An audit is an independent examination by suitably qualified persons of a company’s financial statements including its balance sheet, profit and loss account, supporting notes and other documents as applicable to that particular entity.
The purpose of an audit is to satisfy the needs of shareholders and the wider stakeholder community as to the accuracy of the company’s accounts which are presented to them by the directors.
Changes in the Companies Act and to Audit Requirements
In recent years the Companies Act have revised the audit requirements for UK companies and has introduced several exemptions which are largely governed by the size and activities of the business. This is largely in recognition that for most smaller companies, the directors and the shareholders are one and the same people and therefore, to some extent, negate the purpose of an audit.
Hence a situation where a director prepares the financial statements and requires them to be audited before presenting them to himself was seen as unnecessary and an added expense for small businesses which did not reap obvious benefits.
Currently, audit exemptions exist for small companies as defined by the Companies Act. A company will be classed as small if it meets the criteria of having a turnover equal to or less than £5.6 million and a balance sheet total equal to or less than £2.8 million and does not fall in to one of the groups for which the exemption does not apply.
Balance sheet totals are calculated as the total of fixed assets and current assets without any deduction of current or long term liabilities.
The exemptions apply to accounting periods ending after 31 March 2004. There are lower exemption limits which apply to financial years ending before this date. These are not mentioned here as the date has past by some years.
The work that an auditor undertakes on a company’s financial statements will be summarised in their report which usually accompanies the accounts which are presented to shareholders.
The audit report will contain several distinct sections including one that states the name of the company or group which has been audited and the accounting standards which have been used as the basis for their assessment. They will then go on to provide a synopsis of the scope of their work and thus seek to provide the reader with a clear understanding of what was within the scope of their work.
The audit report will then present a conclusion of whether or not the company has met its statutory obligations as defined in the Companies Act for delivering accounts and whether they show a “true and fair” view of the actual activities engaged in during the period under consideration.
A further section within the audit report would highlight any significant discrepancies between the auditor’s and director’s view of the accounts and would details such differences for the reader to make an informed assessment.
Appointment of an Auditor
In cases where an audit is required either by law or requested by holders of at least one tenth of any class of shareholding, it is normal for the company directors to evaluate and select the initial appointment.
In subsequent years, the continuing retention of a particular auditor is ratified by the shareholders. It is possible for private limited companies to pass an elective resolution which replacing the need to provide approval and re-appointment of the audit each year.
In such cases, the services of a particular auditor would be retained indefinitely until the elective resolution is disbanded.
Restrictions apply which prevent persons “connected” with a particular company from becoming its auditor. Those who would fall in to this category would include employees of the company (or another associated with it) and their partners. These provisions exist to ensure that a high level of independence exists between the company and the persons reporting on it.
In addition, in order to ensure that the person auditing a company possess the requisite skills, experience and judgement they must be a suitably qualified persona and a member of one of the recognised professional accountancy bodies.