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Company auditor

Company auditor

What is an auditor?

An auditor is a person who makes an independent report to a company's shareholders ('members') to show whether the company has prepared its financial statements according to company law and other financial reporting rules. The report must also state whether a company's accounts give a true and fair view of its financial affairs at the end of the year.

The auditor must be told of all general meetings of the company and can attend and speak. However, the auditor isn't entitled to vote.

Must my company appoint an auditor?

If your company is small, it might not have to conduct and file a statutory audit.

A small company is one meeting 2 out of the 3 following criteria:

  • A balance sheet total of up to £5.1 million
  • A turnover of up to £10.2 million
  • No more than 50 employees

In order to be exempt from conducting and filing an audit, the directors must declare on the balance sheet that:

  • the company is exempt;
  • they acknowledge their responsibility to keep accounts complying with the Companies Act 2006 and the accounts do comply; and
  • the shareholders haven't called for an audit (as they have a right to do under s 476 of the Companies Act).

Dormant companies can also benefit from the exemption if certain conditions are met.

Who can my company appoint as an auditor?

An auditor must be independent of the company. Therefore, you can't choose an auditor who is:

  • an officer or employee of the company or an associated company; or
  • a partner or employee of such a person, or a partnership of which such a person is a partner.

How does my company appoint an auditor?

Your company must appoint an auditor for each financial year. However, the directors might decide that an auditor isn't necessary if audited accounts won't be needed. This decision must be a reasonable one. As a practical matter, the directors should consider whether not having audited accounts would affect the willingness of banks to give credit to your company.

The directors can appoint an auditor by board resolution. If the directors should have appointed an auditor but don't, the members of the company can appoint an auditor by ordinary resolution. (See Shareholder meetings for more information on resolutions.)

Private companies

The directors appoint the first auditor of the company. The members can then appoint or reappoint an auditor each year at a meeting of the company's members. This should be done within 28 days after the directors send or should have sent the accounts to the members. This can also be done by written resolution.

If the members don't do so for a particular year, however, the auditor is deemed to be reappointed and remains in office. This won't be the case if that auditor had been appointed by the directors. Similarly, this won't be the case if the company's articles of association (the company's set of rules) state that a new auditor is needed every year, or if the members give notice to the company to prevent the auditor from being reappointed, or if the members pass an ordinary resolution to remove the auditor.

What are the auditor's duties?

The auditor will check the accounts of the company and prepare a report for the members.

The auditor acts according to International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.

The auditor's report must include:

  • A statement as to whether the auditor believes the accounts have been prepared according to the Companies Act 2006 and International Accounting Standards;
  • A statement as to whether the accounts give a true and fair view of the company's or (in the case of group accounts) group's financial affairs; and
  • A statement as to whether the directors' report is consistent with the accounts.

If the auditor is satisfied that they've seen all the necessary accounts and they're satisfied with them, the auditor will normally give an 'unqualified' report. A 'qualified' report will alert shareholders and others reading the accounts that the auditor didn't receive all the necessary material, or disagreed with the company over some material issue, or that they suspect fraud.

What do I have to do with an auditor's report?

Before the auditor signs the audit report, the directors must sign the balance sheet, formally approving the accounts. The auditors must then sign and date their report when the audit is finished.

A private company must send a copy of the auditor's report to all the members. It must also file their accounts including the auditor's report at Companies House within 9 months of the end of the company's relevant financial period.

Can my company's accountant be its auditor?

Your accountant can act as the company's auditors if they:

  • don't fall into one of the disallowed categories (see 'Who can my company appoint as an auditor?' above);
  • don't take part in the management of the company at all; and
  • have a current audit-practising certificate issued by a recognised supervisory body.

What and who are recognised supervisory bodies?

The Professional Oversight Board recognises the following bodies as having strict regulations and a disciplinary code to govern the conduct of their registered auditors:

Can my company remove an auditor?

Removing an auditor during their term of office

The members of a company can remove an auditor at any time during their term of office by passing an 'ordinary resolution' at a general meeting, i.e. voting in the meeting. They can't do so by written resolution. The member proposing the resolution to remove the auditor must give the company 28 days' notice of their intention to do so. See Shareholder meetings for more information on resolutions.

The company must send a copy of the notice to the auditor, who then has the right to make a written response. The company must then send the auditor's response to the members before the meeting. If the auditor's response arrives too late, it must be read at the meeting if the auditor asks for this to be done. The auditor can also ask to speak at the meeting where the resolution will be considered.

The members can then pass an ordinary resolution to remove the auditor at the general meeting.

Your company must deliver Form AA03 to Companies House within 14 days of a resolution being passed to remove an auditor.

Although your company can remove an auditor from office at any time, the auditor could be entitled to compensation or damages if your company is breaching its contract by removing them.

Removing the auditor at the end their term of office

Alternatively, a company can wait until the end of the auditor's term and then decide not to reappoint him for a further term. In a private company, the members can prevent an auditor from being reappointed if members with at least 5% of the company's voting rights tell the company of their intention.

At the end of the auditor's term, the members can change the auditor either by a written resolution or by an ordinary resolution at a general meeting. If it's passed at a meeting, the shareholder proposing it must give 28 days' notice to the company. Both in the case of a written resolution and a general meeting, the company must send a copy of the proposed resolution to the outgoing auditor and to the proposed new auditor. The outgoing auditor is entitled to respond in writing and ask the company to send their (the auditor's) response to the members.

What must an auditor do when leaving?

If the auditor leaves a private company for any reason and in any manner, including resignation, the auditor must give the company a statement. This statement should either:

  • set out the circumstances surrounding their leaving if they think there are any circumstances that the members or creditors of the company should know about; or
  • state that there are no such circumstances if there are none.

If the auditor's statements set out circumstances they think the members need to know about, the company must within 14 days send a copy of the auditor's statement to all the members and anyone entitled to the accounts of the company. This won't be necessary if the company makes a successful application to the court not to do so.

The auditor must send a copy of their statement to Companies House.

In certain circumstances, your company and the auditor must also tell the 'appropriate audit authority'. There is more detailed guidance on what to do on the Financial Reporting Council website.

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