Glossary

Expenses that have been incurred but not yet invoiced or paid at the balance sheet date. Common examples include utility bills, professional fees and employee bonuses. Auditors test accruals as part of cut-off testing to confirm expenses are recorded in the correct period.

An audit opinion issued when the auditor concludes that the financial statements are materially misstated AND the misstatements are pervasive - meaning the accounts as a whole do not give a true and fair view. This is the most serious type of modified opinion under ISA (UK) 705.

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.

The four largest professional services networks: Deloitte, EY, KPMG and PwC. Between them they audit the majority of FTSE 100 and FTSE 250 companies. The Big 4 firms have global reach, but their fee structures and ways of working aren't always the right fit for SMEs, charities or owner-managed businesses, where mid-tier firms tend to give better partner attention. See our guide to the Big 4 audit firms and our comparison of Big 4 vs mid-tier audit firms.

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 income and asset limits that determine whether a charity needs a statutory audit, an independent examination, or no external scrutiny at all. The thresholds differ across England and Wales, Scotland and Northern Ireland, and there are separate rules for company charities, CIOs and unincorporated charities. See our full breakdown of charity audit thresholds across the UK.

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.

The overall attitude, awareness and actions of directors and management regarding internal controls and their importance. The control environment sets the tone for the organisation and is the foundation of the COSO internal control framework. It includes governance structures, ethical values, competence of personnel and management's operating style.

The risk that a misstatement could occur in the financial statements and not be prevented or detected by the entity's internal controls. If controls are weak or absent, control risk is high, and the auditor performs more substantive testing.

The point at which transactions are recorded in the correct accounting period. Cut-off testing is a standard audit procedure that checks whether revenue and expenses near the year-end date are recorded in the right period. Cut-off errors are one of the most common audit adjustments.

Income received in advance for goods or services not yet delivered. Treated as a liability on the balance sheet until the performance obligation is satisfied. Common in subscription businesses, SaaS companies and professional services. Auditors check that deferred revenue schedules correctly release income over the contract period.

The systematic allocation of the cost of a tangible fixed asset over its useful life. Auditors check that depreciation policies are reasonable, consistently applied, and that useful life estimates reflect the actual pattern of economic benefit. Under FRS 102, residual values must also be reviewed annually.

The risk that the auditor's own procedures fail to detect a material misstatement in the financial statements. This is the only component of audit risk that the auditor can directly control - by choosing more effective procedures, testing larger samples, or deploying more experienced staff.

Issued when the auditor is unable to obtain sufficient audit evidence on which to base an opinion, and the possible effects on the financial statements could be both material and pervasive. This typically occurs when the auditor's access to records has been significantly restricted.

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 permanent reduction in the recoverable amount of an asset below its carrying value. Under FRS 102 Section 27, entities must assess at each reporting date whether there are indicators of impairment. If so, a formal impairment review is required. Auditors test that impairment indicators have been properly identified and that write-downs are correctly calculated.

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.

The susceptibility of a financial statement assertion to misstatement, before considering any related internal controls. Complex transactions, accounting estimates, and areas involving significant judgement carry higher inherent risk. The auditor assesses inherent risk as part of the ISA 315 risk assessment.

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.

The standard covering identification and assessment of the risks of material misstatement. ISA (UK) 315 (Revised 2019) requires the auditor to understand the entity, its environment, the applicable financial reporting framework and the system of internal control, and to use that understanding to design risk-responsive audit procedures. Effective for audits of periods beginning on or after 15 December 2021. See our guide to audit risk assessment under ISA 315.

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. See our explainer on material misstatements in audit.

Any audit opinion other than an unmodified (clean) opinion. The three types of modification are: qualified opinion, adverse opinion, and disclaimer of opinion. A modified opinion signals that the auditor has concerns about the financial statements or was unable to complete their work.

The amount set by the auditor below overall materiality to reduce the risk that the total of uncorrected and undetected misstatements exceeds materiality. Typically set at 50-75% of overall materiality. Used to determine the extent of audit sampling and testing.

A correction to an error that originated in a previous financial year but was only discovered during the current audit. Under FRS 102 Section 10, prior period errors must be corrected by restating the comparative figures - they cannot simply be adjusted through the current year's profit and loss.

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.

Liabilities of uncertain timing or amount recognised in the balance sheet. Common examples include warranty provisions, restructuring provisions and legal claims. Under FRS 102 Section 21, a provision is recognised when there is a present obligation, it is probable that payment will be required, and a reliable estimate can be made.

An audit opinion issued when the auditor concludes that the financial statements contain a material misstatement or limitation of scope, but the issue is not pervasive - meaning it affects specific items rather than the accounts as a whole. Expressed as "except for" the matter described. Less serious than an adverse opinion.

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 person or entity that is related to the reporting entity through control, significant influence, or key management. Related party transactions must be disclosed under FRS 102 Section 33. ISA (UK) 550 requires auditors to identify related parties and assess whether transactions are properly disclosed and conducted at arm's length.

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 a subsidiary company to claim audit exemption, whatever its size, if all the statutory conditions are met: for current financial years the parent undertaking giving the guarantee must be established under the law of a part of the United Kingdom (an overseas or EEA parent doesn't qualify merely by owning the subsidiary), it must guarantee the subsidiary's outstanding liabilities under section 479C, all members must agree to the exemption, the subsidiary must be included in that parent's audited consolidated accounts with the exemption disclosed in the notes, and the members' agreement, guarantee statement, consolidated accounts, auditor's report and consolidated annual report must be delivered to Companies House. Members holding at least 10% of the shares can still require an audit under section 476. See do I need a statutory audit?

An internal control principle that separates incompatible functions to prevent errors and fraud. For example, the person who authorises payments should not be the same person who processes them. In smaller companies where full segregation is impractical, compensating controls (such as director review) become important.

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 or our explainer on what is a statutory audit.

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.

A "clean" audit opinion confirming that the financial statements give a true and fair view and have been properly prepared in accordance with the applicable financial reporting framework. This is the standard opinion that most companies receive.

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?

The documentation prepared by the auditor during the audit that records the procedures performed, evidence obtained, and conclusions reached. Required by ISA (UK) 230 to be sufficient to enable an experienced auditor with no previous connection to the engagement to understand the work done and the basis for the opinion.