How to Prepare for an Audit: A Guide for Charities and SMEs
It’s that time of the year again when your charity or company needs to be audited. If you’re caught off guard, this can be a stressful experience. Are your records in order? Have you missed any compliance requirements? These are all legitimate questions that charity trustees, SME directors, and shareholders ask themselves when preparing for an audit.
But what if you had everything in order, waiting patiently for the auditors to confirm what you already know: that you’ve been transparent and responsible throughout the year? Knowing how to prepare for an audit can turn it into a manageable, even insightful experience that can help strengthen your organisation’s finances and control structures.
In this guide, we’re starting off with the basics, explaining why and when UK charities and SMEs need to be audited, and covering all the important steps trustees and shareholders should follow to avoid compliance issues.
Why Are Audits Important for Charities and SMEs?
Not all charities and SMEs in the UK are required to perform audits – generally, smaller organisations are exempted from this type of scrutiny and can go with an independent evaluation. However, for those who decide to have their accounts audited, there’s a strong set of benefits available.
Charities, for instance, struggle to maintain a high level of trust and transparency with their donors, which according to a report by the Charity Commission, is difficult to achieve when there’s a lack of financial information. Regular audits can provide the donors and supporters with a guarantee that the charity is well-managed and complies with all the Charity Commission regulations.
SMEs often arrange for an audit when they are looking to attract new investors or apply for a loan. The report shows where the organisation stands financially and can provide peace of mind to the stakeholders and future partners. Sometimes the shareholders may require an audit if they feel the need for more transparency and assurance about the company’s financial health.
If audits can be optional for smaller organisations, it is important to mention that once your charity or SME has reached the income threshold set by UK law, you are required to arrange for them.
There have been some initiatives over the years that required for the threshold to be increased or the audit obligations reduced; however, several studies, including Matthew Gorrie’s 2023 paper showed that this can result in increased rates of economic crime and poor-quality corporate reporting.
When Can Charities Opt for an Independent Examination Instead of an Audit?
The charity income threshold was last increased in 2015 via the Charities Act 2011 (Accounts and Audit) Order 2015. The current thresholds are:
- £1 million (raised from £500,000) gross income, applicable if your income is over £25,000.
- £3.26 million gross assets, applicable if your gross income is over £250,000.
Charities that have a gross income below £25,000 are not required to perform any type of external scrutiny. However, some charities, such as Parochial Church Councils, can be subject to external scrutiny requirements.
Some not-for-profits may need to perform an audit, even if they don’t meet any of the thresholds mentioned. Such cases appear when the governing document stipulates that the charity is required to perform audits. The good news is that, if you and your co-trustees consider your organisation only needs an independent examination, you can change the document to remove this provision.
When Are Audits Mandatory for UK SMEs?
In the UK, SMEs are required to conduct audits if they exceed two of the following thresholds for two consecutive financial years:
- Turnover: £10.2 million or more.
- Total assets: £5.1 million or more.
- Employees: 50 or more.
Other situations when an audit is mandatory may include an explicit request in the company’s governing documents, if the company serves a public interest, or if the shareholders who own at least 10% of shares request one.
If your company doesn’t meet the thresholds we mentioned, you can request an audit exemption, but you will still need to file unaudited financial statements and submit a director’s declaration confirming eligibility for exemption.
Free Financial Health Check
Take the test to reveal your charity’s financial strengths and weaknesses.
✓ No obligations
✓ Completely free
What Is the Audit Threshold for Charities in England?
The Charities Act 2011 mentions the following audit thresholds for charities in the UK:
- The charity’s gross income exceeds £1 million in the financial year, or
- The gross income exceeds £250,000, and the total assets are more than £3.26 million.
If the charity’s governing documents include a clause explicitly requiring an audit, the trustees must arrange for one irrespective if the threshold is met or not. This requirement can however be modified if the trustees consider the charity can maintain its transparency and compliance by performing independent examinations.
Charities that fall below the audit threshold can opt for an independent examination of their account if their gross income exceeds £25,000, which is a less costly process.
How to Prepare for an SME Audit
For small and medium-sized enterprises (SMEs), an audit provides the opportunity to check the company’s financial health by reviewing the control structure’s efficiency and identifying potential security branches that can favour fraud. Here are the steps you should follow to make sure your audit runs smoothly:
Organise Financial Records
Preparing for an audit involves maintaining accurate financial records throughout the year. These records often include trial balances, accounts receivable/payable, general ledgers, and payroll records, which need to be backed by invoices, contracts, and tax returns.
Some companies opt for cloud-based accounting software to keep all these documents organised, which makes it easier to retrieve them when the audit starts.
Review Internal Controls
Here’s a quick tip: thinking like an auditor can help you streamline the audit process and improve your company’s control structure. Auditors will look at your internal controls to ensure they are strong enough to prevent fraud, so pay attention when you are building them. Focus on key areas such as procurement, expense approvals, and cash handling, where implementing a dual-approval system can be a good strategy.
Reconcile Accounts
You don’t want to find out your inventory records and physical stock don’t match during the audit, so make sure you reconcile your key accounts before the auditor arrives. Compare your financial records regarding bank accounts, creditors, debtors, and inventory with actual balances to avoid discrepancies. It’s a good way to build trust with your auditor and shorten the audit process.
Prepare Explanatory Notes
Take a look at your most important financial events and prepare explanatory notes for your auditor, who can use them to understand the context. Whether we are talking about a significant asset acquisition or a change in accounting policies, providing a clear explanation of the transaction or the decision can help you avoid unnecessary discussions.
Seek Professional Support
Sometimes, even when you’ve put your best efforts into ensuring your company is compliant with accounting standards, there are still things that get overlooked, especially when your company lacks a dedicated department.
Here’s where financial experts can help by providing tailored financial management services for SMEs, from bookkeeping to preparing audit-ready accounts and assisting you with preparing financial statements and resolving discrepancies.
Having an expert take a look at your accounts before the auditor arrives can provide the assurance you need that the audit will be successful.
How to Prepare for a Charity Audit
When preparing for an audit, charities need to ensure that they comply with the Charity Commission regulations as well as their governance document. Here’s how to get ready:
Review Governance and Financial Records
To prepare for an audit, the first step is to revisit your charity’s governing document. This crucial document sets the framework for your operations and ensures your activities align with your stated objectives.
For example, if your charity’s mission is focused on providing educational resources, any expenditure or activity outside this scope could raise red flags during an audit. In addition, maintaining accurate financial records is essential. Ensure receipts, invoices, and bank statements are up to date, clearly categorised, and properly reconciled.
Build Robust Management Accounts
A 2022 study revealed that charities that implement independent audits enjoy better financial performance than those that don’t. One of the reasons is that these organisations maintain management accounts, which allow them to oversee their income, expenditure, and cash flow. By preparing management accounts, trustees can identify trends and issues even before the audit takes place and address them on time.
Engage Your Auditor Early
You can reduce preparation time if you connect with your auditor well before the audit begins. A good strategy is to contact them at least six months in advance, sharing preliminary documents and asking for a checklist of additional information. This way, you’ll know what they are expecting from you and can gather all the necessary documents as well as address minor compliance issues early.
Involve Key Stakeholders
Audit preparation is not solely the responsibility of the finance team. Trustees, finance officers, and senior managers should all be involved in the process. Consider organising a workshop to familiarise them with financial statements and compliance requirements – it will make it easier to obtain the support you need from them during the audit. Plus, having all the stakeholders involved can increase their trust in financial governance and foster a culture of transparency.
Conquer Audits with Ease
If you’ve had some bad audit experiences in the past, you know that insufficient preparation is often the reason. Maybe you didn’t pay enough attention when reconciling your accounts or some transactions weren’t documented properly. Either way, the simplest way to make sure everything is in order for your next audit is to start preparing well in advance.
FinOps Partners can help you build strong management accounts to track your financial operations and have clear reports to show your auditors. If you are looking for financial experts to reassure you that your organisation is compliant and financially healthy, get in touch with us today! call with us and see where you are standing!
Author Spotlight
Carl Wakeford, ACA
Carl began his career within the Big Four where he spent four years auditing many public and private sector organisations, and qualifying as a Chartered Accountant. With a passion for business resilience, Carl specialised in risk consultancy, helping organisations strengthen financial processes and controls. Since leaving the Big Four, Carl has worked within multinational commercial finance teams, fast paced start-ups, the charity sector, and is now the CEO of FinOps Partners.
Do Charities Really Need Specialist Accountants?
A Guide to Charity Accounts – All You Need to Know in 2025
