What is Audit?
An audit is an independent examination of your company's accounts to verify they give a true and fair view. Small companies are usually exempt.
Example
Large companies must have accounts audited by registered auditors who verify the figures are accurate.
Key Dates
Small company exemption: turnover under £10.2m, assets under £5.1m, under 50 employees
How Audit Works in Practice
A statutory audit is an independent examination of your company's financial statements by a registered auditor. The auditor checks whether the accounts give a 'true and fair view' of the company's financial position and comply with the Companies Act 2006 and applicable accounting standards (FRS 102 or IFRS).
The vast majority of UK limited companies qualify for audit exemption. To be exempt, your company must meet at least two of three criteria in the financial year: annual turnover not exceeding £10.2 million, balance sheet total (gross assets) not exceeding £5.1 million, and average number of employees not exceeding 50. If you qualify as a small company under the Companies Act, you can include an audit exemption statement on your balance sheet.
However, certain companies must always be audited regardless of size. These include public companies (PLCs), companies that are part of a group exceeding the thresholds, banks and insurance companies, and companies where shareholders holding at least 10% of shares request an audit. Charities and community interest companies may also have different thresholds.
Even if your company is exempt, you might choose a voluntary audit. Lenders, investors, or potential acquirers sometimes require audited accounts as a condition of funding. An audit can also be valuable for your own assurance that financial controls are working properly, particularly if you have employees handling money or complex transactions.
Step by Step
The audit process typically begins with the auditor understanding your business and assessing the risks of material misstatement in your accounts. They then plan what areas to test and how much evidence to gather. This is called the audit plan or audit strategy.
During fieldwork, auditors examine supporting evidence for the figures in your accounts. They may verify bank balances directly with your bank, send confirmation letters to debtors and creditors, physically inspect assets, review invoices and contracts, and test your accounting systems and internal controls. They also assess whether accounting policies are appropriate and consistently applied.
Once testing is complete, the auditor issues an audit report stating whether, in their opinion, the accounts give a true and fair view. An unqualified (clean) opinion is the standard outcome. If there are issues, the auditor may issue a qualified opinion, an adverse opinion, or a disclaimer of opinion, depending on the severity.
Practical Tips
- Check the small company thresholds each year - if you qualify for exemption, include the audit exemption statement on your balance sheet to avoid unnecessary costs
- Even without an audit requirement, consider an annual independent review of your accounts if you have employees handling finances, as it provides some assurance without the full cost of an audit
- If you do need an audit, keep organised records throughout the year - messy bookkeeping significantly increases audit fees because auditors charge for time spent requesting and chasing documentation
- Get audit quotes from at least three firms and ask for a fixed fee rather than an open-ended hourly rate to avoid surprises
Common Mistakes to Avoid
- Assuming your company needs an audit when it qualifies for small company exemption - most micro and small companies are exempt
- Forgetting to include the audit exemption statement on the balance sheet when filing unaudited accounts at Companies House
- Not keeping adequate records throughout the year, which makes the audit process more expensive and time-consuming if one is required
- Confusing an audit with an accountant's compilation or review engagement - these provide far less assurance than a full statutory audit
Frequently Asked Questions
Does my small limited company need an audit?
Almost certainly not. If your company meets at least two of these three criteria - turnover under £10.2m, assets under £5.1m, fewer than 50 employees - you qualify for audit exemption. The vast majority of UK small companies are exempt.
How much does a company audit cost?
Audit fees vary widely depending on company size and complexity. For a small company just above the exemption thresholds, expect to pay £5,000 to £15,000. Larger companies can pay significantly more. The cost is driven by the amount of testing work the auditor must perform.
Can shareholders force an audit?
Yes. Members holding at least 10% of the issued share capital (or 10% of any class of shares) can require the company to obtain an audit for a financial year. The request must be made at least one month before the end of the financial year in question.
What is the difference between an audit and an accountant preparing my accounts?
When an accountant prepares your accounts, they compile the figures you provide into the correct format. An audit is an independent examination where the auditor gathers their own evidence to verify the figures. An audit provides a much higher level of assurance to third parties.
Do I need an audit if I have a bank loan?
Not necessarily as a legal requirement, but your bank may include an audit requirement as a condition of the loan facility. Check your loan agreement. Many banks accept unaudited accounts for small companies but may require a review or audit for larger facilities.
Source: Companies Act 2006, Part 16, Chapter 1 - Requirement for audited accounts; Companies House guidance on audit exemption
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