Company audit is assessment of accuracy and completeness of your accounting records to see if it gives true and fair view. Generally, Auditor looks at your company’s financial accounting system and internal controls procedure to assess it’s effectiveness. Auditor assesses if the data used to compile your company accounts is reliable.
The company audit is carried out by sections individually then piece together to form a big picture. The objective is to form an audit opinion on your financial statements and accounts. Consequently, Auditor issues either qualified or unqualified audit report. In brief, an unqualified audit report is desired. This is because a qualified report indicates that your auditor not satisfied with something. For that reason, you definitely do not want a qualified audit report.
Revenues and Expense
Broadly, audit on sales are to make sure the sales in the accounts are genuine and booked on timely manner. Similarly, the audit on expenditure is to make sure they were incurred exclusively for business. This is to avoid deliberate tax avoidance.
For example, a fake sale is where an invoice is created and money received in the bank to make it as if a genuine sale has happened. In real life there was the customer was a dummy. Thus, you may ask why do they want to do that? They have to pay tax on it. Exactly, they do not mind paying tax on it because they want to make “dirty” money become legal money through a business. why? so they can use it to buy property or expensive item freely. Usually, buying expensive property involve large amount of money require proof of income source.
Play with the timing of accounting
Another instance would be deliberately to book the sales earlier in the account to make the figures look good in order to borrow money from the bank or to book it later to defer tax liability. This is not allowed.
Whereas for expense, the audit test is to make sure it was an business expense. It was not a personal expense being put through into a business. Thus your company would pay less tax on your profit.
For instance, a company car on the book was said solely for business use. But in real life it was a car bought solely for personal leisure.
Assets and Liabilities
Largely, auditor will verify your business assets. They would trace your physical asset to the purchase invoice and ownership document. They will also assess if the asset values in your accounts reflect the current market value. The assets referred here include stock, trade debtors and property and equipment.
Similarly, for the audit of your business liabilities. The aim is to ensure monies owed are related to business expenditure. Loans to directors are properly accounted for in the accounts.
Universally, company audit also includes assessment of what kind of internal controls procedure you have when come to handling petty cash, issuing a cheque or making a large sum payment.
For example, say, for a cheque amount more than £20,000 two signatory are required and for the sum in access of £5,000,000 the payment must be authorized by all the directors. How often do you do petty cash reconciliation? Can you trace on your petty cash to who the reimbursement was paid to? Ideally invoices and receipts must attach to the petty cash voucher for each reimbursement.
On the other hands, what are the internal controls procedure implemented for booking of a sale transaction. For cash sales, do you issue a sale receipt? how soon after that the sales receipts are banked? Similarly, for non cash sales, do you do regular sales reconciliation to the bank statement? who is monitoring the outstanding invoices? and what methods are used to get customers to settle their invoice sooner and so on.
Widely, accounting policy adopted for stock accounting should bring the valuation of your goods and products to its net realizable value or costs.
Correspondingly, your fixed assets depreciation policy adopted must reflect the useful economic life of the assets. Subsequently, the methods of depreciation used whether straight line method or reducing balance method.
Overall, you shall adopt accounting policies that gives true and fair view business affairs. In addition, you must apply it consistently from year to year and you must justify if any changes.
Company audit risk
Any business unavoidably present the risk of fraud and other irregularities.Commonly, this includes an attempt to manipulate the figures in the accounts fraudulently and so on.
For example, a restaurant business has high volume of cash takings. Cash misappropriation is at high risk. Staff authorized to handle cash may be tempted to steal. Thus, your Auditor looks at what are the internal controls system implemented to mitigate the associated risks and to prevent cash being stolen.
On the same note, they would also look at if there is a history of cash theft. How the situation was handled and what measures were implemented to avoid similar occurrence. Was measures effective for its purpose and so on.
Another example is staff payroll. People can create a dummy employee record with a real bank account and pay out salary accordingly. Auditor may verify the physical number of staff to the staff payroll record to see any variances.
Accounting and auditing rules
Company audit also include assessment of statutory compliance of accounting or auditing rules applicable to your business.
For example, the Building Societies Act 1986 governs the audit of Building Societies. If this apply to your business then you must comply with it.
Another example, the Financial Conduct Authority (FCA) will regulate all companies provide financial services activities thus you must comply with FCA rules if this applicable to you.
Concurrently, you must comply with regulatory body applicable to your business.
For instance, a registered charity company must comply with the Regulator for Charities in England and Wales. Your charitable activities and accounting records must comply with the rules of the Regulator. Therefore, file accounts with the charity commission as well as Companies House.
Previous year statutory reports
Last but not least, your trading history provides good indications of the inheritance risk, associated risks level and your business growth. Auditor usually find this indication from the following documents.
Signed company accounts
The prior year figures known as comparatives in your company accounts allow Auditor to spot big variances on each line in your profit and loss account and balance sheet year on year. The variances are explainable. For example, Sales in current year dropped by 30%. This event is explainable. Accordingly, Auditor will zoom in to find out why.
Auditor’s opinions on your financial statements.
Auditor usually follows up on highlighted issues in the qualified audit report to see if they were taken care of, if not yet then why not.
Regulatory inspections reports on your business
Regulatory inspections reports is an independent report carried out to check compliance with the Regulatory body requirements. Any non compliance issues will flag up here.