What is an auditor?

The purpose of auditing is to provide assurance to shareholders and other stakeholders that financial information is reliable and trustworthy.

An auditor is an independent professional who reviews the accuracy and transparency of financial records and processes. Auditors provide assurance that financial statements produced by an organisation reflect its operational and financial results and comply with accountancy standards, tax laws and regulatory requirements.

They provide some assurance that financial statements are free from misleading statements and fraud. They can also help businesses to assess their financial health and help boost operational efficiency.

Auditing plays an important role in maintaining confidence in financial reporting, by independent assessment of whether financial records are accurate, transparent and compliant with legal requirements and accounting standards.

Types of auditor

• Internal – Auditors can work internally; examining their employer’s policies, procedures and finances and advising where improvements could be made.
• External – Or they can work externally for an auditing firm, examining multiple client company accounts for legal purposes.
• Government auditors – maintain and examine records of government agencies and of private businesses or individuals performing activities subject to government regulations or taxation. They detect embezzlement and fraud, analyse agency accounting controls and evaluate risk management.
• Forensic auditors – specialise in criminal law and investigate for evidence of financial crimes, often working with law enforcement agencies and lawyers.
• Technological auditors – help detect fraud and find errors in an organisation’s financial statements by evaluating and assessing information technology systems, processes and controls to ensure that they run accurately and comply with relevant regulatory, legal and industry standards.

What size of organisation needs an audit?

In the UK, by law, large companies must be audited yearly by an external organisation; ‘large ‘is defined as meeting at least two of the following criteria:

• Turnover of more than £36m;
• Balance Sheet total of more than £18m;
• More than 250 employees.

Smaller companies do not legally have to have a formal audit, but they can volunteer to have an audit if they feel it will help their reputation or provide reassurance to shareholders and suppliers. Similarly, some charities and membership organisations below the legal thresholds do have an audit or external financial review in order to provide reassurance.

What qualifications does an auditor need?

There is no legal requirement for an auditor to be qualified; anybody can set themselves up as an auditor. However, most auditors are professionally qualified, having spent years in training, and passing examinations in a range of subjects including accounting, taxation and company law and governance, and continuing to maintain their expertise, skills and knowledge through required continuing professional development. They are often members of one of the professional bodies, which provide training and support, and have strict ethical codes for members to follow. The size of auditor firms can range from a one-person company to one of the largest multinational professional firms.

Responsibilities

One common misconception is that it is the auditors who are responsible for the accuracy and correctness of an organisation’s accounts; that is not the case. That responsibility lies with the directors of the organisation.

An auditor’s responsibility is to use their professional skills and experience to review the financial statements of the organisation, and to form an opinion as to whether they present ‘a true and fair view’. That does not mean totally accurate and correct; to do that, auditors would have to check every single transaction. It means that someone reading the accounts, and relying on them, would not have a false or misleading picture of the organisation.

What does an auditor do?

Auditing plays an important role in maintaining confidence in financial reporting. An auditor conducts investigations of financial records to check the integrity and accuracy of the financial information that an organisation has reported.

To do this they:

• Need a thorough understanding of the business.
• Perform compliance audits to verify that financial statements, policies, and systems are accurate and adhere to legal requirements, regulations, industry standards and contractual obligations.
• Carry out tests of the processes and procedures to confirm that they are working as expected.
• Evaluate the strength of the internal controls which are put in place within the organisation to reduce or eliminate the possibility of error or fraud.
• Evaluate risk management practices by identifying and assessing internal and external potential risks that could impact the business’ objectives and recommend risk management strategies.

Audit outcomes

Having done all of the above, towards the end of the audit the auditor will do a number of things.

• Propose adjustments to the accounts. If the auditor has identified what they believe to be errors, or incorrect application of accounting standards, they will propose adjustments to the directors of the company. They will only do so if they consider the changes to be ‘material’ i.e. of such a size or effect that the accounts could be considered misleading as they stand. The auditors cannot adjust or change the accounts themselves; the directors are responsible for the accounts, and only they can change them.
• Issue their audit opinion on the accounts. Usually, the opinion is ‘unqualified’ i.e. the auditors say that in their opinion the accounts do give a ‘true and fair view’ of the financial position. Their opinion might include a qualification if for example, they have proposed a material adjustment that the directors have declined to make, perhaps because of a different interpretation of a standard or set of circumstances. In this case, the auditors will include a description of the situation and provide an estimate of the effect on the financial statements.
• Prepare a report for the directors on things they have identified in the course of their work. This might include areas where internal controls can be introduced or improved, or profits enhanced through changes to systems and procedures.

Why are auditors important?

Auditors are important because they provide an independent oversight of a business’ financial statements and annual reports, providing assurance and credibility from an unbiased perspective.

Auditors play an important role in maintaining confidence in a business’ financial reporting, which in its absence would be potentially unreliable and unverifiable.

Auditors:

• Help shareholders and other stakeholders hold directors to account.
• Report to shareholders on the ‘truth and fairness’ of financial statements which must be prepared in accordance with accounting standards and legal requirements.
• Help businesses maintain consistency and detect errors or fraud.
• Advise the board of directors.
• Give assurance to shareholders and stakeholders.
• Reduce investor risk by providing validity, increasing investor confidence.
• Provide an overview of the financial statements of a company which can demonstrate effective management.

What’s the difference between an auditor, accountant and actuary?

Accountants, auditors and actuaries are three distinct professions. While all three require strong mathematical, accounting, and statistical problem-solving, each profession requires specialised skills and knowledge and plays an essential role in the financial management and decision-making processes of organisations.

Accountant

Accountants record, organise and analyse financial transactions. They provide an overview of financial performance through the preparation of financial statements and accounting records (balance sheets, income statements and cash flow management statements).

They evaluate the health of the business, providing the information the company needs to make informed business decisions.

Accountants may also undertake tax preparation, book-keeping, budgeting and financial reporting. They ensure compliance with accounting principles and regulations, helping businesses maintain accurate financial records and make informed financial decisions.

Actuary

Actuaries analyse data to solve real-world problems. They assess and manage financial risk and uncertainty, using data to predict and measure the degree of future risk and then mitigating those risks by putting financial safeguards in place.

Using advanced statistical and mathematical techniques, actuaries develop models and projections to inform decision-making related to risk management, investment strategies and pricing, particularly in the insurance and banking industries.

Actuaries play a crucial role in setting insurance premiums, designing insurance policies, estimating future claims and ensuring the financial stability of insurance companies and pension funds.

To sum up, accountants prepare financial statements and reports, while auditors review and verify financial records for accuracy and compliance and actuaries assess financial impact and manage risks.

Choosing the right auditor for your business

While an audit should be rigorous and challenging, it should deliver more than simply business compliance and can offer useful insights integral to business success.

To add value to your business, your chosen auditors should have the skills, knowledge and industry-specific experience to be able to analyse business performance and offer informed advice on improvements.

The auditor’s reputation is your quality assurance and is demonstrated through compliance with regulations, standards and a regular programme of professional development, as well as testimonials, references and awards.

A good audit will offer ongoing support for agile decision-making and growth. Your auditor will be a business partner who can provide insightful analysis, assurance and business advice to improve efficiency as well as your business reputation and stakeholder confidence.

Related courses

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