Audit exemption

Audit exemption

Limited company is required by the UK company law to have their company accounts audited by a Registered Auditor unless they are entitled to audit exemption.

Audit exemption threshold

Audit exemption under the Company Law means your limited company accounts are not compulsory to be audited by a Registered Auditor.

To claim audit exemption, your company must meet the following criteria.

Audit exemption thresholdCompany accounts begin 1 Jan 2016Company accounts prior 1 Jan 2016
Sales less than£10.2 million£6.5 million
Business assets worth less than£5.1 million£3.26 million
No. of staff less than5050

Your company must engage a Registered Auditor to audit your company financial statements and accounts if your sales and business assets worth is valued more than the audit exemption threshold.

This aside, however, your bank or major creditors or investors may require your company accounts to be audited under their terms of lending or loans to your company regardless the audit exemption rules.

Also, take note that your company shareholders whom hold more than ten percent of your issued share capital could request your company accounts to be audited, in this situation your audit exemption entitlement is waived.

Dormant Company quality for audit exemption

Dormant company is qualify for audit exemption and is eligible to file dormant account with Companies House. Your dormant company must not be part of a group of companies that required audit by law.

Businesses do not qualify for audit exemption

Limited company with the following principal business activities are not qualify for audit exemption by defaults. In other words, your company must submit audited company accounts with Companies House.

  • A public limited company.
  • A company is parent or a subsidiary a group, with the group turnover exceed the audit threshold.
  • An authorised insurance company or carrying out insurance market activity.
  • A company involved in banking or issuing e-money.
  • A Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company.
  • A corporate body and its shares have been traded on a regulated market in a European state.

Sample transactions for audit

Sample transactions for audit

Your Auditor get paid for their independent opinions on your financial statements and company accounts. This is their job.

Before your Auditor could express their opinions on whether your company accounts and financial statements give a true and fair view of the state of your business affairs, they would have to do their audit first.

It would be unreasonable to expect your Auditor to check every single transaction on your accounting records for accuracy. They can do it if you want them to but that’s going to cost you a lot. You better off hired an in house accountants with past auditing experience to lead your finance department.

Your Auditor sample your business transactions for audit tests based on the level of risks they identified in your business operations. Auditor is prudent in their audit approach because if someone rely on your financial statements based on their opinions and disaster happened and the someone may sue your Auditor. That’s why Auditor can be a pain sometime. Forgive them. They are just doing their job and you pay them for it, is it not?

Audit sampling methods

Your Auditor would have audit objectives to achieve and they would use combination of the following audit sampling methods when come to selecting samples of transactions for audit tests.

All of your business transactions may not be 100% audited but every single transaction has the equal chance of being picked for audit testing.

Haphazard

Simply choosing items subjectively but avoiding bias. Bias might come in by tendency to favour items in a particular location or an accessible file or conversely in picking items because they appear unusual. This method is acceptable for non-statistical sampling but is insufficiently rigorous for statistical sampling.

Simple random

All items in the population have (or are given) a number. Numbers are selected by a means which gives every number an equal chance of being selected. This is done using random number tables or computer or calculator generated random numbers.

Stratified

This means dividing the population into sub populations (strata = layers) and is useful when parts of the population have higher than normal risk such as high value items, overseas debtors. Frequently high value items form a small part of the population and are 100% checked and the remainder are sampled.

Cluster sampling

This is useful when data is maintained in clusters (in groups or bunches) as wage records are kept in weeks or sales invoices in months. The idea is to select a cluster randomly and then to examine all the items in the cluster selected. The problem with this method is that this sample may not be representative.

Random systematic

This method involves making a random start and then taking every item at the determined interval thereafter. This is a commonly use method which saves the work of computing random numbers.

However the sample may not be representative as the population may have some serial properties.

Multi stage sampling

This method is appropriate when data is stored in two or more levels. For example stock in a retail chain of shops. The first stage is to randomly select a sample of shops and the second stage is to randomly select stock items from the chosen shops.

Block sampling

Simply choosing at random one block of items such as all June invoices. This common sampling method has none of the desired characteristics and is not popular or recommended.

Value weighted selection

This method uses the currency unit value rather than the items as the sampling population . It is now very popular and it is also known as Monetary Unit Sampling.

Company audit

Company audit

Generally, your Auditor will look at your company’s financial recording system and internal controls systems in place to verify your business operations effectiveness and reliability of the data collected for your company accounts.

Revenues and Expense

There would be an audit on your accounting system in place for recording of sales and expenditure. The way sale and expense is processed whether the expense transaction is authorized for payment and sale deal is recorded on time and if you have a debtors system in place to monitor outstanding sales invoices and how bad debts are dealt with.

Assets and Liabilities

Your Auditor may verify the existence of your business assets and trace it to the ownership and ensure the values of the assets are true and fair and reflect the current market value. The assets of your business mentioned here include stock, trade debtors and property and equipment.

Similar verification will be carried out on liabilities to ensure monies owed by your business are incurred by your company and they are not loans for directors put through to your business.

Internal Control

What kind of internal controls procedure do you have when come to issuing a cheque or making a large sum payment, say above £20,000, whether more than two signatory are required for a cheque amount more than £20,000 or the payment has to be authorized by all the directors for the sum in access of £5,000,000.

Your frequency of reconciliation carried out for petty cash in the office relating to cash expenses.

Accounting Policies

Your accounting policy adopted for stock accounting, if your business hold stock. The policy adopted should bring the valuation of your goods and products to its net realizable value or costs.

How your business assets are depreciated over its useful economic life and what method of depreciation is used for each category of asset and the depreciation is charge to profit and loss account.

Most importantly the policies adopted must be applied consistently from year to year and any changes must be justified.

Audit risk

The risk of fraud and other irregularities of people in your business may attempt to manipulate the figures in your company accounts. For example, in a restaurant business, the cash may subject to misappropriation by any level of staff authorize to deal with cash and your Auditor will be looking at what are the internal controls system are put in place to mitigate the associated risks and to prevent cash being stolen.

Accounting and auditing rules

Consider any accounting or auditing rules applicable to your business as required by statute, for example the audit of Building Societies are governed by the Building Societies Act 1986.

Regulatory body

Consider the requirement of any regulatory body applicable to your business. For example, a registered charity company must comply with the Regulator for Charities in England and Wales in its charitable activities and in terms of its accounting records.

Previous year statutory reports

The trading history of your business provides important gesture to your Auditor as to the way your business has been operated and the inheritance and associated risks level as well as the growth. The following documents provide good indications.

  • Your signed company accounts
  • Auditor’s opinions on your financial statements
  • Regulatory inspections reports on your business, if any.
Audit tests samples characteristics

Audit tests samples characteristics

Before your Auditor could express their opinions on whether your company accounts give a true and fair view, they will perform a number of audit tests.

Your Auditor do not verify every single transaction booked on your company accounts. They used sampling methods when come to their audit tests. The sample selection process is structured and with defined objectives of the audit tests.

Generally, the samples chosen have the following characteristics:

Random

A random sample is one where each item of the population has an equal (or specified) chance of being selected. Statistical inferences may not be valid unless the sample is random.

Representative

The sample should be representative of the differing items in the whole population. For example, it should contain a similar proportion of high and low value items to the population such as all the debtors.

Protective

Protective, that is, of the auditor. More intensive auditing should occur on high value items known to be high risk.

Unpredictable

The client should not be able to know or guess which items will be examined.

Even though your Auditor perform their audit tests on sample basis they still have equal chances of identifying unusual transactions and fraudulent business dealing. Should your Auditor is of the opinion that the financial statements are misleading, they may issue a qualified audit report. The bank and investors may not like to see this type of audit report on your financial statements.

Choosing your Auditor

Choosing your Auditor

Auditor of your company must be a member of a recognized professional body and he/she must hold the relevant practicing certificate to practice as an Auditor under the rules of his/her professional body.

The Companies Act recognizes Auditor’s professional qualification from the five professional bodies listed below:

  1. The Institute of Chartered Accountants in England and Wales (ICEAW). www.icaew.com
  2. The Institute of Chartered Accountants in Scotland (ICAS) www.icas.org.uk
  3. The Institute of Chartered Accountants in Ireland (ICAI) www.icai.ie
  4. The Association of Chartered Certified Accountants www.accaglobal.com
  5. The Association of authorized Public Accountants. A subsidiary of ACCA, refer to www.accaglobal.com

If your company accounts are required to be audited and you are looking for an Auditor, you may contact the above professional bodies, they will provide list of registered auditors for you to choose.

Auditor’s report

Auditor’s report

Auditor express their opinions by issuing an independent auditor report.

It is the responsibility of your auditor to report to the shareholders of your company as to whether your company accounts have been properly prepared in accordance with the Companies Act and relevant accounting standards have been applied consistently.

Your auditor must also report as to whether your company accounts give a true and fair view of the state of your company’s affairs.

In order for your auditor to form their views and conclusions of the state of your company’s affairs, they will carry out an examination of your accounting records on a test basis to ensure that your company accounts are not materially misstated (incorrect). Your auditor will also read your company’s policy for consistency with their knowledge of your company.

This does not mean that your auditor will check every transaction or that your company accounts have to be 100 percent accurate; just that anyone looking at your company accounts will be able to obtain a fair view of the state of your company’s affairs and will not be misled if they rely upon the figures in your accounts.

Your auditor will issue a qualified audit report or unqualified report. Unqualified report is desired and this means your company accounts are free from material errors and they are reliable.

Permanent file for audit

Permanent file for audit

If your company accounts are subject to audit as required by the Companies Act, you must appoint a registered auditor. The auditor will audit your company accounts and express their opinions on whether your company accounts give a true and fair view.

Your auditor will gather information of your company at the initial stage of appointment for their permanent file for your company. They will ask you for the information, since you have to prepare, gather and provide the information to your auditor, why not you also create a permanent file for your own record. Then pass the file to your auditor to make a copy of it. This can save both yours and your auditor time.

The Permanent File

The permanent file usually contains documents and matters of continuing importance of your company which will be required for more than one audit.

Below are some of the documents and records auditors would keep in your permanent file.

Statutory material

Documents governing the conduct, accounts, and audit of your company.For example, a copy of the Financial Services Act if your company is regulated by the Financial Services Authority (FSA) and other legislation applicable to your business.

The rules and regulations of your company

For limited company, this means the Memorandum and Articles of Association.

For partnerships, it means the partnership agreement.

For sports clubs, the club rules, and so on.

Copies of documents of continuing importance and relevance to your auditor

  • Letter of engagement and minutes of appointment of the auditor. This is particularly important in non-statutory audits as it embodies the auditor’s instructions.
  • Trade, license, and royalty agreements; entered into by your company.
  • Debenture deeds.
  • Leases
  • Guarantees and indemnities entered into.
  • Copies of Confirmation Statement. The Confirmation statement replaces the annual return.

Addresses of the official office and business

Your company’s registered office address and all other offices and premises, with a short description of the work carried on at each branch.

An organization chart

Detailed of the principal departments and sub-divisions thereof with a note of the numbers of people involved.

The names of responsible officials and staff within the organization structure. Extra details should be given for accounting departments.

List of books and records

The place where they were kept. Names, positions, specimens of signatures and initials of persons responsible for books and document should also be included. Account codes and classifications should also be held.

An outline history of the organization

Special mention must be made of the history of Reserves, Provisions, Share Capital, Prospectuses, and acquisition of subsidiaries and businesses. There should also be a record of important accounting ratios.

List of accounting matters of importance

Accounting policies used for material areas such as stock, work in progress, depreciation, research and development expenditure in your company accounts.

Internal Controls

Notes of interviews and correspondence regarding internal control matters and all past letters of weakness.

The business structure within a group and associated companies

A note of the position of your company in the Group and of all subsidiaries and associated companies with holdings therein.

Clients’ Internal Audit and Accounting Instructions

If any.

Details of shareholders and directors

A list of your directors, your shareholdings, and service contracts. This information contained in your Confirmation Statement which can be downloaded from Companies House website.

Investments

A list of the company’s properties and investments with notes on verification.

Company’s Advisers

A list of the company’s advisors such as bankers, merchant bankers, stockbrokers, solicitors, valuers, insurance brokers etc.

Insurance

A list of company’s insurance

The permanent file is updated on annually and usually during the audit. Your company shall provide the information listed above to enable your auditor to complete their audit assignments.

Remember that the information in the permanent file is handled with strict confidence.

Auditor’s statement of circumstances

Auditor’s statement of circumstances

When your company’s auditor ceased to hold office for any reasons, they are required to deposit a statement of circumstances
at your company’s registered office, set out any issues relating to the cessation of office that they consider should be brought to the attention of your shareholders or creditors of your company or state that no such circumstances exist.

In the case of resignation, Your auditor’s statement should accompany with the notice of resignation. If your company’s auditor is not seeking reappointment, their statement should be deposited at least 14 days before your general meeting where your company account are laid or within 14 days of your accounts being circulated to your shareholders if a resolution has been passed to remove the requirement for laying accounts at general meeting. In all other cases the statement of circumstances should be deposited within 14 days if ceasing to hold office.

Your company must send a copy of the statement to everyone entitled to receive a copy of your company accounts within 14 days. If your company considers the statement of circumstances to be defamatory, your company may apply to the court to allow the statement not to be circulated.

Your company’s auditor must be informed within 21 days if a court order is sought, and if this time elapses and no order is sought, your company’s auditor has a further seven days to send a copy of the statement to Companies House.

If your court application is successfully made, your company must inform everyone entitled to receive a copy of your company accounts within 14 days of the court’s decision. If the court order fails, your company’s auditor’s statement must be circulated within the same time frame and your company’s auditor must also be informed of this decision. Your company’s auditor then has a further seven days to deliver a copy of the statement with Companies House.

Auditor resigns from office

Auditor resigns from office

Your auditor may resign from office before end ff term by giving written notice to your company. Your auditor’s appointment will end on the date when the notice was deposited at your company’s registered office or on a later date specified by your auditor in the notice.

The notice will only be effective if it is accompanied by a statement of circumstances which details of any relevant circumstances relating to their resignation that your auditor thinks should be brought to the attention of the shareholders or creditors of the company.

If your auditor has no circumstances to report, the statement must state this. Once the notice has been received it is your company’s responsibility to deliver a copy of it to the Registrar of companies within 14 days.

Your auditor may also request that the extraordinary general meeting be called to consider the circumstances connected with the resignation by depositing a signed requisition with the resignation. The meeting must be arranged within 21 days, for a date within 28 days of it being convened, totaled of 49 days. Failure to do so will render your directors liable to a fine.

Your auditor may also request that a written statement relating to the resignation be sent to all shareholders (also commonly referred to as members) prior to the extraordinary meeting. Such a statement may also be sent prior to the general meeting at which your auditor’s term of office would have expired or where a replacement auditor is to be appointed. Your auditor also has the right to attend and be heard at either of these meetings.

If the statement is received too late to be included in the notice to the general meeting, your auditor can require the statement to be read out at the meeting.

If your auditor does not seek reappointment at the general meeting, at the end if his term of appointment, this does not constitute resignation and no notice is required to be deposited at your company’s registered office. However, a statement of circumstances is still required.

Remove auditor from office

Remove auditor from office

Your limited company can remove your auditor from office by resolution if you are not happy with their auditing service.

Your company must deliver a Companies House form AA03 within 14 days of the resolution being passed to remove your auditor.

There is a different between your company is removing your auditor from office and your auditor has removed themselves from office. The first one means you are sacking your auditor in simple term and the latter means your auditor has resigned and in this case you cannot use the Companies House form AA03.

Section 510 (3)(a) Resolution removing auditor from office of the Companies Act 2006 states “Nothing in this section is to be taken as depriving the person removed of compensation or damages payable to him in respect of the termination of his appointment as auditor.” This means your company must not use this law to remove your auditor and not pay them for the assignment already completed for your company.

Your company must give special notice for a resolution at the general meeting of your intention to remove your auditor from office and immediately send a copy of the notice to your auditor.

Your auditor has the right to receive the notice of the resolution and to make representations to the shareholders (also commonly referred to as members) in writing.

The representation should be forwarded to shareholders or may be read out in general meeting, if received too late to be included with the notice of meeting. The auditor has the right to attend and be heard at the meeting and at any general meeting.

Within 14 days of the resolution being passed, your company must send notice of the resolution to Companies House and your auditor must deposit a statement of circumstances at your company’s registered office and with Companies House.

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