What is an Audit, and Why is it Necessary?

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There is no doubt about it; the UK economy could be braced for a serious slowdown in the months ahead.

Brexit negotiations have certainly stalled growth in the region, with the Bank of England (BoE) having recently downgraded its 2017 growth forecast to 1.7% (while simultaneously holding interest rates). Inflation has also risen at a disproportionate rate to earnings, which has caused consumer spending to drop for the third consecutive month in July.

These are challenges that the business community in the UK must face head on, and auditing can play a pivotal role in this. We will explore in further detail in this article, but asking why audits have never been more necessary in the business world?

What is an Audit?

 

In simple terms, a financial audit is the objective evaluation of your organisations fiscal reports. It is designed to explore both the detail of your finances and your reporting processes, so that regulators can draw reasonable assurance that the fiscal statements made by your business are genuine. Beyond this, the process of auditing also creates transparency and financial accountability within the business world, guaranteeing compliance and ensuring that firms are unable to achieve an unfair and illegal advantage in their chosen market.

Companies can have their accounts audited at random, which is why businesses must always be prepared come the end of the financial year. Once a company has submitted their financial statements for review, it is possible for HMRC to commission a further audit that explores the accuracy and the processes behind the accounts. This is something that your firm must proactively prepare for, especially if it is to guarantee compliance and avoid any unwanted financial sanctions.

Why are Audits Important?

 

We have touched briefly on why audits exist, particularly from a business transparency and compliance perspective. In fact, there is an argument to suggest that the mere prospect of having their business audited is enough to ensure that most entrepreneurs adhere to the best financial practice and maintain accurate accounts. The penalties for failing to comply with tax legislation in the UK are huge, as any back-dated debt will need to be repaid along with a significant fine imposed HMRC.

While there is a tendency for some businesses to fear audits, however, they actually have a number of benefits and can be important from the perspective of entrepreneurs. Firstly, companies can commission their own independent audits prior to the end of the financial year, during which time industry experts can review your accounts and provide actionable feedback. This highlight any discrepancies in your accounts ahead of time, while also helping you to refine your reporting processes going forward.

Proactive audits can also have additional advantages for business-owners, which may prove important in the current economic climate. More specifically, you can audit your spending in relation to incomings, while identifying any areas of excess expenditure that can be reduced. This will incrementally reduce the cost of running your venture, potentially increasing your profit margin and growth prospects for future.

So rather than dreading audits as an entrepreneur, now is actually the time to embrace them and make them work for your venture.