Newly audit-exempt? The case for keeping a voluntary audit

Exempt from audit is not the same as better off without one

For financial years beginning on or after 6 April 2025, a company qualifies as small, and can therefore potentially claim exemption from statutory audit, if it meets at least two of three tests: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, and an average of no more than 50 employees. The previous limits were £10.2 million, £5.1 million and 50 employees (GOV.UK, Companies House guidance).  Further detail is provided below.

The government estimates, as reported by ICAEW, that around 14,000 companies and LLPs will move from medium-sized to small under the new limits. For many of those businesses, audit has changed from a legal requirement to a decision.

Meeting the small-company size thresholds does not automatically mean an audit is unnecessary. Group membership, the nature of the company’s activities, its articles and demands from shareholders or lenders can all mean an audit is still required.

That decision is not only about the audit fee. A company that stops being audited also gives up the independent opinion that its lenders, investors and shareholders may be relying on. This article sets out what changes when audit stops, five reasons directors keep or start a voluntary audit, who it suits and how to decide. It is written for companies that sit between the old and new limits, companies funded by lenders or investors, and owner-managed companies with shareholders outside the business.

What changes when a company stops being audited

Stopping an audit changes more than the fee:

• The independent opinion goes. An auditor reports on whether the accounts give a true and fair view (GOV.UK). Without an audit, nobody independent has given that opinion.
• Lenders and investors lose a point of reliance. Research on UK private companies reports that lenders often require audits and that companies are more likely to buy a voluntary audit when they wish to raise capital (The Demand for Audit in Private Firms). A facility or investment agreement may already require audited accounts.
• Shareholders outside the business lose independent assurance. They rely on the directors’ own figures instead.
• The directors confirm more themselves. Unaudited accounts carry statements on the balance sheet that the company was entitled to exemption, that members have not required an audit and that the directors acknowledge their responsibilities (GOV.UK). From 1 April 2028 they must also state which exemption is relied on and confirm that the company qualifies (ICAEW).

None of this makes exemption the wrong choice. It means the audit fee is one side of the comparison, and the other side depends on who relies on the company’s accounts.

Five reasons directors keep or start a voluntary audit

Lender confidence

Lenders often require audited accounts (The Demand for Audit in Private Firms). A company that qualifies for exemption can still choose to provide them. Check your existing facility agreements first, because a requirement may already be written into them.

There is research behind the point. A review of the academic literature on private company audit reports a strong positive relationship between voluntary audit and credit ratings in large UK samples, and US evidence of lower interest rates on revolving credit agreements for small private companies (The Demand for Audit in Private Firms). These are associations, and the interest rate evidence is from the US, so they show that audited companies tend to borrow on better terms rather than that an audit guarantees them.

Selling the business or raising investment

The same research finds that companies wishing to raise capital are more likely to buy a voluntary audit (The Demand for Audit in Private Firms). Buyers and their advisers test financial information closely in due diligence, and a run of audited accounts gives them an independently examined starting point. An audit history does not replace due diligence, but a company expecting a sale or an investment round can build that history in advance.

Shareholders who are not involved day to day

Where there are minority shareholders, outside investors or partners with different levels of involvement, an audit provides independent assurance over whether the financial statements are free from material misstatement and give a true and fair view (GOV.UK). That is reasonable assurance, not a guarantee that every figure is accurate and complete. Research on UK private companies also finds that those with more dispersed ownership are more likely to buy a voluntary audit (The Demand for Audit in Private Firms).

Preparing for a future statutory audit

A growing company that expects to stop qualifying as small may choose to begin voluntary audits before audit becomes compulsory. That gives the finance team experience of the audit process before the first mandatory year. Size is judged on two of the three limits, not on turnover alone, so when an audit becomes compulsory also depends on the balance sheet total, employee numbers and group position (GOV.UK).

What an audit can show the board

Research on micro-companies in Finland, drawing on interviews with owner-managers, found that audit was valued for reducing control risk and business risk for management (The Demand for Voluntary Audit in Micro-Companies). The value to a board depends on how the audit team communicates its findings.

Who a voluntary audit suits

A voluntary audit is most worth considering for:

• companies whose lenders, investors or parent company already expect audited accounts
• companies funded by private equity or other outside investors
• owner-managed companies with shareholders outside management
• companies that expect to stop qualifying as small, through growth, an acquisition or joining a group
• companies preparing for a sale, a refinancing or an investment round

For a straightforward owner-managed company with no external investors, borrowing requirements or planned transaction, the exemption may be enough. A review of the research on private company audit finds that companies choosing an audit generally judge its benefits to outweigh the cost, but that voluntary audit is least common among the smallest companies, which suggests they benefit least (Auditing private companies: what do we know?).

The costs to weigh are:

• the audit fee, which rises with complexity rather than turnover alone
• finance team time, particularly around the year end
• the need to resolve any weak controls or poor record-keeping the audit exposes

Depending on the objective, a narrower engagement may answer a specific question at lower cost than a full audit of the financial statements. Agreed-upon procedures report factual findings only and are not assurance engagements (ICAEW assurance glossary), while a review engagement provides limited assurance on financial statements (ICAEW technical release TECH 09/13AAF). A buyer in due diligence, for example, may only want comfort over revenue recognition. Agree with the person asking what evidence would satisfy them before committing to a full audit.

How UHY Williamson Croft supports a first voluntary audit

A first audit goes more smoothly when the timetable, scope and information list are agreed before the year end. Our article on making your audit run smoothly sets out what finance directors can expect from an audit team.

Is a voluntary audit right for your company? Five questions

1. Does any lender, investor or parent company require audited accounts now, or will it within the term of the facility or investment?
2. Is a sale, refinancing or new investment likely in the next few years?
3. Are any shareholders outside day-to-day management?
4. Does the company expect to stop qualifying as small, through growth, an acquisition or joining a group?
5. Would the finance team benefit from independent challenge of its controls and processes?

Any yes is worth a conversation, and a yes to the first question usually settles it. If all five answers are no, the exemption probably fits, and a narrower engagement may answer any specific question at lower cost.

Check your exemption position first

A voluntary audit is an audit a company commissions although the law does not require one. Where an exempt company chooses to have its financial statements audited, the audit is conducted under the applicable auditing standards, including International Standards on Auditing (UK), and the auditor reports on whether the accounts give a true and fair view. The principal difference is that the company has chosen the audit rather than being required to have one.

Before treating audit as optional, check five points:

• The two-of-three test. The company must meet at least two of the three small-company limits above (GOV.UK).
• Which year the new limits apply to. They apply to financial years beginning on or after 6 April 2025, and the previous limits apply to an accounting period that starts before that date (same source). A company with a 31 March 2026 year end is therefore still tested against the old limits for that year, and the first March year end that uses the new limits is 31 March 2027 (ICAEW).
• The two-year rule. An established company generally changes status only when it meets or ceases to meet the conditions in two consecutive years, under section 382 of the Companies Act 2006 (GOV.UK). A transitional rule means that, for a financial year beginning on or after 6 April 2025, the new limits are also used when looking back at the previous year for that test (ICAEW).
• Group position. A parent or subsidiary company in a group that was not a small group, or that was an ineligible group, cannot use the small-company audit exemption, although other exemptions may apply. A group qualifies as small if it meets at least two of: aggregate turnover of no more than £15 million net (£18 million gross), an aggregate balance sheet total of no more than £7.5 million net (£9 million gross), and an average of no more than 50 employees (GOV.UK).
• Excluded companies. Section 478 of the Companies Act 2006 excludes various categories of company from the exemption (explanatory notes). Companies House guidance lists public companies, authorised insurance companies and businesses carrying on insurance market activity, banking companies and e-money issuers, MiFID investment firms, UCITS management companies, master trust pension scheme funders, special register bodies and employers’ associations (GOV.UK).

An audit can also be required for reasons other than company size: a lender’s facility terms, an investor’s agreement, a parent company, or the company’s own articles. In addition, members holding at least 10% of the company’s issued share capital, or 10% of any class of shares, can require an audit, and for a company without share capital the threshold is 10% of the members. Notice cannot be given before the financial year it relates to and must be given no later than one month before the end of that year (Companies Act 2006, section 476, GOV.UK).

Frequently asked questions

Talk to us about keeping or starting a voluntary audit

If your company is newly exempt, or expects to stop qualifying as small in the next couple of years, Tor Stringellow, Partner at UHY Williamson Croft, can review your position and talk through the options with you.

The audit thresholds and rules in this article are correct for financial years beginning on or after 6 April 2025.