Small Companies: Don’t Forget to Claim Audit Exemption

Did you know that many small companies do not require an audit of their Financial Statements? Companies that meet certain criteria can qualify for audit exemption. Audit exemption removes the need for an audit but accounts still need to be prepared and submitted to the Companies Registration Office (CRO) and Corporation Tax returns will still need to be filed. Proper books and records will also still need to be kept, even if an auditor is not delving into them in detail.

Instead of filing audited accounts with the CRO, a company can either prepare and submit their own accounts (in the correct format) or ask an accountant to prepare them for them.

What’s an audit?

An audit is an examination of the Financial Statements of a company by an independent person, an auditor. The auditor attaches a report to the Financial Statements stating that they show a true and fair view of the state of affairs of the company and of the profit or loss for the period (or otherwise, as may be the case). The auditor will also review the Financial Statements to ensure that they have been prepared in accordance with company law and accounting standards.

Auditors need to follow international auditing standards, even for small audits, and are subject to regulation by their professional body. An audit can be a costly process, so availing of audit exemption can significantly save on professional fees.

Criteria

In order to avail of audit exemption, a company must satisfy all of the following conditions, both in respect of the current financial year and the preceding financial year (unless it is the company’s first financial year):

• turnover less than €7.3 million for the year
• balance sheet total less than €3.65 million at the end of its financial year
• the average number of employees less than 50 for the year
• the company must not be a parent or subsidiary
• the company must not be regulated under financial, banking, insurance, investment or trade union legislation
• the company must not be a public company or limited by guarantee
• the annual returns must be up to date having been filed on time with the Companies Registration Office and abridged financial statements attached.

As the above shows, it is vital that annual returns are filed on time with the CRO. Missing an annual return deadline can have costly repercussions in terms of filing fees and the requirement to have an audit.

Before claiming audit exemption, the directors need to be sure that an audit isn’t required for other purposes, for example, as a condition of a grant claim. Banks may also require audited accounts.

How does a company apply for audit exemption?

The directors need to:

1. Pass a resolution stating that the company is taking advantage of audit exemption.
2. Keep a written record of the resolution which is available for inspection.
3. Make certain declarations on the face of the audit exempt Balance Sheet stating that the company is availing of audit exemption.
4. Inform the auditor of the decision to claim audit exemption.

Shareholders have the right to object to the company availing itself of audit exemption by serving notice on the company. Shareholders holding in excess of 10% of the voting rights (in aggregate) must serve notice of the objection in the year prior to the year in which exemption is being availed of or during that financial year (at least one month before the year end).

What happens to the auditor?

Once the auditor has received notification that the company will claim audit exemption, he/she must serve notice on the company within 21 days. The notice specifies whether there are any circumstances that need to be brought to the attention of members or creditors in relation to the company’s decision to avail of audit exemption. The auditor must send a copy of this notice to the CRO within 14 days.

The auditor can be retained as an accountant to prepare the Financial Statements, annual return to the CRO and corporation tax return.  The accountant does not need to be concerned with following international auditing standards although he/she will need to prepare Financial Statements in accordance with accounting standards and company law. The accountant may attach an “Accountants Report” to the audit exempt Financial Statements but an opinion is no longer given on the Financial Statements. Qualifications are not given and as such there is no “qualified” report. However, if the accountant considers that the Financial Statements contain errors or are misstated, he/she will not issue an Accountants Report.

Auditing standards are getting stricter every year and an audit can place disproportionate burden on a small company. Therefore it is vital for directors of small companies to claim audit exemption where possible and to keep it by submitting annual returns on time.

If you have any queries, please email me on blog@parfreymurphy.ie or leave a comment.