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Benefits of an audit

Effective 1 January 2016, small company limits are changing. Companies with turnover up to £10.2 million and gross assets up to £5.1 million will be eligible to file abbreviated accounts at Companies House.

These thresholds are higher than the current audit exemption limits, where companies with turnover up to £6.5 million and gross assets up to £3.26 million are not required to have their financial statements audited.  There is a possibility that these audit exemption limits will rise in the near future to mirror the abbreviated accounts’ thresholds.  As they increase, more and more companies will have to decide whether they will continue to have an audit.

In 2008, research indicated that 40% of audit exempt companies chose to have an audit (Dr Jill Collis of Brunel University). They did so because they believe they get value from the process. An audit should impose financial discipline on an entity, reduce the risk of fraud and help to identify any errors in the accounts. An audit should also ensure continued access to the financial expertise of the accounting firm through regular contact with staff who understand the business through their auditing experience.

Volunteering for an audit demonstrates to users of the accounts that you are serious about your company and your obligations as a director and the stewardship role this involves. This should help to increase confidence in the financial strength of the company.

The effect of this can be significant as demonstrated in a recent academic study ‘The impact of voluntary audit on credit ratings: evidence from UK private firms’ by Dedman and Kauser. This significant piece of research concluded that firms which retain an audit in the voluntary regime enjoy significantly better credit scores than those which opt out. Credit scores were on average 22% better when an audit was chosen. This can be the difference between getting the finance the business requires and not getting it. It will certainly make credit more expensive for the non-audited company.

The 2008 Brunel University research also showed that 50% of companies choosing not to have an audit didn’t think it saved them much money. The recent research shows that such a decision might actually cost a company much more than it saves.



Date: 19th May, 2015
Author: Andy Crook


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