As you may know, audits are often very expensive. It’s not surprising when you consider the amount of work involved, and the qualification level of at least the Senior Auditor / Audit Manager. So it will come as no surprise that most companies will avoid incurring this expense if the legally can. The law says that all companies must have an audit - or does it?
A Statutory Audit is so called because it is required by the Companies Act 2006. As referenced in my article ‘Company accounts or Financial Statements?’, a Statutory Audit is mandatory for all companies, unless they may be exempted.
The audit exemption
Putting more detail to this: A statutory audit is mandatory for all active companies classified as medium-sized or large, listed companies, and for companies dealing in regulated financial activities, as well as some others. Small and micro-sized companies are generally exempt but may elect to have an audit voluntarily - or the Shareholders can require one - but this would be rare, as the cost of an audit can be relatively significant. In any case, it is worth noting that audits do provide value – see my article on this here (in progress).
The broad principle behind mandatory auditing is that certain companies are deemed to have a significant enough effect on the local or national (or even wider) economy, such that their financial performance and position should be independently and competently verified. (see my article ‘What is a Statutory Audit?’). For example, pension funds often rely on investments in PLCs - so any drop in the performance of those PLCs can lower the value of the pension fund and negatively impact those relying on it for retirement. Of course, there is also the fact that the bigger the company, the more jobs are at stake; those of its own employees, as well as of suppliers and customers who may be reliant on it (look at what happened with Carillion and some of its smaller partner companies).
So, to figure out which companies can claim exemption from being audited, there are – rather helpfully - three criteria to measure against. This is what we refer to as the audit threshold, or the audit exemption threshold. The threshold would have to be exceeded for two consecutive years, within which at least two of the following criteria are exceeded:
• Annual turnover of £10.2 million,
• Balance sheet total asset value of £5.1 million,
• Employee count of 50.
If you’re good at ‘official-style-legal-speak’, see the Companies Act 2006, Section 477, as well as the other Sections referenced therein, for full details: www.legislation.gov.uk/ukpga/2006/46/section/477.
So there you have it; the audit threshold and the ‘two year rule’ in one. Has all of this helped or added any value? Have you got to the end of reading this knowing more than you did before? If so, I am really, really happy!
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