Many small companies find having to conduct an annual audit of their accounts a heavy burden to bear. However since January 2016 the rules have changed regarding the threshold at which companies are legally required to conduct an audit.
If a company meets the criteria to be considered ‘small’, it is now exempt from conducting an annual audit unless it meets certain exclusions, its articles of association require one, or an audit is requested by the shareholders.
Is my company exempt from holding an annual audit?
As of January 2016 if your company meets at least two of the following criteria (and has done so for at least two years) it will not need to conduct an annual audit:
- Has an annual turnover of no more than £10.2 million
- Has assets worth no more than £5.1 million
- Has 50 or fewer employees on average
These thresholds have increased, due to the integration of an EU directive into UK law, from the previous limits of companies only being exempt if they have a turnover of less than £6.5 million and assets worth less than £3.26 million.
Are there any exemptions to the auditor threshold?
Even if your company meets the audit exempt criteria there are some circumstances in which an audit will still need to be legally held every year.
Your company will be legally obliged to hold an audit if at any time in the year if it has been:
- a public company (unless it is dormant)
- a subsidiary company (although there are certain circumstances under which they could still be exempt)
- involved in banking or issuing e-money
- an authorised insurance company or carrying out insurance market activity
- a corporate body and its shares have been traded on a regulated market in a European state
- a Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
Companies may also need to hold an audit for any of the other reasons below, although these are not always bound by law:
- the constitution (articles of association) of the company legally requires it
- an audit has been requested by the shareholders. This can either be a simple preference, or can be a legal requirement if shareholders who own at least 10% of the company’s shares (by number or value) have requested one
- the company’s lender or grant provider requires an audit
- to provide a history of audited financial statements to support the public offering or sale of the business.
What about a small company within a larger group?
A company will require an annual audit if it is part of a larger group which would exceed the exemption thresholds, even if it would be exempt when viewed as a separate entity.
There are some circumstances in which a subsidiary company can be exempt from holding an audit which must be backed by a guarantee provided by the parent company in respect of all actual outstanding liabilities and all contingent liabilities at the end of the financial year.
What about charities?
The audit threshold for all charities and charitable companies is different to that that for companies. Charities can be exempt from conducting a statutory audit if they meet certain criteria, but this varies between countries within the UK:
- England and Wales – charities registered with The Charity Commission in England and Wales are exempt if their gross income falls below £1 million
- Scotland – charities registered in Scotland are exempt if their gross income is below £500,000
- Northern Ireland - charities registered in Northern Ireland are exempt if their gross income is below £500,000
In most cases exempt charities are required to obtain an alternative assurance service such as an independent examination of their accounts.
What are the alternatives to an audit?
If your company or charity is exempt from holding a full audit you may still want to conduct an examination of your accounts to ensure they are fully complete and compliant. In this case you may still want to engage the services of an accountant to provide either an:
- Assurance review – an accountant will conduct an in-depth assessment of your financial accounts, comparing information year on year and investigating any areas of concern.
- Agreed-upon procedures – you will work with an accountant to agree a set of procedures that are then performed to suit your requirements, but will not venture further than these
- Accounts preparation – an accountant will compile your company’s statutory financial statements
Handpicked Accountants can connect you with only the very best accountants in your area who can either provide audit or other accounts examination services. Contact us and take advantage of our free accountant matching service. We will quickly and proficiently connect you with your perfect accountant today.