When does your company need an external auditor?
What an independent external audit adds, when it becomes necessary, and how to prepare so that it runs smoothly.
An external audit is an independent examination of the financial statements by an auditor from outside the company, ending in a report that gives an opinion on whether those statements fairly present the financial position and results. Its real value is that it gives everyone who relies on your figures — partners, banks, investors, official bodies — a higher level of confidence.
When is an audit required?
Some legal forms of companies are obliged to appoint an auditor and submit audited financial statements, and the details differ with the type and size of the company and the rules in force at the time of filing. It is therefore best to confirm the current requirements that apply to your company with the office or the competent authority rather than rely on old information.
Situations where you need an audit even if it is not mandatory:
- Applying for bank finance or facilities, where certified financial statements are usually requested.
- A new partner or investor joining, or a partner leaving and having their share valued.
- Expansion, new branches and more people handling cash and inventory.
- Repeated unexplained differences in cash, inventory or customer and supplier balances.
- Wanting to assess the internal control system and find weaknesses before they turn into losses.
Audit versus bookkeeping:
Bookkeeping is recording transactions and preparing the accounts; an audit is an independent examination of what has been recorded. For the auditor’s opinion to remain impartial, the auditor should be independent of whoever prepared the accounts.
How to prepare for an audit:
- Close the accounts for the period and have the trial balance and draft financial statements ready.
- Prepare bank reconciliations and bank statements for the whole period.
- Organise sales and purchase invoices and important contracts so they are easy to refer to.
- Carry out a physical count of inventory, fixed assets and cash at the end of the period.
- Name one person to answer the audit team’s queries.
What do you receive at the end?
The auditor’s report attached to the financial statements, and usually a letter of observations explaining what can be improved in the accounting system and internal controls. Taking those observations seriously is what makes next year’s audit easier and faster.
Note: this article is general accounting and tax information for awareness and is not professional advice on a specific case. Tax rates, thresholds and dates change, so confirm the rules currently in force with the office or the tax authority.
