External Audit: 3 things to know
An external audit assesses a business's financial health and viability, sometimes legally required for larger companies. Regardless of legal obligations, it offers valuable insights. This article outlines what an external audit entails, its legal requirements, and the benefits it provides. If you've considered having an auditor review your books, read on to learn about the external audit process.
What is an external audit?
An audit is an accounting process involving the examination of the financial records of a business, partnership, or company. The aim of an audit is to determine if the financial statements derived from a business’s accounting records are a true, fair, and accurate representation of the enterprise’s current financial situation at the end of an accounting period or at the end of the fiscal year. An audit can be conducted internally by a division or department of the company or externally by a third party.
External audits are often required as part of a large company’s tax obligations. They are performed by accredited auditors whose role is to act as independent, impartial observers. The purpose of an external audit is not to solve issues or errors. This remains the responsibility of the business owners, partners, or company directors. An external audit is solely completed to determine the veracity of the information used to compile the financial statements.
Does my business require an external audit?
If you operate a large company, then it may be a statutory requirement that you must have an external audit completed once every financial year. Failure to do so can result in significant penalties.
Criteria for external audit
Your enterprise must have an external audit done once every financial year if it complies with any of the following criteria:
- It has an annual turnover of over £10.2 million
- It has subsidiaries in the UK or abroad
- It is a public company (unless dormant)
- It is an authorised insurance company that carries out insurance activities
- It is involved in banking services or the cryptocurrency market
- It has shares traded on a regulated European market
- It is a Markets in Financial Instruments Directive (MiFID) investment company
- It is an Undertakings for Collective Investment in Transferable Securities (UCITS)
Exceptions to external audit
You are not required to conduct an external audit if two or more of the following criteria can be applied to your business:
- Your annual turnover is less than £10.2 million
- The company assets are worth less than £5.1 million
- There are fewer than 50 employees
It should be noted, however, that even if two or more of the above criteria are met, section 476 of the Companies Act empowers shareholders that have more than 10% of the company shares to request an external audit at any time. The request must be sent in writing to the company’s registered office address and must be received at least one month before the end of the financial period that is to be audited.
What does an external audit involve?
Who conducts the audit
Accredited auditors acting as independent third parties carry out external audits. They may be appointed by His Majesty’s Revenue and Customs (HMRC) for tax reasons, or they may be hired by the company itself. Many firms choose to conduct external audits to ensure that they are meeting all relevant tax obligations and that their financial records meet accounting standards.
Access to financial records
The auditors will require complete access to the business’s financial records and accounting books. They will have the power to request information from employees or ask to see documentation or transaction records.
Analysis of financial statements
Before the audit commences, the business will be required to complete its three major financial statements, the balance sheet, the cash flow statement, and the profit and loss statement. These will be stringently analysed by the auditors. All documentation and information that were used to complete the statements will be tested for veracity and accuracy.
Final report and opinion
The auditors will prepare a final report giving their opinion on whether or not the financial statements are a true and accurate representation of the financial state of the enterprise and if they view the business as being a risk or not. An external audit is not completed to uncover wrongdoing, although it may do so. It is not completed to correct errors or to prevent fraud.
What are the benefits of having an external audit?
Uncovering Fraud and Improving Processes
Although your business may not legally require an external audit, many business owners choose to have one conducted. An external audit can help you to uncover instances of fraud or embezzlement, it can pinpoint weak or underperforming areas of your business and can help you to strengthen your internal accounting processes.
Credibility and Business Growth
An external audit that delivers a positive result also provides a level of credibility that can be leveraged to attract investors or to secure a loan. The future direction of the business can be greatly impacted by the data gathered from an external audit. A positive external audit can provide an assurance that your business is sustainable and give shareholders, investors, and lenders confidence in the business.
Simplifying Accounting with Mooncard
Keeping your accounting records in order can be complicated and a lot of work. You can ensure that your business maintains good accounting habits by using the Mooncard payment system.
The Mooncard payment card provides you with a digital record of all purchases made on behalf of your business and automatically generates a corresponding expense report.
Every time a purchase is made on behalf of the business, a digital photo of the receipt is uploaded to the Mooncard solution. The data on the receipt is used to automatically create an expense account using prefilled information. The expense report is then sent straight to your accounting department. With Mooncard, you can always stay on top of your expense reporting!
To arrange a free, no-obligation demonstration of the Mooncard solution, simply visit the Mooncard website. You’ll be amazed at how Mooncard can streamline your accounting processes and make it easier for auditors to complete an external audit.