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This time, we break down the two-year rule.
As we’ve covered previously, UK audit thresholds have undergone some big changes in recent years. However, understanding how they apply isn’t just about your current year’s figures.
Ultimately, understanding audit thresholds correctly the first time saves your business time and money, which is exactly why we’re here to make it as clear as possible.
Current UK audit criteria
In simplest terms, the audit threshold determines whether your company requires a statutory audit.
To qualify for exemption, your company must meet at least two of these three criteria:
- Have an annual turnover of no more than £15 million
- Have total assets of no more than £7.5 million
- Have 50 or fewer employees
However, this is just a top-level view of the criteria as the two-year rule adds in extra complexity to whether you qualify for exemption.
What is the two-year rule and how does it work?
To change your company’s audit status, you need to either meet or fail to meet the audit exemption criteria for two consecutive years.
This is known as the two-year rule and exists to provide stability and prevent your audit requirements from changing due to temporary fluctuations in your business.
For example, if your growing company exceeds the turnover and asset thresholds for the first time, you won’t immediately need an audit. Only if you exceed these thresholds for a second consecutive year would your audit exemption be affected.
This can give businesses vital extra time to prepare for a mandatory audit.
When does the two-year rule not count?
Some companies will still have to be statutorily audited, even if they otherwise meet the two-year exemption criteria discussed above.
These tend to be businesses operating in tightly financially regulated sectors, or that need additional scrutiny for other reasons, like being a public company. Here are some other examples:
- Banking institutions
- Insurance companies
- MiFID investment firms or UCITS management companies
- Companies that are part of a larger group that isn’t classified as small
- Companies whose shares are traded on regulated markets in any European state
- Any subsidiary company within a group that isn’t small
Approaching audit thresholds? Plan ahead
Understanding how these audit threshold rules work can help you understand when your company is approaching the boundaries of needing a statutory audit. Don’t be taken by surprise – think ahead and make time for strategic growth planning.
Here’s what to consider.
Internal controls
Even without a statutory audit requirement, you need reliable systems to manage your finances. This means having clear processes for tasks like checking supplier invoices, managing cash flow, reconciling bank accounts, and tracking business expenses.
Many businesses find that setting up these robust financial checks and controls early makes the transition to statutory audits much smoother when the time comes.
Monitor your position
Use regular financial reporting to keep track of where your company stands in relation to the thresholds. Remember, you’ll need to exceed them for two consecutive years before requiring an audit, so regular monitoring helps you prepare in good time.
Consider your company structure
If you’re part of a group, changes in any group company could affect audit requirements for all e.g. by being acquired by a medium or large sized group where statutory audits are mandatory. Factor this into your planning.
Planning a sale or investment?
If so, you’re likely to need audited accounts even if you’re currently exempt. Building this into your timeline early can prevent delays down the line at crucial points in your timeline.
There are other situations like this one where there are advantages of auditing, even if you’re currently exempt.
Expert audit support when you need it
Determining your audit requirements isn’t always straightforward, especially when the two-year rule comes into play. At Williamson & Croft, we provide comprehensive auditing services to get to grips with your liability and plan for the future. Get in touch with the expert team at Williamson & Croft today to start the conversation.