Statutory Audits

What are Statutory Audits

A statutory audit is an annual audit required by law to verify the financial statements of an organisation. This is for compliance with statutory audit requirements which includes legal obligations and different requirements for different entities like public companies and some private entities. Done by independent auditors who give an unbiased opinion on the financial records. These audits are to ensure financial statements are ‘true and fair’ and compliant with laws and regulations.

Public companies, banks and insurance companies must go through these audits. An audit gives stakeholders confidence that the company is complying with financial laws, reduces risk of errors or fraudulent reporting. This legal requirement promotes transparency and accountability in the financial sector.

Statutory Audits vs Non-Statutory Audits

Statutory audits and non-statutory audits differ mainly in legal obligations and scope. While statutory audits must comply with regulatory requirements, non-statutory audits are more flexible, for specific business needs like risk assessment or performance evaluation.

Scope and Requirements

Statutory audits are required for companies that exceed certain thresholds, these recently changed which you can find more details for below. Companies that meet specific financial thresholds and criteria for company size may be exempt from annual statutory audits. Companies that are exempt from statutory audits do not need to undergo annual audits.

Non-statutory audits are initiated by the entity’s directors or shareholders when there is no legal requirement to do so. Its scope can be more flexible, maybe focusing on internal processes or specific concerns set by management. This type of audit does not require a formal report, it’s more flexible in implementation.

The thresholds for statutory audits are:

Micro

• Less than £1 million annual turnover, less than £500,000 gross assets, less than 10 employees

Small

• Less than £15 million annual turnover, less than £7.5 million gross assets, less than 50 employees

Other proposed changes include:

• Increasing the average employee numbers threshold for medium-sized enterprises from 250 to 500

• Removing the requirement for medium-sized enterprises to prepare a strategic report

• Exempting smaller public interest entities from audit tender

• For many businesses, this could mean a welcome reduction in compliance costs. However, it also raises important considerations for companies that might find themselves no longer required to undergo an audit due to the revised small company thresholds outlined in the Companies Act 2006.

Approach for Non-Statutory Audits

The approach for non-statutory audits can be very different depending on the objectives of the company. For instance these audits may focus on operational efficiency or risk management rather than strict regulatory compliance. Statutory audits on the other hand is more rigid and focuses on compliance with laws and financial regulations.

Non-statutory audits can be done as and when required, allows businesses to respond to internal or external changes more quickly. This flexibility is good for companies that wants to streamline their processes or focus on specific issues without the constraints of statutory requirements.

For Stakeholders

Stakeholders like investors, shareholders and regulatory bodies rely on statutory audits. These audits gives assurance to the financial statements. Investors and shareholders use this information to make informed decisions on investments or engagement with the company.

For public companies, statutory audits gives market confidence by verifying that financials meet legal requirements. In banking and insurance sectors, they are critical in risk management, ensuring financial positions are correctly stated.

In short, statutory audits is a safeguard that protects the interest of various stakeholders by promoting financial transparency and integrity. This trust building is important in today’s financial world, for stability and compliance.

Compliance

Compliance with regulatory requirements is top priority for statutory auditors, requires strict adherence to laws. Auditors must navigate the maze of local and international regulations, keep up to date with relevant laws including Companies Act and EU directives. They must ensure their audit reports meet the requirements of the governing bodies like FRC. Failure to comply can lead to legal penalties and loss of credibility. Strict compliance procedures will protect the audit process and uphold the standards in financial reporting, to have trust and reliability in company disclosures.

Why Statutory Audits are Important to Business

Statutory audits will maintain the financials and operational transparency of the business. Will instill confidence among stakeholders, for informed decision making. Audit services not only ensure regulatory compliance but also identify areas for improvement and efficiency, for growth.

Small, Private, Public Companies

Statutory audits are not just for big corporations but also for small and private companies. By having these audits, small businesses can verify their financial statements, will have an accurate reflection of their financials. This is especially important for small companies looking for investments, loans or partnerships. A financial audit can also provide valuable insights to business processes and ensure accuracy of financial records, a comprehensive assessment of the company’s financial health and compliance with reporting requirements.

For private companies, statutory audits will show credibility, will give assurance to stakeholders on the financial reports. In an environment where mistakes can harm business reputation, these audits will be a safeguard, so small businesses can manage their financials with more confidence and security.

Transparency and Efficiency

Statutory audits is a mechanism for transparency in financial reporting. By requiring companies to comply with auditing standards, these audits will promote accurate and full disclosure of financials. Transparency is key to building trust with investors, regulators and other stakeholders, as it reduces the risk of misinformation.

Audits will make companies to improve operational efficiency. Companies will implement more robust internal controls and accounting practices to comply with auditing requirements, so they will be audit ready and will also develop a culture of accountability and precision within the organisation.

Stakeholder Confidence

One of the benefits of statutory audits is stakeholder confidence. Through an independent review of a company’s financials, audits will assure investors, creditors and other stakeholders of the financial statements.

A company that is audited regularly and meets standards will attract more investors and partners. This confidence will lead to a wider investor base and easier access to capital, for growth and expansion in a competitive market.

Continuous Improvement

Statutory audits will drive continuous improvement within the organisation by identifying areas for financial and operational improvement. Auditors will provide feedback on existing processes, so companies can pinpoint inefficiencies or non compliance to best practices.

By implementing the recommendations from audits, companies can make systematic improvements, for better financial performance and risk management. Continuous improvement is key to businesses that want to be competitive and agile in a fast paced market. These audits will be a benchmark for companies to aim for higher standards over time.

Impact to Financial Health

Statutory audits is key to accurate financial reporting, trust in financial systems and big corporations financial assessment. They also provides financial stability by having a comprehensive review.

Accurate Financial Statements

Statutory audits will maintain the integrity of an organisation’s finances by verifying the accuracy of financial accounts and representations. Through reviewing balance sheet, income statement and cash flow statement, auditors will ensure that financial information will reflect the company’s reality.

Financial errors can lead to misinterpretation, decision making. Chartered accountants will scrutinise the discrepancies, to comply with statutory requirements. By pointing out the inconsistencies, audits will enable corrective actions, to protect the financial health of the organisation and build stakeholder confidence.

Big Corporations Financial Position

For big corporations, statutory audits will give an independent view of financial health. They will review key indicators, including balance sheet totals and number of employees, which will give insight to operational efficiency and resource utilisation.

Auditors will look at the potential risks and inefficiencies, so management can address them proactively. This is more important for government agencies that regulates financials to ensure companies comply with laws. By revealing the true financial position, audits will inform investment decisions and long term plans for expansion.

Audits and Financial Stability

Financial stability is enhanced by statutory audits through risk assessment and mitigation. Auditors will identify areas prone to fraud or financial mismanagement and recommend changes to controls.

Through regular review and evaluation, they will build trust to the financial data to stakeholders, including investors and regulatory bodies. This will create a stable financial environment for growth, not just for the audited entities but for the whole economy.

Want to learn more?

Get in touch with our in house expert Chris Morey to see how we can help.