When Is a Company Audit Required?

Maybe you're wondering when your company needs an audit? Well you’ve come to the right place! Businesses should conduct a yearly independent company audit of their financial reporting to ensure it’s maintaining and accurately reporting its financial records using approved standards.

What Is a Company Audit?

A company audit is an independent examination of your business’s financial records to ensure your company is accurately completing its financial reporting. It’s carried out via an auditor conducting a systematic review of your past transactions.

During a company audit, auditors will do the following:

• Review and ensure that financial statements are accurate.
• Verify that financial statements have been prepared according to legislation and standards from regulatory bodies such as Companies House and HM Revenue & Customs (HMRC).

Does My Company Require an Audit?

If your business meets at least two of the following criteria, it will require a company audit.

1. Annual turnover of more than £10.2 million
2. Assets worth more than £5.1 million
3. Have 50 or more employees
4. If the company is a part of a bigger group, the entire group as a whole must fulfil the above conditions

If you’re not eligible for an exemption your company’s annual accounts will be required to have a statutory audit.

Additionally, even if your small business qualifies for an audit exemption, shareholders with 10% of shares (either percentage or value) can request an audit.

Who Is Exempt From An Audit?

The good news is that many companies in the U.K. can benefit from a small company audit exemption and aren’t required to go through an annual company audit.

As long as your company doesn’t have:

1. An annual turnover of more than £10.2 million
2. Assets worth more than £5.1 million
3. Have 50 or more employees

You won’t be required to submit for an audit.

Plus, no matter the size of their turnover, all sole traders and general partnerships are also exempt from completing an audit.

Limited companies are also granted a one-year grace period if they fall outside of the audit exemption conditions. However, should your limited company no longer qualify for a small company exemption two years in a row, you must complete a company audit in the second financial year.

How To Apply for An Audit Exemption

If you want to apply for a small company audit exemption, you need to do the following:

1. File your full unaudited accounts with HMRC.
2. Include a statement that the company qualifies for an audit exemption and it hasn’t received any shareholder requests for an audit to be completed.

What Are the Responsibilities of an Auditor?

Auditors are required to have access at all times to your business's books, financial statements, and accounts.

They’re bound to conduct audits in accordance with HMRC’s legislation and standards, including the following:

• Document findings of their audit tests and questionnaires.
• Appraise a company's internal control systems.
• Verify a company’s liabilities and assets.
• Ensure a company's compliance with internal control processes through examining reports, records, documentation and operating practices.

What Is My Responsibility as a Company Director?

While auditors do have a lot of responsibilities when it comes to the auditing process, they are not there to prevent error or fraud.

That responsibility lies with you or your directors. You or your directors are required to prepare and present your financial statements for auditors.

Additionally, you may need a dedicated employee or external accountant who’s responsible for your company books and accounts. They or you must be able to give necessary information and explanation required for the auditor to do their job.

Need help with your bookkeeping and accounts? We can do that!

How Do I Start Planning My First Company Audit?

Tax season along with a company audit can be a stressful time! So to make sure yours runs as smoothly as possible, here’s what you can do:

Step 1: Discuss your need for assistance with your auditor

Together with your auditor, agree on a list of high-priority tasks. And make sure that the auditor has a fair turnaround time to work with.

Step 2: Discuss with your stakeholders

Take your stakeholders through any needs you have. Explaining any additional audit procedures that are required.

Step 3: Determine your contact person

Establish a point of contact for each area required by the company audit. Try to limit any potential clashes, such as; public holidays,  annual leave, and work schedules.

Step 4: Establish an ‘auditor’ file

Keep organised — set up an ‘auditor’ file for any regulatory agency correspondence. Plus create and keep separate folders for copies of new or edited documents that are for: fixed asset additions and disposals, leasing arrangements, debt agreements, lawsuits, technology modifications, complex transactions, and major customers and vendors.

Step 5: Reconcile information

Make sure that all of your general ledger account totals are reconciled. For instance: all bank accounts, accounts payable, accounts receivable, and equipment lists.

You can request templates, clarification or copies of prior working papers to help you prepare documents in a format acceptable for auditors.

Prepare your main documents beforehand. If the information is readily available, you can minimise the disruption to you and your employees during the audit:

1. Primary accounting records.
2. Representation of structure and ownership of the company/group of companies.
3. Year-end bank statements and reconciliation available for the entire period. This applies to all bank accounts for your business.
4. Aged creditors’ and debtors’ listing
5. Balance sheet breakdown, including invoices to evidence items such as: prepayments, accruals, and fixed asset additions.
6. Wages records and P11D returns.
7. All hire purchase and leasing agreements.
8. Stock reports.
9. VAT returns and workings.
10. Copies of all shareholder meeting minutes held during the assessed year.
11. Information of any changes in share ownership.

Step 6: Set deadlines

Set deadlines to discuss important estimates used in financial statements, such as warranty reserves, debts that can't be collected, and project completion percentages.