An audit is an independent assessment of a company’s accounts, carried out by a trained specialist.
Who needs an audit?
Companies who have shareholders/members have a responsibility to communicate details of their financial position to these shareholders and are thus required to ensure that an audit of their company is carried out and submitted to Companies House on an annual basis.
Please note, not all limited companies must undergo an audit and smaller companies may qualify for exemption. For further information about which company’s need to have an audit, please read on to ‘Audit Exemption’.
Companies House is the regulatory body for the registration of companies and the maintenance of company records. All limited companies including Private Limited Companies (Ltd), Public Limited Companies (PLC), and Limited Liability Partnerships (LLP) are obliged to make themselves known to Companies House by law.
Some limited companies consider audits simply to be an additional overhead for their business and the price they pay for the huge benefits that come hand in hand with having ‘limited liability’. However, they are a necessary undertaking – central to reassuring shareholders, creditors and lenders that the companies in which they have invested have sound accounts.
According to the global accounting firm MacIntyre Hudson, 93% of complaints that are received by Companies House are related to the credibility of accounts filed by companies that are exempt from the audit procedure, indicating that though the audit procedure can be seen as an annoyance – it is an essential one.
It is only limited companies that must submit an annual audit – sole traders and partnerships are not expected to do so. The three key types of limited company and their individual defining features are as follows:
1. Private Limited Company (Ltd) (private company limited by shares)
- Must register with Companies House and submit an audit (unless audit exempt) and Annual Return.
- Liable for Value Added Tax (VAT) if turnover reaches a certain threshold.
- Owned by shareholders (can operate through just one director and one shareholder).
- The liability of each shareholder is limited to the amount unpaid on shares held by them.
- Cannot offer shares for sale on the stock market.
- Subject to Corporation Tax on profits.
2. Public Limited Company (PLC) (public company limited by shares)
- Must register with Companies House and submit an audit and Annual Return.
- Is able to trade on the stock market if a trading certificate is obtained from Companies House.
- Limits the liability of each shareholder to the amount unpaid on their shares.
- Must have a minimum of two directors and a qualified company secretary.
- Must have a share capital of at least £50,000.
3. Limited Liability Partnership (LLP)
- Must register with Companies House and submit an audit and Annual Return.
- Individual partners are not solely responsible for any debts run up.
- Must have two or more members.
4. Private company limited by guarantee
- Does not have shares, members are usually guarantors not shareholders and their ‘liability’ is limited to the amount they have agreed to contribute to the company’s assets.
- A company structure often used by charities.
Appointment of an auditor
Auditors appointed to audit the annual accounts must be independent of the company, for example they must not be employees of your limited company or associated in any way – such as the partner of an employee.
The audit itself must inspect the accuracy of the company’s accountants and whether they have been prepared in accordance with Company Law (Companies Act 2006) and any additional relevant reporting framework. The aim of an audit is to establish whether or not the company’s accounts present a fair view of its dealings at the end of the year.
It is up to the company to appoint a suitable auditor who will carry out the procedure following the International Standards of Auditing (UK and Ireland), issued by the Auditing Practices Board. Typically the auditor will closely examine evidence that relates to amounts in financial statements, as well as assessing the estimates and judgments made by the directors of the company in preparing their financial payments.
Each financial year it is up to the company to appoint an auditor to carry out this procedure. It is worth noting that the auditing procedure works slightly differently depending on the type of limited company:
Public Limited Companies (PLC)
The directors of the company must appoint an auditor and they will hold office until the first meeting of the company’s shareholders when the accounts are presented. The shareholders will then decide whether they wish to reappoint the current auditor or to elect a new one by passing a resolution until the next accounts meeting.
Directors must elect the first auditor and shareholders can then reappoint an auditor each year. Shareholders can do this during a shareholders meeting, or by resolution within 28 days of receiving accounts from directors. If shareholders choose not to exercise this right the auditor selected by the directors will remain in office.
Limited Liability Partnership (LLP)
Designated members elect the first auditor, after which members can reappoint them on an annual basis within 28 days of receiving the accounts. If no vote is taken the current auditor will remain in office.
Not all companies have to have their accounts audited and certain companies such as dormant companies or small companies may qualify for exemption.
Qualifying criteria for audit exemption currently states that a company must meet two of the following:
- an annual turnover of no more than £6.5 million
- assets worth no more than £3.26 million
- 50 or fewer employees on average.
However, these guidelines are subject to review and change so please visit Gov.uk for up-to-date information.
There is some information that an audit must contain without fail, including the following:
- An introduction identifying the company accounts that were subjected to the audit.
- Information about the range of the audit and what standards and framework have been used in preparing the accounts. For example, does the auditor follow International Accounting Standards (IAS) or UK Generally Accepted Accounting Principles (GAAP).
- A statement written by the auditor which confirms that he or she (in their opinion), have prepared the accounts in accordance with the Companies Act 1985 (for financial years beginning before 6 April 2008) or 2006 (for subsequent financial years).
- A statement written by the auditor that confirms that he or she has given a true and fair view of the company’s accounts.
- A statement as to whether the report written by the directors’ is in keeping with the accounts.
- If the auditor believes the company has not kept sufficient and accurate accounting records then they must issue a statement detailing their reasons as to why.
- If the auditor believes the company has not provided them with all of the necessary information needed to complete their audit report then they must issue a statement detailing the information required to complete the report fully.
Once the audit has been completed the auditor must sign and date the report that they provide to the company. If the auditor is from a firm then the senior statutory auditor will need to sign the document on behalf of the firm.
Each copy of the report that is published must include details of the individual auditor, or the senior statutory auditor in the case of a firm carrying out the audit. The same rule applies for any additional copies of the report.
Could an accountant perform my company audit?
Yes. However the audit of limited companies is a practice that is currently regulated by law, and it is illegal for any individual or firm that is not a ‘Registered Auditor’ to carry out an audit of a UK Limited Company.
In order to become a Registered Auditor, accountants must hold a practicing certificate from one of four recognised bodies. This certification means that the accountant in question has proven the necessary professional ability in that particular area and it also means they are subject to regular inspections. It is important to note however, that the four recognised bodies also have members who are not audit compliant. Ensure that you select an accountant who has a current audit-practicing certificate to act as your company’s auditor.
The four following associations are the bodies that are responsible for awarding the qualifications needed to carry out audit work. Each has their own rules to ensure that their auditors work to the highest possible professional standards and they are all also governed by strict regulations and a code of ethics.
- Association of Chartered Certified Accountants (ACCA)
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Institute of Chartered Accountants in Ireland (CAI)
- Institute of Chartered Accountants of Scotland (ICAS)
Imposed regulations that mean all company directors are responsible for ensuring annual accounts are correctly prepared and audited means, that for many companies an additional overhead is added to the cost of running their business. Though limited companies who do fall into the audit category are obliged to have an audit carried out by law, it should be noted that whilst an accountant carries out your audit, they can also benefit other areas of your business.
If you are new to the world of auditing then you may want to use your existing accountant (if you have one who is a ‘Registered Auditor’) to perform your audit for you. They will have the benefit of already possessing knowledge about your company and accounts and they may be able to include the audit as part of a service package (if choosing this option bear in mind that shareholders may be entitled to elect a new auditor).
Whether you choose an accountant who already provides you with services, or you decide to elect a new one, upon completion of the audit your accountant will be able to report back to you and provide you with recommendations for dealing with key aspects of the process for future audits. A qualified accountant will also be able to deliver advice about the most appropriate accounting systems and can work with you to ensure that all of the processes run as smoothly and as cost effectively as possible.
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