Whilst there is a statutory requirement for companies which do not qualify as small companies or those which are members of a non-small group to have an audit in the UK, there is no such legal requirement for small companies or groups.
- Turnover less than £10.2 million;
- Gross assets less than £5.1 million; or
- Employees less than 50.
However, even where a company does not have a statutory requirement to undertake an audit of its financial statements, many choose to voluntarily have a “non-statutory” audit due to the significant potential benefits of having expert scrutiny and advice on their financial performance, position and systems.
The Board of Directors of one such company recently asked us to undertake an audit of their financial statements following the completion of an acquisition of the business by new management. The company had not previously ever had an audit and had filed unaudited accounts annually.
Adjustments to financial statements from the audit work
Our audit work identified a number of weaknesses in the financial records of the company and errors in the figures in the draft financial statements. This included:
- Stock was not supported by a detailed line-by-line listing and when this was investigated the value of stock was found to be materially overstated due to inflated historic estimated round-sum values for items which were either obsolete, unusable or did not exist.
- The fixed asset register was poorly maintained and when tested there were a number of assets which could not be supported by physical verification or by purchase documentation.
- Tracing the above fixed asset transactions identified these as assets which were recorded as having been acquired personally by the former owner and then recharged to the Director’s Loan Account.
The identification and correction of the above errors meant that monies which were showing as owed to the former owner were not in fact due to him. The audit work, therefore, resulted in direct cost savings to the new owners in not settling these erroneous loan balances.
Corporation tax advice
In carrying out our audit work we advised the Board of Directors on a number of potential measures which they could take to save corporation tax, including:
- We identified expenditure and activities in the business which qualified for research and development tax credits;
- Work undertaken by businesses with common ownership on behalf of this company had not been fully recharged by way of an effective and valid management recharge structure and doing so would reduce the overall tax due across the companies; and
- We noted that by restructuring the ownership of the company and other businesses under common ownership that further tax savings may be made by utilisation of tax losses by way of Group relief in future periods.
Improvements to systems and controls
The errors noted in the financial statements were noted as deriving from a lack of a system of effective controls (stock counts and records, fixed asset register reconciliation, etc) and so we provided as part of our audit a listing of proposed controls improvements which management subsequently implemented.
This meant that the financial information both for the year-end accounts and on an ongoing basis in terms of monthly management accounts used by management to manage the business day-to-day were more reliable and accurate. This also reduces the risk of erroneous and unsupported transactions being recorded.
The Board of Directors were provided with the peace of mind and security they wanted in that the transactions reflected in the financial records were a true and fair representation of the performance and financial position of the company.
The identification of the erroneous transactions and the tax savings advised on meant that the company got significant added value from the audit in terms of direct reductions in their financial outgoings. Meanwhile the suggested improvements in controls meant that the financial information is now accurate on a real-time basis.
If you feel your business could benefit from an audit and are looking for an accountancy firm you can trust, then trust in Williamson & Croft. With offices in Manchester and Liverpool, we can help those in the surrounding areas of Stockport, Widness, Warrington and St Helens too. Contact us today to learn more about our audit services.