Statutory audit: definition, types, and examples

A statutory audit represents the legally mandated inspection of a company’s financial statements and financial accounts by an independent qualified auditor. This verification process is designed to ensure accuracy and compliance with relevant financial and regulatory standards, safeguarding the interests of stakeholders and the public. By examining a company’s records, auditors assess the fairness and reliability of the financial reports, assuring that the statements accurately reflect the company’s financial status in accordance with prescribed accounting principles and legal requirements.

What does a statutory audit mean?

UK company law requires certain incorporated entities like public limited entities, larger private companies, subsidiary businesses, etc. to have their annual financial statements audited by a qualified, external auditor. This statutory requirement intends to assure that financial statements issued by the company adhere to relevant standards and legal or regulatory requirements, the reports accurately reflect the organization’s financial position and follow prescribed accounting conventions.

Specifically, the auditor reviews if the financial statements prepared by the company adhere to relevant standards and legal or regulatory requirements. The audit report and opinion offer reasonable confirmation that the information presents a true and fair view without material misstatements.

​​Statutory auditors are often chartered certified accountants with recognized qualifications from accredited bodies like ACCA or ICAEW. They follow a rigorous auditing process to verify financial statements. Entities may seek professional assistance from qualified chartered accountants to ensure compliance.

The statutory audit requirements are outlined under the Companies Act 2006 in the UK. The same holds for foreign parent companies with UK-incorporated subsidiaries. Opting for a qualified accountant as an auditor can help satisfy legal or regulatory requirements.

Which entities need statutory audits?

Entities such as public limited companies, larger private companies, and every subsidiary company are subject to statutory audits. This requirement ensures that their annual accounts reflect a true and fair view of their financial position, safeguarding client funds and investor interests. Typical examples of UK structures needing mandatory statutory audits include:

• Public and private limited companies exceeding size thresholds;
• Parent companies along with their subsidiaries;
• Heavy investment firms and brokerage firms;
• UK companies with significant shareholder funds or turnover;
• Other regulated entities such as charities and pension schemes;
• Any government entity like councils, housing associations, etc.

Most private companies satisfying at least two of the following criteria for two consecutive years require audits: 

• Turnover over £10.2 million;
• Balance sheet total exceeding £5.1 million;
• Over 50 employees.

In the context of global operations, entities must comply with the statutory audit requirements of their own country. A subsidiary company operating in foreign jurisdictions must also adhere to local audit requirements, ensuring the transparency and reliability of their annual accounts.

What exemptions exist?

Here are some instances where exemptions may apply:

• Private companies falling under the turnover, assets base, and employees threshold;
• Inactive or dormant UK companies in certain categories;
• Subsidiaries consolidated within group financial statements of an audited parent company.

Additionally, private companies with turnover less than £6.5 million, assets under £3.26 million, and up to 50 employees can optionally apply for an audit exemption annually. Smaller companies are generally exempt.

How do internal and statutory audits differ?

While internal audit involves self-assessments by a company’s employed internal auditors focusing on process risks and controls, statutory audit requirements include qualified third-party auditors mainly checking legal compliance.

An internal audit is a self-assessment focusing on operational improvements, while independent statutory audits verify compliance with accounting standards and company law.

Statutory auditors must register with a recognised supervisory body like ICAEW or ACCA that enforces standards of independence, quality, and competency.

Internal audits, conducted by internal auditors, help companies identify potential risks and improve internal controls. Although different in scope, both internal and statutory audits are essential for ensuring compliance and financial integrity.

Distinguishing statutory from voluntary audits

Unlike statutory audits mandated by legislation, some companies opt for a voluntary non-statutory audit to provide financial statement assurance for shareholders or attract investors. A non-statutory audit isn’t required for legal or regulatory reasons, but statutory audits follow obligatory regimes to satisfy UK regulatory compliance.

While non-statutory audits allow voluntary financial reviews, statutory audits are mandatory for certain companies to ensure compliance with regulations. Non-statutory audits can still provide useful independent evaluations of company finances.

What is a tax audit?

A tax audit is a thorough examination by tax authorities to verify that a company’s or individual’s tax returns are accurate and comply with tax laws and regulations. During a tax audit, auditors, often chartered accountants or internal auditors, accurately review financial statements and transactions, including client funds and annual accounts, to identify potential risks of tax evasion or non-compliance. The goal is to ensure that all entities meet their legal obligation to pay the correct amount of taxes. This process is important for maintaining trust between taxpayers and the government, ensuring that everyone pays their fair share according to the laws of their own country.

Improving audit readiness with Wallester

Accurate financial records are essential for passing statutory audits without complications. Wallester offers financial tools that assist businesses in maintaining audit-ready documentation. By providing real-time transaction tracking, automated reporting, and detailed financial insights, Wallester helps companies’ accounts remain compliant with relevant standards and regulations. This level of precision reduces the likelihood of errors or discrepancies, making it easier to meet audit requirements and deadlines.

Overview of the statutory audit process 

The key statutory audit requirements include:

1. Planning. The auditor determines focus areas, information needs, timelines, etc. based on the company’s scale, industry, perceived risks, and intricacy.
2. Evidence testing. The auditor verifies samples of transactions, contracts, assets, etc. to pinpoint potential errors.
3. Analysis and reporting. The auditor prepares reports communicating findings, concerns, and the final audit opinion for submission to regulatory agencies.
4. Filing. The company must file the audited statements and reports with authorities like the Companies House within stipulated timeframes.

Choosing the right statutory auditor

Selecting an auditor with proper credentials and expertise is vital for legal conformance and quality. Warning signs like:

• Lack of affiliation to accredited supervisory bodies;
• Inadequate understanding of the company’s industry, operations and risks;
• Pushiness, vagueness about process or charges.

Opting for an independent and qualified auditor with industry specialization and transparent communication practices can help ensure diligent statutory audits that satisfy compliance needs.

Key takeaways

1. Statutory audits represent mandatory periodic inspections of incorporated companies’ financial records by qualified third-party auditors.
2. Particular types of UK entities like public companies and their subsidiaries require legal statutory audits annually, though small companies may qualify for exemptions.
3. A statutory audit differs from an internal audit or optional audit in terms of purpose, responsible party, and regulatory needs.
4. Carefully vetting an auditor’s competencies and communication approach is vital for satisfactory statutory audits meeting quality and conformance expectations.