For growing UK businesses, understanding when an audit becomes mandatory is crucial for financial planning and compliance. Missing audit requirements can result in penalties, while preparing early helps minimise disruption and costs.
Do you need an audit?
You likely need an audit if your company:
- Exceeds two of the three “small company” thresholds for two consecutive years
- Is a public limited company (PLC)
- Has shareholders holding 10%+ demanding an audit
- Operates in banking, insurance, or investment services
- Is a charity with income over £1 million (or £250,000 if assets exceed £3.26 million)
What is a financial audit?
A financial audit is an independent examination of your company’s financial statements to assess whether they present a “true and fair view” of your financial position. Qualified auditors scrutinise your financial records, internal controls, and accounting practices.
In the UK, audits are governed by the Companies Act 2006, with additional requirements for specific industries. While some audits are mandatory, many businesses choose voluntary audits to enhance credibility with investors and lenders.
The three-factor test: Size-based triggers
One of the key audit triggers is company size, measured across three dimensions. Your company needs an audit if it exceeds two of these three thresholds for two consecutive financial years:
Small company thresholds (Audit exempt)
Medium/large company thresholds (Audit required)
Key timing point: A company needs two consecutive years above the thresholds before an audit becomes mandatory. However, plan ahead – crossing thresholds in year one means the company will need an audit for year two’s accounts.
Revenue considerations: What counts as turnover?
Turnover includes:
- Revenue from sales of goods and services
- Rental income from properties
- Royalties and licence fees
- Some investment income
What counts as an employee?
A common mistake is using FTE (Full-Time Equivalent) calculations when determining employee count. For example, if you have 10 people working half days, you have 10 employees, not 5. This distinction is often misunderstood and can lead to applying the wrong audit thresholds.
Group company complications
If a company is part of a group structure, consider both individual and group turnover. A small subsidiary may still require an audit if it’s part of a larger group.
Real-world example: An engineering company grew from £12 million to £16 million turnover but assumed they had another exempt year (needing two consecutive years above threshold). However, the business was acquired and became a subsidiary of a medium-sized group, meaning they immediately triggered audit requirements.
Ownership structure triggers
Automatic audit requirements:
- All public limited companies (PLCs) regardless of size
- Shareholder demands 10%+ shareholders can force an audit
- Articles of association: Some companies have built-in audit requirements
- Group thresholds are exceeded: International groups often require subsidiary audits
Different thresholds apply to charitable companies:
- Income exceeding £1 million, OR
- Gross assets exceeding £3.26 million AND income exceeding £250,000
Real-world example: A family manufacturing business with £9 million turnover, assets totalling £3.5 million and 20 employees would normally be audit-exempt. However, when they took external investment exceeding 10% shareholding, the new investor requested an audit as part of their investment terms.
Regardless of size, there are some companies that always require audits:
- Authorised insurance companies
- Banking companies and e-money issuers
- Investment firms (MiFID) and fund management companies (UCITS)
- Companies involved in cross-border mergers
Timeline and preparation
When should an audit start?
- Crossed threshold: Audit required for accounts filed in the second consecutive year above thresholds
- New company formations: PLCs and regulated companies need audits from formation
- Ownership changes: Immediate if shareholder demands trigger requirements
What is the timeline for the preparation of an audit?
- 12 months ahead: Monitor your growth trajectory against thresholds
- 6 months ahead: Begin auditor selection process if crossing thresholds
- 3 months ahead: Prepare documentation and internal controls review
- Filing deadline: Audited accounts typically due 9 months after year-end for private companies
Why is audit preparation important?
Poor preparation can have real-world consequences and impact the audit process. For example, if auditors cannot attend the year-end stocktake, they may be unable to obtain sufficient evidence about inventory valuation, and the audit report may need to be qualified which can affect a company’s credit score.
What are the consequences of non-compliance?
- Penalties: Up to £1,500 for late filing, plus daily penalties
- Director liability: Potential personal liability for directors
- Regulatory action: Industry-specific sanctions for regulated businesses
- Stakeholder impact: Loss of credibility with investors and lenders
Are you ready for an audit?
To help you prepare effectively and ensure you’re ready, download our comprehensive Audit Readiness Checklist.
This detailed checklist will help you prepare your business for a smooth audit process.
Expert audit support when you need it
Understanding audit triggers is just the first step. When your business reaches these thresholds, you need an audit firm that understands growing companies and can make the process as smooth as possible. That’s where we can help.
At DJH, we specialise in working with growing businesses across the UK. Our experienced team helps you:
- Navigate complex trigger scenarios including group structures and ownership changes
- Prepare efficiently with clear guidance on documentation and processes
- Minimise business disruption through careful planning and flexible scheduling
- Add genuine value beyond compliance through insights that support your growth
We’ve guided hundreds of businesses through their first mandatory audit and continue to support them as they scale. Our clients appreciate our practical approach and commitment to making audit a positive experience.
The audit requirement system ensures transparency as businesses grow. With the right preparation and professional support, your audit becomes more than a compliance exercise – it’s a valuable validation of your success and a foundation for future growth.
Ready to discuss your audit requirements? We’re here to help – let’s start the conversation.
