Audit Exemption

To ease red tape on smaller companies, company law allows them to take advantage of audit exemption.

While there can be good commercial reasons to continue having an annual audit, read on to see what’s involved in audit exemption.

Criteria

Company law in Ireland provides that private companies meeting certain criteria can take advantage of an exemption from the requirement to have their accounts audited.

The criteria are set out in Companies Act 2014 which can be broken down into these 2 areas.

1. The company needs to considered ‘small’.

  • To be classed as ‘small’ the company must meet at least two out of the following three limits:
    • turnover is less than €8.8 million for the year.
    • assets are less than €4.4 million at the end of its financial year.
    • the average number of employees is less than 50 for the year.
  • A group company cannot be considered small unless the group as a whole qualifies as a small group (i.e. the entire group meets the same turnover, assets and employee limits set out above).
  • A holding company that prepares group accounts cannot be considered small.
  • A company that undertakes any of the 18 activities set out in Schedule 5 of the Companies Act 2014 cannot be considered ‘small’. (Broadly speaking these relate to financial, banking, insurance, investment or trade union activities.)

2. Annual return filing

  • the annual returns must be up-to-date having been filed on time with the Companies Registration Office and abridged accounts attached.

Small company status

Unless it’s the first year of trading, a company must look at both the current AND the preceding year to see whether it’s considered ‘small’ and so can take advantage of audit exemption.

When it comes to looking at the turnover, assets and employee limits (see above) the company needs to meet at least 2 of the 3 limits in one of these 3 ways:

  1. The company meets 2 out of the 3 limits in both the current and preceding year.
  2. The company meets 2 out of the 3 limits in the current year. And in the preceding year it qualified as a small company (perhaps under different criteria).
  3. The company meets 2 out of the 3 limits in the preceding year AND it qualified as small in the preceding year.

What’s interesting about the third way is that a company can keep its audit exemption even if its above the limits in the current year.

Example

Say a company that otherwise meets the audit exemption criteria has the following:

  • Current year:
    • Turnover – €7.5m
    • Assets – €3.5m
    • Average employees – 60
  • Preceding year:
    • Turnover – €6.8m
    • Assets – €3.2m
    • Average employees – 52

The company meets at least 2 out of the 3 limits (turnover and assets) for both years and so it qualifies as ‘small’ and can take advantage of audit exemption.

Then the next year:

  • Current year:
    • Turnover – €9.2m
    • Assets – €3.7m
    • Average employees – 61
  • Preceding year:
    • Turnover – €7.5m
    • Assets – €3.5m
    • Average employees – 60

For the current year the company doesn’t meet the limits. But, it does meet at least 2 out of 3 of the limits in the preceding year AND it qualified as ‘small’ in that year (as we demonstrated above). As a result it will still be considered ‘small’ this year and so can take advantage of audit exemption again.

Late annual return

It’s important to note that, if a company’s annual return is filed late, then entitlement to audit exemption is lost for the year the return is filed late AND also the subsequent year. Only in the third year would it be able to get back audit exemption (assuming the return is filed on time in year 2).

For example, suppose a company files its return late in 2015. It then loses its audit exemption and must file audited accounts in 2015 and 2016. It must then file its 2016 return on time to get back audit exemption. But the first year that the audit exemption will be available is 2017.

Clearly it’s vital that a company files its annual returns on time!

How does the company take advantage of audit exemption?

There are 3 things that a company must do to take advantage of audit exemption.

  • The company must pass a resolution stating that the company is taking advantage of audit exemption
  • The directors must keep a written record of the resolution and it must be available for inspection if required.
  • The directors must make certain declarations on the face of the balance sheet and above the directors’ signatures as outlined below.

An interesting point to note is that the members of the company (usually shareholders) have the right to object to the company taking advantage of audit exemption.

However, this is unlikely to happen in practice because the member must hold in excess of 10% of the voting rights AND they have to serve notice of their objection in:

  • the financial year prior to the year in which the company is taking advantage of the exemption, or
  • during the first 11 months of the financial year in which the company is taking advantage of the exemption.

What are the directors’ declarations?

On the face of the balance sheet the directors must make declarations that:

  • The company is availing itself of the exemption provided for by Chapter 15 of Part 6 of the Companies Act 2014.
  • The company is availing itself of the exemption on the grounds that the conditions specified in s.358 are satisfied.
  • The shareholders of the company have not served notice on the company under s.334(1) in accordance with s.334(2).
  • The directors acknowledge the company’s obligations under the Companies Act 2014, to:
    • keep adequate accounting records and prepare financial statements which give a true and fair view of the assets, liabilities, and financial position of the company at the end of its financial year and of its profit or loss for such a year; and
    • to otherwise comply with the provisions of Companies Act 2014 relating to financial statements so far as they are applicable to the company.

Failing to include these declarations is an offence and makes the directors liable to prosecution.

Call Now

Please call Noel Murphy today on 021 431 0266 if you need further information on audit exemption or a consultation.

 

.Related Article:           Making the Most of Your Annual Audit