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Auditors - GBA4
Contents

 
Introduction

1. Appointment of auditors

2. Removal of auditors
3. Further information
This is a guide only and should be read with the relevant legislation.

Introduction

This booklet briefly explains the role of a company auditor. It outlines which companies must appoint an auditor and the circumstances when an auditor is not required. It also explains the procedure for appointing and removing auditors from office.

The booklet does not cover the role of a 'reporting accountant' appointed to charitable companies which are partially exempt from audit. For information on this, please refer to our booklet 'Accounts and Accounting Reference Dates'.

You will find the relevant law in the Companies Act 1985 (as amended in 1989 and later).

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CHAPTER 1
Appointment of auditors


1. What is an auditor?

An auditor is a person who makes an independent report to a company's members as to whether its financial statements have been properly prepared in accordance with the Companies Act 1985. The report must also say if a company's accounts give a true and fair view of its affairs. Most companies are required to have their accounts audited - see question 2 below.

2. Must all company accounts be audited?

No. If they qualify for exemption and wish to take advantage of it, dormant companies and certain small companies do not have to have their accounts audited. To qualify for audit exemption as a small company, the company must:

  • qualify as small;
  • have a turnover of not more than £5.6 million; and
  • have a balance sheet total of not more than £2.8 million.
Please note: The above accounting exemption thresholds apply to financial years ending after 30 March 2004. For earlier financial years, to qualify for total audit exemption a company must:
  • qualify as small;
  • have a turnover of not more than £1 million; and
  • have a balance sheet total of not more than £1.4 million.
     
  • For a charitable company to qualify for total audit exemption, it must qualify as small, its gross income must not be more than £90,000 and its balance sheet total must not be more than £2.8 million (£1.4 million for financial years ending on or before 30 March 2004).

    Charities with a gross income between £90,000 and £250,000 and a balance sheet total of not more than £1.4 million qualify for partial exemption.
     
  • Dormant company audit exemption may be claimed by a limited company that has not traded during a financial year, and provided it meets certain other criteria. See our booklet, 'Dormant Companies'. Dormant companies do not need to appoint auditors and can deliver very basic accounts to Companies House.
More information about audit exemption for dormant companies and small companies is available in our booklet, 'Accounts and Accounting Reference Dates'.

Audited accounts must be delivered to Companies House if a company falls into any of the following categories:

(a) A parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) except where the group:
  • qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
  • the turnover for the whole group is not more than £5.6 million net or £6.72 million gross; and
  • the combined balance sheet total is not more than £2.8 million net (£3.36 million gross).
Please note: The above audit exemption thresholds apply to financial years ending after 30 March 2004. For earlier financial years, a parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) cannot qualify except where the group:
  • qualifies as a small group or would qualify if all the bodies corporate in the group were companies ; and
  • the turnover for the whole group is not more than £1million net (or £1.2million gross); and
  • the group's combined balance sheet total is not more than £1.4 million net (or £1.68 million gross).


(b) A member of a group of companies in which any member is:
  • a public company or body corporate which (not being a company) has power under its constitution to offer shares or debentures to the public;
  • a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity; or
  • a person who carries on insurance market activity.

(c) A person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity (other than an appointed representative whose scope of appointment is limited to activities that are not regulated activities - see below).

"Regulated activity" does not include:

  • arranging regulated mortgage contracts;
  • assisting administration and performance of a contract of insurance;
  • advising on regulated mortgage contracts; or
  • dealing as agent, arranging deals in investments or advising on investments - where the activity concerns relevant investments that are not contractually based investments.

(d) A company which carries on insurance market activity.

(e) An appointed representative within the meaning of s.39 of the Financial Services and Markets Act 2000

(f) A public limited company unless the company is dormant. See our booklet 'Accounts and Accounting Reference Dates'.

(g) A special register body or an employers' association under the Trade Union and Labour Relations (Consolidation) Act 1992.

(h) A company where an audit is required by a member or members holding at least 10% of the nominal value of issued share capital, or holding 10% of any class of share or - in the case of a company limited by guarantee - 10% of its members in number.

3. How is a company auditor appointed?

The directors appoint the first auditor of the company. The auditor then holds office until the end of the first meeting of the company at which its accounts are laid before the members. At that meeting the members of the company can re-appoint the auditor, or appoint a different auditor, to hold office from the end of that meeting until the end of the next meeting at which accounts are laid.

However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the company's members that must be held within 28 days of the accounts being sent to the members.

Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-introduce annual appointment or to remove him or her as auditor. For more information on resolutions, see our booklet 'Resolutions'.

4. What does an auditor do?

The auditor will check the accounts and accounting records of the company and prepare a report for the company's members.

For financial years beginning on or after 1 January 2005, the auditors' report must include:

  • An introduction identifying the accounts that were the subject of the audit and the financial framework that has been applied in their preparation (i.e. whether UK GAPP or IAS as adopted for use in the EU).
  • A description of the scope of the audit identifying the accounting standards used in the audit.
  • A statement as to whether in the auditors' opinion the accounts have been properly prepared in accordance with the Companies Act (and, if appropriate, Article 4 of the IAS Regulation) and if they give a true and fair view of the companies financial affairs.
  • If they are of the opinion that the directors' report is inconsistent with the accounts, a statement of that fact.
  • The auditors' report may be either unqualified or qualified and must include a reference to any matters to which the auditors' wish to draw attention by way of emphasis without qualifying the report.

Please note: For accounts beginning on or after 1 April 2005 the audit report must in all cases state whether, in their opinion, the information given in the directors' report is consistent with the accounts, not only if the information is not consistent.

There are additional requirements for the audit reports of quoted companies:

  • A report on the auditable part of the directors' remuneration report and whether it was properly prepared in accordance with the Companies Act (applies to financial years ending on or after 31 December 2002).
  • Whether the operating and financial review (OFR) is consistent with the accounts and whether any matters came to their attention which in their opinion were inconsistent with the operating and financial review. (The requirement to prepare an OFR applies to accounts beginning on or after 1 April 2005).
The auditors' report delivered to the registrar must be signed by the auditors. For financial years beginning on or after 1 January 2005, the auditor's report must also be dated.

5. Can my accountant be my auditor?

An auditor must be independent of the company, therefore, a person cannot be appointed as an auditor if they are:

  • an officer or employee of the company or an associated company;
  • a partner or employee of such a person, or a partnership of which such a person is a partner
If your accountant does not fall into one of the above categories and if he or she has a current audit-practising certificate issued by a recognised supervisory body, they may act as the company's auditors.

REMEMBER: Not all members of a recognised supervisory body are eligible to act as an auditor but the appropriate body will be able to tell you whether a particular individual or firm has a current audit-practising certificate.

6. What and who are recognised supervisory bodies?

These are bodies recognised by the Professional Oversight Board for Accountancy as having rules designed to ensure that auditors are of the highest professional competence. Each recognised body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The five recognised bodies are:
  1. The Institute of Chartered Accountants of Scotland
    21 Haymarket Yards
    Edinburgh EH2 5BH
    Tel: 0131 347 0100
  2. The Institute of Chartered Accountants in England and Wales
    Professional Standards Office
    Silbury Court
    412-416 Silbury Boulevard
    Central Milton Keynes
    MK9 2AF
    Tel: 01908 248100
  3. The Institute of Chartered Accountants in Ireland
    Chartered Accountants House
    87-89 Pembroke Road
    Dublin 4
    Tel: 0035 3166 80400
  4. The Association of Chartered Certified Accountants
    64 Finnieston Square
    Glasgow G3 8DT
    Tel: 0141 582 2000
  5. The Association of Authorised Public Accountants
    10 Lincoln's Inn Fields
    London
    WC2A 3BP
    Tel: 020 7396 5954
REMEMBER: You can ask your auditor to confirm that he or she is registered with one of these bodies or you can contact the appropriate body.


7. Is an auditor only concerned with annual accounts?

Yes. However, there is nothing to stop you employing an auditor for other purposes, such as keeping the books or compiling the tax return, provided he (or she) does not take part in the management of the company. You should agree an engagement letter that sets out the auditor's duties. For instance, the company may want the auditor to prepare a management report after an audit, listing all the minor faults that were found even if they have been corrected.

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CHAPTER 2
Removal of auditors


1. Can an auditor be removed?

Yes. The members of a company may remove an auditor from office at any time during his (or her) term of office or decide not to re-appoint the auditor for a further term. They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's members.

 

Although a company may remove an auditor from office at any time, the auditor may be entitled to compensation or damages for termination of appointment.


If an auditor ceases for any reason to hold office, he must deposit a statement at the company's registered office. The statement should set out any circumstances connected with his ceasing to hold office that he considers should be brought to the attention of the members and creditors of the company.
  • If there are any such circumstances, the company must send a copy of the statement to all the members of the company unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, the auditor must within a further 7 days send a copy of the statement to Companies House for the company's public record.
  • If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.
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CHAPTER 3
Further information


1. How do I send information to the Registrar?

You may deliver documents to the Registrar by hand (personally or by courier), including outside office hours, bank holidays and weekends to Cardiff, London and Edinburgh.

You may also send documents by post or by the Hays Document Exchange service (DX) or by Legal Post (LP) in Scotland. If you send documents, please address them to:

 

For companies incorporated in
England & Wales:
For companies incorporated in
Scotland:
The Registrar of Companies
Companies House
Crown Way
Cardiff CF14 3UZ

DX33050 Cardiff
The Registrar of Companies
Companies House
37 Castle Terrace
Edinburgh EH1 2EB

DX ED235 Edinburgh 1
LP - 4 Edinburgh 2

If you are sending documents by post, courier or Britdoc (DX) and would like a receipt, Companies House will provide an acknowledgement if you enclose a copy of your covering letter with a pre-paid addressed return envelope. We will barcode your copy letter with the date of receipt and return it to you in the envelope provided.

Please note: an acknowledgement of receipt does not mean that a document has been accepted for registration at Companies House.

 
Please note: Companies House does not accept accounts or any other statutory documents by fax.


2. Where do I get forms and guidance booklets?

This is one of a series of Companies House booklets which provide a simple guide to the Companies Act.

Statutory forms and guidance booklets are available, free of charge from Companies House. The quickest way to get them is through this website or by telephoning 0870 3333636.

If you prefer you can write to our stationery sections in Cardiff or Edinburgh.

Forms can also be obtained from legal stationers, accountants, solicitors and company formation agents - addresses in business phone books.

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