How to prepare for your first financial audit: tips for UK businesses

Preparing for your first financial audit can be daunting, but with the right approach, it can be a straightforward process that adds significant value to your business. Whether you’re required to undergo an audit due to legal thresholds or simply want to ensure your financials are in top shape, being well-prepared will help you navigate the audit process smoothly.

In this article, we’ll cover everything you need to know, including audit thresholds, a preparation checklist, and actionable steps to get ready for your first financial audit.

Firstly, how does an organisation determine whether you require an audit?

Not all businesses in the UK are legally required to undergo a financial audit. To determine if your business needs an audit, it’s essential to begin by understanding the current audit thresholds:

1. Annual turnover: Exceeding £10.2 million
2. Gross assets: Exceeding £5.1 million
3. Number of employees: More than 50

If your business meets two out of the three criteria for two consecutive financial years, you’re legally required to have an audit. Even if your company doesn’t meet these thresholds, you may still consider an audit if you seek investor confidence, plan to scale, or want to maintain transparent financial records.

Secondly, consider any special industry regulations or requirements that may impact your need to undergo an audit.

Thirdly, check for shareholder demands or internal policies that might necessitate an audit.

And finally, evaluate the benefits of a voluntary audit – if not legally required.

What you need for your first financial audit

 Being organised and working collaboratively is crucial for a successful audit. That’s why we’ve created a checklist of the key documents and information your auditor will need:

1. Accounting policies: It is important that you are aware of the accounting policies of the company, particularly surrounding revenue recognition, this will be the starting point for our testing.
2. Systems and controls: Know your systems, as part of our planning we will review the operational effectiveness of your systems, if these are documented in advance this will enable a smooth review of process.
3. Risk Assessment: Internal risk assessment at director level.
4. Going concern considerations: Going concern is a key consideration during the audit process. The directors need to ensure that supporting documentation, particularly budgets and forecasts, are maintained for twelve months forward at any given time.
5. Internal governance: Ensuring copies of group/company structure are maintained along with board meeting minutes. It’s also important to ensure you understand the laws and regulations applicable to your business, maintaining supporting documentation of compliance.
6. Trial Balance: Ensure you have a trial balance prepared with supporting documentation for each balance. The support should be in the form of original documentation to prove the balance. Often this is a key change for clients who rely on their system reports.
7. Financial statements: This includes the balance sheet, profit and loss statement, cash flow statement and notes to the financial statements. Here at Verallo, size dependant, we can assist with the preparation of the financial statements from your trial balance, but it is important that the support for the key disclosures is provided.
8. Contracts and agreements: Signed copies of significant contracts, including lease agreements, loan documents, and supplier contracts.
9. Payroll records: Information on employee wages, PAYE, National Insurance contributions, and pension records.
10. Fixed assets register: Details of all company assets, including depreciation schedules.
11. Tax filings: VAT returns, corporation tax returns, and any other relevant tax documents.
12. Bank statements: Ensure that all business bank statements are up-to-date and match the figures in your financial statements.
13. Invoices and receipts: A record of all sales invoices and purchase receipts, organised by date and type.
14. Previous audit reports (if applicable): Any prior audit reports and the actions taken to address recommendations.
15. Accounting system access: Ensure auditors have the necessary permissions to access your accounting software if needed.

Bringing it all together – steps to prepare for your first audit

 Once you’ve gathered all the necessary documents, follow these steps to prepare effectively:

1. Understand the scope of the audit: Have a clear understanding of what the audit will cover. Discuss the scope with your auditor to ensure you have all relevant documentation prepared.
2. Conduct an internal review: Before the audit begins, perform an internal review of your financial statements and processes. Identify any discrepancies and resolve them ahead of time.
3. Organise documentation: Keep all documents neatly organised and labelled. Use cloud storage for easy access and ensure all records are up to date.
4. Assign a point of contact: Designate a team member who will act as the primary point of contact for the auditors. This person should be knowledgeable about your financials and able to quickly answer any questions.
5. Review internal controls: Ensure your internal controls are robust and well-documented. Auditors will assess the effectiveness of these controls, so it’s crucial to have them in order.
6. Prepare for auditor questions: Be ready to explain any unusual transactions, discrepancies, or significant changes in your financial position. The more prepared you are to address auditor questions, the smoother the process will be.
7. Communicate with your auditor: Maintain open communication with your auditor throughout the process. Discuss any concerns or issues early on to avoid surprises.
8. Plan for timelines: Ensure that you and your team are aware of the audit timeline and deadlines. Allocate time to review and respond to any auditor findings.
9. Learn from the process: Use the audit as an opportunity to improve your financial processes. Take on board any recommendations from the auditor to strengthen your financial management.

Explore the benefits of an audit

 An audit isn’t just a compliance requirement; it can provide valuable insights into your business. It helps to build credibility with stakeholders, uncover areas for improvement, and enhance the overall accuracy of your financial reporting.

A well-prepared audit can help you make informed business decisions, attract investment, and support long-term growth.

How can we help?

 Our Audit service offers complete immersion in your business operations and imperatives to allow for a bespoke audit approach that can be tailored to your unique needs.  To find out how we support you every step of the way, call us on 0203 912 9933 or email info@verallo.com.