Sample transactions for audit

Your Auditor gets paid for their independent opinions on your financial statements and company accounts. This is their job. For this purpose, they collect sample transactions for audit.

Before your Auditor could express their opinions on whether your company accounts and financial statements give a true and fair view of the state of your business affairs, they would have to do their audit first.

It would be unreasonable to expect your Auditor to check every single transaction on your accounting records for accuracy. They can do it if you want them to but that’s going to cost you a lot. You better off hired an in house accountants with past auditing experience to lead your finance department.

Your Auditor sample your business transactions for audit tests based on the level of risks they identified in your business operations. The auditor is prudent in their audit approach because if someone relies on your financial statements based on their opinions and disaster happened and someone may sue your Auditor. That’s why Auditor can be a pain sometimes. Forgive them. They are just doing their job and you pay them for it, is it not?

Audit sampling methods

First and foremost, your Auditors would have audit objectives set to achieve in their audit. For this purpose, they would use a combination of the following audit sampling methods when come to selecting samples of transactions for audit tests.

All of your business transactions may not be 100% audited. However, every single transaction has an equal chance of being picked for audit testing.

Sample transactions using Haphazard method

First is the Haphazard audit sampling. For this, simply choosing items subjectively but avoiding bias. Bias might come in with the tendency to favour items in a particular location or an accessible file or conversely in picking items because they appear unusual.

In short, this method is acceptable for non-statistical sampling but is insufficiently rigorous for statistical sampling.

Simple random

Second is the simple random. With this audit method, all items in the population have (or are given) a number. Numbers are selected by a means which gives every number an equal chance of being selected. This is done using random number tables or computer or calculator generated random numbers.

Stratified

Stratified audit method is dividing the population into subpopulations (strata = layers) and is useful when parts of the population have higher than normal risk such as high-value items, overseas debtors. Frequently high-value items form a small part of the population and are 100% checked and the remainder is sampled.

Cluster sampling

Next audit sampling method is useful when data is maintained in clusters (in groups or bunches). For example, wage records are kept in weeks or sales invoices in months. The idea is to select a cluster randomly. Subsequently, to examine all the items in the cluster selected. However, the problem with this method is that this sample may not be representative.

Random systematic

Random systematic audit sampling involves making a random start. thereafter, taking every item at the determined interval. This is a commonly used method which saves the work of computing random numbers.

However, the sample may not be represented as the population may have some serial properties.

Multi-stage sampling

Multi-stage audit sampling is appropriate when data is stored in two or more levels. For example, stock in a retail chain of shops. The first stage is to randomly select a sample of shops. Then, the second stage is to randomly select stock items from the chosen shops.

Block sampling

Block sampling audit method is simply choosing at random one block of items such as all June invoices. This common sampling method has none of the desired characteristics and is not popular or recommended.

Value weighted selection

Valve weighted selection audit sampling method uses the currency unit value rather than the items as the sampling population. It is now very popular and it is also known as Monetary Unit Sampling.

Permanent file audit

Your auditors will check your confirmation statement in the permanent agreed to the Companies House register.

Variation of class rights

Variation of share class rights is allowed by passing a special resolution for limited company.

Every share has its own rights attached to it. The rights typically cover matters such as voting rights, rights to dividends and rights to a return of capital on winding up. This will be referred to as class right in this article.

Procedure for variation of shares rights

Your company’s articles of association may set out class rights and provisions for altering or varying those rights.

If your company’ articles of association do not contain provisions for varying the rights, your company can vary them either by obtaining consent from the shareholders of at least three quarters in nominal value of the issued shares of that class excluding any treasury shares, or by the members of that class passing a special resolution at a separate general meeting.

You must deliver a copy of the special resolution to Companies House.

You must also deliver a Form SH10 called a notice of particulars of variation of rights to Companies House within one month of the date of variation.

Objection to variation of shares rights

If your shareholders of not less than 15% of the aggregate of the issued shares of the class in question, disregarding any treasury shares in the class, did not consent to the variation of the class right, they are entitled to apply to the court to cancel the variation.

They must make the application no later than 21 days after the consent was given, or the resolution passed. The court may confirm or cancel the variation and your company must deliver a copy of the court order to Companies House no more than 15 days after it is made.

Other important Companies House filings

Your company must deliver the following documents to Companies House every year and when it si due.

If you require help with your company accounts preparation and filing, contact our accountants. We would be able to assist you.

Company audit

Company audit is an assessment of the accuracy and completeness of your accounting records to see if it gives true and fair view. Generally, Auditor looks at your company’s financial accounting system and internal controls procedure to assess it’s effectiveness. Your auditor will assess if the data used to compile your company accounts is reliable.

The company audit is carried out by sections individually then piece together to form a big picture. The objective is to form an audit opinion on your financial statements and accounts. Consequently, Auditor issues either qualified or unqualified audit report. In brief, an unqualified audit report is desired. This is because a qualified audit report indicates that your auditor was not satisfied with something. For that reason, you definitely do not want a qualified audit report.

Revenues and Expense

Broadly, audit on sales is to make sure the sales in the accounts are genuine and booked in a timely manner. Similarly, the audit on expenditure is to make sure they were incurred exclusively for business. This is to avoid deliberate tax avoidance.

Fake sale

For example, a fake sale is where an invoice is created and money received in the bank to make it as if a genuine sale has happened. In real life there was the customer was a dummy. Thus, you may ask why do they want to do that? They have to pay tax on it. Exactly, they do not mind paying tax on it because they want to make “dirty” money become legal money through a business. why? so they can use it to buy property or expensive item freely. Usually, buying an expensive property involves a large amount of money requires proof of income source.

Play with the timing of accounting

Another instance would be deliberately to book the sales earlier in the account to make the figures look good in order to borrow money from the bank or to book it later to defer tax liability. This is not allowed.

Personal expense

Whereas for the expense, the audit test is to make sure it was a business expense. It was not a personal expense being put through into a business. Thus your company would pay less tax on your profit.

For instance, a company car on the book was said solely for business use. But in real life, it was a car bought solely for personal leisure.

Assets and Liabilities

Largely, your auditor will verify your business assets. They would trace your physical asset to the purchase invoice and ownership document. They will also assess if the asset values in your accounts reflect the current market value. The assets referred here include stock, trade debtors and property and equipment.

Similarly, for the audit of your business liabilities. The aim is to ensure monies owed are related to business expenditure. Loans to directors are properly accounted for in the accounts.

Internal Control

Universally, company audit also includes the assessment of what kind of internal controls procedure you have when come to handling petty cash, issuing a cheque or making a large sum payment.

For example, say, for a cheque amount more than £20,000 two signatories are required and for the sum, in access of £5,000,000 the payment must be authorized by all the directors. How often do you do petty cash reconciliation? Can you trace on your petty cash to who the reimbursement was paid to? Ideally, invoices and receipts must attach to the petty cash voucher for each reimbursement.

On the other hands, what are the internal controls procedure implemented for the booking of a sale transaction? For cash sales, do you issue a sale receipt? how soon after that the sales receipts are banked? Similarly, for non-cash sales, do you do regular sales reconciliation to the bank statement? who is monitoring the outstanding invoices? and what methods are used to get customers to settle their invoice sooner and so on?

Accounting Policies

Widely, accounting policy adopted for stock accounting should bring the valuation of your goods and products to its net realizable value or costs.

Correspondingly, your fixed assets depreciation policy adopted must reflect the useful economic life of the assets. Subsequently, the methods of depreciation used whether the straight-line method or reducing balance method.

Overall, you shall adopt accounting policies that give a true and fair view of your company’s affairs. In addition, you must apply it consistently from year to year and you must justify if any changes.

Company audit risk

Any business unavoidably present the risk of fraud and other irregularities. Commonly, this includes an attempt to manipulate the figures in the accounts fraudulently and so on.

For example, a restaurant business has a high volume of cash takings. Cash misappropriation is at high risk. Staff authorized to handle cash may be tempted to steal. Thus, your Auditor looks at what are the internal controls system implemented to mitigate the associated risks and to prevent cash being stolen.

On the same note, they would also look at if there is a history of cash theft. How the situation was handled and what measures were implemented to avoid similar occurrence. Was measures effective for its purpose and so on.

Another example is staff payroll. People can create a dummy employee record with a real bank account and pay out salary accordingly. Your Auditor may verify the physical number of staff to the staff payroll record to see any variances.

Accounting and auditing rules

Company audit also include assessment of statutory compliance of accounting or auditing rules applicable to your business.

For example, the Building Societies Act 1986 governs the audit of Building Societies. If this applies to your business then you must comply with it.

Another example, the Financial Conduct Authority (FCA) will regulate all companies provide financial services activities thus you must comply with FCA rules if this applies to you.

Regulatory body

Concurrently, you must comply with the regulatory body applicable to your business.

For instance, a registered charity company must comply with the Regulator for Charities in England and Wales. Your charitable activities and accounting records must comply with the rules of the Regulator. Therefore, file accounts with the charity commission as well as Companies House.

On the other hand, your company must also comply with Companies House filing requirements. For example, your company’s filings are up to date with Companies House, no accounts or confirmation statement is overdue.

Previous year statutory reports

Last but not least, your trading history provides good indications of the inheritance risk, associated risks level and your business growth. Auditor usually finds this indication from the following documents.

Signed company accounts

The prior-year figures known as comparatives in your company accounts allow Auditor to spot big variances on each line in your profit and loss account and balance sheet year on year. The variances are explainable. For example, Sales in the current year dropped by 30%. This event is explainable. Accordingly, Auditor will zoom in to find out why.

Auditor’s opinions on your financial statements.

Your Auditor usually follows up on highlighted issues in the prior year’s qualified audit report to see if they were taken care of, if not yet then why not.

Regulatory inspections reports on your business

Regulatory inspections reports is an independent report carried out to check compliance with the Regulatory body requirements. Any non-compliance issues will flag up here.

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