Below the threshold?
Understanding where your company falls in regard to audit thresholds is crucial to ensure that companies are able to adequately plan ahead should an audit become a necessity in the future. It is also important to be aware of the benefits of undertaking an audit as well as a voluntary audit may be worthwhile for your business.
Importance of planning ahead in respect of company audit
Knowing that your company will require an audit in advance of the financial year end can be crucial in ensuring that the auditors have sufficient information with which to complete the audit without the need to modify the audit opinion. This is because important audit work which is unable to be completed retrospectively may be needed at the year end. This would include attendance of the year end stock take for companies which hold material stock levels.
Statutory audit thresholds
Currently a UK limited company must exceed two of the following three criteria for two consecutive years in order to require a statutory audit; Turnover of £10.2m, Gross Assets of £5.1m, over 50 employees on average.
These audit thresholds have been in place since 1 January 2016, however companies are still getting caught out and finding themselves requiring an audit only once their accounts for a given financial year end are with their accountant, and more importantly when completing the time dependent work described above is no longer possible.
Impact of groups on the audit thresholds
One of the areas where companies are often caught out regarding the audit thresholds is when the company is a member of a group. In these cases, it is the total consolidated turnover, gross assets and average staff numbers for the worldwide group which must be considered when determining whether a statutory audit is required. This means that companies that are part of larger groups will find they need an audit even when the company in question may be tiny and well under the thresholds in isolation.
It also may not be as simple as summing the individual results of the group companies to compare to the thresholds. Amongst other factors, intercompany trading, balances, and the potential for goodwill can all have an impact. If your company is part of a group and you are unsure where you stand with the audit thresholds it is recommended to speak to your accountant.
If the worldwide group exceeds the audit thresholds above, then the company will require an audit unless it is eligible to claim an exemption by way of parent guarantee. Where a UK company is the subsidiary of another UK company which is audited, the subsidiary can claim exemption from audit if its results are included in the audited companies consolidated accounts. This exemption was previously available to UK companies with an EEA parent, however due to Brexit for periods starting on or after 1 January 2021 this exemption was no longer available. If the worldwide group exceeds the thresholds, and the UK company does not qualify for exemption either by parent guarantee or by being dormant, the company will require a statutory audit regardless of the size of the entity.
If a company does not meet the criteria requiring a statutory audit, they may instead opt to undertake one voluntarily.
The key benefits of having a voluntary audit are:
- Greater financial confidence may be gained from the perspective of existing and potential shareholders, banks, customers, and suppliers. This could make it easier to obtain increased credit limits, bank loans or other sources of external finance.
- Assistance in detecting weaknesses in internal controls and will provide useful recommendations on improving any deficiencies identified
- Greater potential to uncover instances of fraud or error within the financial statements which may otherwise go unnoticed.