An audit is simply an evaluation of something, such as a product, a system, a document, or a person. In accounting terms it is an evaluation of the truth and fairness of the statutory financial statements.


An auditor must be either:

  • a member of recognised supervisory body (ICAEW, ICAS or ACCA) and eligible under their rules, or
  • qualified by a similar overseas body and authorised by the Department for Business, Innovation and Skills.

The auditor must not be:

  • an officer or employee of the company
  • the partner of an officer or employee of the company.


Auditors should generally be appointed by the shareholders by ordinary resolution. However, the directors can appoint the company's first auditor to fill casual vacancies.

A company must inform the Secretary of State if it has failed to appoint an auditor within 28 days of circulating its accounts. The Secretary of State has power to appoint an auditor in those circumstances.

Audit exemption

For financial years starting on or after 6 April 2008, to qualify for total audit exemption a company must:

  • have a turnover of not more than £6.5m; and
  • have gross assets not more than £3.26m.

However, these exemptions do not apply to public companies, banking or insurance companies or those subject to a statute-based regulatory regime.


An auditor can resign at any time by giving written notice to the company: s516 CA06.

The resignation is effective from the date it is delivered to the company's registered office, or from a specified later date. To be effective it must be accompanied by the statement required by s519 (see below).

A company whose auditor resigns is required to inform the registrar. Failure to do so is an offence.

Under s518 CA06, an auditor who resigns can require the directors to convene a general meeting to consider his explanation of the circumstances that led to his resignation. The directors have 21 days to send out a notice convening a meeting and it must be held within 28 days of the notice.


An auditor can be removed by ordinary resolution. The resolution must be passed at a general meeting; a written resolution cannot be used to remove an auditor.

Special notice of the resolution is needed (i.e. 28 days). The company must send a copy of the resolution to the auditor and he has the right to make a statement of his case. The company then has to circulate his statement to the shareholders. However, if time does not allow for circulation, the statement can be read out at the meeting.

Notice of the resolution removing the auditor must be sent to the Registrar within 14 days.

Statement by departing auditor

Under s519 CA06, a departing auditor is required to make a statement and to deposit it with the company:

  • For quoted companies, this statement must explain the circumstances surrounding his departure.
  • For other public companies and all private companies, it should explain the circumstances surrounding his departure, unless the auditor thinks that there is no need for them to be brought to the attention of the shareholders or creditors. In that case, the statement should state that there are no such circumstances.

Unless there are no circumstances to be brought to the attention of shareholders and creditors, the company is obliged to circulate the statement to everyone to whom it needs to send the annual accounts. It must do this within 14 days of receiving it.

If the company does not want to circulate the statement, it can apply to the court for an order that it need not circulate the statement.


The auditor has a statutory duty to report to the members on whether the accounts:

  • give a true and fair view and
  • have been properly prepared in accordance with the Companies Act and the relevant financial reporting framework.

The auditor must investigate and form an opinion as to whether:

  • proper books of accounting records have been kept
  • proper returns adequate for their audit have been received from branches not visited by them
  • the accounts are in agreement with the books of account and returns
  • the information given in the directors' report is consistent with the accounts.

If the auditor is dissatisfied with the findings of his investigation he must qualify the audit report.

The report (whether qualified or unqualified) must state the name of the audit firm, or if an individual has been appointed as auditor, his name. Where the auditor is a firm, the senior statutory auditor must sign the report in his own name on behalf of the firm.

Under s507 CA06 it is a criminal offence to knowingly or recklessly cause an audit report to include anything that is misleading, false or deceptive, or to omit a required statement of a problem with the accounts or audit. The offence carries an unlimited fine.

There could also be liability under the tort of negligence for including misleading accounts.

Companies Act liability

s507 of the Companies Act 2006 (s507 CA06) makes it an offence for an auditor to recklessly cause an auditor's report to contain any matter that is misleading or false to a material extent. The offence is punishable by a fine.

s532 CA06 makes any provision exempting auditors from or indemnifying them against liability for negligence void in relation to providing audited accounts.

s534 CA06 provides that a company may enter into a liability limitation agreement with an auditor, limiting his liability for negligence (among other things) in the course of auditing accounts.


The auditor has the right to:

  • receive notice of, attend and speak at general meetings.
  • access the books at all times
  • require such information and explanations from the company's officers and employees as the auditor thinks fit for the performance of his duties (it is a criminal offence to fail to provide the information requested, unless it was not reasonably practicable to do so).
Created at 8/21/2012 2:27 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/14/2012 3:36 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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