What are annual financial reviews and statutory audits?
Many companies choose to use the services of a third party firm of accountants to prepare their statutory accounts and/or provide some degree of assurance on the contents of the accounts both in terms of the numerical position and the compliance with underlying rules and regulations for the preparation of accounts. There level of assurance provided by the accountant dictates which end of the scale of work the undertaking falls, whether it is an annual financial review or a statutory audit.
What is the difference between an annual financial review and an audit?
An annual financial review is an assurance engagement conducted under the rules of the International Standard for Review Engagements (ISRE) 2400 (Revised). In short this gives a framework for the acceptable level of work that the accountant undertaking the review should perform in order to express an opinion on the accounts. The level of assurance is limited to providing a degree of surety that the financial statements comply with the chosen financial reporting framework and give a true and fair view and that management is aware of its responsibilities for producing the accounts.
An audit provides a much higher level of assurance than an annual financial review and consequently is more significantly regulated and requires considerably more work and expertise in its execution. As a result of this, a set of audited accounts is viewed by some as providing a more positive impression to the general public due to the external scrutiny involved in the process.
How do the statutory audit and annual financial review procedures compare?
Fundamentally audit is a risk based process to ensure that a set of financial statements are free from material error or misstatement. An audit follows a set of Auditing Standards to ensure a knowledge of the business, the sector it operates in, the risks to the business, and controls to mitigate those risks. Based on this initial work detailed work as appropriate is undertaken to ensure that the underlying records that support the accounts are correct. The level of detail, particularly in areas considered to be high risk, can be significant and the regulations guide an auditor on the level of reliance that can be placed on various sources of information.
An annual financial review is significantly less onerous on the company, involving a process of ensuring that the underlying records agree to the annual financial statements without testing underlying transactional systems in detail. Significant transactional testing is not required, making this a service that is more flexible and perhaps proportionate for smaller entities.
When is a statutory audit required?
There are three circumstances where a statutory audit may be required:-
- The company exceeds the small company thresholds (two from turnover >£10.2m, assets >£5.1m, employees >50)
- The company is part of a group that as a whole exceeds the thresholds mentioned above. This extends to a small company that is part of a large multinational group
- There is either a third party requirement for an audit (perhaps as part of a loan agreement or covenant), a significant shareholder requests it, or the articles of the company mandate it.
Companies that are not mandated a statutory audit do however often undertake an audit of their statutory accounts for the perception of accountability described above or in anticipation of selling the company in the near future.
When is an annual financial review required?
The benefit of an annual financial review is that the statutory accounts filed at Companies House and on the public record will have an accountants report attached. This is not a requirement for a company that falls below the audit threshold but does give the accounts a degree of assurance that a set without an accountants report does not have. It may be of particular use to a company that has limited statutory accounting experience internally and wish to have their financial statements reviewed for obvious omissions or errors.
Get in touch
If you want to know more about financial statement audits, then please feel free to get in touch via our contact page or call 020 7388 2641 (London office) or 01727 833222 (St Albans office) or contact our audit team.
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