Audits are a common business practice, and they serve a critical purpose in ensuring financial transparency and compliance. However, many individuals and organisations are uncertain about when an audit is required and what prompts it. In this blog, we will explain the circumstances that trigger an audit, shedding light on the reasons behind this vital financial procedure.

What Is a Financial Audit?

Before delving into when audits are required, it's essential to understand what an audit is. An audit is an independent examination of financial information, records, transactions, and operations to verify their accuracy and compliance with relevant laws, regulations, and standards. The primary objective of an audit is to ensure the organisation’s accounts have been prepared correctly, accurately and in line with relevant standards.  

You will have a year to prepare after having passed the audit thresholds (You get one years grace so if you pass the thresholds below it won't be until the next financial year you require an audit). Gravitate Accounting can assist you through the process and act on your behalf. We don't complete an audit but can also find the best auditors for your business.

It should be noted that your company may qualify for an audit exemption (see below).  

For financial years that begin on or after 1 January 2016.

Your company may qualify for an audit exemption if it has at least 2 of the following:

• An annual turnover of no more than £10.2 million.
• Assets worth no more than £5.2 million.
• 50 or fewer employees on average.

As well as exceeding the thresholds above when else may an audit be required?

One of the most common triggers for an audit is legal or regulatory requirements. Many jurisdictions have specific laws mandating audits for certain entities. These entities often include public companies, financial institutions, and non-profit organisations. These regulations are in place to protect investors, creditors, and the public by ensuring transparency and accountability.

Investor and Lender Demands: Investors and lenders may request an audit before making financial commitments. They want assurance that the financial information provided to them is accurate and reflects the true financial health of the business. In such cases, audits are performed to build trust and attract potential investment or secure loans.

Size and Complexity of Business: The size and complexity of a business can also influence the need for an audit. Large corporations or organisations with complex financial structures are more likely to undergo audits. Smaller businesses may be exempt, but they may still opt for voluntary audits to build trust with stakeholders.

Mergers and Acquisitions: When a merger or acquisition occurs, an audit is may be requested by aquiring parties. This process allows the merging or acquiring entity to gain a comprehensive understanding of the financial health of the other party.

Internal Control Weaknesses: If a business's internal controls are weak or have been compromised, an audit may be needed to identify issues and rectify them. Weak internal controls can lead to errors, fraud, or financial mismanagement.

Grant or Contract Compliance: Organisations that receive government grants or have contractual obligations with specific compliance requirements may be subject to audits. These audits ensure that the funds are used as intended and in accordance with the grant or contract terms.

What’s involved in the financial audit process?

• A review and inspection of your financial statements
• Identification of material misstatements through sample testing of transactions/balances
• Confirmation that disclosures meet accounting and other relevant business standards
• Any identified issues reported to and discussed with directors/managers
• Audit report compiled for inclusion with financial statement submissions

Tips on what to do when you’ve been audited

1: Stay Calm and Gather Documentation -An audit is not an accusation of wrongdoing; it is a routine examination of your financial records. Start by gathering all the relevant documentation, such as tax returns, receipts, invoices, and any records related to the audit.

2: Consult with Accountants -Consider consulting with a tax professional. At Gravitate Accounting we don't complete an audit for you but can ensure you are fully prepared and work with an auditor supporting you through the process.

4: Organise Your Records -Make sure everything is well documented and easily accessible. Proper record-keeping can streamline the audit process and help you present a strong case.

5: Cooperate and Communicate -During the audit, maintain open and respectful communication with the auditor. Answer their questions honestly and provide requested documentation promptly. Being cooperative can help build trust and lead to a more efficient audit.

6: Comply with Deadlines -Ensure you meet all deadlines provided in the audit letter. Failure to comply can result in penalties or additional scrutiny. If you need more time to gather documentation, communicate with the auditor to request an extension.

Being audited does not have to be a daunting experience if you approach it methodically. Stay organised, consult with professionals, and cooperate with the audit process. By following these steps and seeking expert advice, you can navigate an audit successfully and ensure compliance with tax regulations, safeguarding your financial well-being. If you find the audit process overwhelming or have specific questions, do not hesitate to reach out to us at Gravitate Accounting where we can direct you on what you should do next.

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