Auditors

This guide briefly explains the role of a company auditor. It outlines which companies must appoint an auditor and the circumstances when an auditor is not required. It also explains the procedure for appointing and removing auditors from office.

What is an auditor

An auditor is a person who makes an independent report to a company's members as to whether its financial statements have been properly prepared in accordance with the Companies Act 1985. The report must also say if a company's accounts give a true and fair view of its affairs.

Must all company accounts be audited

No. If they qualify for exemption and wish to take advantage of it, dormant companies and certain small companies do not have to have their accounts audited. To qualify for audit exemption as a small company, the company must:

  • Qualify as small
  • Have a turnover of not more than £5.6 million
  • Have a balance sheet total of not more than £2.8 million.
  • Dormant company audit exemption may be claimed by a limited company that has not traded during a financial year, and provided it meets certain other criteria.

Audited accounts must be delivered to Companies House if a company falls into any of the following categories:

(a) A parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) except where the group:

  • Qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
  • The turnover for the whole group is not more than £5.6 million net or £6.72 million gross; and
  • The combined balance sheet total is not more than £2.8 million net (£3.36 million gross).

The above audit exemption thresholds apply to financial years ending after 30 March 2004. For earlier financial years, a parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) cannot qualify except where the group:

  • qualifies as a small group or would qualify if all the bodies corporate in the group were companies ; and
  • the turnover for the whole group is not more than £1million net (or £1.2million gross); and
  • the group’s combined balance sheet total is not more than £1.4 million net (or £1.68 million gross).

(b) A member of a group of companies in which any member is:

  • a public company or body corporate which (not being a company) has power under its constitution to offer shares or debentures to the public;
  • a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity; or
  • a person who carries on insurance market activity.

How is a company auditor appointed

The directors appoint the first auditor of the company. The auditor then holds office until the end of the first meeting of the company at which its accounts are laid before the members. At that meeting the members of the company can re-appoint the auditor, or appoint a different auditor, to hold office from the end of that meeting until the end of the next meeting at which accounts are laid.

However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the company's members that must be held within 28 days of the accounts being sent to the members.

Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-introduce annual appointment or to remove him or her as auditor.

What does an auditor do

The auditor will check the accounts and accounting records of the company and prepare a report for the company's members.

For financial years beginning on or after 1 January 2005, the auditors’ report must include:

  • An introduction identifying the accounts that were the subject of the audit and the financial framework that has been applied in their preparation (i.e. whether UK GAPP or IAS as adopted for use in the EU).
  • A description of the scope of the audit identifying the accounting standards used in the audit.
  • A statement as to whether in the auditors’ opinion the accounts have been properly prepared in accordance with the Companies Act (and, if appropriate, Article 4 of the IAS Regulation) and if they give a true and fair view of the companies financial affairs.
  • If they are of the opinion that the directors’ report is inconsistent with the accounts, a statement of that fact.
  • The auditors’ report may be either unqualified or qualified and must include a reference to any matters to which the auditors’ wish to draw attention by way of emphasis without qualifying the report.

Please note: For accounts beginning on or after 1 April 2005 the audit report must in all cases state whether, in their opinion, the information given in the directors’ report is consistent with the accounts, not only if the information is not consistent.

There are additional requirements for the audit reports of quoted companies:

  • A report on the auditable part of the directors’ remuneration report and whether it was properly prepared in accordance with the Companies Act (applies to financial years ending on or after 31 December 2002).
  • Whether the operating and financial review (OFR) is consistent with the accounts and whether any matters came to their attention which in their opinion were inconsistent with the operating and financial review. (The requirement to prepare an OFR applies to accounts beginning on or after 1 April 2005).
The auditors’ report delivered to the registrar must be signed by the auditors, the auditor’s report must also be dated.

Can my accountant be my auditor

An auditor must be independent of the company, therefore, a person cannot be appointed as an auditor if they are:

  • an officer or employee of the company or an associated company;
  • a partner or employee of such a person, or a partnership of which such a person is a partner

If your accountant does not fall into one of the above categories and if he or she has a current audit-practising certificate issued by a recognised supervisory body, they may act as the company's auditors.

Not all members of a recognised supervisory body are eligible to act as an auditor but the appropriate body will be able to tell you whether a particular individual or firm has a current audit-practising certificate.

What and who are recognised supervisory bodies?

These are bodies recognised by the Professional Oversight Board for Accountancy as having rules designed to ensure that auditors are of the highest professional competence. Each recognised body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The five recognised bodies are:

  • The Institute of Chartered Accountants of Scotland
  • The Institute of Chartered Accountants in England and Wales
  • The Institute of Chartered Accountants in Ireland
  • The Association of Chartered Certified Accountants
  • The Association of Authorised Public Accountants

Is an auditor only concerned with annual accounts?

Yes. However, there is nothing to stop you employing an auditor for other purposes, such as keeping the books or compiling the tax return, provided he (or she) does not take part in the management of the company. You should agree an engagement letter that sets out the auditor's duties. For instance, the company may want the auditor to prepare a management report after an audit, listing all the minor faults that were found even if they have been corrected.

Removal of auditors

The members of a company may remove an auditor from office at any time during his (or her) term of office or decide not to re-appoint the auditor for a further term. They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's members.

If an auditor ceases for any reason to hold office, he must deposit a statement at the company's registered office. The statement should set out any circumstances connected with his ceasing to hold office that he considers should be brought to the attention of the members and creditors of the company.

  • If there are any such circumstances, the company must send a copy of the statement to all the members of the company unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, the auditor must within a further 7 days send a copy of the statement to Companies House for the company's public record.
  • If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.