Does My Business Need an Audit?

Wondering if your business needs an audit? It’s a common question for many business owners, especially when navigating the complexities of financial regulations. Understanding whether an audit is necessary can save you time, money, and potential legal headaches.

The financial year plays a significant role in determining audit requirements, including thresholds and eligibility criteria for audit exemptions.

Audits aren’t just for large corporations; small businesses might also be required to undergo them under certain conditions. Factors like your company’s size, industry, and revenue play a crucial role in determining this obligation. By knowing these criteria, you can ensure your business remains compliant and operates smoothly.

Does my company need an audit?

There are a few reasons why your company could need an audit:

• You have outgrown the statutory audit exemptions (see below).

• New investors have included an audit requirement in the funding agreement.

• You might just value the objective independent insight into your accounts and financial processes that an audit will provide.

The statutory audit exemptions are:

• The audit regime only applies to limited companies and LLP’s. Companies subject to the small companies’ regime may be eligible for exemption from audit under section 477 of the Companies Act 2006.

• Unincorporated sole traders and partnerships are exempt whatever their size

When does my company need an audit?

For a non-group company, you will need to have an audit when you exceed 2 out of the following 3 tests;

• Turnover of more than £10.2m

• Gross Assets of more than £5.1m

• 50 or more employees

Under the small companies regime, companies that don’t exceed these thresholds may be exempt from audit. This exemption is under section 477 of the Companies Act 2006 and companies must include a statement in their financial statements that they have prepared accounts in accordance with the provisions applicable to companies in the small companies regime.

Industry-Specific Regulations

Some industries have more stringent audit requirements due to regulatory oversight. Industries like financial services, healthcare and charities require audits regardless of company size or revenue. For example financial institutions are under the scrutiny of the Financial Conduct Authority (FCA) who require regular audits to ensure financial stability.

Legal Structure Impact

Your company’s legal structure affects its audit requirements. Limited companies have more audit requirements than partnerships or sole traders. Partnerships in regulated professions like law firms may also need an audit. Sole traders are generally exempt from mandatory audits unless in highly regulated sectors.

Turnover Thresholds and Financial Statements

Companies need to watch out for turnover. Companies with an annual turnover of more than £10.2m require an audit. This threshold ensures large entities have accurate reporting and investor confidence.

Voluntary Audits

Although not mandatory, voluntary audits will give you credibility with investors and stakeholders. It shows you are committed to transparency and can simplify financial management. Voluntary audits are particularly useful for companies seeking external funding or going public.

International Operations

Understanding international audit requirements is key for companies going global. Different countries have their own audit regulations. A subsidiary company may be exempt from audit if it meets certain criteria, for example if it’s part of a larger group and has a guarantee from the parent company. Complying with these laws will reduce risk and avoid potential legal consequences. For example US subsidiaries must comply with the Sarbanes-Oxley Act which requires strict audit processes.

By looking at financial thresholds, industry regulations, legal structure, turnover and international operations you can determine if you need an audit and stay compliant.

Have the limits for audits changed recently?

In October 2024, the UK is set to implement significant changes to audit requirements, primarily through a 50% increase in the monetary thresholds that determine whether a company must undergo a statutory audit.

Isn’t an audit just an extra expense?

An audit isn’t just an extra cost; it adds value to your business. Statutory audits ensure compliance with financial regulations which is required for companies with turnover of more than £10.2m, total assets of more than £5.1m or an average of more than 50 employees. Without an audit your business may face penalties and damaged reputation.

Audits increase financial transparency which increases investor and stakeholder confidence. For example potential investors look favourably upon audited financial statements which makes it easier to access capital. Lenders require an audit before they approve loans and offer better terms and lower interest rates when your financial health is verified.

Plus audits can find inefficiencies and fraud within your business. If you find these issues early you can put in place corrective action and improve profitability and security. Regular audits will also ensure your business practices are in line with industry standards and will build trust with clients and partners.

In today’s business world audits go beyond compliance. They are part of strategic decision making and risk management. By giving you an objective view of your financial position audits will help you identify trends and areas for improvement and make better business decisions.

Weigh up the benefits against the cost. The long term benefits of increased credibility, improved operational efficiency and better access to funding far outweigh the short term cost of an audit. Ignoring the need for an audit could cost you more in the long run in fines or lost business.

Are there any other benefits to an audit?

Yes, if you are considering selling your business, an audit in the years leading up to a sale may give further assurance to potential purchasers, regarding the operation and conduct of the business, making it a more attractive acquisition target.

Read our guide on benefits of an audit

Who is exempt from audit?

Small companies in the UK may not need an audit if they meet specific criteria outlined in the Companies Act 2006.

Qualifying as a Small Company

A small company is considered exempt if it meets at least two of these criteria:

• Annual turnover less than £10.2 million

• Balance sheet total less than £5.1 million

• Fewer than 50 employees

Exemptions for Certain Types of Companies, Including Subsidiary Company

Subsidiaries could be exempt if:

• Their parent company provides a guarantee

• Group accounts are prepared for the entire group

• The subsidiary company meets the criteria for small subsidiary companies, such as being part of a larger group and adhering to specific conditions set by the parent company

Charitable companies also have exemption thresholds:

• Gross income less than £1 million

• Total assets less than £3.26 million with a gross income of under £250,000

How to Apply for Audit Exemption under Companies Act 2006

1. Verify eligibility based on the above criteria.

2. Include an exemption statement in the director’s report.

3. Ensure shareholder approval, as shareholders holding at least 10% of shares can request an audit.

4. File unaudited accounts with Companies House, marking them as “unaudited.”

For more information on this matter or to find out about our Audit and assurance services, please contact Chris Morey on 01273 701200 or email chrism@plusaccounting.co.uk. 

Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

Originally Posted: 9 June 2016

Last Updated: 22 August 2024

Want to learn more?

Get in touch with our in house expert Chris Morey to see how we can help.