How to Prepare Documentation for an External Audit
An external audit examines a company's financial records to ensure accuracy and compliance with applicable laws. Auditors evaluate your financial statements, transactions, and internal processes to verify the integrity of your accounting practices. Preparing well in advance will streamline the audit process and help maintain a strong financial record for your business.
Why Documentation Matters
Documentation is the backbone of any audit. An audit can quickly become complicated without proper paperwork, causing unnecessary delays and stress. The right documents help auditors understand your financial position, assess risks, and make informed conclusions about your business practices.
Following this guide will help ensure you're audit-ready, regardless of whether you're a small business, a medium-sized company, or a large corporation.
Gather Financial Statements and Reports
Compiling your financial statements is the first and most critical step in preparing for an external audit. Auditors will examine your balance, profit and loss, and cash flow statements, which provide a clear picture of your company's financial health.
Checklist for Financial Statements
Balance Sheet
Income Statement (Profit and Loss)
Cash Flow Statement
Statement of Changes in Equity
Having these reports ready and organised will make it easier for auditors to assess your financial standing. Ensure these documents are up-to-date and reflect your company's current financial position.
Organise Invoices and Receipts
Invoices and receipts play a vital role in verifying the transactions that make up your financial statements. Ensure all invoices, both issued and received, are organised chronologically. Receipts for expenses and other transactions should also be easily located and well organised.
Using a digital accounting system to store and organise your invoices and receipts will make this step much easier. For example, if your business uses Manchester accounting services, ensure all relevant documentation is accessible through your accounting platform and everything is categorised correctly.
Payroll and Employee Records
Your payroll records provide evidence of employee payments and any tax-related deductions. Auditors will review these to ensure you comply with employment laws and tax regulations. Ensure all salary slips, tax deduction reports, and employee contracts are well documented.
Key Documents
Payroll Records
Employee Contracts
Tax Deduction Certificates
Benefits and Bonuses Reports
Ensure the records are accurate and match the figures reported in your financial statements. Payroll discrepancies can raise red flags during an audit, so it's essential to double-check for consistency.
Tax Returns and VAT Documentation
Tax documents are often the central focus of an external audit. Auditors will review your company’s tax returns, VAT filings, and related documentation to ensure everything aligns with the law. Have your tax returns ready for review, proof of submission, and any correspondence with HMRC.
Checklist
VAT Returns
Corporation Tax Returns
Proof of Payment for Tax Liabilities
Correspondence with HMRC
These records help verify that your tax filings are accurate and paid on time. If there are any pending issues with the tax authorities, be transparent with your auditors about the situation.
Fixed Assets and Depreciation Records
Another area of interest for auditors is your company’s fixed assets. This includes any property, equipment, or vehicles your business owns. Auditors will want to see records of these assets and how they’ve been depreciated over time.
Key Documents
Asset Purchase Invoices
Depreciation Schedules
Maintenance and Repair Records
Ensure these documents are organised and up-to-date, especially depreciation schedules, as auditors will want to verify that these are recorded correctly.
Review Internal Controls and Processes
Auditors also evaluate internal controls to assess how well your company prevents and detects errors or fraud. Well-documented procedures, such as who is authorised to approve expenses or who manages payroll, will help demonstrate that your internal processes are robust and compliant.
Documents to Include
Internal Control Policies
Approval Processes
Expense and Reimbursement Policies
Risk Management Reports
Clearly defined processes show auditors that you diligently follow the correct protocols, which reflects positively on your business.
Compile Contracts and Agreements
Contracts and agreements with clients, suppliers, and employees are essential for verifying the terms under which you operate. Auditors will review these documents to ensure they align with your financial records.
Include
Supplier Contracts
Client Agreements
Lease Agreements
Loan Agreements
Keep these documents organised and ensure they are consistent with the transactions listed in your financial statements.
Conclusion
Preparing for an external audit may seem overwhelming, but gathering the right documentation in advance can make the process much easier. Start by organising your financial statements, invoices, payroll records, tax returns, asset records, and internal control documents. With everything in place, your auditors will clearly understand your company’s financial health and processes.
The same principles apply to accounting for sole traders. Proper documentation and organisation are essential to ensure compliance with tax laws and regulations, even for smaller businesses.
