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The Mechanics of Statutory Audits
A brief definition of a statutory audit
Statutory audits are specifically required by government agencies and do not affect all UK businesses. For example, brokerage companies, insurance companies, or banks usually require statutory audits. This is due to the fact that this type of businesses needs to meet specific financial regulations and be UK GAAP compliant. The purpose of statutory audits is to analyse the accuracy of a company’s financial records, and it usually implies the examination of financial transactions, bookkeeping records, and bank balances.
Nevertheless, other types of companies registered in the UK may become subject to a statutory audit. It is highly advisable for business owners to check with their accountant which are the requirements that apply to their business under the UK law and the UK GAAP. Failure to comply with the respective regulations is usually heavily penalised.
Many companies voluntarily decide to undertake an audit in order to demonstrate their financial and organizational health, thus increasing their customers’ and suppliers’ confidence.
Types of companies that have the obligation to be audited
If your business meets at least one of the following criteria, you will be required a statutory audit:
– Turnover: if your company has a turnover of above £6.5 million
– Gross assets: if your company has gross assets of above £3.26 million
– Shareholder request: if a shareholder requests an audit under the Companies Act 2006 (Section 476)
– Regulated industry sector: for example, charities, financial services providers, or solicitors.
– Lender request: if a bank or another type of lender requests audited financial statements
What does a statutory audit imply exactly?
Statutory audits must be carried out by competent accounting firms that find themselves in the possession of a Licence to Audit and are registered with one of the ‘Recognised Supervisory Bodies’ in the UK. An audit process implies several stages:
1. Planning the audit
At this stage, the auditor has an initial meeting with the company’s executives and tries to thoroughly understand your business and assess your risks and internal controls. Based on the findings, an audit strategy is built.
2. Interim audit
This stage involves compliance testing and a thorough review of key systems and performance. At this stage, possible system and control issues and potential improvements are identified.
3. A final audit report
Once the audit is completed, you will be provided with a complete report which includes comments, recommendations, and further implications.
How can audits benefit your company?
Regular audits will help you identify weak spots in the accounting system, thus preventing fraud and other irregularities. Having your company audited will also provide you with valuable recommendations that can highly benefit your business’ performance. In addition, audits add credibility and reliability to all the published information for customers, employees, investors, suppliers, shareholders, and tax authorities.