Appointment of auditors
1. What is an auditor?
An auditor is a person who makes an independent report to a company's members as to whether the company has prepared its financial statements in accordance with Company Law and the applicable financial reporting framework. The report must also state whether a company's accounts give a true and fair view of its affairs at the end of the year.
2. How do I appoint an auditor?
An auditor must be appointed for each financial year, unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required. The rules are different for public and private companies.
For public companies, the directors appoint the first auditor of the company. The auditor then holds office until the end of the first meeting of the company at which the directors lay its accounts before the members. At that meeting, the members of the company can re-appoint the auditor, or appoint a different auditor, to hold office from the end of that meeting until the end of the next meeting at which the directors lay accounts.
For private companies, the directors appoint the first auditor of the company. The members may then appoint or re-appoint an auditor each year at a meeting of the company's members, or by written resolution, within 28 days of the directors sending the accounts to the members. If they do not do so for a particular year, however, the appointed auditor remains in office until the members pass a resolution to reappoint him or to remove him as auditor (5% of members, or fewer if the articles say so, can force the consideration of a resolution to remove an auditor). This provision about remaining in office, however, does not apply if the auditor’s most recent appointment was by the directors or the company’s articles require annual appointment.
3. What does an auditor do?
The auditor conducts the audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in preparing the financial statements.
4. What does an auditor’s report include?
The auditor’s report must include:
An introduction identifying the accounts that were the subject of the audit;
A description of the scope of the audit identifying the auditing standards used and the financial reporting framework used in the preparation of the accounts;
A statement as to whether in the auditor’s opinion the accounts have been prepared in accordance with the Companies Act 2006 and, where appropriate, in accordance with Article 4 of the EU Regulation on International Accounting Standards, (Regulation (EC)1606/2002, the "IAS Regulation");
A statement as to whether they give a true and fair view of the company’s or (in the case of group accounts) group’s financial affairs;
A statement as to whether the directors’ report is consistent with the accounts;
If the auditors are of the opinion that the company has not kept adequate accounting records, a statement to that effect; and
If the company has not provided the auditors with all the information they need to complete the report, a statement to that effect.
The auditor’s report must be either unqualified or qualified and include a reference to any matters to which the auditors wish to draw attention by way of emphasis without qualifying the report. The auditors will qualify the report where either there has been a limitation on the scope of the auditors’ work or where there is a material disagreement between the company and the auditors about the accounts.
5. Who is responsible for signing the auditor’s report?
The auditors must sign and date the report they provide to the company upon completion of the audit.
Where the auditor is a firm, the senior statutory auditor must sign the original auditor’s report in his own name on behalf of the firm. He must also date the signature. The company must state the name of the senior statutory auditor in copies of the auditors’ report which it publishes. Copies of the auditor’s reports delivered to the registrar must state the names of the audit firm and the senior statutory auditor but need not be signed.
6. Are there any exemptions from stating the auditor’s name on the auditor’s report?
Yes. If the company considers that there is a risk that the auditor or any other person would be at risk of serious violence or intimidation if the auditor‘s name (or the name of the “senior statutory auditor” who signed the report on the audit firm’s behalf) appeared on filed or published copies of the report, they may pass a resolution to omit the name from those copies.
Do not send a copy of the resolution to Companies House, but you should send notice of it to the following address:
The Secretary of State
PO Box 4082
Cardiff CF14 3WE
The notice must state:
the name and registered number of the company;
the financial year of the company to which the report relates; and
the name of the auditor and (where the auditor is a firm) the name of the person who signed the report as senior statutory auditor.
The auditor’s report attached to the accounts would need to contain the following statement:
‘The company has passed a resolution in accordance with section 506 of the Companies Act 2006 that the auditor’s name should not be stated.’
7. Can my accountant be my auditor?
An auditor must be independent of the company. Therefore, you cannot appoint a person as an auditor if they are:
an officer or employee of the company or an associated company; or
a partner or employee of such a person, or a partnership of which such a person is a partner
If your accountant does not fall into one of the above categories and if he or she has a current audit-practising certificate issued by a recognised supervisory body, they may act as the company's auditors.
Remember: Not all members of a recognised supervisory body are eligible to act as an auditor. The appropriate supervisory body will be able to tell you whether a particular individual or firm has a current audit-practising certificate.
8. What and who are recognised supervisory bodies?
The Professional Oversight Board recognises these bodies as having rules designed to ensure that auditors are of the appropriate professional competence.
Each recognised body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The four recognised bodies are:
1. The Institute of Chartered Accountants of Scotland
21 Haymarket Yards
Edinburgh EH12 5BH
2. The Institute of Chartered Accountants in England and Wales
321 Avebury Boulevard
Milton Keynes MK9 2FZ
3. The Institute of Chartered Accountants in Ireland
32-38 Linenhall Street
Belfast BT2 8BG
4. The Association of Chartered Certified Accountants
29 Lincoln’s Inn Fields
London WC2A 3EE
9. Is an auditor usually only concerned with annual accounts?
Subject to the Auditing Practices Board ethical standards, the auditors’ statutory duties are limited to checking that there are adequate books and records, and to reporting on the annual accounts. Subject again to those ethical standards, there is nothing to stop a company employing an auditor for other purposes, such as keeping the books or compiling the tax return, provided he (or she) does not take part in the management of the company.
You should agree an engagement letter that sets out the scope of the auditor's engagement and the form of any reports that the auditor will make.
Removal of auditors
10. Can a company remove an auditor?
Yes. The members of a company may remove an auditor from office at any time during their term of office. They or the directors must give 28 days notice of their intention to put to a general meeting a resolution to remove the auditor. The company must send a copy of the notice to the auditor, who then has the right to make a written response and require that the company sends it to the company's members, and to speak at the meeting where the resolution is to be considered.
The company must deliver a form AA03 at Companies House within 14 days of the resolution being passed to remove the auditor.
Although a company may remove an auditor from office at any time, the auditor may be entitled to compensation or damages for termination of appointment.
Alternatively a company may decide not to re-appoint the auditor for a further term.
For a private company, the deemed reappointment of an auditor may be prevented by the members by ordinary resolution. It can also be prevented if the company is notified to this effect by members representing at least 5% of the company’s voting rights. The notices must be received before the end of the accounting reference period preceding the deemed reappointment.
11. What must an auditor do when he ceases to hold office?
If an auditor ceases for any reason to hold office, he must deposit a statement at the company's registered office. If the company is not quoted on a stock exchange, the statement should set out any circumstances connected with his ceasing to hold office that he considers should be brought to the attention of the members and creditors of the company. If the company is quoted, he must set out the circumstances whether or not he considers that they need to be brought to the attention of the members and creditors of the company.
If the circumstances are set out in the statement, the company must send a copy of the statement to all the members of the company unless it makes a successful application to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, the auditor must within a further 7 days send a copy of the statement to Companies House for the company's public record;
If (in the case of an unquoted company) the circumstances are not set out in the statement, the auditor must deposit a statement with the company to that effect. The company does not have to circulate this statement to the members.
Also, where the auditor resigns or is removed from office, there are obligations on the auditor and the company to notify the “appropriate audit authority”. There is more detailed guidance on these provisions on the Financial Reporting Council website.