Company and Audit Size Limits – Will demand for audit decrease?

Back in 2015 the Companies Act incorporated the new EU Accounting Directive meaning company size limits saw a much needed increase as have the audit thresholds which were increased to be the same as the company size limits.

However, as the new size limits only come into force for periods beginning on or after 1 January 2016 we are only now starting to see the implications for companies.

So how will the changes affect your company and is there much to discus with your accountant? Firstly, the new size limits for small companies are now:

NewOld
Turnover£10.2m£6.5m
Gross Assets£5.1m£3.26m
Average employees5050

 

And the new size limits for medium companies are now:

NewOld
Turnover£36m£25.9m
Gross Assets£18m£12.9m
Average employees250250

 

The size limits for gross criteria for groups have also increased as they are calculated at 120% of the above limits for Turnover and Gross Assets with Employee numbers remaining the same.

As you can see the increase is a substantial one from the previous limits meaning that more companies will now be classified as small and therefore also able to take the available audit exemption for small companies. For companies to be classified as small and therefore audit exempt they can breach only one of the small company tests, if two are breached the company will be medium, unless it also breaches two of the medium company tests in which case it will be large.

It is also important to note that although the new regulations came into force for periods beginning on or after 1 January 2016 companies can choose to early adopt the new size limits for periods beginning before this. This means that you can prepare a set of accounts with a reduction in the amount of disclosures required such as not being required to submit the following to Companies House:

  • Profit and loss account
  • Cash flow statement
  • Notes that relate solely to the profit and loss.

Further, adopting the new size limits could avoid preparing a consolidated set of accounts with all the necessary statutory disclosures that come with it, this does not however mean that a pro forma consolidation could be prepared but this can include as much or as little as you wish and does not need to be submitted to Companies House so can just be used for internal purposes.

On the face of it early adoption seems great but there are a couple of downsides namely:

  • Early adoption will not get the company out of having an audit as the old size limits for audits will still apply,
  • The Company will be required to adopt the new accounting standards FRS102 Section 1A reduced disclosure although this will just be bringing the date forward from a years’ time.

So is this increase a shot in the foot to auditors with fewer and fewer companies wishing to have audits performed? I personally do not think so as a lot of companies that I deal with like to have the security that an audit provides, giving them more credibility when they go and tender and to provide the reassurance that the systems and controls are working as expected. These companies therefore will continue with the statutory audit.

This is not to say that the take up of audits will drop but it is an important decision for companies to make. I therefore recommend that in this time of transition a call to your respective auditor to go through the new size limits and to weigh up the benefits and costs of having an audit performed is highly recommended as each company will have its own unique circumstances to consider.

Talk to Barnes Roffe today
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