Audit and accounting: an overview

The following is a basic overview of the company audit and accounting requirements.

It is a summary only of the Companies Act 2006 requirements. 

Articles of association

The articles of association of a company may prescribe that an audit of the accounts should be carried out regardless of the fact that audit exemption may be available in accordance with relevant legislation.

The articles would therefore need to be carefully considered when determining whether exemption from audit could be claimed.

The articles of association supplement but do not replace statutory audit requirements. 

MEMBERS’ RIGHT TO REQUIRE AUDIT 

The ability of a small company to claim audit exemption is limited by the right of members to require an audit.

Members representing not less than 10% of the issued share capital, or not less than 10% of the members in number, if the company does not have a share capital, may require an audit of the accounts of a company under section 476 of Companies Act.

This request is required to be in place in the year and given not later than one month before the end of that year.

NON-GROUP COMPANIES 

Under amended section 477 of the act, companies that are not part of a group may claim exemption from audit if they qualify as small in a year in accordance with section 382 of Companies Act 2006 and if they do not fall within a category of companies excluded by section 478 of the act. 

Small companies 

Under section 382 of the act a company qualifies as small in its first financial year if it meets at least two of the following three requirements: 

• turnover not more than £6.5m 
• balance sheet total not more than £3.26m 
• number of employees not more than 50. 

Small companies audit (periods beginning on or after 1 January 2016):

• turnover not more than £10.2m
• balance sheet total not more than £5.1m
• number of employees not more than 50.

Ministerial statement: Small Companies Audit Exemption Thresholds: Written statement - HLWS479

Regulations: The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015

Excluded entities

A non-group company is unable to claim audit exemption if, at any time during the financial year, it falls within one of the following categories of companies excluded by section 478 of the act: 

1. a public company 
2. a company that:
   (i) is an authorised insurance company, a banking entity, an e-money issuer, an MiFID investment firm or a UCITS management company, or
   (ii) carries on insurance market activity.  
3. a special registered body or an employers’ association as defined in the Trade Union and Labour Relations (Consolidation) Act 1992 or the Industrial Relations (Northern Ireland) Order 1992.  

GROUP COMPANIES 

In addition to meeting the conditions for non-group entities outlined above (ie qualifying as small and not being an excluded entity), companies that are parents or subsidiaries of a group may claim audit exemption if the group of which they are part qualifies as a small group in accordance with section 383 of the act, and if the group was not at any time in the financial year an ineligible group under section 384 of the act.

The exemption provisions for group companies and LLPs are included in the amended section 479 of the act. 

Small groups

Under section 383 of the act, a group qualifies as small in respect of its parent’s first financial year if it meets at least two of the following three requirements: 

• turnover not more than £6.5m net or £7.8m gross 
• balance sheet total not more than £3.26m net or £3.9m gross 
• number of employees not more than 50. 

Periods beginning on or after 1 January 2016:

• turnover not more than £10.2m net or £12.2m gross
• balance sheet total not more than £5.1m net or £6.1m gross
• number of employees not more than 50.

A company is unable to claim audit exemption if, at any time during the financial year, it was part of an ineligible group.

Under section 384 of Companies Act, a group is ineligible if any of its members is: 

• a public company 
• a body corporate (other than a company) whose shares are admitted to trading on a regulated market in a European Economic Area (EEA) state 
• a person who has permission under part 4 of the Financial Services and Markets Act 2000 (c 8) to carry on a regulated activity 
• a small company that is an authorised insurance company, a banking company or banking LLP, an e-money issuer, an MiFID investment firm or a UCITS management company 
• a person who carries on insurance market activity. 

EEA PARENT’S SUBSIDIARIES 

Exemption from mandatory audit in section 479 of the act is available for qualifying subsidiaries that fulfil a set of rather stringent conditions.

The eligibility for this exemption is not limited by the failure of the company to meet the requirements of section 477, 478 or 479 of Companies Act outlined above.

A subsidiary company will be able to claim audit exemption if it fulfils all of the following conditions: 

1. Its parent undertaking is established under the law of an EEA state. 
2. All members must agree to the exemption in respect of the financial year in question. 
3. The parent must give a statutory guarantee under section 479C of all the outstanding liabilities to which the subsidiary is subject at the end of the financial year.
4. The company must be included in the consolidated accounts drawn up by the parent undertaking, which must be prepared in accordance with the Seventh Company Law Directive or International Accounting Standards specifically drafted. 
5. The use of the exemption by the subsidiary under Companies Act 2006 must be disclosed in the notes to the consolidated accounts drawn up by the parent. 
6. The following documents must be filed by the directors or designated members of the subsidiary at Companies House on or before the date that they file the subsidiary’s accounts:
   i) written notice of the agreement in 2 
   ii) a statement under section 479C by the parent that it guarantees the subsidiary’s liabilities
   iii) a copy of the consolidated report and accounts referred to in 4 and the auditor’s report on those accounts.
7. The company is not quoted within s385(2) of the Companies Act at any time in the year.
8. It is not an authorised insurance company, a banking company or LLP, an e-money issuer, an MiFID investment firm or a UCITS management company, or carries on insurance market activity.
9. It is not a trade union or an employer’s association. 

DORMANT COMPANIES 

A dormant company or LLP may be able to claim exemption from audit under section 480 of Companies Act 2006 if: 

• it has been dormant since its formation 
• it has been dormant since the end of the previous financial year and the conditions below are met.

The conditions are that the company, as regards its individual accounts for the financial year in question: 

• is entitled to prepare accounts in accordance with the small companies or LLPs regime, or
• would be so entitled but for having been a member of an ineligible group, and 
• is not required to prepare group accounts for that year. 

Some dormant companies or LLPs will not be able to claim exemption from audit if at any time during the financial year in question they were: 

• an authorised insurance company, a banking company or banking LLP, an e-money issuer, an MiFID investment firm or a UCITS management company 
• carried on insurance market activity. 

SMALL

Under section 382 of the act a company qualifies as small in its first financial year if it meets at least two of the following three requirements: 

• turnover not more than £6.5m 
• balance sheet total not more than £3.26m 
• number of employees not more than 50. 

For periods beginning on or after 1 January 2015 the turnover and balance sheet requirements change the conditions to:

• turnover not more than £10.2m
• balance sheet total not more than £5.1m
• number of employees not more than 50.

Regulations: The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015

Small groups 

Under section 383 of the act a group qualifies as small in respect of its parent’s first financial year if it meets at least two of the following three requirements: 

• aggregate turnover not more than £6.5m net or £7.8m gross 
• aggregate balance sheet total not more than £3.26m net or £3.9m gross 
• aggregate number of employees not more than 50. 

For periods beginning on or after 1 January 2015 the turnover and balance sheet requirements change the conditions to:

• turnover not more than  £10.2m (£12.2m gross)
• balance sheet total not more than £5.1m (£6.1m gross)
• number of employees not more than 50.

MICRO

The definition of a micro-entity is contained in sections 384A and 384B of the Companies Act 2006. The qualifying conditions are met by a company in a year in which it does not exceed two or more of the following criteria:

• turnover: £632,000
• balance sheet total: £316,000
• number of employees: 10.

Certain companies are excluded by section 384B of the act from being treated as micro-entities, including those excluded from the small companies regime for reasons of public interest (as set out in section 384), certain financial institutions, charities, those voluntarily preparing group accounts and those included in group accounts. The act should be referred to for a full list of excluded companies.

REPORTING CHOICES: BASIC OPTIONS

The reporting options available to organisations are:

Micro

• FRS 105
• FRSSE 2015 (one year only)
• FRS 102 section 1A
• FRS 102
• EU-adopted IFRS 

Small

• FRSSE 2015 (one year only)
• FRS 102 section 1A  
• FRS 102
• EU-adopted IFRS 

Non-small

• FRS 102
• EU-adopted IFRS

FRS 102 section 1A is effective for accounting periods beginning on or after 1 January 2016. Early application is:

1. permitted for accounting periods beginning on or after 1 January 2015 provided that The Companies, Partnerships and Groups (accounts and Reports) Regulations 2015 (SI2015/980) are applied from the same date; and
2. required if an entity applies the regulations to a reporting period beginning before 1 January 2016.

FRS 101

FRS 101 may be applied to the individual financial statements of a qualifying entity which is a member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation.