Introduction to audits
The UK economy continues to perform well and although the true impact of Brexit is still unknown, a weak pound has made Britain a cheaper place to invest for overseas companies.
If you are an overseas company looking to set up a UK subsidiary then there are certain compliance requirements that you will need to consider.
In the UK, all companies are required to prepare a set of financial statements and a corporation tax return which is filed with the tax authorities, HM Revenue & Customs.
Audit requirements for UK subsidiaries
With regards to the financial statements, these may need to be audited. Under UK company law a small company is usually exempt from audit. A company will be considered small if for both the year and the prior it met 2 out of 3 of the following conditions
- Turnover less than £10.2 (ii) Total assets of less than £5.1m (iii) less than 50 employees.
Where the company is part of a group then one has to consider the whole group to see if meets criteria as small. So, although a subsidiary on its own may qualify as small because it is part of a group that is not defined as small, it will mean that the subsidiary’s financial statements will be subject to audit.
Only a firm of registered auditors can perform an audit. One can check if a firm is registered to carry out this work by going to the following website www.auditregister.org.uk
The statutory financial statements can be prepared under UK GAAP or IFRS. Audits are performed in accordance with International Standards on Auditing (UK) and applicable law.
The auditor’s report will express an opinion on the financial statements as to whether they give a true and fair view but also whether they have been prepared in accordance with UK GAAP or IFRS as well as the requirements of UK company law.
The going concern period of assessment extends to 12 months from approval of the financial statements so if there are issues then this will be included within their audit report.
The audit objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes their opinion. For a description of the auditor’s responsibilities then follow the link below https://www.frc.org.uk/auditorsresponsibilities
The cost of audits
Audits are usually carried out on a fixed fee basis and depending on the nature and complexity of the transactions the time taken to review how these have been accounted for will have a bearing on this. Most auditors will take a risk based approach to the audit, so depending on the audit risks identified this will also be a factor on the cost.
Benefits of an audit
Even though a subsidiary may be exempt from audit there are benefits that can still be had.
Where the shareholders are not involved in the day to day running of the business for example since they are based overseas, then an audit can help provide them with assurance.
In the event that the parent company decides to sell the subsidiary then audited financial statements will add credibility to the figures provided to any prospective purchaser.
A company’s credit rating may be affected by not having an audit which could impact when it comes to obtaining credit from suppliers or obtaining finance. Some bank agreements require audited financial statements to be submitted to them within a certain timeframe of the year end.
An audit should not just be seen a compliance burden as there are also benefits to be had. For example, the auditor will write to management about the weaknesses identified around the accounting system and related controls and will suggest improvements to deal with these.
Find out more about audits
If you would like to know more then please contact Wisteria Limited, Chartered accountants and registered auditors, on +44 (0) 208 429 9245. Or alternatively email us at [email protected]