Do I Need An Audit?
By Edmund Cartwright, Auditor, Johnsons Chartered Accountants
In part two of our new blog series we explore Audit services, and ask whether your organisation requires an audit. There have been numerous high profile incidences recently where audit firms have not picked up on crucial errors, and have subsequently been fined. This has shaken investors’ confidence in the ability of an audit to identify the issues it is designed to identify. Indeed we frequently help clients and uncover significant errors in past Audits, a topic that we will unpack later in this series.
Do I need an Audit?
As a high-level summary, you are exempt from annual Audit if your company is:
- Dormant, ie, registered as dormant at Companies House
- A small, stand-alone company, ie, no subsidiaries or parent company
- A small member of a small group
- A subsidiary of a UK-based parent company with a parent guarantee
In fact, the thresholds for audit exemption are generous. According to HMRC companies may qualify for an audit exemption if they meet two of the criteria below:
- An annual turnover of no more than £10.2 million (see note on Charities below)
- Assets worth no more than £5.1 million (see note on Charities below)
- 50 or fewer employees on average (see note on Charities below)
Notable Exceptions – UK subsidiaries of EU Parent Companies & Charities
It’s worth noting in point 4 above that only subsidiaries of UK-based parent companies are exempt from audit (when they meet the other criteria). Since Brexit came into force on 1 January 2021, companies have not been able to claim the UK subsidiary Audit exemption for EEA Parent Companies. Put simply, many UK subsidiaries have required a statutory audit by law since then, and we find that few accountants have been advising their clients to do so.
A number of new customers have come to us in recent months for accounts preparation, and we have been able to point out that their former advisor has left them in breach of the law by failing to advise an audit as part of their accounts for 2021. However if you need urgent help in this area, contact the audit experts at Johnsons.
The second exception is Charity audits. Often run by volunteers, charities have a much lower threshold for audit, providing greater oversight and controls for stakeholders. In Scotland, charities are exempt if income is below £500k, and in England and Wales charities are exempt if income is below £1M or if income is below £250,000 and their assets are below £3.26m.
Even if a charity does not require an Audit, it may require an independent examination. An Independent examination is required for charities whose income is above £25k. This assurance service will document the charity’s controls, gain an understanding of how the charity is run, and review ledgers and bank accounts to check that things are being done properly.
All assurance service use the accountant’s inquisitive mind, knowledge and experience to make sure it’s being run in the right way. Independent Examinations are less expensive, and give all concerned in the running of Charities, Societies and CICs great peace of mind.
Case Study – Charity Audit & R&D Tax Credit
The Client: A charity client that was also carrying out Research & Development (R&D)
The Brief: We were called in to carry out a statutory audit for a charity.
The Solution: We gained a good understanding of what they did, and highlighted it to our in-house Tax team to look at options to make use of potential R&D Tax Credit. Since charities cannot claim R&D Tax Credit, our charities team set up a limited liability subsidiary that would own the Intellectual Property of any future inventions. It resulted in a £200k Tax Credit in their first year of the new structure.
The Johnsons Audit team is an experienced group of Audit professionals, who are commercially-minded and have their eye on the bigger picture for your benefit. Contact us for to learn more.
<<Previous article in the series from an audit firm London.
Next article in the series from an audit firm in London>>