Balance the books
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44 1 cs a nuisance, costs a small fortune, but I suppose it has to he done." This
small business owner is talking about the audit of his company's accounts, and he echoes the thoughts of thousands of others.
The audit does not have to disrupt the running of the company, or carve a large hole in the profits—too many hauliers see it as a negative activity, rather than a way of encouraging the sort of practices that make an operator more successful.
"Many businesses are not that good at helping the auditor," says Eric Kench, whose Buckinghamshire accountancy practice audits many small and medium-sized companies. He points out that by presenting books and records in the way the auditor wants to see them, many companies can gain tighter control over spending and a better grip on the management of the business.
But what can the average small business do to help the auditor? Kench, a member of the General Practitioner Board of the English and Welsh Institute of Chartered Accountants, recommends 10 simple tips.
1 Provide the auditor with a set of accounts. Kench points out that in many small businesses the accounts are audited by the same accountant who provides the company with general accountancy and tax advice—he may be handed a set of books for the audit which are not even be balanced "Very few small companies provide their auditors with finished accounts in Companies Act format," he says. "The auditor has to get them in that form before he can begin the audit, but he is not performing the audit function in getting to the starting post. Clearly, if he's given a trial balance, the first thing he's got to do is to prepare a set of accounts and put it into Companies Act format. That is an accountant's role, not an auditor's."
2Make sure books AL are added correctly and cross-cast. Kench sees many inadequacies in basic book keeping which have to be sorted out before the audit can begin. Books may not be
added up, or may even be . • added up incorrectly it's part of the work of the auditor to uncover in-accuracies in the books," he says, "but he can't even start his work if he has to check all the balances and calculations before he starts."
iInvest more time and money in book%) keeping. Most problems arise because not enough resources si .-tre devoted to basic bookkeeping. It may m a useful economy measure to hire a part.timer ther than a fuIl.time book keeper, but it frequently proves lobe a false economy. "lu the dild the auditor ends up doing much of the work that ought to have been done by the book.keeper," says Kench. "The auditor's hourly charging rate is higher than a bookkeeper's, so the basic work costs more than necessary. It's a bit like hiring Michelangelo to slap a quick coat of emulsion over the ceiling."
AKeep source documentation logically.
Kench explains: "Often source documents, invoices for example, are held in a format that does not help the audit or. There is no set format for holding documents, but if you are to get from an entry in the books to a piece of paper there needs to be a fairly quick way I if doing that."
It make; sense to give documents a logical reference number but many small firms don't have that kind of system. One of the problems is that some documents—insurance papers are a favourite—are kept outside the main accounting source document system. As Kench says: "This means that from the auditor's point of view the costs relating to insurance has disappeared from the accounting system.' And that means the auditor might have to spend his time, and your money, locating them.
gMake manual documents legible and 40 consistent. lven though many small firms now run computerised book keeping systems, they still maintain manual files of source documents. These often contain important notes which the auditor might need to see.
6 Keep books up to date. "Ideally, you should be handling n iutme hook keeping day to clay and reconciling the various accounts monthly," says Kench. One of the few beneficial effects of VAT is to force registered small businesses to update their books at least quarterly. If an error has occurred it is easier to spot if there is less of a backlog to wade through.
7 If computerised, make sure that more than
one person knows how the system works. If only one person knows how the system works, which is often the case in small companies, other managers find they can't get vital accounting data if the operator is absent.This creates backlogs of work which can cause errors and sloppy recording. This is especially awkward if the sole custodian of the computer is absent when the auditor is at work. Vital queries may go unanswered causing audit delay and extra cost.
8 Brief the auditor thoroughly. All too often business owners fail to give the auditor vital information because they don't think it's relevant to the auditor," says Kench. "It's best to tell the auditor everything and let him decide what's relevant. tie stresses that the auditor needs "unfettered access" to all books and records— including information that may not seem to be wholly financial.
9I1 the auditor is working on your premises give him adequate facilities. In many eases auditors are graciously allowed to perch on the edge of the book-keeper's desk. Not only is that inadequate from the auditor's point of view, it may also not be in the business owner's best interest. "Inevitably the auditor may look at matters which the ow-ner will want to keep confidential from his book keeper," says Kench. "That is not best served when the auditor is working under the bookkeeper's eye.'
1 0 Provide management accounts or a directors' view before the audit starts. Planning how audit resources are to be deployed is an important first stage. lithe auditor has some background on what the company sees as its position he can be guided to the areas that might need closer investigation. If the position primes to he different to that which the owners expected, the auditor gets an early warning of areas that might need closer examination.
Auditors are generally down-to-earth types and don't expect to he greeted with opens arms. But these pointers can make the audit quicker and cheaper. Above all, agree the cost of the audit before it starts. "The auditor should have a good idea how much time he'll need at the planning stage," says Kench.
by Peter Bartram