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.