Help with Audit requirements

Help with Audit requirements

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I am a little confused with the exact requirement for an audit in the following situation:

Clients accounts to end of March 12 whihc I am currently preparing show TO of £5.5m and BS gross assets of £3.6m. The business has over 50 employees

My understanding is the business now is no longer "small" and requires an audit.

In all previous years TO was less than £6.5m and BS gross assets less than £3.26m.

My question is does the business still need the 2012 accounts auditing? I think it does but confirmation would be helpful

Thanks

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By Roland195
25th Jul 2012 11:34

Audit rules are not the same as small company rules

You are right that the company requires an audit however it is not a medium sized company until it has exceeded 2/3 of the limits for two years running.

You are now in the delightful position of explaining to your client that although his turnover is up to £1m less then the previous year, he now needs to pay you for an audit that you know you may have to qualify from the beginning as the previous years figures an unaudited, you may not have attended the stock take etc etc but yet you still have to do all the other work.

Good luck.  

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By Euan MacLennan
25th Jul 2012 11:44

Audit required

I agree with Roland.

An audit is required because the gross assets exceed the limit at 31st March 2012, but the company is still small this year, despite exceeding 2 out of the 3 thresholds for the first time, and the accounts can be prepared under the FRSSE.  If the gross assets or the turnover exceed the respective limits next year, full FRS accounts (with cash flow statement, etc.) will be required for next year.

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By Marmite
25th Jul 2012 11:45

Thanks Roland195

 

Unfortunately we are not auditors and all my other clients are small so am left with the situation we will need to help find auditors and decide on our continued involvement - any tips?

Also I wonder if we are in a position to finalise the accoiunts especially if an audit is required . Is it easy to work with a seperate firm as auditors and still prepare accounts - albeit according to small company rules?

Is it better for the client to have a single firm preparing accounts and audit?

Not a happy day if we have to let this client go.

 

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By Roland195
25th Jul 2012 11:57

You could consider

As we are only talking about £340,000 of assets (what's that between friends), if I were you I would be going through the assets with a fine toothed comb looking for ways to reduce it.

For example, look for bank overdrafts where there is the formal right of set off (meaning you have cash in the bank in one account ranking as a debtor but an overdraft in another account with the same bank) or reviewing the bad debt provisions when you and the client are in a particularly pessimistic mood.

Other than that, I can't really see how you could retain the client. These days, it will pretty much work out twice as expensive for the client to have the two firm involved.

 

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By Euan MacLennan
25th Jul 2012 12:07

Cheaper for client

... if the same firm both prepares and audits the accounts, because the auditors will have to repeat much of the work you will have done in preparing the accounts.

It is not that difficult to work with external auditors.  You prepare accounts to the final draft stage, along with a properly indexed and cross-referenced file of working papers, and hand them over to the auditors.  It is easier if you use the same method of accounts preparation, filing at Companies House and iXBRL tagging for the CT return.  On the other hand, you may need to bite the bullet if you have no means or experience of preparing full FRS accounts next year.

You should be able to find a local firm of auditors on the Register of Statutory Auditors.  I would hope that many firms which have retained auditor registration, such as ourselves, will be happy to help out a local firm without trying to poach the client.

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By Marmite
25th Jul 2012 12:11

There is a NBV of £1m on the

There is a NBV of £1m on the balance sheet for goodwill formed on incorporation from a partnership several years ago which is being written off over the next 4 years. Could the directors justifiably increase the rate of amortisation so to bring the gross asset figure below £3.26 or would this be viewed as simply " finaincial engineering"

 

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Replying to andybailey:
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By Roland195
25th Jul 2012 12:33

Impairment Review

Marmite wrote:

There is a NBV of £1m on the balance sheet for goodwill formed on incorporation from a partnership several years ago which is being written off over the next 4 years. Could the directors justifiably increase the rate of amortisation so to bring the gross asset figure below £3.26 or would this be viewed as simply " finaincial engineering"

The turnover has fallen by £1m in the last year. This could suggest that the goodwill valution is overstated given the current financial climate, especially if the calculation was based on re-occuring fees or total sales.

You should consider carrying out an impairment review to investigate this then write off any amount as necessary to provide a true and fair view.

 

 

 

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By Marmite
25th Jul 2012 13:38

The actual market value of the goodwill (which has recently been independently valued) is in excess of £2m. How to justify an impairment review on the goodwill when in fact its more valuable than stated?  I guess I'm stuggling to impair goodwill in these circumastances and best increase the marketing budget to find me some more clients!

 

 

 

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By skay98
25th Jul 2012 14:16

I have pm'd you

PM

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By Roland195
25th Jul 2012 14:35

Market Value

The Market Value of the internally generated goodwill as of today is a different animal to the purchased goodwill from the partnership obtained a few years ago but I am stuggling to see how this helps. Perhaps if the nature of the business had changed dramatically there would be an argument.

If after considering:-

- Tangible & Intangible Impairment

- Stock e.g obsolete items etc

- WIP e.g overvaulations

- Trade Debtors & Bad Debt Provisions

- Bank O/D set offs

And anything else in a similiar vein you can think off, the assets are still too high then it will be a case of biting the bullet and calling in an auditor (who may then demand the the goodwill be written down to £1 on some vague reason but only after the full audit has been completed). 

 

 

 

 

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By Marmite
26th Jul 2012 10:41

Goodwill and amortisation

Hi Roland195 - what I was meaing was the goodwill was inlcuded on the BS on incorporation at the MV of £2m and we and the directors had chosen an amortisation period of 6 years.

Speeding the amortisation up for whatever reason in the current period would reduce the carrying value of the goodwill thereby reducing total asset value and audit requirement. Indeed is there any reason why we couldnt write off all the reminaning goodwill all off this year thereby reducing the asset value by the £1m - result no audit? I am sure we could find a reason!

 

The fact the MV of goodwill is now valued over £2m (inc internally generated goodwill) is not relevant to this issue as it is unrecognised in the accounts.

This is an area I struggle to see the logic in accounts prep - the fact we can only recognise goodwill that is purchased yet it is clear the businesses actual goodwill valuation is much greater yet we are prevented from recognising the value. Add to this we are required to amortise the goodwill that was aquired on incorp and we are left with a situation where accounts in fact do not reflect the true scenario.

 

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By Roland195
26th Jul 2012 13:54

Nearly there

After two years, the difference between amortising £2m of goodwill over 4 years instead of 6 years would be £333,333 (don't you just love it when a plan comes together?).

The change in the amortisation rate is not even a change in accounting policy, just a change in estimation technique which is the prerogative of the directors however you may arouse the interest of HMRC (assuming your goodwill is already tax deductable).

You are knocking a fair chunk from the balance sheet so you will have to make sure the client fully understands the implications of this although you may argue that all you are doing is speeding up this process and the extra would fall of in the next few years anyway.

 

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