Audit exemption statement

Generally, limited company that is classified as small company according to Companies Act 2006 is eligible to claim this audit exemption. In other words, you are allowed to deliver unaudited company accounts to Companies House. Correspondingly, the disclosure would include the audit exemption statement in the balance sheet page.

The audit exemption statement shall be at just above your director’s signatory.

The standard audit exemption statement wording sound like this.

  1. For the year ending (your company’s year end date), the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.
  2. The members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476.
  3. The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.
  4. These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies’ regime.

The benefit of claiming audit exemption is that you put less information in your company accounts for public register. Why put less information in your company account is good? less information for your competitors.

However, you must not deliver unaudited company account if your shareholders requested an audit on your company accounts. That why in the second paragraph of the audit exemption statement state the member has not requested an audit. Your director’s signatory on the balance sheet page with that statement on it would confirm that is the case legally.

Feel free to contact us if you have any questions about your limited company accounts. Our accountants would be more than happy to help you.

Auditor statement of circumstances

When your external auditor ceased to hold office, they are required to deposit a statement of circumstances at your company’s registered office. They must set out any issues relating to the cessation of office that should be brought to the attention of your shareholders or creditors of your company. If there is no issues then state that no circumstances exist.

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

Thereafter, your company must send a copy of the statement to everyone entitled to receive a copy of your company accounts within 14 days.

Court order

If your company considers the statement of circumstances to be defamatory, you may apply to the court to have the statement not to be circulated.

Subsequently, you must inform your auditor within 21 days if a court order is sought. 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. On the other hand, if the court order fails, your auditor’s statement must be circulated within the same time frame. Concurrently, you must also inform your auditor of the court’s decision. Your auditor then has a further seven days to deliver a copy of the statement to Companies House.

Auditor resigns from office

Auditor resigns from office before end of term, he/she would have to give a written notice to your company. Thus, your Auditor’s appointment will end on the date when the notice was deposited at your company’s registered office. If your auditor specify at a later date then that would the date of their official resignation.

For this purpose, it is imperative you have access to mails sent to your registered office and act promptly. Remember to notify Companies House if you would like to change your registered office address. In this case, you must complete and deliver the form AD01 to Companies House.

Statement of circumstances

Your auditor resigns from office will only be effective if he/she provides a statement of circumstances. The statement must include details of any relevant circumstances relating to their resignation that should be brought to the attention of the shareholders or creditors.

In the event your auditor has no circumstances to report, the statement must state this fact. Once your company has received your Auditor’s notice, you must deliver a copy of it to Companies House.

Auditor request to call for extraordinary general meeting

On the other hand, your Auditor may also request that your company to call an extraordinary general meeting to consider the circumstances connected with their resignation. He/she could make such request by depositing a signed requisition with their resignation. Subsequently, you are to arrange the meeting within 21 days. The meeting must be for a date within 28 days of it being convened. Total length of the process is 49 days. Failure to do so will render your directors liable to a fine.

Auditor’s written statement

Your auditor may also request you to send their written statement relating to the resignation to all shareholders prior to the extraordinary meeting. The 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 received is too late to be included in the notice to the general meeting, your auditor can request the statement to be read out at the meeting.

Reappoint Auditor

If your auditor does not seek reappointment after the end of term at the general meeting then this does not constitute a resignation. Thus, your auditor do not require to deposit a notice at your company’s registered office. However, your auditor must still provide a statement of circumstances.

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. Ordinarily, your Auditor would create a permanent file for audit for your company.

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.

What is 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.

Generally, your Auditor would keep the following documents and records auditors in your permanent file.

Statutory material

Firstly, documents governing the conduct, accounts, and audit of your company. For example, If you are in the business is regulated by Financial Conduct Authority (FCA), your Auditor would keep a copy of the relevant Financial Services Act that applies to your business.

The rules and regulations of your company

Concurrently, your Auditor would also need to know how your company is managed and what rules and regulations applies within your business itself. For instance, if you are a limited company, this means the Memorandum and Articles of Association. If you are a partnerships, it means the partnership agreement. For sports clubs, the club rules, and so on.

Other 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 filed with Companies House.

Official business address

Your current company’s registered office address. If your registered office address is not the same as your trading address then provide all other offices and premises locations. Together with a short description of the work carried on at each branch.

An organization chart

Your organisation chart to give a snapshot of your business structure within your management teams. For example, 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 your organization structure. Give extra details for your accounting departments.

List of books and records

You specify the place where you keep your accounting records. You provide names, positions, specimens of signatures and initials of persons responsible for books. Additionally, your account codes and classifications as well.

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

If your company is part of a group, you are to provide a note of the position of your company in the Group. For this purpose, a group structure would be helpful with all subsidiaries and associated companies with holdings therein.

Clients’ Internal Audit and Accounting Instructions

If you have internal audit and accounting instructions. please provide those.

Details of shareholders and directors

A list of your directors, your shareholdings, and service contracts. Usually, your Auditor can download your Confirmation Statement filed with Companies House. It would be nice you could provide so that they could verify any changes of your company officers not yet notify with Companies House.

Investments

You are to provide 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.

Audit exemption

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

Audit exemption threshold

To file non-audited accounts with Companies House, 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 accounts. Especially, if your sales and business assets are worth 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. In this case, your company must appoint an auditor to fulfill the requirement.

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. However, your dormant company must not be part of a group of companies that required audit by law.

Concurrently, company registered as a public limited company (PLC) must file audited account even if your PLC is dormant. If you would like to submit unaudited dormant account then you must first re-register your company from a PLC to a private limited company.

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.

Understanding balance sheet

Understanding balance sheet would give you clues how to improve and do better in managing your business affairs. Universally, a balance sheet is a standard document that summarize your company’s assets and liabilities.

Companies incorporated in the United Kingdom must follow the applicable accounting standards when preparing a balance sheet as part of the company accounts.

Accountants can tell you a story of your business affairs based on your balance sheet. How much corporation tax to pay and where to sign on your company accounts are the primary reasons you hire an accountant. Don’t stop here, your accountant can do more for you. Ask questions.

There are benefits to understand figures presented in your balance sheet, Firstly, you would need to learn the terminology used in that financial document. In the accounting world, balance sheet is a statement of your business assets and liabilities at the end of your company’s financial year.

The terminology used in a balance sheet is explained below.

Cash

Money held in hand including coins and currency. Sometime, they call it petty cash. Cash also money available in your company’s bank accounts. This excludes the overdraft facility you can used and draw down loans agreed.

Trade Debtors

Amounts not yet collected from your customers or amount outstanding from credit sales. In other words, what your customers still owe you.

Prepayment

Payment in advance that cover subsequent financial year. For instance, office rent paid in advance.

Stock

Value of products hold in stock by your company. The stock value is normally made up of purchases cost, production costs or net releasable value of the products.

Fixed assets (Property, Plant and Equipment)

Amounts of costs invested in long life, tangible, productive, operating assets. People often referred this type of investment as capital expenditure.

Trade Creditors

Amounts owing to suppliers for unpaid bills and invoices.

Other Creditors

Money owed to HM Revenue and Customs for PAYE, VAT and corporation tax is presented under this heading. This sometime include directors’ loans to the business.

Accruals

Commonly, this include invoices issued after your year end but for services rendered during the year. For example, accountancy fee and auditor fee.

Overdrafts and loans

Amounts borrowed on interest-bearing liabilities from bank and financial institution. For instance, a short term loan for working capital to keep your business going.

Called up share Capital

Amounts of capital invested in the business by owners (shareholders). Usually, a private limited company can have share as little as £1.

Retained earnings or reserves

Cumulative profits not yet distribute to shareholders. Generally, you can only distribute your profits through dividend after your corporation tax. Correspondingly, if you have insufficient profit after corporation tax then you cannot declare a dividend.

Small, medium sized and large companies

The above is a simple set of balance sheet format that many small limited company would have. They are more complex balance sheet for medium sized and larger companies.

Dormant company balance sheet

A balance sheet for a dormant company is even more simple. A dormant account literally only have share capital information on the document. For example, the called up share capital and issued share capital.

Vocabulary used in financial statements

Understanding vocabulary used in the financial statements will help you to understand the report and figures presented in your company accounts.

Below are frequently used vocabulary you see in your financial statements and company accounts.

Accounts

Basically, Accounts are normally consists of profit and loss account, balance sheet, notes to financial statements and directors report. For companies registered in the United Kingdom, your company accounts must comply with the Companies Act 2006.

Tangible Asset

Generally, asset is anything that a business owns. This includes buildings, cash, furniture, and equipment. Ordinarily, tangible assets are subject to depreciation or revaluation. Furthermore, tangible assets are entitled to claim capital allowances in your company tax return.

Intangible Asset

While intangible asset is asset neither be seen or touched. For instance, goodwill, patents, trademark and copyright.

Audit

Audit is a process of verifying accounting records to ensure completeness and free from material errors. Normally, the audit is done on samples test basis.

Auditor

Auditor is an individual registered to practice as qualified auditor with the main accountancy bodies to perform statutory audit. The Auditor performs the audit must not have conflict of interests in his/her role as an auditor for your company.

The professional accountancy bodies that issue auditing certificate for practitioners include The Institute of Chartered Accountants in England and Wales (ICEAW), the Institute of Chartered Accountants Scotland (ICEAS)or The Institute of Chartered Certified Accountants (ACCA) or other recognized professional bodies in the UK.

Capital

What the business is worth? Capital for limited companies are in the form of shares invested by their shareholders.

Credit

Credit is an entry on the right side of an account ledger.

Debit

Debit is an entry on the left side of an account ledger.

Ledger

A group of accounts of similar types. For example, debtors’ ledger containing the accounts of your business customers and creditors’ ledger containing the accounts of your suppliers.

Liability

Anything that a business owes. For example, mortgage, credit card charges, loans and bank overdrafts under your business names.

Liquidator

A liquidator is a person appointed either by the court, your shareholders or your creditors. Your liquidator would perform due diligence, identify assets can be sold for cash and distribute the cash after debts are settled.

Petty cash

Petty cash is a small amount of cash for day to day small expenses in your business.

Receivables

Receivables means debts owed to your business from your customers. In other words, debtors.

Receivership

A situation where your company is in default. As a result, your lender who holds a mortgage or a charge over your company’s asset, appoint a receiver to sell the asset to repay debt.

Trial Balance

Trial Balance shows expenses on the debits and income and loans on the credits and the ledger are equal. Similarly, it presents the assets on the debits. Liabilities and share equity on the credits.

Company accounts filing deadline

Company accounts filing deadline is set by Companies House on the day your company was incorporated. By comparison, the company accounts filing deadline for a private limited company and a public limited company is different. A private company has longer period to file compared to a public company.

For example, if your company is incorporated on 28 December 2018 and your default company accounting year end date is 31 December. This is same for both types of companies.

However, if your company is a private limited company, then your accounts filing deadline would be 30 September 2020. Which is nine months after your year end.

On the other hand, if your company is a public limited company then your default filing deadline would be 30 June 2020. which is six months and it’s shorter.

Change your year end date

You are allowed to change your company accounts filing deadline. In this case, you use the form AA01 to change your accounting reference date. You must submit the form with Companies House.

For one thing, your company accounts must not already overdue. Furthermore, your new accounts year end date must not cover period more than 18 months.

First company accounts filing deadline

The filing periods for first accounts for a private limited company is 21 months whereas for a public company is 18 months.

Your company accounts filed with Companies House is available for public to view. In other words, anyone interested in your company affairs can check your accounts with Companies House.

Audit or non-audit company accounts

Generally, a private limited company that meet the criteria of a small company is allowed to submit non-audit accounts with Companies House. In this case, you must opt to take advantage of the audit exemption. Accordingly, this fact must be disclosed in your company accounts.

Any other companies, medium sized or a large company and public limited companies, all must submit audited company accounts with Companies House.

The law governing the preparation of company accounts for a public limited company especially those with their shares listed in the stock exchange is vigorous. In this case, you are not only must comply with Companies House rules but also the Financial Conduct Authority (FCA) requirements.

Dormant company

Ordinarily, a dormant company registered as a public limited company must submit an audited company account. Even if your public limited company has no transaction whatsoever. In this situation, you must hire a qualified Auditor to take care of your company accounts.

You may re-register your public company to a private company is having a PLC status no longer serve your business.

On one hand, if your dormant company is a private limited company then you can file a non-audit dormant account.

Late filing penalty

You will receive late filing penalty if your accounts are filed late. The late filing penalty starts from £150 to a maximum of £1500 for a private company. It will cost you a lot more for a public limited company.

You may appeal to your late filing penalty If your circumstance causing the late filing is exceptional. In this case, you must write to Companies House explaining it. Even better if you have evidence to support your case. Otherwise, you would have no choice but to pay the penalty.

Submit your account soon after your financial year end. Don’t wait till last minute.

Accounting for stock

Accounting for stock involves physical stock counts to its valuation at the financial year end. The closing stock value to be registered in your company accounts would have impact on your corporation tax liability.

If your company is subject to an audit, you auditor will take a good look at your company’s stock valuation policy. Especially if the stock represents significant assets in the company’s accounts and high stock volume is involved.

Normally, your auditor would send their own people to attend stock take at your premises. They would use the stock record you provide them. They would test the effectiveness of your stock accounting system. they would seek understanding how your business is recording, valuing, managing and storing your stock items.

To begin with they would select samples of stock items on your stock record and trace it through to the physical stock item. If they noted any variances in your physical stock to that of your stock record. They would want to know how you deal with damaged stock and missing stock and so on.

Consequently, your auditor would issue either qualified or unqualified audit report. Ideally, you would like to have an unqualified audit report. Because, this means your stock accounting system is good and gives a true and fair view of your company stock’s affairs.

However, if your auditor going to issue a qualified audit report, they would give reasons for their qualified report. You can then work to improve your stock accounting system so that you would not get the same audit report in the subsequent year. It is very important you get your stock accounting system right especially stock is your major asset in your business.

Objectives of stock valuation

The stock value included in your balance sheet represents your company’s current assets, it is often referred to as the stock or closing stock value. Usually, stock can be turned into cash fairly quickly if necessary. Concurrently, this closing stock value included in your balance sheet also also represent the value excluded from your profit and loss account.

There are two objectives you can achieve playing with stock valuation figures. Firstly, you can shift your business profit from one year to another by overvaluing your stock to achieve minimum corporation tax liability. Secondly, you can create fictitious profit by undervaluing your stock.

For this reason, some companies may attempt to overvalue their stock in order to pay minimum corporation tax. On the other hand, others may try to undervalue their stock to improve their financial performance for borrowing or proposing dividends purposes. Dependent on what your business needs at the time. However, this is not allowed by law.

Stock accounting methods

Generally, there are three generally accepted methods of accounting stock.

  1. The First In First Out (FIFO)
  2. The Last In First Out (LIFO)
  3. The Weighted Average Cost valuation

FIFO is widely used by many businesses. The stock valuation using FIFO is stock that is received first is also sold first. LIFO is stock received last is sold first. This is opposite of FIFO. Whereas Weighted Average Cost valuation is taking all the stock costs and divide them by the number of stock to arrive at the average cost of stock per unit.

Generally speaking, choosing an accounting for stock method to used for your business is largely dependent on your business itself. For example, if you are in fresh fruits wholesale, the FIFO method may be suitable and if you are in a vintage wine seller then LIFO is.

Above all, your accounting for stock policy adopted must provide true and fair value of actual physical stock held. In other words, your stock value shall be closest to its net realizable value or cost.

Stock items management

It is ideal to have a system to keep track of your physical stock. You may use a bespoke stock accounting system or manual stock recording system. Organised your physical stock storage for easy access and counting. This would ease your stock replenishment task too.

Occasionally, schedule a physical stock count. This would flag up the variances between your physical stock and stock on your system. You could then update your stock record accordingly.

Also, investigate the stock variances such as what made up the physical and system stock variances. Sometime, the stock could be still in transit, or damaged or stolen. Encourage staff to report damaged stock items and have a record of how the stock was damaged.

On one hand, regular stock count would also help to identify slow moving stock items. What are you going to do with slow moving stock items? You may sell it at discounted price. Or may be you return them to your suppliers if you have that arrangement in place.

Likewise, for high demand stock items, are the stock coming in on time to meet the demand?

Besides, regular stock take would also encourage staff that handling stock to be more efficient in terms of storage and retrieving stock items.

Basically, accurate physical stock would give you accurate stock value to be booked on your balance sheet. At the same time, it would also help you to make an informed decision on stock ordering and management.

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