A statutory audit is an independent examination of a company’s financial statements by a registered auditor. The purpose is to give shareholders and other stakeholders confidence that the company accounts present a true and fair view of the company’s financial position.
Most UK small businesses are exempt from audit, but understanding the thresholds matters because crossing them triggers significant compliance costs.
Who Needs an Audit?
Under the Companies Act 2006, all UK companies must have their accounts audited unless they qualify for an exemption. The main exemption is for small companies.
Small Company Exemption
A company qualifies as small (and is exempt from audit) if it meets at least two of three criteria in the current and preceding financial year. These thresholds apply to financial years beginning on or after 6 April 2025:
| Criterion | Threshold |
|---|---|
| Annual turnover | Not more than GBP 15 million |
| Balance sheet total | Not more than GBP 7.5 million |
| Average number of employees | Not more than 50 |
A company must meet two of the three thresholds for two consecutive years before it qualifies (or loses) the exemption. A new company qualifies if it meets the criteria in its first year.
Companies That Cannot Claim the Exemption
Even if a company meets the size criteria, the following types are not eligible for audit exemption:
- Public limited companies (PLCs)
- Banks, insurance companies and other regulated entities
- Companies that are part of a group (unless the group itself qualifies as small)
- Companies whose articles of association require an audit
- Companies where shareholders holding at least 10% of shares request an audit
Shareholder Right to Request an Audit
Members (shareholders) holding at least 10% of the issued share capital (or 10% of any class of shares) can require the company to have an audit. The request must be made in writing and received at least one month before the financial year end.
This right exists to protect minority shareholders who want assurance that the accounts are accurate, particularly in companies where they are not involved in day-to-day management.
Group Company Rules
If a company is part of a group, the audit exemption is only available if the group as a whole qualifies as small. The aggregate thresholds for a small group are:
| Criterion | Gross threshold | Net threshold |
|---|---|---|
| Turnover | GBP 18 million | GBP 15 million |
| Balance sheet total | GBP 9 million | GBP 7.5 million |
| Employees | 50 | 50 |
Gross thresholds apply before intercompany eliminations; net thresholds apply after. The group must meet two of the three criteria.
What a Statutory Audit Involves
If your company requires an audit, this is the typical process:
1. Planning
The auditor reviews the company’s operations, identifies key risks and plans the audit procedures. They assess internal controls and decide which areas require detailed testing.
2. Fieldwork
The auditor tests a sample of transactions and balances, including:
- Revenue: checking invoices, contracts and bank receipts
- Expenses: verifying supplier invoices and payments
- Bank balances: confirming directly with the bank
- Debtors and creditors: sending confirmation letters to third parties
- Stock: attending the year-end stock count (if material)
- Fixed assets: verifying existence and checking the fixed asset register
- Payroll: reviewing a sample of PAYE calculations and RTI submissions
3. Completion
The auditor reviews the accounts for compliance with UK GAAP (FRS 102), checks that disclosures are complete and considers any events after the balance sheet date.
4. Audit Report
The auditor issues an audit report that is included with the filed accounts. The report states whether the accounts give a true and fair view. The possible opinions are:
| Opinion | Meaning |
|---|---|
| Unqualified | Accounts are materially correct |
| Qualified | Accounts are correct except for a specific matter |
| Adverse | Accounts do not give a true and fair view |
| Disclaimer | Auditor could not obtain sufficient evidence |
The vast majority of small company audits result in an unqualified opinion.
Cost of an Audit
Audit fees vary by company size, complexity and location. Typical ranges for UK small businesses:
| Annual turnover | Indicative audit fee |
|---|---|
| GBP 1-5 million | GBP 5,000-15,000 |
| GBP 5-10 million | GBP 10,000-25,000 |
| Above GBP 10 million | GBP 20,000+ |
These fees are in addition to the cost of preparing the accounts themselves. The audit fee is a tax-deductible expense for Corporation Tax purposes.
Preparing for an Audit
Companies can reduce audit fees and disruption by being well prepared:
- Reconcile all bank accounts before the auditor arrives
- Complete the year-end checklist including accruals, prepayments and deferred income
- Maintain a clean trial balance with no unreconciled items or suspense balances
- Keep supporting documents organised and accessible (invoices, contracts, board minutes)
- Prepare schedules for fixed assets, debtors, creditors and provisions
Well-prepared companies pay less because the auditor spends less time requesting information and chasing missing documents.
Voluntary Audit
Some companies that are exempt from audit choose to have one anyway. Common reasons include:
- Bank or lender requirements: lenders may require audited accounts as a condition of finance
- Investor confidence: potential investors or acquirers expect audited figures
- Internal assurance: the directors want independent confirmation that the financial controls and record keeping are sound
- Tender requirements: some public sector contracts require audited accounts
If your company is growing and likely to need external funding, establishing an audit relationship early makes the process smoother when it becomes mandatory.