Why is Financial Audit Important for UK startups & businesses?
5 Min Read
Jan 15, 2023
Audit & Assurance
An audit is essential as it proves a business’s credibility via a company’s financial statements, and it also provides confidence to shareholders. Moreover, it is necessary to improve business performance, systems, and controls. An audit’s duration highly depends on the size of the company and if there are already some pre-established measures to make the audit process easy. You can expect the time of an audit to be 1-3 months on average. An audit improves the financial credibility of a company, and generally, it is a good practice for large corporations and SMEs.
Following are three ways showing how auditing helps a business:
- Prevents fraud risks
- Establishes a sound system of internal controls
- Secures company reputation
Many circumstances would require a company to perform an audit. Following are some of the reasons that prompt a company to start an audit:
- A bank or investor requires you to showcase that your financial statements are valid
- The business decides to raise capital or go public
- A business reaches the 1-2 million dollars revenue mark
- Another case could be a business acquisition by a seller or a merger with another company
Importance of Financial Auditing
Financial auditing is beneficial to a company’s performance since it increases productivity. Conducting financial audits allows you to identify areas of the firm that require attention. The audit results will also assess whether the company’s financial statements are comprehensive, accurate, and under set standards.
Financial audits require accountability and effective company operations. The procedure entails a careful and thorough review of the company’s financial records and statements to identify discrepancies. Apart from the legal criteria for a statutory audit, the auditing process gives valuable perspective.
An audit assesses if an organisation presents a fair analysis of its financial performance and status, which every organisation strives for. A year-end audit is essential to decision-making for a company that relies on management information, whether it provides assurance about the accuracy of management accounts or uncovers systematic errors that occur throughout the year. The auditing process challenges the robustness of a company’s internal controls, providing an external perspective and valuable input.
Types of Audits
i) External Audits
Financial audits determine the extent to which a company’s financial statements include any misstatements. An unqualified auditor’s judgement gives users of financial statements confidence that the figures are accurate and comprehensive. External audits enable stakeholders to make more informed choices about the organisation under audit.
External audits can be incredibly beneficial in removing any prejudice in evaluating the condition of a company’s financials. The idea of independence of the external auditor is the major difference between internal and external audits. When third-party audits are undertaken, the subsequent auditor’s opinion on the items audited can be candid and truthful.
ii) Internal Audits
Internal audits assure compliance with laws and regulations and assist to maintain accurate financial reporting on time. Consultant auditors, not hired internally, apply the company’s standards rather than a different set of standards. Internal auditors are employed when a company lacks the in-house capacity to audit certain aspects of its operations.
Internal audit results make managerial changes and improve internal procedures. Furthermore, it helps management by discovering problems before being reviewed by external auditors in financial reporting.
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6 Things to Include in a Financial Audit Checklist
1. Budgets and Financial Reports
A budget and financial statements are two of the most essential items that should be included in a financial audit checklist. Every type of business has a set of budgets and financial statements that enable them to monitor and assess the financial health of the organisation.
Budgets for anticipated revenue and expenses should be established at the start of each year and tracked on a regular basis. The balance sheet, income statement, owner’s equity statement, and statement of cash flow are the most essential financial statements.
2. Revenue and Costs of Sale
Professional accountants must test revenue and cost-of-sales entries in the general ledger and supporting financial statements. These entries must first be confirmed by demonstrating inventory shipment or service delivery. Businesses will be able to declare regular long-term contract sales as a result of this. Cost-of-sales statements should be accurately timed and compared to associated revenue entries for reliability.
3. Trial and Error
A firm’s “trial balance” comprises the values of all accounts as a timely picture. Audit processes should be used to confirm the balances, with a special emphasis on reconciling the important ones. Inventory and fixed assets should be certified by item, quantity, and value throughout the year, with periodic cycle, counts verified. Documentation in the form of detailed reports supporting the balance of accounts receivable and payable is required.
Also Read: How to register a company in the UK?
4. Documentation of Transactions
The general ledger must record all of the organisation’s financial transactions. Every transaction, whether recorded manually or electronically, should be recorded on a daily basis with enough information to determine who made it and for what reason.
5. Accrual Accounts
Accruals must be in existence in order to establish balance sheet reserves for pending payments. In general, this covers items such as paychecks that are pending clearance, sick-day earnings, incentives, commission contracts, and so on. Accruals must also be financed for property, sales, or income taxes owed to the state, local, and federal governments, as required by law.
6. Meeting Minutes and Rules
Guidelines enacted by the board of directors for the sake of the company and stakeholders should be examined and documented in order to ensure compliance with all mandates. It is also necessary to go over the minutes of executive meetings to ensure that adequate action has been taken to resolve any issues that arose during these meetings.
Get Audit & Assurance Services from Octa Accountants
Company audits are becoming more and more overwhelming due to ever-changing industry practices, regulations and emerging risks in the competition landscape. It is becoming common for many corporations and SMEs to hire expert auditors to analyse internal and external aspects associated with a business.
- Become Legally Compliant – We take care of legal matters so you can work on your business with a carefree mind.
- Reassure Investors – Our expert handles legal & regulatory matters to maintain complete compliance.
- Improve Business KPIs – We manage the legal part of your business to help you get more time for closing sales.
- Build More Credibility – Octa Accountants‘ staff will move the world to help you with any queries.
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