If you run a UK company, understanding UK auditing requirements is one of those things you can’t afford to get wrong. The rules are set out in the Companies Act 2006, and they determine whether your business needs a statutory audit, qualifies for an exemption, or sits somewhere in between. Get it wrong and you could face penalties from Companies House – or worse, lose the trust of your shareholders and lenders.
The good news is that UK audit requirements aren’t as complicated as they first appear. Most of the confusion comes from the exemption thresholds and the special cases that apply to a group of companies, subsidiary undertakings and regulated businesses.
What are the criteria for auditing in the UK?
Under the Companies Act 2006, a company must have its annual accounts audited unless it qualifies for an audit exemption. The default position is simple: if you’re a UK registered company, you need an audit. The exemptions are the exception, not the rule.
Who needs an audit?
You’ll definitely need a statutory audit if your company meets any of these conditions:
- It’s a public limited company
- It’s an authorised insurance company or involved in insurance market activity
- It’s a traded company (shares admitted to a regulated market)
- A shareholder or group of shareholders holding at least 10% of issued share capital requests one
- It’s a subsidiary that doesn’t qualify for group exemption
Beyond these automatic triggers, size is the main factor. Small companies that stay below certain thresholds for turnover, balance sheet total or employee numbers can claim exemption. Companies must have an audit if they exceed them.
The small company audit exemption thresholds
A company qualifies as “small” for the purposes of audit exemption if it meets at least two of the following three conditions in a financial year:
- Annual turnover of no more than £15 million
- Balance sheet total of no more than £7.5 million
- No more than 50 employees on average
Meet two out of three and a company is exempt from the requirements for a statutory audit – provided none of the automatic triggers above apply. But there’s a catch. You need to meet these threshold tests in two consecutive financial years to qualify, unless it’s your first year of trading.
And even if your company is small enough, your directors still need to confirm the exemption by including a statement on the balance sheet when filing at Companies House before the deadline. Miss that statement and you’ve technically not claimed the exemption at all. Companies subject to audit requirements can’t simply opt out.
How do group companies and subsidiaries fit in?
This is where things get more involved. A subsidiary company can be exempt from audit if the parent company guarantees its liabilities under section 479A of the Companies Act 2006. The audit must be conducted in accordance with ISAs (UK) when required. But the parent must be established in the EEA (or the UK), and the subsidiary’s shareholders must all agree – unanimously, not by majority.
The group as a whole also has its own size test. A group of companies qualifies as small if the group must meet at least two of the following conditions on a net (or gross) basis, prepared in accordance with the Act:
- Aggregate turnover of no more than £15 million net (or £18 million gross)
- Aggregate balance sheet total of no more than £7.5 million net (or £9 million gross)
- No more than 50 employees in total
If the group exceeds these limits, subsidiary companies within it generally can’t claim the small company exemption – even if they’d individually qualify. Where a group must consolidate its accounts, the threshold test applies at group level. That surprises a lot of business owners who assume each company is assessed on its own merits.
What are UK auditing standards?
Once you’ve established that your company needs an audit, the next question is what that audit actually involves. UK audits are conducted under International Standards on Auditing (UK) – commonly called ISAs (UK) – which are issued by the FRC.
These standards cover everything from how the auditor plans the engagement to how they test transactions, verify balances and form their opinion. Key standards include:
- ISA (UK) 200 – sets out the auditor’s objectives and the overall principles of an audit
- ISA (UK) 315 – requires the auditor to understand the entity and its environment, including internal controls
- ISA (UK) 700 – governs how the auditor forms and reports their opinion on the financial statements
- ISA (UK) 570 – deals with going concern assessments, which became a major focus after several high-profile corporate failures
The FRC’s Ethical Standard also applies. It sets out the independence and objectivity requirements that every auditor and audit firm must follow. ICAEW members are bound by this as a condition of holding an audit registration.
For companies close to the audit thresholds, it’s worth knowing that an auditor doesn’t just check the numbers add up. They’re assessing whether the accounts give a “true and fair view” – a legal concept under the Companies Act 2006 that goes beyond arithmetic accuracy. It means the financial statements should faithfully represent the company’s financial position, performance and cash flows.
What happens if you get it wrong?
Filing unaudited accounts when your company should have had an audit is a criminal offence under the Companies Act 2006. Directors can face fines, and the registrar may reject the filing entirely. That leads to late filing penalties – £150 for private companies up to £7,500 if accounts are more than 12 months overdue.
But the practical consequences often matter more than the legal ones. Banks and investors increasingly ask for audited accounts before extending credit or funding. If you should have had an audit and didn’t, it raises questions about governance and reliability that are hard to answer.
On the other side, some companies pay for audits they don’t actually need. If you qualify for exemption, you could save several thousand pounds a year in audit fees. It’s worth checking every year, because growth (or contraction) can push you across the thresholds in either direction.
Practical steps for directors
If you’re not sure whether your company needs a statutory audit, here’s what to do:
- Check your latest two years of filed accounts against the small company thresholds
- If you’re part of a group, check the group totals as well – don’t just look at your company in isolation
- Confirm none of the automatic triggers apply (PLC, regulated activity, shareholder request)
- If you do qualify for exemption, make sure the directors’ exemption statement appears in the accounts
- Review annually – the thresholds can change, and so can your company’s size
At Audit Group, we advise businesses across Manchester and the UK on their audit obligations. Whether you need a full statutory audit or want to confirm you’re genuinely exempt, we can help you work through the requirements quickly. Call us on 0161 832 4451 or visit our contact page to get started.
