For both listed and limited liability companies, audits are a necessary part of operations, and are usually conducted every year. They can reveal the overall financial health of a company, and are usually conducted by a professional firm such as RSM.
Here is some useful information about audits, including the basic processes involved and why they are necessary.
What Does the Auditing Process Involve?
The most important element of auditing is the fact that it is conducted by an entity which is independent of the company receiving the audit. Each year, larger businesses/companies release an annual report, which also contains a financial report detailing all of the company’s financial information.
The auditor will go through this financial report, examining all the accounting. This includes looking at cash flow statements, balance sheets and various other records which the company will have kept over the year.
What Does it Show?
The auditor will ultimately verify that the financial information presented in the company’s documents is fully accurate, and that there has been no malpractice involved. The standards for auditors are created by a government body, meaning that all auditors must be stringent and adhere to external guidelines when conducting their assessments.
An auditor’s report will show whether any given company is fully transparent and implementing all the necessary internal controls to help offset any financial risks their operations may involve. It also shows that a company has the correct accounting practices and procedures in place.
Why is it Necessary?
Not only does auditing ensure that a company is financially sound and following all necessary regulation, but it also provides shareholders with peace of mind. In the past, there have been many examples of large companies deliberately altering their accounting, reporting false earnings and obscuring large debts from their records.
This has often led to their eventual collapse, causing significant financial damage to shareholders, employees and others. Auditing has thus become an effective way of regulating companies, and making sure they are financially responsible given their corporate power. Whilst an audit cannot say anything about the company’s future, it does at least make clear how the company’s decisions and/or industry events have affected its finances for the previous year.
What About Smaller Businesses?
Whilst audits are a necessity for larger businesses who deal with high annual turnovers and a labyrinth of accounting, they are not necessarily a legal necessity for smaller businesses, as they can apply for an exemption This makes sense, since audits can be fairly expensive, and often require time consuming preparation.
That being said, smaller businesses could also benefit from receiving an audit, even if it is not every year. This is for a number of reasons, all of which should be taken into careful consideration by any serious small business owner.
Prepares for Growth
One of the main reasons a small business could benefit from an audit is that it prepares it for legally necessary audits further down the line, once it has grown into a larger company. Knowing how audits work and how to prepare for them can go a long way in ensuring the auditing process is as quick and straightforward as possible.
This may entail digging out accounting records and ensuring that all accounting processes and record keeping are up to scratch. This will allow the business owner to put in place a good system for preparing for future audits.
Another benefit which small businesses could enjoy by receiving an audit is the fact that professional auditors will be able to suggest improvements that they could make in order to help their systems flow smoothly and efficiently.
They may, for instance, be able to highlight any anomalies on balance sheets which may cause problems further down the line, so the business can ensure that it fixes these and prevents them happening in the future.
Since external auditors will be well accustomed to finding problems with larger companies, they can easily advise smaller businesses on how to avoid the most common pitfalls which growing/larger businesses will face. They can also make sure that a business is clued up on all tax and legal obligations, and that the owner fully understands the main accounting principles.
An audit cannot, however, provide a small business (or any business) with a strategy or guaranteed formula for financial success. They simply reflect the health of the business’s finances, and, more specifically, its accounting processes.
Audits have become a necessary part of operations for the majority of larger companies around the world. They serve as an effective regulatory tool as well as a good means of ensuring that companies are fully transparent with their operations. For smaller businesses, they may not be legally necessary, but there are certainly some benefits to receiving an audit which are worth considering.