Thousands of businesses need to appoint auditors to verify their year-end accounts, providing audit services reports that offer an independent conclusion on the accuracy of financial statements indicating whether they present a ‘true and fair’ representation of the company’s position and performance.
However, confusion around thresholds and requirements is common, where business owners previously exempt from mandatory audits find that growth in their turnover, workforce or assets mean they fall into the criteria that mean an audit is compulsory.
In this article the James Todd & Co audit team recaps the rules and audit regulations to indicate whether your company will require registered auditors for your next year-end.
Audit Exemptions for British Businesses
The government guidelines around company audits are based on the business size, with exemptions for micro entities and small businesses. While exemptions may mean an audit is not mandatory, it remains a valuable exercise in many cases. Exempt companies can commission an audit for internal control purposes regardless of their eligibility.
From January 2016 onward, companies that meet two of the following conditions are categorised as small and are exempt:
- Having a turnover of up to £10.2 million.
- Holding net assets of up to £5.1 million.
- Having an average workforce of up to 50 people.
Depending on their shareholders, some small companies may still be compelled to hire an auditor. If a shareholder with 10% or more of the share capital or 10% of members requires an audit, the business must act accordingly.
Exemptions apply to dormant companies although they must still file accounts with Companies House as usual. Some organisations, such as banks, insurance providers, public companies and brokers, must arrange a statutory audit regardless of their size.
Otherwise, if you have a registered limited company and exceed the above turnover, asset or workforce thresholds, you will need to arrange an external audit each year.
The Process Followed By Registered Auditors UK
Companies subject to an independent audit for the first time often assume the process is challenging and even combative – but a qualified, accredited auditor can provide beneficial insights and help a growing business succeed with a clear understanding of the opportunities and inefficiencies they may have been unaware of.
During a formal statutory accounts audit, the auditor or audit team, depending on the business size and complexity of the task, will get to know your company, how it works, and the processes and functions you follow on a day-to-day basis.
Audit work includes analysing the details within your accounts and figures and selecting samples or specific calculations to assess the suitability of the estimates or accounting principles applied, reviewing documents and records, and sometimes carrying out stock checks on certain parts of your inventory to verify the asset values shown.
Other aspects of audit work are more communicative, where an auditor may ask you or specific team members to complete surveys and questionnaires or discuss their approach to a part of the business to gain a deeper understanding of where they can offer advice.
While the statutory nature of an audit may seem focused on figures and calculations, the bigger picture is around internal controls, efficient systems, and helping clients address opportunities or enhance their risk management policies for long-term growth.
How to Select an Audit Firm for Your Statutory Audit
In the UK, auditors must be chartered accountants with up-to-date membership of one of the applicable chartered accountancy bodies, such as the Institute of Chartered Accountants in England and Wales (ICAEW) or, alternatively the Association of Chartered Certified Accountants (ACCA).
Registered audit firms are commonly accountancy practices, such as the James Todd & Co team – we provide general accountancy, business development support, taxation advice, outsourced payroll and bookkeeping alongside comprehensive audit services.
Can your accountant also act as your external auditor? In short, yes, provided they are not involved in running the company since individuals linked to the business would have a conflict of interest. Registered auditors must be independent to provide an impartial view.
Audit firms or accountants providing audit services should also be registered with a recognised supervisory body, which oversees technical audit standards and the conduct of auditors performing statutory audits.
The same professional organisations mentioned above also act as the recognised supervisory bodies responsible for regulating and overseeing statutory auditors across the UK.
Audit Deadlines and Non-Compliance Repercussions
Accounts audits are conducted annually once the financial year-end has passed. Although some exceptions apply, most companies need to hire an audit firm to complete the process within nine months of their accounting year-end date – the same deadline applies to filing your financial statements with Companies House and HMRC.
For example, if you have an accounting year-end of 30th September, your accounts should be submitted along with the audit report by 30th June of the following year.
When the statutory auditor has finished their work, they will provide a report, which includes several mandatory inclusions:
- Their opinion as to whether the accounts have been prepared in compliance with accounting standards and within the requirements of the Companies Act 2006.
- A statement indicating whether the accounts offer a true and fair view of the company and its financial position.
- A final statement showing whether the auditor believes the director’s report is consistent with the rest of their accounting information.
Statutory auditors can provide unqualified reports, meaning they have seen all the relevant information, received cooperation from the business, and are happy that everything is in good order.
Qualified reports mean the opposite, and although rare, can be filed when the auditor believes there is reason to believe that some aspect of the accounts is fraudulent, or because they have experienced a conflict with the business over a material issue or have not been provided access to appropriate records to be able to deliver a conclusion.
Failure to comply with mandatory audit rules is serious and can result in fines, investigations or reputational damage – late accounts which are delayed due to an audit attract the same penalties as other late filings, with public companies fined up to £7,500 for filing over six months late, and private companies £1,500.
For more information about audits, the audit process, or help to assess whether your company requires an audit, please contact James Todd & Co at any time for more guidance.