Audit on company accounts

Audit on company accounts are compulsory for large and medium size company. However, small company and micro entity may claim audit exemption. In other words, small company and micro entity do not need to audit their accounts.

However, some companies even if they are small companies and micro entities are not allowed to claim audit exemption. They must deliver audited company accounts to Companies House.

These companies are:

  • A public limited company.
  • A company is parent or a subsidiary of a group and the group turnover exceeds 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.

Compulsory Audit

Large companyMedium size company
Sales less than> £36 million£36 million
Balance Sheet total> £18 million£18 million
Average no. of staff less than> 250250

Large company must prepare and submit full audited accounts with Companies House.

Similarly, medium size company must have their accounts audited but may opt to prepare accounts giving less information for public record.

Audited accounts comes with an auditor report. Your auditor would express their opinions on your accounts whether it gives true and fair view. It is a good report if you get an unqualified audit report.

Voluntary audit

Micro entitySmall companyAudit exemption
Sales less than£632,000£10.2 million£10.2 million
Balance Sheet total£316,000£5.1 million£5.1 million
Average no. of staff less than105050

Small company and micro entity company may choose not to audit their company accounts by claiming audit exemption.

Accounting and auditing are two different assignments. To put it simply, accounting is assembling transactions into profit and loss account and balance sheet and other financial statements. Whereas auditing is checking the accounting is accurate. For this reason, you must hire a qualified auditor to do the work. The auditing fee is on top of your accounting fee.

However, they may opt for voluntary audit if an audit would benefit them. For example, a company preparing for admission into stock exchange require minimum of three years audited accounts with unqualified audit report prior to admissions.

Generally, an audit includes verifying information in your accounts on sample test basis and also your company documents such as the Confirmation Statement filed with Companies House if it is still valid. ‘in addition, the disclosure in the accounts are appropriate.

Where to send your company accounts

Where to send your signed company accounts is dependent on where your company’s registered office is situated. For instance, company with registered office in England and Wales may send their accounts to Companies House London office or Companies House Cardiff office.

As a matter of fact you may file your micro entity account using the webfiling service. In this instance, you would require your authentication code for this purpose. The authentication code is the electronic equivalent of your director’s signature. Therefore always Keep safe of your code.

In situation where you have misplaced your code, you can request it again from Companies House. It takes five working days to arrive at your registered office address. However, if your registered office is no longer valid, change it.

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. Consequently, should your Auditor is of the opinion that the financial statements are misleading, they may issue a qualified audit report.

Generally, the bank, investors and creditors prefer to see your unqualified audit report. In short, an unqualified audit report means your financial statements and company accounts overall give a true and fair view.

Auditor report

Auditor express their audit opinions on their auditor report independently. Basically, they would assess your accounts and financial statements then tell you if your accounts are reliable. If not, they will highlight what are the issues on their report. Then you decide if you would like to rely on the company accounts.

Report to shareholders

Largely, your auditor is responsible to report to the shareholders of your company financial affairs. Broadly, the audit report would include as to whether your company accounts have been prepared in accordance with the Companies Act. This extends to application of the relevant accounting standards consistently.

True and fair view

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. This means your auditor will not check every transaction in your accounts.

Overall, they like to make sure that your company accounts are not materially misstated (incorrect). So that anyone looking at your company accounts will be able to obtain a fair view of the state of your company’s affairs. And that they will not be misled if they rely upon the figures in your accounts.

In addition, your auditor will also read your company’s policy for consistency with their knowledge of your company. For example, your accounting policy for stock. What method do you use? First in Last Out (FILO) or First in first Out (FIFO) and did you apply it consistently.

Qualified or unqualified auditor report

Your auditor will issue either a qualified audit report or an unqualified report. Unqualified report is desired. This means your company accounts are free from material errors. Thus, they are reliable.

Whereas a qualified audit report indicates that your Auditor is not happy with something included in your accounts and financial statements. This is not the audit report your many creditors and shareholders desired.

Qualified audit report could impact on your plan to list your company in the stock exchange. For example, a public limited company must have three years unqualified audit report consecutively on their accounts prior to admission. Therefore, this may pro long your admission process.

Auditor

Choosing an Auditor to audit your company accounts is a must for company is not entitled to audit exemption. In addition, your Auditor must hold a membership from one of the accredited professional accountancy bodies. He/she must hold the relevant practicing certificate to practice under the rules of his/her professional accountancy body too.

For the purpose of audit, the Companies Act 2006 recognizes the professional qualification from the five professional bodies listed below.

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

Registered Auditors

Therefore, you may contact one of the above professional accountancy bodies if you are looking for an auditor. They will provide a list of registered auditors. You may then choose your auditor.

Audited company accounts

Deliver your audited company accounts to Companies House by the due date. Otherwise your company will receive automatic late filing penalty. The penalty start from £150 to £1500. However, you may appeal to Companies House if your reasons of delay is exceptional.

Remove auditor from office

Your limited company can remove your auditor from office by resolution. For example, you are not happy with their auditor’s service. May be that they have issued a qualified audit report. But you think they should have issued unqualified audit report instead.

In this circumstance, your company must deliver the form AA03 to Companies House within 14 days of the resolution being passed.

Broadly, the difference between your company is removing your auditor from office and your auditor is removing themselves from office. The first one means you are sacking your auditor in simple term. The latter means your auditor is resigning.

In the event where your auditor is removing themselves from office, you must not use the Companies House form AA03 to notify Companies House.

Auditor’s fee

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.”

In other words, your company must not use this law to remove your auditor and not pay for their work done so far.

Special resolution

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

Likewise, your auditor has the right to receive the notice of the resolution. Correspondingly, they could make representations to the shareholders in writing.

General meeting

Usually, the representation is to be forwarded to shareholders. Alternatively, it may be read out in general meeting, However, if received too late, then it must be included with the notice of meeting. Concurrently, the auditor has the right to attend and be heard at the meeting. As a matter of fact, they can be heard at any general meetings.

Companies House

On the other hand, your company must send notice of the resolution to Companies House within 14 days. At the same time, your auditor must also deposit a statement of circumstances at your company’s registered office. And also, file a copy of the statement with Companies House.

UK Accounting standards

The UK company law requires limited company accounts to be presented in a prescribed format and according to UK accounting standards.

Generally, the UK accounting standards apply to companies registered with Companies House in the United Kingdom.

These accounting standards are known as Statements of Standard Accounting Practice (SSAP) for accounting standards issued prior to September 1990. Thereafter, they are known as Financial Reporting Standards (FRS).

List of accounting standards

RefAccounting standard for
SSAP 4The accounting treatment of government grants
SSAP 5Accounting for value added tax
SSAP 9Stock and long term contracts
SSAP 13Accounting for research and development
SSAP 17Accounting for post-balance sheet events
SSAP 19Accounting for investment properties
SSAP 20Foreign currency translation
SSAP 21Accounting for leases and hire purchase contracts
SSAP 24Accounting for pension costs
SSAP 25Segmental reporting
FRSSEFinancial Reporting Standard for Smaller Entities (Jan 2015) no longer applicable.
FRS 1Cash flow statements
FRS 2Accounting tor subsidiary undertakings
FRS 3Reporting financial performance
FRS 4Capital instruments
FRS 5Reporting the substance of transactions
FRS 6Acquisitions and mergers
FRS 7Fair values in acquisition accounting
FRS 8Related party disclosures
FRS 9Associates and joint ventures.
FRS 10Goodwill and intangible assets.
FRS 11Impairment of fixed assets and goodwill.
FRS 12Provisions, contingent liabilities and contingent assets.
FRS 13Derivatives and other financial instruments: disclosures.
FRS 14Earnings per share.
FRS 15Tangible fixed assets.
FRS 16Current tax.
FRS 17Retirement benefits.
FRS 18Accounting policies.
FRS 19Deferred tax.
FRS 20 (IFRS 2)Share-Cased payment.
FRS 21 (IAS 10)Events after the balance sheet date.
FRS 22 (IAS 33)Earnings per share.
FRS 23 (IAS 21)The effects of changes in foreign exchange rates.
FRS 24 (IAS 29)Financial reporting in hyperinflationary economies.
FRS 25 (IAS 32)Financial Instruments: Disclosure and Presentation.
FRS 26 (IAS 39)Financial Instruments: Measurements.
FRS 27Life Insurance.
FRS 28Corresponding Amounts.
FRS 29Financial Instruments : Disclosures.
FRS 30Heritage Assets.

UK accounting standards effective on or after 1 January 2015

FRS 100 Application of Financial Reporting Requirements.
FRS 101 Reduced Disclosure Framework
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
FRS 103 Insurance Contracts.
FRS 104 Interim Financial Reporting.
FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

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

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

The 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

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

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 is assessment of accuracy and completeness of your accounting records to see if it gives true and fair view. Generally, Auditor looks at your company’s financial accounting system and internal controls procedure to assess it’s effectiveness. Auditor assesses if the data used to compile your company accounts is reliable.

The company audit is carried out by sections individually then piece together to form a big picture. The objective is to form an audit opinion on your financial statements and accounts. Consequently, Auditor issues either qualified or unqualified audit report. In brief, an unqualified audit report is desired. This is because a qualified report indicates that your auditor not satisfied with something. For that reason, you definitely do not want a qualified audit report.

Revenues and Expense

Broadly, audit on sales are to make sure the sales in the accounts are genuine and booked on timely manner. Similarly, the audit on expenditure is to make sure they were incurred exclusively for business. This is to avoid deliberate tax avoidance.

Fake sale

For example, a fake sale is where an invoice is created and money received in the bank to make it as if a genuine sale has happened. In real life there was the customer was a dummy. Thus, you may ask why do they want to do that? They have to pay tax on it. Exactly, they do not mind paying tax on it because they want to make “dirty” money become legal money through a business. why? so they can use it to buy property or expensive item freely. Usually, buying expensive property involve large amount of money require proof of income source.

Play with the timing of accounting

Another instance would be deliberately to book the sales earlier in the account to make the figures look good in order to borrow money from the bank or to book it later to defer tax liability. This is not allowed.

Personal expense

Whereas for expense, the audit test is to make sure it was an business expense. It was not a personal expense being put through into a business. Thus your company would pay less tax on your profit.

For instance, a company car on the book was said solely for business use. But in real life it was a car bought solely for personal leisure.

Assets and Liabilities

Largely, auditor will verify your business assets. They would trace your physical asset to the purchase invoice and ownership document. They will also assess if the asset values in your accounts reflect the current market value. The assets referred here include stock, trade debtors and property and equipment.

Similarly, for the audit of your business liabilities. The aim is to ensure monies owed are related to business expenditure. Loans to directors are properly accounted for in the accounts.

Internal Control

Universally, company audit also includes assessment of what kind of internal controls procedure you have when come to handling petty cash, issuing a cheque or making a large sum payment.

For example, say, for a cheque amount more than £20,000 two signatory are required and for the sum in access of £5,000,000 the payment must be authorized by all the directors. How often do you do petty cash reconciliation? Can you trace on your petty cash to who the reimbursement was paid to? Ideally invoices and receipts must attach to the petty cash voucher for each reimbursement.

On the other hands, what are the internal controls procedure implemented for booking of a sale transaction. For cash sales, do you issue a sale receipt? how soon after that the sales receipts are banked? Similarly, for non cash sales, do you do regular sales reconciliation to the bank statement? who is monitoring the outstanding invoices? and what methods are used to get customers to settle their invoice sooner and so on.

Accounting Policies

Widely, accounting policy adopted for stock accounting should bring the valuation of your goods and products to its net realizable value or costs.

Correspondingly, your fixed assets depreciation policy adopted must reflect the useful economic life of the assets. Subsequently, the methods of depreciation used whether straight line method or reducing balance method.

Overall, you shall adopt accounting policies that gives true and fair view business affairs. In addition, you must apply it consistently from year to year and you must justify if any changes.

Company audit risk

Any business unavoidably present the risk of fraud and other irregularities.Commonly, this includes an attempt to manipulate the figures in the accounts fraudulently and so on.

For example, a restaurant business has high volume of cash takings. Cash misappropriation is at high risk. Staff authorized to handle cash may be tempted to steal. Thus, your Auditor looks at what are the internal controls system implemented to mitigate the associated risks and to prevent cash being stolen.

On the same note, they would also look at if there is a history of cash theft. How the situation was handled and what measures were implemented to avoid similar occurrence. Was measures effective for its purpose and so on.

Another example is staff payroll. People can create a dummy employee record with a real bank account and pay out salary accordingly. Auditor may verify the physical number of staff to the staff payroll record to see any variances.

Accounting and auditing rules

Company audit also include assessment of statutory compliance of accounting or auditing rules applicable to your business.

For example, the Building Societies Act 1986 governs the audit of Building Societies. If this apply to your business then you must comply with it.

Another example, the Financial Conduct Authority (FCA) will regulate all companies provide financial services activities thus you must comply with FCA rules if this applicable to you.

Regulatory body

Concurrently, you must comply with regulatory body applicable to your business.

For instance, a registered charity company must comply with the Regulator for Charities in England and Wales. Your charitable activities and accounting records must comply with the rules of the Regulator. Therefore, file accounts with the charity commission as well as Companies House.

Previous year statutory reports

Last but not least, your trading history provides good indications of the inheritance risk, associated risks level and your business growth. Auditor usually find this indication from the following documents.

Signed company accounts

The prior year figures known as comparatives in your company accounts allow Auditor to spot big variances on each line in your profit and loss account and balance sheet year on year. The variances are explainable. For example, Sales in current year dropped by 30%. This event is explainable. Accordingly, Auditor will zoom in to find out why.

Auditor’s opinions on your financial statements.

Auditor usually follows up on highlighted issues in the qualified audit report to see if they were taken care of, if not yet then why not.

Regulatory inspections reports on your business

Regulatory inspections reports is an independent report carried out to check compliance with the Regulatory body requirements. Any non compliance issues will flag up here.

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.

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