A small private company that is exempt from audit can still choose to have one, and it often makes sense when a lender, investor, buyer or major customer wants independently audited figures, or when the company expects to outgrow the exemption soon. The trade off is cost against the reasonable assurance opinion an audit gives. A review engagement sits in between and is sometimes enough, so check what the reader of the accounts actually requires first.

When is a small company exempt, and can it be made to have an audit?

For financial years beginning on or after 6 April 2025, GOV.UK explains that a private company may qualify for audit exemption if it meets at least two of three tests: turnover of no more than £15 million, assets of no more than £7.5 million and no more than 50 employees on average. Some companies cannot use the exemption at all, such as public companies, banking and insurance companies and MiFID investment firms. The detail is in audit exemption for small companies.

Even an eligible company can be required to have an audit. GOV.UK notes that an audit is needed if the articles of association say so. Under section 476 of the Companies Act 2006, members holding at least 10% in nominal value of the issued share capital, or of any class of shares, can require an audit by notice. If there is no share capital, 10% of the members can do so. The notice cannot be given before the financial year it relates to and must be given no later than one month before that year ends.

A voluntary audit is different: nobody is forcing it, and the directors decide it is worth paying for.

Why do exempt companies choose an audit?

The FRC’s information sheet for smaller entities sets out the benefits plainly. For many banks, lenders and investors, audited accounts signal robust business practices and may inform their decisions to allocate capital. In practice, the FRC says, an audit may lead to lower risk premiums, be a precondition of a loan agreement or be required under a contract. It adds that the auditor can give an informed perspective on controls and processes, while remaining independent of management decisions.

Research on the small company exemption published by the then Department for Business, Energy and Industrial Strategy in January 2017 found that the most common reason for companies to keep having audits was to meet lenders’ requirements, cited by 17% of those not taking the exemption, including audits as a precondition for loans or investments. Other reasons included the requirements of trustees, shareholders, funders or regulators, group policy, a view that audits add credibility and good financial discipline, and inertia. Notably, 16% of those still being audited had not realised they were eligible for exemption.

Typical situations where an audit can be worth the fee include:

  • a bank facility or invoice finance agreement that requires audited accounts;
  • outside shareholders or investors who are not involved in running the business;
  • a planned sale, where a buyer and its advisers will want reliable historical figures;
  • tenders or contracts with large customers that ask for audited accounts; and
  • rapid growth that will take the company over the thresholds within a year or two.

What does an audit give that a review or compilation does not?

Service Assurance Typical report
Audit Reasonable assurance Opinion on whether the accounts give a true and fair view
Review Limited assurance Conclusion that nothing has come to the accountant’s attention suggesting the accounts are materially misstated
Compilation None Report that the accounts were prepared from the company’s records and explanations

The FRC describes reasonable assurance as obtained when the auditor has reduced the risk of not identifying a material misstatement to an acceptably low level, by assessing where risks lie and gathering sufficient appropriate evidence. It is not absolute assurance. A review relies on procedures that do not provide all the evidence an audit would. If a lender will accept a review, it may cost less; see review engagements and the accountants’ report on unaudited accounts.

Why does timing affect a future sale or growth?

The first audit of a company whose previous accounts were unaudited is an initial audit engagement under ISA (UK) 510. The auditor still needs sufficient appropriate evidence that the opening balances do not contain material misstatements. If it cannot get that evidence, paragraph 10 requires a qualified opinion or a disclaimer. ISA (UK) 710 paragraph 14 also requires an Other Matter paragraph stating that the corresponding figures are unaudited.

The practical point is that problems such as an unobserved stock count at the previous year end are easier to deal with if the audit starts a year early. A company that expects to cross the thresholds, raise equity or be sold may find a voluntary audit in the preceding year makes the first required audit cleaner. See first year audits and opening balances.

How is a voluntary audit set up?

Section 485(3)(b) of the Companies Act 2006 lets the directors appoint an auditor following a period in which the company, being exempt, had no auditor, at any time before the next period for appointing auditors. The members can also appoint by ordinary resolution under section 485(4). The auditor must be eligible as a statutory auditor; see registered auditors and appointing and removing auditors.

Once the company is not claiming exemption, section 495 requires the auditor to report to the members on the annual accounts, identifying the accounts, the framework and the auditing standards used. Three filing points follow:

  • the balance sheet should not carry the audit exemption statements under section 475;
  • if the company files its profit and loss account, it must file the auditor’s report too (section 444(2)); and
  • if it files filleted accounts, the notes must state whether the auditor’s report was qualified or unqualified, give the basis of any qualification, mention any emphasis of matter and name the auditor and senior statutory auditor (section 444(5A) and (5B)), unless the company uses the micro entity provisions.

How might the decision look in practice?

Illustration only. A manufacturing company has turnover of £6 million, assets of £3 million and 30 staff, so it is exempt. Its bank is offering a £1.5 million facility for new equipment and the draft facility letter asks for audited accounts within six months of each year end. An accountant quotes £12,000 for an audit and £5,000 for a review. The directors ask the bank whether a review would satisfy the covenant; the bank says no, because of the size of the facility. The directors appoint an auditor in the first quarter of the year, so that the auditor can attend the year end stock count, and the cost is weighed against the lower interest margin the bank offers.

What mistakes come up most often?

  • Not reading the facility letter or contract. Some lenders accept a review; others specify an audit.
  • Appointing the auditor too late. A missed stock count can lead to a qualified opinion in a first year audit.
  • Leaving exemption statements on the balance sheet. They are wrong once the accounts are audited.
  • Using the same firm to prepare and audit without safeguards. See self review threats in accounts preparation.
  • Missing a shareholder’s notice. A valid section 476 notice makes the audit compulsory for that year.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.