As a limited company in the UK, there are various legal and financial obligations you must meet, one of which is determining whether an external audit of your company’s accounts is required. An audit provides assurance that your financial statements accurately reflect the company’s financial position and are compliant with accounting standards.
While an audit is a key process for ensuring the reliability of your financial reports, not all limited companies are legally required to undergo one. In this guide, we’ll explain the circumstances under which an external audit of your accounts is required, the benefits of having one, and the conditions under which your company might be exempt.
What Is an External Audit?
An external audit is an independent examination of a company’s financial statements by a qualified auditor, typically an external accounting firm. The purpose of the audit is to provide an objective review of your company’s financial position and confirm whether the financial statements are free from material misstatements.
Auditors will review:
- Income statements
- Balance sheets
- Cash flow statements
- Other financial records
The outcome of the audit is a report that expresses an opinion on whether the accounts present a true and fair view of the company’s financial position.
When Is an External Audit of Accounts of a Limited Company Required?
In the UK, the requirement for an external audit of a limited company’s accounts depends on several factors, including company size, turnover, and other specific circumstances.
- Company Size Criteria (Turnover, Assets, and Employees)
Under UK law, the obligation to have an external audit is typically based on the size of the company, measured by the following thresholds:
- Turnover: £10.2 million or more
- Total assets: £5.1 million or more
- Number of employees: 50 or more
If your company meets two out of three of these criteria for two consecutive financial years, you are required to have an external audit. If your company does not meet these thresholds, an audit is generally not required.
- Public Limited Companies (PLCs)
If your company is a Public Limited Company (PLC), it is legally required to have an external audit regardless of its size. This applies to all PLCs, even if their turnover or assets fall below the thresholds mentioned above.
- Charity and Regulated Sectors
Certain types of companies, such as those operating in regulated industries or as charities, may be required to undergo an audit, even if they do not meet the size criteria for a general audit.
- Shareholders Requesting an Audit
In some cases, shareholders of a private limited company can request an audit, even if the company is not legally required to have one. This may occur if shareholders are concerned about the accuracy or transparency of the company’s financial records.
- Subsidiaries and Group Accounts
If your company is a subsidiary of a larger group, and the parent company is required to have an external audit, your company may be subject to an audit as part of the group’s consolidated financial statements.
Conditions for Exemptions from an External Audit
While an external audit is often a requirement for many limited companies, certain companies are exempt from the audit requirement. These exemptions typically apply to smaller companies that meet specific criteria:
- Small Companies
A limited company is considered small and may be exempt from an external audit if it meets at least two of the following three criteria for two consecutive years:
- Turnover: Less than £10.2 million
- Total assets: Less than £5.1 million
- Number of employees: Fewer than 50
If your company qualifies as small, it may be exempt from the external audit requirement. However, the company must file a small company exemption notice with Companies House.
- Micro-Entities
A micro-entity is a smaller subset of a small company. A company can qualify as a micro-entity if it meets two of the following three criteria:
- Turnover: Less than £632,000
- Total assets: Less than £316,000
- Number of employees: Fewer than 10
Micro-entities benefit from simplified accounting requirements and are not required to have an audit, provided they meet the qualifying criteria.
- Dormant Companies
If your limited company has been dormant (i.e., it has not traded or carried out any business during the financial year), it will generally be exempt from an audit. However, dormant companies must still file financial statements with Companies House.
