In the wake of a global pandemic that has stretched on for over 18 months, auditors are finding it harder than ever to operate. This has already resulted in huge losses for shareholders where companies collapsed without warning, and without any sign of volatility due to failures in the auditing process. But just how important can the auditing process be, and why are shareholders blaming auditors for their losses? Let’s take a look at the purposes of an audit, and how they help your business.
What Is an Audit?
There are two principal kinds of audit as it relates to finances: internal, and external. An internal report is where a member of your organisation’s team examines its accounting processes, with a view to finding any discrepancies, errors or opportunities for optimization. These are usually done in order to prepare a company for an external audit, where in an independent auditor is brought in to ensure the organization is operating legally, accurately reporting income and gaining a more objective sense of the company’s worth.
Why do Audits Happen?
Audits happen for two principle reasons – they are requested, or required. An external audit may be ordered by HMRC for tax purposes, in order to clear up any confusion or discrepancies with regards to your business’ tax records. Alternatively, you might voluntarily retain the services of an independent auditor to carry out a financial audit, with the aim of gaining an objective view of your accounts in order to prepare a business growth plan. Private audits may also be required by court, in the event of a dispute with shareholders or another business.
What Are the Purposes of an Audit?
We’ve briefly touched on the reasons audits take place in defining them, but here we’ll go into greater detail regarding the specific reasons an audit may take place, whether ordered internally or required externally – and what it can mean for your company, or shareholders.
If HMRC has ordered a ‘compliance check’ into your company, this is an audit, and has been ordered due to discrepancies in, or questions regarding, your company’s tax records in a given year. The reasons for this might be that you paid significantly more or less than the previous year – or perhaps declared no profits the previous year, and a large profit during the tax year in question. These may have simple answers, such as your business growing exponentially, or being adversely affected by a specific event, but HMRC will investigate nonetheless to ensure tax fraud is not taking place.
You might want to carry out an internal audit in order to discover the effectiveness of your accounting team. If records are poorly kept, or accounting processes inscrutable, this could cause issues in the event of a government- or court-mandated audit. Alternatively, an independent auditor might be brought in to assess the company’s health, growth, and tax records – not only to ensure compliance ahead of a HMRC compliance check, but also to gain an objective idea of the company’s share price. If growth is being reported to shareholders but not evident in the financial data, an audit will reveal this fact and enable shareholders to act accordingly.