with businesses with similar ambitions and of a similar size might bring benefits. Selecting a big firm won’t always give the business a better result and finance directors or other members of a management team should make sure they can collaborate well with those responsible for delivering the audit. Similarly, choosing a smaller audit firm, purely because they came up with the best quote could prove a false economy.
In terms of technology, the best audit teams aren’t always those with the most striking, hi-tech gadgetry, however having the resources and software capabilities to guarantee the process runs smoothly and efficiently is key. Selecting a team with specific skills in the area of data analytics could also be advantageous as there is added value for clients as a result of the audit process.
Don’t let go of a good audit team
As soon as a business has found a good audit team, that delivers a good experience, it’s worth keeping them. This will improve efficiency as the individuals involved will have a solid understanding of how the business runs, but it will also make it much easier to deal with any issues that may rise. For instance, the auditor may find that the finance team has provided information that is inaccurate or incomplete. In this circumstance, the audit team should be prepared to flag the issue internally, so necessary action can be taken to address the issue after the audit is finished.
In other cases, the audit team might realise that they have missed a financial opportunity. For example, legal invoices might show intellectual property assets, that could’ve been leveraged using Patent Box Relief to reduce the client’s corporation tax liability. Instead, details of development expenditure might hint that investments in technology upgrades or other improvements could be leveraged to make a back-dated claim for R&D tax relief. An audit team that is aware of these opportunities and armed to relay them to the business could bring substantial rewards.
By respecting ethical standards and developing professional and efficient working relationships from the get-go, auditors can deliver an enhanced audit experience. By doing this, auditors will be better placed to support their clients in recognising areas for improvement and nurturing their own financial leaders.