Although the audit thresholds are set out in legislation, the application of it can be sometimes very challenging with changes in circumstances such as acquisition or disposal of subsidiaries or even during transition through changes etc.

Audit thresholds

Companies are exempt from audit as per s477 of Companies Act 2006 (the Act) if they qualify as small companies under s382-384, unless they are members of a group or are charities and hence are required to follow the different charity audit thresholds.

A company is small if it meets two out of three of the following criteria for two consecutive years

Once a company size is established, it must meet or cease to meet only when the limits are exceeded for two consecutive years (see s382(2) of the Act). The audit exemption does not apply if the company is ineligible.

The following should be borne in mind when applying the above thresholds:

1. A company must have an audit if at any time in the financial year it has been: 

• a public company (unless it’s dormant)
• a subsidiary company within a group which is not small
• an authorised insurance company or carrying out insurance market activity
• 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 UK-regulated market.
  

2. The ineligible rules only refer to the financial year for which the accounts relate.

3. The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 which increased the monetary thresholds include some transitional provisions to assist with the application of the revised size thresholds. When an entity is assessing whether it meets the revised size criteria in the first year of application (ie the first financial year beginning on or after 6 April 2025), it is to be treated as having qualified as micro, small or medium if it meets the criteria in that year and would have met the revised criteria in the previous year had the revised thresholds been in place. This allows the new thresholds to be applied as soon as possible without having to wait for two consecutive years.     

4. A group has to meet the above limits as a whole to be able to exempt from an audit. If the group does not qualify as a small group, then an audit will be required for each group member – see our technical factsheet on consolidated financial statements for further guidance. 

5. There is an exemption for subsidiaries under s479A-479C if they meet certain criteria and if the parent company provides a guarantee in respect of all actual outstanding liabilities and all contingent liabilities at the end of the financial year.

6. From 1 January 2021 s479A subsidiary audit exemption is only available if its parent undertaking is established under the law of any part of the United Kingdom. This is because after this date only a parent established in the UK will be able to provide the guarantee for subsidiary audit exemption.

7. A plc in the group would make the entire group ineligible only if the plc is also a traded company (eg listed on the London Stock Exchange). So having a ‘vanity plc’ in the group will not on its own prevent other group companies preparing accounts under the small regime and claiming small audit exemptions.

8. A small subsidiary company which is part of a large group (which is not ineligible), can qualify as small for accounts preparation purposes. Then the small company can prepare its financial statements in accordance with FRS 102 s1A, but an audit would still be required unless an exemption is taken as described above.

9. A dormant company is generally entitled to exemption from audit. Under s480, a company is exempt from the requirements of this Act relating to the audit of accounts in respect of a financial year if:

a. it has been dormant since its formation; or

b. it has been dormant since the end of the previous financial year and the following conditions are met:

• as regards its individual accounts for the financial year in question, it is entitled to prepare accounts in accordance with the small companies’ regime, or would be so entitled but for having been a public company or a member of an ineligible group; and
• it is not required to prepare group accounts for that year.
  
  

10. Although small companies are exempt from an audit under the criteria, they may still undertake an audit for various other reasons eg: 

• the company’s lender requires an audit
• a grant provider requires an audit
• directors or shareholders may request an audit assurance
• the company constitution may require it
• to support the future sale or public offering of the business.

Useful resources

Read ACCA's technical factsheet on consolidated statements

Read ACCA's guide to the latest GAAP 

Read ACCA's guidance for determining the size of groups for audit purposes