Statutory audits explained: FAQs answered

There are certain key thresholds within UK company accounts (turnover, gross assets or employees) which once breached in conjunction with each other, trigger a compulsory statutory audit. These can creep up on owner-managed businesses.

This article is designed to encourage owners to track these and to explain what is then expected from the resulting audit process.

What is a statutory audit?

A UK statutory audit is an independent, third-party review of a company’s annual financial statements, as required by the Companies Act 2006. This is carried out by a registered statutory auditor to understand whether the financial statements give a true and fair view of the company’s financial position at the year-end date and during that year, checking that the relevant financial reporting framework has been adhered to.

Statutory audits facilitate clear reporting for external stakeholders for companies of a certain size, in order to build confidence in their economic decision making. While statutory audits are often seen as a compliance exercise, many businesses use them as an opportunity to gain valuable insight into their financial controls and reporting processes.

Is a statutory audit the same as an external audit?

Yes, all statutory audits are external audits, but crucially not all external audits are statutory audits.

A statutory audit is underpinned by a requirement of UK legislation, it’s conducted by a registered statutory auditor and includes an audit opinion under the Companies Act framework (whether the financial statements give a true and fair view).

An external audit may be voluntarily enacted instead, it would be conducted by an independent external auditor (rather than a registered one) and may have a broad range of reporting objectives as set by the client.

Examples of some non-statutory external audits include:

• Voluntary financial statement audits – Small companies request an audit to provide assurance to its bank, ultimate shareholders or potential future investors.
• Charities – Charities receiving their funding may be required to verify grant funds were spent in accordance with their funding conditions.
• Regulatory audits – Certain regulators may require independent assurance engagements e.g. FCA client money (CASS) audits.
• Client Due Diligence reviews – A financial review for a buyer considering a company acquisition.

Is a statutory audit compulsory?

No, a UK statutory audit is not compulsory for every company.

Under section 475 of the Companies Act 2006, a company’s annual accounts must be audited unless the company is exempt from audit. Most small private companies qualify for an audit exemption and therefore do not require a statutory audit.

The requirement for an audit depends on company size and circumstances. Typically, private companies require an audit when two of the below thresholds are breached for two consecutive periods.

Even if the above thresholds are not breached for two consecutive periods, an audit may still apply in specific circumstances. For example, when the company is publicly listed, the sector in which it operates is highly regulated where an audit is required or a voluntary audit is decided upon.

There is also a requirement for a group of companies to be audited depending on group size and circumstances. Typically, groups require an audit when two of the below thresholds are breached for two consecutive periods:

Not sure if you need an audit? Our team can assess your circumstances and advise whether your business qualifies for an exemption.

Learn more in our article – Audit exemptions: Is your company exempt from an audit?

When is a statutory audit applicable?

A statutory audit is applicable once two of the thresholds in the above table is breached for two consecutive years.

It’s crucial to understand that these thresholds do change (the most recent change was in April 2025) and that businesses should seek advice on interpreting the current legislation.

Ideally, recognition of when an audit would apply would be easy – the company sees steady growth and then breaches the audit thresholds. However, there are also scenarios where an audit may suddenly apply, for example rapid company growth, the company is purchased by a significant-sized group, changing investor requirements and taking on debt where the lender makes this conditional.

How does a statutory audit work?

An audit is generally performed in five phases

• Planning – Initial planning activities include formal acceptance of the client by an audit firm, verifying compliance with independence requirements, building the audit team and performing other procedures to determine the nature, timing and extent of the procedures to be performed in order to conduct the audit in an effective manner.
• Risk assessment – Auditors use their knowledge of the business, industry and the environment in which the company operates to identify and assess the risks that could lead to a material misstatement in the financial statements. This knowledge is supplemented with communication and knowledge from management, as gathered during the initial phase of the audit. Management’s assessment of risks in the business is combined with the auditor’s experience of the industry in order to form a good understanding and identification of the significant risks.
• Audit strategy and plan – Once the risks have been assessed, auditors develop an overall audit strategy and detailed audit plan to address the risks of material misstatement in the financial statements. Among other things, this includes designing a testing approach to various financial statement items, deciding whether and how much to rely on the company’s internal controls, developing a detailed timetable and allocating tasks to the audit team members.
• Gathering evidence – Auditors apply professional scepticism and judgement when gathering and evaluating evidence through a combination of testing the company’s internal controls, tracing the amounts and disclosures included in the financial statements to the company’s supporting books and records, and obtaining external third-party documentation. Independent confirmation is sought where this is possible to do, for example cash balances.
• Finalisation – The audit and client team’s hold a finalisation meeting to close off any remaining points. The audit team give written feedback on process improvements that can be made to client systems and a list of agreed audit figure adjustments. The audit opinion is signed and issued within the financial statements, the designated director also signs. The financial statements are now complete.

Can an internal auditor carry out a statutory audit?

An internal auditor cannot carry out a statutory audit. Internal auditors work for the company that requires the statutory audit, whereas a statutory audit requires a level of independence in order to meet its objectives.

What are the benefits of a statutory audit beyond compliance?

1. Improvements to internal controls – Auditors identify weaknesses with these and report these to management. If acted upon, the resulting enhancements will reduce the risk of errors and improve operational efficiency.
2. Better fraud and error detection – Although an audit is not designed to detect this, audit tests can deter fraud, identify control weaknesses, highlight unusual transactions and reduce the likelihood of large errors remaining undetected.
3. Easier access to finance – Lenders view audited financial statements as more reliable. These can form a part of a pitch for new credit facilities, loans, external investment or in mergers/acquisitions.
4. Improved financial reporting quality – The audit process challenges assumptions, accounting treatments and disclosures. This can lead to better treatment of revenue recognition, impairment reviews, going concern assessments, and related party disclosures. This could lead to more coherent monthly management accounts and stronger inputs to key business decisions.

How Gerald Edelman can help

Gerald Edelman’s approach is centred on our values of being quality obsessed, entrepreneurial and collaborative. Our partners lead a tailored audit approach to our clients’ needs, an approach which leverages the technology available to produce clear business insights whilst minimising disruption to operations. We are proud of our long-standing client relationships and support clients at all stages of the business audit lifecycle (initially exempt, facing an audit, facing a group audit).

Unsure whether your company requires a statutory audit under the latest UK audit thresholds?

Speak to our Audit team today. We can help you determine whether an audit is required, assess your exemption status, and guide you through the preparation process to ensure a smooth and efficient audit. Contact us to discuss your specific circumstances and the steps needed so that you can prepare with confidence.