Acceptance
An audit firm has to check a few things before it can take you on. It confirms who owns and runs the company under the money laundering rules, checks that it has no conflict of interest and is independent of the company, and, if you are changing auditor, writes to your previous auditor with your permission. Then it sends an engagement letter setting out the scope, the fee and both sides' responsibilities, which the directors sign.
Planning
The audit partner meets your finance team, and ideally a director, to understand what has happened in the year: new contracts, new systems, acquisitions, problems. From that the team decides where the risk of a material mistake in the accounts is highest and plans the work around it. Auditors work to a level of materiality, an amount below which an error would not change anyone's view of the accounts, so they test the areas that matter and spend less time on the rest.
You then receive a request list: the schedules, reconciliations and documents the team needs, with dates.
Want to talk it through? Tell us about the company and speak to the audit team. The budget and timetable are agreed before any work starts.
Talk to usFieldwork
This is the main part of the audit. The team tests the figures in the accounts against evidence: invoices and contracts for sales, bank letters for cash, counts and valuations for stock, payroll records, loan agreements and board minutes. They write to banks, and sometimes customers, to confirm balances directly. If stock is significant, someone attends the count at the year end.
If something comes up during fieldwork, such as a figure that doesn't reconcile, an accounting treatment that needs changing or a document that's missing, you should hear about it straight away, in writing, so it can be dealt with while there is still time.
Completion
Towards the end, the auditor looks at events after the year end, considers whether the company can keep trading for at least the next twelve months (the going concern assessment), and agrees any adjustments to the accounts with you. The directors sign a letter of representation confirming what they have told the auditor.
Then come the close-down meetings: one with the finance team to go through the detail, and one with the directors before anything is signed. The partner signs the audit report, the directors approve the accounts, and the accounts are filed at Companies House. Private companies have nine months from the year end to file.
Afterwards
A good auditor finishes with a short note of what would make next year quicker: controls to tighten, schedules to prepare differently, issues to raise early. Then the cycle starts again with planning before the next year end.
Questions
How much of our time will the audit take?
Most of it falls on the finance team, gathering what is on the request list and answering questions during fieldwork. The directors' time is mainly the planning meeting, the close-down meeting and signing the letter of representation. The better prepared the information, the less time it takes.
Does the audit happen at our office?
It can, or it can be done remotely, or a mix of both. Stock counts and some checks are easier on site. Agree the arrangement at the planning meeting.
What is a management letter?
A letter from the auditor at the end of the audit setting out weaknesses they found in controls or processes, with suggestions to fix them. It is not published. A useful one is short, specific to your business and written so the finance team can act on it.