Glossary

A sub-committee of the board of directors responsible for overseeing the company's financial reporting, internal controls and the external audit process. The audit committee appoints the external auditor, reviews the audit plan and management letter, and monitors auditor independence. The UK Corporate Governance Code requires premium-listed companies to have an audit committee. Many private companies adopt one voluntarily as a matter of good governance. See our guide to audit committee best practices.

The information obtained by the auditor to support the conclusions that form the basis of the audit opinion. Audit evidence includes documents, records, confirmations from third parties, observations, and analytical procedures. Under ISA 500, the auditor must obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.

The right of qualifying small companies to opt out of having a statutory audit. Under the Companies Act 2006, a company qualifies for audit exemption if it meets two of three size thresholds: turnover no more than £15 million, balance sheet total no more than £7.5 million, and no more than 50 employees. Certain companies (public companies, regulated firms, large groups) cannot claim the exemption regardless of size. See do I need a statutory audit?

The formal conclusion expressed by the auditor in the auditor's report. There are four types: an unqualified opinion (also called a "clean" opinion - the accounts give a true and fair view), a qualified opinion (the accounts are materially correct except for a specific matter), an adverse opinion (the accounts do not give a true and fair view), and a disclaimer of opinion (the auditor cannot form an opinion due to insufficient evidence). The vast majority of UK company audits result in an unqualified opinion.

The initial phase of the audit where the auditor develops the overall audit strategy and detailed audit plan. Planning involves understanding the business, identifying key risks, setting materiality, determining the nature and timing of audit procedures, and allocating team resources. Good planning reduces the risk of problems emerging late in the process. See why audit planning matters.

The formal document issued by the auditor at the conclusion of the audit, containing the audit opinion on the financial statements. Also called the "auditor's report" or "independent auditor's report". The report is addressed to the members (shareholders) of the company and is included in the company's annual report filed at Companies House. See also: audit opinion.

The risk that the auditor expresses an inappropriate opinion on financial statements that are materially misstated. Audit risk is the product of three components: inherent risk (the susceptibility of an account balance to misstatement), control risk (the risk that a misstatement won't be prevented or detected by internal controls), and detection risk (the risk that the auditor's procedures won't detect a misstatement). See audit risk assessment and ISA 315.

The process of inviting audit firms to submit proposals for the statutory audit engagement. A tender typically involves sharing company information, receiving written proposals, holding presentations, and evaluating firms on experience, team quality, approach and fee. Good governance suggests tendering the audit every five to seven years. See submit an audit tender and how to change auditors.

The size limits that determine whether a company needs a statutory audit. Since April 2025, the UK thresholds are: turnover above £15 million, balance sheet total above £7.5 million, or more than 50 employees. A company that exceeds two of these three thresholds must have a statutory audit. See UK audit thresholds and exemptions.

A chronological record of transactions and events that allows an auditor to trace a figure in the financial statements back to its source documents. A complete audit trail includes invoices, purchase orders, bank statements, receipts, journal entries and supporting approvals. Businesses with weak audit trails take longer and cost more to audit.

The requirement that the statutory auditor is free from any relationship with the client that could compromise their objectivity. Independence rules are set by the FRC's Ethical Standard and cover threats such as self-interest, self-review, familiarity and intimidation. Auditors must decline engagements where threats to independence cannot be reduced to an acceptable level. See why auditor independence matters.

A specialist audit of a firm's compliance with the FCA's Client Assets Sourcebook (CASS). Required for FCA-regulated firms that hold client money or custody assets. The CASS audit is separate from the statutory audit of the firm's own financial statements and the auditor reports directly to the FCA. See financial services audit.

The statutory audit of a charity's financial statements under the Charities Act 2011. Required for charities with gross income exceeding £1 million, or with gross assets exceeding £3.26 million and income over £250,000. Charity audits must comply with the Charities SORP (Statement of Recommended Practice) and address fund accounting, restricted funds and trustees' responsibilities. See charity audit services.

The primary legislation governing UK company law, including the requirements for statutory audit, the appointment and removal of auditors, the preparation of annual accounts, and the duties of directors. Key audit sections include Part 16 (audit) and Part 15 (accounts and reports). The Act sets out the audit exemption thresholds and the procedures for changing auditors.

The UK government agency that registers and maintains records of all limited companies and LLPs. Companies must file their annual accounts (including the auditor's report where applicable) at Companies House. Late filing incurs automatic penalties starting at £150 for private companies.

The process of combining the financial statements of a parent company and its subsidiaries into a single set of group accounts. Consolidation requires eliminating intercompany transactions, aligning accounting policies, and translating foreign currency subsidiaries. Group audits under ISA 600 involve the group auditor coordinating with component auditors. See foreign subsidiary audit.

A formal letter from the auditor to the client setting out the terms of the audit engagement, including the scope of work, the responsibilities of both parties, the basis of fees, and the applicable auditing standards. The engagement letter must be agreed before the audit begins. ISA 210 requires the auditor to obtain agreement on the terms of the engagement.

Under IFRS 9 (and FRS 102 Section 11 for UK GAAP reporters), companies must recognise expected credit losses on financial assets such as trade debtors and loans. The auditor tests whether the ECL provision is adequate by reviewing historical loss rates, ageing analysis, and management's forward-looking assumptions.

An audit engagement where the fee is agreed in advance and does not change unless the scope changes. Fixed fees give budget certainty and are increasingly common among mid-tier audit firms. The fee covers the statutory audit, the audit opinion and the management letter. See how much does a statutory audit cost?

The independent regulator responsible for setting auditing and accounting standards in the UK. The FRC issues International Standards on Auditing (UK), the Ethical Standard for auditors, and the UK Corporate Governance Code. The FRC also inspects audit firms and can impose sanctions for audit failures. The FRC is being replaced by ARGA (Audit, Reporting and Governance Authority) under planned reforms.

The Financial Reporting Standard applicable in the UK and Republic of Ireland, issued by the FRC. FRS 102 is the main accounting standard used by UK companies that don't report under IFRS. It covers everything from revenue recognition (Section 23) to financial instruments (Sections 11 and 12) to employee benefits (Section 28). See FRS 102 changes for 2026.

The assumption that a company will continue to operate for the foreseeable future (usually at least 12 months from the date the accounts are approved). The auditor must assess whether this assumption is appropriate. If there is material uncertainty about going concern, the auditor's report must include an emphasis of matter paragraph or, in severe cases, the opinion may be modified. See going concern in audit.

An audit or assurance engagement verifying that grant funding has been spent in accordance with the grant conditions. Common for Innovate UK, UKRI, Horizon Europe and government-funded projects. The auditor examines eligible expenditure, checks compliance with the grant agreement, and certifies the financial claim. See grant audit services and Innovate UK audit guide.

The Institute of Chartered Accountants in England and Wales. One of the recognised supervisory bodies (RSBs) that can authorise firms to carry out statutory audit work. ICAEW members use the designation ACA (Associate) or FCA (Fellow). Audit Group is ICAEW-regulated.

A set of accounting standards issued by the International Accounting Standards Board (IASB). UK-listed companies are required to prepare their consolidated accounts under IFRS. Private companies can choose to report under IFRS or under UK GAAP (FRS 102). Key IFRS standards that affect audits include IFRS 9 (financial instruments), IFRS 15 (revenue), and IFRS 16 (leases).

A lighter-touch review of a charity's accounts, available as an alternative to a full audit for smaller charities. An independent examination provides less assurance than an audit - the examiner reviews the accounts for consistency and compliance but does not perform the same depth of testing. See charity audit vs independent examination.

An independent assurance function within an organisation that evaluates the effectiveness of risk management, internal controls and governance processes. Internal audit is conducted by the company's own staff or outsourced providers, not by the external (statutory) auditor. The two functions are complementary but distinct. See internal audit vs external audit.

The systems, processes and procedures that a company puts in place to ensure the accuracy of financial reporting, compliance with laws and regulations, and the safeguarding of assets. Examples include segregation of duties, authorisation limits, bank reconciliations and IT access controls. The auditor evaluates internal controls as part of the risk assessment and may rely on them to reduce the extent of substantive testing.

The professional standards that govern how statutory audits are conducted in the UK. Issued by the FRC as "ISAs (UK)", they cover every aspect of the audit from planning (ISA 300) to audit evidence (ISA 500) to going concern (ISA 570) to the auditor's report (ISA 700). Compliance with ISAs is mandatory for all registered auditors.

A letter from the auditor to the directors (or audit committee) summarising the findings from the audit, including any control weaknesses, accounting issues and recommendations for improvement. Also called "letter of comment" or "report to those charged with governance" (ISA 260). A good management letter contains specific, actionable recommendations - not boilerplate observations.

An error or omission in the financial statements that is large enough to influence the economic decisions of users. Misstatements can arise from fraud or error. The auditor's job is to obtain reasonable assurance that the financial statements are free from material misstatement. See also: materiality.

The threshold above which errors or omissions in the financial statements would be considered significant enough to influence the decisions of users. The auditor sets a materiality level at the planning stage, typically as a percentage of a benchmark such as revenue, profit before tax or total assets. Materiality determines the extent of testing and the size of errors that must be corrected or reported.

The process by which a newly appointed auditor contacts the outgoing auditor to ask whether there are any professional reasons why they should not accept the engagement. Required by ICAEW and ACCA ethical standards. The outgoing auditor must respond promptly and honestly. See how to change auditors.

An individual or firm registered to carry out statutory audit work in the UK. Registration is through a recognised supervisory body (ICAEW, ACCA or ICAS). The Register of Statutory Auditors is maintained by the FRC. Only registered auditors can sign statutory audit opinions.

A letter from the directors to the auditor confirming certain matters relevant to the audit, such as the completeness of information provided, the existence of any undisclosed liabilities, and compliance with laws and regulations. Required by ISA 580. The auditor cannot complete the audit without receiving signed representations from management.

The accounting rules that determine when and how revenue is recorded in the financial statements. Under FRS 102 Section 23 (or IFRS 15 for IFRS reporters), revenue is recognised when performance obligations are satisfied. Revenue recognition is one of the most common areas of audit focus, particularly for businesses with complex contracts, milestone payments, or subscription models.

A provision of the Companies Act 2006 that allows subsidiary companies to claim audit exemption if specific conditions are met: the parent must guarantee the subsidiary's liabilities, all members must consent, Companies House must be notified, and the subsidiary must be included in audited consolidated group accounts. See do I need a statutory audit?

A specialist compliance engagement for law firms that hold client money, required under the SRA Accounts Rules 2019 (Rule 12). The auditor examines how the firm handles client funds, checks that client money is properly separated from office money, and reports any breaches directly to the Solicitors Regulation Authority. See SRA audit services and guide to SRA audits.

The annual audit of a company's financial statements required by the Companies Act 2006 for companies that exceed the audit exemption thresholds. The audit must be conducted in accordance with ISAs (UK) by a registered auditor. The purpose is to provide reasonable assurance that the financial statements give a true and fair view. See statutory audit services.

Audit procedures designed to detect material misstatements in the financial statements. Substantive tests include tests of details (examining individual transactions and balances) and analytical procedures (comparing financial data against expectations). The extent of substantive testing depends on the assessed risks and the auditor's reliance on internal controls.

The standard against which UK financial statements are measured. The auditor's opinion states whether the financial statements give a "true and fair view" of the company's financial position and performance in accordance with the applicable accounting framework. This is a higher standard than simply "presenting fairly" and requires the accounts to reflect the economic substance of transactions, not just their legal form.

An audit undertaken by a company that is not legally required to have one. Companies may choose a voluntary audit to satisfy lenders, investors or other stakeholders, to identify control weaknesses, or to prepare for future growth above the audit threshold. See voluntary audit services and why get a voluntary audit?