As business starts growing, the possibility of human errors in managing the processes increases, which invites HMRC to investigate. Audit ensure your business complies with legal regulations and give confidence to shareholders and investors that all accounts are updated, true, and fair.
Among different types of Audits, a statutory audit is mandated by the government in the UK. This comprehensive guide will cover everything you must know about statutory audits.
Table of Content
What is a statutory audit?
The law usually mandates a statutory audit, and any company meeting its requirements must follow them. Shareholders or members meeting specific criteria can request it voluntarily too. It ensures your accounting books are true and fair and can be represented to the public, investors, shareholders, and regulators.
Audit refers to examining an organisation’s financial records, a government entity, or an individual. It includes the analysis of financial records or other business processes involving income or profit, investment returns, expenses, assets, liabilities, accounting estimates etc.
The main objective of a statutory audit is to express an audit opinion on whether financial statements are free from material misstatements.
A company being audited gathers and supplies the necessary information to the auditor. During this process, the auditor may ask for a person from your company responsible for preparing the documents or who understands your business to help them throughout the process. In the end, you receive a report that can be provided to HMRC and others. If any inaccuracy is found in the business process, these experts can help you take the necessary actions.
Does every company need statutory audits?
No, a statutory audit is not mandatory for all companies in the UK unless they meet the criteria to do so.
Small companies, unless charities or members of a wider group are usually exempt from some audits. However, they must meet two of three criteria for two consecutive years.
● Turnover of £10.2m or less
● Balance sheet total of £5.1m or less
● The average number of employees is 50 or less
Although your company fulfils the criteria for exemption, you must do statutory audits if a shareholder, investor, or regulator asks.
A list of companies that are subjected to such audits includes
● Banks or investment firms,
● Insurance companies,
● Brokerage firms,
● Public companies (if not dormant)
● Subsidiary company (unless qualifying for exemption)
It is good to ask a statutory auditor if you need an audit and how to prepare for it.
Statutory audit vs non-statutory audit
Unlike statutory or external audits, a non-statutory audit reviews company finances and business processes not mandated by any law or statute. Any organisation that wants to ensure they are implementing the right processes, following government regulations, reasons affecting their productivity, company’s financial strengths, etc., can perform non-statutory audits.
The main difference between the statutory and non statutory audit is
● Statutory audits are mandatory and must be performed by external auditors.
● The other is done when requested or the business wants to look into itself and can be performed by internal auditors.
Statutory Audit process
After hiring an auditor in business, the auditing process looks like this:
● Create a pre-audit agreement
Before starting the process, your auditor needs the necessary financial information and ensures that you have completed due diligence and KYC (Know Your Client) procedures. They sign an agreement only when they have the essential details like the scope and objective of the audit, duration, and responsibilities, and you understand their charges.
● Risk assessment and planning
The professional provides an overview of your previous order history, current accounts, operational or financial controls, and other potential concerns. They identify risks in business, calculate their levels, and make necessary audit plans to help you solve the problem.
● Reviewing internal financial reports
The auditor now asks for access to different financial documents of your company. They check if your internal controls are adequate, ensure accuracy in internal audit reports and validity, and evaluate data storage and accounting procedures.
● Fieldwork
The auditor needs a detailed analysis of your financials, calculations and cross-referencing across your data. They ask for access to paperwork or digital data like bank statements, invoices, bills, tax records, and contractual agreements besides your core accounts. It is usualy a mix of test of controls and substantive procedures.
● Statutory reporting
Once everything is tested and investigated, the auditor issues an audit report that details the agreement or responsibilities, an overview of internal procedures, and audited statements. The audit opinion is of 4 types:
- Unqualified opinion- means the financial statements are free from material misstatements.
- Qualified opinion- means the financial statements are free from material misstatements except for one or more specific issues- like the valuation of inventories or certain assets.
- An adverse opinion means that financial statements are materially misstated.
- Disclaimer of opinion means the auditor is unable to express an audit opinion.
● Feedback from the auditor
With the feedback from the auditor, your team can prepare an Audit Findings report. It gives the overall opinion on an identified risk, internal control issues, and other business productivity problems.
Conclusion
Statutory audits determine whether financial statements offer a true and fair view. The result of an audit is essential for shareholders and investors to understand if they have invested in the right company and forecast their financial future.
Make a list of reliable statutory audit firms, and find the best help for your company. A proper and unbiased audit helps shareholders understand your financial situation and get clear insights into the business processes.
