What is a company audit?
A company audit is the independent examination of the financial statements of a company by an approved auditor. An approved auditor is a professional who has the accreditation to prepare an independent report for the company’s members on whether the company has prepared its financial statements in accordance with UK Company Law.
Company audits must be run in a standard manner in accordance with the guidance produced by the International Standards on Auditing (ISAs). The ISA guidance sets out the basic principles and processes that all approved auditors are expected to abide by.
As we will explain later in this article, not all companies are required to have an audit of their financial records. Whether an audit is required depends on the turnover, asset value, and number of employees in the business.
The purpose of a company audit is to ensure that the financial statements placed on the public record for each eligible company follow the correct rules and are, therefore, accurate.
What is involved in a company audit?
During a company audit, the instructed auditor reviews the company’s annual accounts and financial statements for accuracy. They also check that any statements have been prepared in complete accordance with the relevant legislation and standards issued by Companies House and HMRC. The auditor will appraise the company’s internal control systems, verify its liabilities and assets, and examine any reports, records, documentation and operating practices.
Having completed the audit review, the compliance officer will draft an audit report setting out the following:
- Title
- Addressee
- The financial statements audited and a statement of the responsibility of the company’s management and the responsibilities of the auditor
- A description of the work performed
- Expression of opinion on the financial statements
- The date of the report
- Auditor’s address
- Auditor’s signature
The auditor provides ‘expressions of opinion’ regarding the state of the company accounts they are auditing. This includes whether the auditor believes that the financial statements provided are ‘true and fair’ or that they are ‘presented fairly in all material respects’.
As HMRC states, “The responsibility for preparing the financial statements rests with the company’s directors, who may employ an accountant to draw them up. The auditor is responsible for reporting on those statements”.
If you require an audit, you will need to ensure that the appointed auditor has access to your business’s latest financial books, financial statements, and financial accounts.
Does my company need an audit?
Your company will need to have a statutory audit if at least two of the criteria are true:
- Your company has an annual turnover of more than £10.2 million
- Your company has assets worth more than £5.1 million
- Your company has 50 or more employees
According to the rules, if a company is part of a larger group of companies, the whole group must meet these criteria in order for an audit to be required.
If a company does not meet the above criteria, it may be eligible for exemption, as we will discuss later in this article.
Shareholders with 10% or more shareholding in a smaller exempted company can formally request an audit if they wish to do so. This must be done in writing and sent to the company’s registered office address. This request must be received at least one month before the end of the financial year to be audited.
It is the job of the directors to appoint the first auditor of the company. In the case of private companies, members can then appoint or re-appoint an auditor each year at a meeting of the company’s members or by written resolution within 28 days of the directors sending the accounts to the members.
What type of companies must have an audit?
In addition to the audit criteria set out above, a company must have an audit if, at any time in its financial year, it has been one of the following company types:
- A public company (unless the company is dormant)
- A subsidiary company (unless it qualifies for an exemption)
- An authorised insurance company
- carrying out insurance market activity
- Involved in banking
- An issuer of electronic money (e-money)
- A Markets in Financial Instruments Directive (MiFID) investment firm
- An Undertakings for Collective Investment in Transferable Securities (UCITS) management company
- A corporate body and its shares have been traded on a regulated market
- A funder of a master trust pensions scheme
- A special register body, or
- A pensions or labour relations body
If you are unsure if your company needs to be audited, it is recommended that you seek guidance from a professional such as an accountant who can advise you.
Is my company eligible for an audit exemption?
Sole traders and partnerships fall outside of the auditing rules and, therefore, are exempt. If you have a private company, it may be eligible for exemption from an audit if it meets the following requirements:
| Financial Year Commencement | Exemption Criteria |
|---|---|
| On or after 1st January 2016 |
May be exempt if at least 2 of the following are met:
|
| Between 1st October 2012 and 31st December 2015 |
May be exempt if at least 2 of the following are met:
|
| Prior to 1st October 2012 |
May be exempt if at least 2 of the following are met:
|
Micro-entity companies fall within the audit exemption rules. If your company meets these criteria, there is no requirement to have an audit.
The rules also state that exempt companies that later become non-exempt do not need to be audited in that year. If they are non-exempt for a second year in a row, they must then complete the audit process.
How to request an audit exemption
To apply for an audit exemption as a small company, the following steps must be taken:
- Unaudited financial accounts should be prepared for the relevant financial year
- The unaudited financial accounts should be filed with HMRC
- Provide an audit exemption statement confirming that the company does not require an audit and that no qualifying shareholders have requested one.
What is an audit exemption statement?
An audit exemption statement is a simple document prepared by a company that states it is eligible for an audit exemption based on the audit exemption requirements outlined above. The statement must be included on a company’s balance sheet when preparing the annual accounts. The audit exemption statement accompanies the company’s unaudited accounts.
The procedural rules state that any exemption statements must appear above the director’s signature when the accounts are approved and signed.
The balance sheet must contain wording along the following lines:
- For the year ending (dd/mm/yyyy), the company was entitled to exemption from audit under section 477 of the Companies Act 2006 for small companies
- The members of the company have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476
- The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.
- These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies regime.
Are company directors responsible for audit findings?
Yes, company directors have the legal responsibility to ensure that the financial accounts are true and accurate. As such, directors are liable for any fraud or errors within the financial accounts, which can lead to serious penalties. While companies rely on internal accounting professionals to prepare their books each year, the ultimate responsibility for their accuracy falls to the directors.
How best to plan for a company audit
There are several steps that directors can take to ensure that any company audit carried out is completed correctly. We recommend:
- Working closely with your accountant to ensure that they understand whether your company requires an audit or it is eligible for an exemption
- If your company is exempt, ensure that the exemption process is completed in plenty of time
- Work closely with the auditor so you understand their requirements during the audit process
- Carefully check the auditor’s report to ensure that you understand the guidance and opinion provided.
- Make sure that any issues picked up by the auditor are actioned in a timely manner by the correct personnel
Final words
We hope you have found this guide to company audits useful in terms of understanding the process and whether you are eligible for an exemption. If an auditor is required, you will need to instruct an auditor who will undertake the audit in accordance with the International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. If you need any guidance on the auditing process, we recommend speaking to your accountant, who can advise on whether you require an audit and the steps to follow.
