What is an audit?

Published Monday 22 June 2026

Table of contents

• What is an audit?
• Who needs an audit in the UK?
• Types of audits
• The audit process
• Audit outcomes and opinions
• Why audits matter for your business
• How to prepare for an audit
• Simplify your audit preparation with Xero
• FAQs on audits

Key takeaways

• An audit is an independent review of your financial records to check they're accurate and comply with UK regulations like the Companies Act 2006.
• Most small companies in the UK are exempt from mandatory audits, but you may still choose a voluntary audit to build credibility with investors or lenders.
• Keeping organised, up-to-date financial records throughout the year makes audit preparation faster and less stressful.
• Cloud accounting software like Xero helps you stay audit-ready by centralising your financial data in one place.

What is an audit?

An audit is a formal, independent examination of your business's financial records and statements. Its purpose is to verify that your accounts are accurate, complete and prepared in line with relevant accounting standards. Audits give stakeholders, including HMRC, investors and lenders, confidence that your reported figures reflect the true financial position of your business.

Financial audits focus on your profit and loss statements, balance sheets and cash flow reports. Operational audits, on the other hand, look at your internal processes and controls to check they're working effectively. Both types help you spot errors, reduce risk and improve how your business runs.

In the UK, audits are governed by the Companies Act 2006. An auditor must be independent of the business they're reviewing, which means they can't have a financial interest in the company or be involved in preparing its accounts. This independence is what gives an audit its credibility.

Who needs an audit in the UK?

Under the Companies Act 2006, your company needs a statutory audit if it meets at least 2 of these 3 criteria in a financial year:

• Annual turnover of more than £15 million
• Balance sheet total of more than £7.5 million
• More than 50 employees

These thresholds were updated on 6 April 2025, when the UK government increased the small company thresholds by 50%. If your company falls below these limits, you likely qualify for the small company audit exemption. This means you're not legally required to have your accounts audited, which saves time and money. However, shareholders holding at least 10% of shares can still request an audit.

Even if you're exempt, there are good reasons to consider a voluntary audit. It can strengthen your credibility when applying for finance, reassure potential investors and help you identify issues in your financial processes early. Some businesses also choose voluntary audits to meet the requirements of contracts or funding agreements.

Types of audits

There are several types of audits your business might encounter, each with a different focus.

• Tax audit:HMRC may review your tax returns and records to check you've reported your income and tax deductions correctly. These can be triggered randomly or by irregularities in your filings.
• External audit: An independent auditor examines your financial statements to confirm they give a true and fair view of your company's finances. This is the type required under the Companies Act for qualifying companies.
• Internal audit: Your business conducts its own review of financial controls, processes and compliance. Internal audits help you catch problems before an external auditor or HMRC does.

The audit process

Whether it's an internal review or a full statutory audit, the process generally follows 4 stages.

• Planning: The auditor defines the scope, objectives and timeline. They'll assess risk areas and decide which records and transactions to examine.
• Gathering information: The auditor collects financial documents, interviews staff and reviews your systems. You'll need to provide access to bank statements, invoices, receipts and financial statements.
• Evaluation: The auditor analyses the evidence to check whether your financial statements are accurate and comply with accounting standards. They'll flag any discrepancies or concerns.
• Audit report: The auditor issues a formal report summarising their findings and opinion on your accounts. This report goes to your directors, shareholders and, where required, Companies House.

Audit outcomes and opinions

Once the audit is complete, the auditor issues an opinion on your financial statements. The type of opinion you receive tells stakeholders how reliable your accounts are.

• Unqualified (clean) opinion: Your financial statements are accurate and comply with accounting standards. This is the best outcome.
• Qualified opinion: The accounts are mostly accurate, but the auditor found specific issues that need attention, such as a misstatement in 1 area.
• Adverse opinion: The financial statements contain material misstatements and don't give a true and fair view. This is a serious result that requires immediate action.
• Disclaimer of opinion: The auditor couldn't obtain enough evidence to form an opinion. This often points to gaps in your record-keeping.

If your audit reveals problems, you'll need to correct the issues and may need to restate your accounts. Your auditor or accountant can help you create a plan to address the findings and strengthen your controls.

Why audits matter for your business

Audits do more than tick a compliance box. They provide an independent check that your financial records are sound, which protects you from penalties and legal issues down the line. In the UK, HMRC completed 316,000 compliance checks in 2024 to 2025, underscoring the scale of tax enforcement activity.

An audit can also uncover fraud, errors or inefficiencies you might not spot on your own. According to a UK Parliament report, HMRC estimates that tax evasion cost £5.5 billion in lost revenue in 2022 to 2023 and is most prevalent among small businesses. By reviewing your processes and controls, auditors often highlight areas where you can reduce waste, tighten procedures and save money.

For businesses looking to grow, a clean audit report is a powerful signal. Investors, lenders and potential partners are more likely to trust a business whose finances have been independently verified. It shows you take financial governance seriously.

Regular audits, even voluntary ones, also help you improve how your business operates. The feedback you receive gives you a clearer picture of your financial health and helps you make better decisions about spending, hiring and expansion. Getting your small business accounting right is a strong foundation for a smooth audit process.

How to prepare for an audit

Good preparation makes the audit process smoother and reduces stress. Here are practical steps you can take throughout the year.

• Keep organised financial records: Store all invoices, receipts and bank statements in 1 place. Tools like Hubdoc can pull bills and receipts into your accounting software automatically.
• Retain tax records for the required period: HMRC requires you to keep records for at least 6 years. Make sure nothing is deleted or lost before that time is up.
• Document your policies and procedures: Write down how your business handles expenses, approvals, payroll and financial reporting. Auditors look for clear, consistent processes. A solid approach to business accounting makes this easier.
• Run periodic internal audits: Review your own accounts quarterly or half-yearly to catch errors early. This also helps you stay on top of reconciliations and outstanding items.
• Stay compliant with regulations: Keep up with tax deadlines, filing requirements and any sector-specific rules. If you're unsure about anything, find a qualified professional through the Xero advisor directory.

Simplify your audit preparation with Xero

Xero accounting software helps keep your financial data organised, accurate and accessible all year round. With automated bank feeds, real-time reconciliation and centralised record-keeping, you can spend less time scrambling before an audit and more time running your business. Get one month free.

FAQs on audits

Here are answers to some frequently asked questions about audits.

How much does a small business audit cost in the UK?

Costs vary depending on the size and complexity of your business. A straightforward audit for a small company typically starts from around £3,000 to £5,000, but fees increase for larger or more complex operations.

When is an audit required in the UK?

A statutory audit is required if your company meets at least 2 of 3 size thresholds under the Companies Act 2006, covering turnover, balance sheet total and employee numbers. Most small companies qualify for an exemption and don't need one.

What is the difference between an internal and external audit?

An internal audit is carried out by your own team to review processes and controls. An external audit is conducted by an independent auditor who provides a formal opinion on your financial statements.

What happens if an audit finds problems?

You'll need to correct any errors or misstatements in your accounts. Your auditor can help you create an action plan to prevent similar issues in future.

How long does an audit take?

The timeline depends on the size and complexity of your business. A straightforward audit for a small company might take a few weeks, while larger or more complex audits can take several months.