Do I need an audit? When a growing business has to be audited

“Do we need an audit?” usually comes up at an awkward moment: a bank renewing a facility, an investor’s term sheet, a grant agreement, or the business quietly growing past a size threshold nobody was watching.

The answer depends on two things: the rules that apply to your type of business, and who else relies on your numbers.

Reason one: the law says so

Most countries require an audit once a company reaches a certain size or takes a certain form, and the thresholds and structures differ from place to place. Using Australia as an example:

• Large proprietary companies. A proprietary company is “large” if, at the end of the financial year, it meets at least two of three tests: consolidated revenue of $50 million or more, consolidated gross assets of $25 million or more, or 100 or more employees. Large proprietary companies must prepare and lodge an annual financial report, and it must be audited unless ASIC grants relief.
• Small proprietary companies. Usually no audit is required, but shareholders with at least 5% of the votes can direct the company to prepare a financial report and ask for it to be audited. ASIC can also direct a company to prepare one.
• Public companies generally have to prepare audited financial reports, with lighter rules for some smaller not-for-profit companies limited by guarantee.
• Registered charities. Size is set by annual revenue. A medium charity ($500,000 to under $3 million) must have its financial report reviewed or audited; a large charity ($3 million or more) must have it audited.

These rules change, and structures such as groups, trusts and foreign-controlled companies have their own twists. Treat the list above as a starting point and confirm your position with your accountant or auditor.

Reason two: someone else asks for it

For many growing businesses, the request comes from outside rather than from the law:

• Lenders. Loan agreements often require audited or reviewed accounts once borrowing passes a certain level, sometimes with a deadline after year-end.
• Investors. Shareholder agreements and term sheets commonly ask for audited accounts, especially after an outside investment round.
• Grant funders and government contracts. Many require audited accounts, or an audited statement of how the grant was spent.
• Buyers. If you plan to sell in the next few years, audited history makes due diligence faster and gives the buyer less to discount.

Read the actual wording. “Audited”, “reviewed” and “prepared by a qualified accountant” mean different things, and the difference can be a large part of the cost.

Reason three: you choose to

Some owners choose an audit without being required to: to give a board or family shareholders independent assurance, to prepare for sale or investment, or simply to find out whether the numbers stand up. That is a sensible reason, as long as the business is ready for one.

Audit, review or compilation?

Not every request needs a full audit. The three levels are quite different:

If a lender or funder asks for “audited” accounts, it is worth asking whether a review would be acceptable. Sometimes it is.

If you do need one

The cost and length of an audit depend far more on how ready you are than on the size of the business. Auditors charge for time, and time goes on waiting for schedules, chasing evidence and working through adjustments.

Our audit readiness checklist covers what auditors ask for and how to have it ready. The free audit readiness scorecard gives you a quick read on where you stand.

This guide is general information, not legal or accounting advice. Your accountant or auditor can confirm what applies to your business.

How we help

We are not auditors and we do not give audit opinions. We help businesses get ready for one. Our audit readiness review works through your schedules, reconciliations and controls the way your auditors will, while there is still time to fix what we find. If a first audit is coming, contact us and we will tell you where to start.