What is a Financial Statement Audit and Does Your Business Need One?
As a business owner, you may have heard of financial statement audits. Wondering if it's necessary? While not obligatory for all businesses, a financial statement audit offers advantages. It ensures tax compliance, organizes financial paperwork, and provides essential data for business decisions. This article outlines the importance of financial statement audits, defining and explaining their types, which businesses need them, and the benefits they offer.
What is a financial statement audit?
The accounting definition of a financial statement audit is a precise examination of a business’s books and records to determine if the financial statements of the business are correct, true and fair and meet the standards of the relevant financial reporting process. It involves a detailed analysis of all financial statements such as the profit and loss statement, the cash flow statement and the balance sheet. A financial statement audit may also look at other financial details such as how much working capital a business has and how much bad debt it is carrying.
A financial statement audit can be carried out internally or it may be done on a voluntary basis or at the request of His Majesty’s Revenue and Customs (HMRC). It is usually the case that an external independent third party carries out the financial statement audit.
Is a financial statement audit a legal obligation?
If your business is incorporated as a company or limited liability partnership, then you may be legally required to have a financial statement audit. Businesses that meet the following criteria must conduct a financial statement audit once every financial year:
- Companies with a turnover of more than £10.2 million
- Any company that has subsidiaries, whether they are located in the UK or abroad
- Public companies (unless dormant)
- Authorised insurance companies or companies carrying out insurance activities
- Companies in the banking sector or cryptocurrency sector
- A corporate body that has shares traded on a regulated European market
- A Markets in Financial Instruments Directive (MiFID) investment company
- An Undertakings for Collective Investment in Transferable Securities (UCITS)
Whether or not a business requires a financial statement audit is dependent on its size. You are not required to conduct a financial statement audit if:
- Turnover is less than £10.2 million
- Company assets are less than £5.1 million
- The business has fewer than 50 employees
What does a financial statement audit involve?
During an audit, the auditors will have full and unfettered access to a business’s accounting records and books. The auditors have the power to request information and ask for explanations and proof of transactions as necessary. An audit does not absolve the company directors of their responsibilities.
Auditors are not there to prevent fraud or errors. The auditor’s only responsibility is to ensure that the financial statements of the business meet the relevant accounting standards and are fair, true and accurate.
Every company or business is different, so the audit procedure differs each time. There are, however, general steps that are followed:
- The company prepares its financial statements beforehand in accordance with all relevant tax and legal obligations
- The auditor researches the company to better understand it and its operations and any factors that can impact its operations
- All financial information will be perused and assessed carefully by the auditors to determine the risks
- Company protocols will be examined to see how they mitigate or eliminate risk
- All financial documents will be assessed and analysed while considering the identified risks
- All financial information and material that is contained in the statements and documents will be tested and verified
- The auditors then prepare a final report stating their opinion on whether or not they believe that the financial statements are accurate and that the information supporting them is correct
What are the benefits of a financial statement audit?
A positive financial statement audit can lend credibility to a business and provide potential lenders and investors with assurances that it is a worthwhile risk. Many investors will ask for a financial statement audit to be conducted and assess the results alongside ROI projections and break-even point reports.
The information gleaned from a financial statement audit and the auditing process can identify weak areas of the business, help with strategic planning and highlight where the business should be heading in the future. Senior management can then be fully informed when developing ventures to improve the business’s profitability. In some cases, a financial statement audit can ensure that a business is well-prepared for any future changes in tax legislation, reporting requirements or accounting standards.
How to prepare for a financial statement audit
To prepare for a financial statement audit, business leaders must ensure firstly that all relevant financial records and documents are in order. They must make certain that the financial statements themselves have been produced.
All staff should be available during the financial statement audit in case the auditors wish to clarify information, ask about transactions for goods or services or request any additional information. Any deadlines that have been set should be rigidly observed.
Making sure that your financial statements and the corresponding proof are in order is not an easy task. However, it can be made easier if you maintain good accounting habits. One way to ensure that you always keep track of company expenditures is to use the Mooncard payment system. With Mooncard, you will always have a digital record of purchases made on behalf of the business and a corresponding expense report.
Every time an employee makes a purchase on behalf of the business using their Mooncard, they take a digital photo of the receipt, which is then uploaded to the Mooncard system. An expense account is automatically created using prefilled information and then sent directly to your accountant or accounting department. Mooncard really does make it simple to stay on top of your expense reporting!
You can arrange to have a free, no-obligation demonstration of the Mooncard system by visiting the Mooncard website. Try it out today!