Businesses and charities must audit their accounts when they have grown above a certain size. The smallest organisations are exempt from this legal requirement. There are also circumstances when you may need or want an audit regardless of the scale of your operations. If you are in any doubt as to whether you need to conduct an audit or not, just contact HB Accountants and we can talk you through the regulations.
Exactly what is an audit?
An audit is the systematic examination of an organisation’s accounting records, as well as the physical inspection of its assets. When performed by a qualified accountant, such as HB Accountants, it enables us to verify whether the financial statements have been prepared in line with relevant legislation and accounting standards, and importantly whether they provide a true and fair view of the organisation’s financial position.
When to book an audit – size threshold
When a private limited company hits two of these thresholds, in two out of three years, it’s time to book an audit.
- annual turnover £10.2m
- assets worth £5.1m
- number of employees 50 on average
When a charity hits either one of these thresholds it’s time to book an audit.
- gross annual income above £1m or
- gross assets of above £3.26m and a gross annual income above £250,000.
Where a charity’s income is from £25,000 to £1m, external scrutiny in the form of an independent examination is still required by the Charities Commission. In addition, many charities require regular audits regardless of the size of the organisation, as set out in their constitution or legal instructions from donors or trustees.
Other reasons to book an audit
There are further reasons why organisations must or should complete an audit.
Regulated finance or legal industry sector firm
If you operate a regulated business, then there’s often a legal requirement that you undertake audits. For example, if your run a financial services business, friendly society or legal practice. These organisations operate in a position of trust with customers, and a regular financial audit provides much-needed assurance as well as compliance with the regulations.
Subsidiary of a company
If your parent company is legally required to audit its financial statements, then this extends to any subsidiary companies, even if they are individually below the legal threshold size unless the subsidiary exemption criteria has been met.
Shareholder makes a section 476 request
Under the Companies Act 2006, section 476, a shareholder can give notice that an audit is required. To be able to do this the shareholder must have at least a 10% stake in a class of the company’s shares or if there are no shares they must represent 10% of the members of the company.
Bank or lender audit requirement
In certain circumstances your bank or another lender may need the added assurance of an audit to assess your current financial position, and make decisions about the services it offers, such as a business loan.
Preparing for sale of business
It may be advantageous to audit your financial statements when you plan to sell your business to maximise the pay-out shareholders receive and to get the best possible terms.
Preference and good practice
Even when an organisation is not compelled to have an auditing regime due to legal regulations, many choose to have regular audits to provide stakeholders with complete confidence in their financial reports.
Some organisations are exempt from having full audits.
Small businesses may be exempt, provided they aren’t required to audit accounts due to being a charity or other regulated business. To be exempt as a small business, at least two of these figures for this year and last year must be below this size threshold:
- Turnover below £10.2 million
- Total assets below 5.1 million
- Number of employees below 50
A subsidiary of a larger group may be exempt if the group meets certain criteria and the parent company gives a guarantee of all outstanding liabilities at the end of the financial year.
Charities with a gross income of less than £1m can choose to opt out of a full audit provided that gross assets do not exceed £3.26m and gross income does not exceed £250,000 and provided their constitution does not demand an annual audit. Although if turnover exceeds £25,000 they will still need some form of independent examination.
It’s easy to be more audit savvy
These are broad guidelines about which organisations must audit their accounting records. If it’s obvious that you need an audit, then get in touch and we can explain the benefits of our audit service. If it’s not obvious whether you need an audit, then do talk to us to discuss your organisation’s circumstances. We can help you to identify if an audit is a legal requirement, or if it simply makes good sense, or if an audit is not required at all. We are always ready to answer questions and provide advice. Just call 01992 444466 or email firstname.lastname@example.org