Appointment and removal of company auditors

Article reference: UK-IA-CP14
Last updated: August 2022 | 7 min read

This article explains the role of a company auditor, which types of companies must appoint an auditor and the circumstances when an auditor is not required.

It also explains the procedure for appointing and removing auditors from office.

The role of auditors

What is an auditor?

An auditor is a person or an organisation that conducts a review of the annual financial statements of a company and makes an independent report to the owners (also known as shareholders or members) as to whether the accounts:

  • have been properly prepared in accordance with the Companies Act
  • in the opinion of the auditor, give a 'true and fair' representation of the financial position and performance of the business

The auditor will also consider if the information given in the directors' report is consistent with the annual accounts.

If in the auditor's opinion, the accounts or directors' report does not comply with the Companies Acts, they will say so in the report.

Is an auditor only concerned with annual accounts?

Most audits are only of the annual financial statements - those subsequently lodged at the Registrar of Companies (Companies House).

However, there may be other reasons to produce audits more regularly such as on the request of significant investors.

For large companies, such as those listed on a stock exchange, the auditors are usually present throughout the year, completing an audit each month or quarter so that by the end of the year there is less work to do on the annual financial statements. The advantages of this approach are that the audit can completed sooner (long audits can delay the publication of financial statements for which there are statutory filing deadlines), by people more familiar with what has happened throughout the year and with increased scrutiny.

An auditor may also be contracted to carry out other accounts-related work, from bookkeeping to completing tax returns to providing business advice.

However, an auditor must never take part in the management of the company.

Must all company accounts be audited?

Not all companies need to be audited.

Some companies qualify for exemption: small companies by asset value or turnover, dormant companies and other certain types of company.

To qualify for audit exemption as a small company, the company must meet the following three requirements:

  • qualify as small (50 or fewer employees on average)
  • have a turnover of not more than £6.5 million
  • have a balance sheet total of not more than £3.26 million

Are all types of small companies eligible for the exemption?

A company that falls into any of the following categories must have its accounts audited.

  • a parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) except where the group:
    • qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
    • the turnover for the whole group is not more than £6.5 million net (or £7.8 million gross); and
    • the combined balance sheet total is not more than £3.26 million net (or £3.9 million gross)
  • a public company (unless it is dormant)
  • a company that at any time in the financial year in question was:
    • a business that is an authorised insurance company, a bank, an e-money issuer, a MiFID (ie Markets in Financial Instruments Directive) investment firm or a UCITS (ie Undertakings for Collective Investment in Transferable Securities) management company;
    • a company that carries on insurance market activity; or
    • a special register body as defined in section 117(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (c. 52) or an employers' association as defined in section 122 of that Act or Article 4 of the Industrial Relations (Northern Ireland) Order 1992 (S.I. 1992/807 (N.I. 5)).
  • a company where an audit is required by a member or members holding at least 10% of the nominal value of issued share capital, or holding 10% of any class of share or - in the case of a company limited by guarantee - 10% of its members in number.
  • some property management companies that would otherwise qualify for exemption may have to prepare audited accounts to comply with the terms of their lease.

What should a company do with the audited accounts?

Audited accounts must be sent to Companies House annually. Companies House publishes them publically so that the stakeholders in the business, including other businesses with which the company trades, can decide whether they wish to do business with the company or not.

Can my accountant be my auditor?

An auditor must be independent of the company, and therefore, a person cannot be appointed as an auditor if they are:

  • an officer or employee of the company or an associated company
  • a partner or employee of such a person, or a partnership of which such a person is a partner

If your accountant does not fall into one of the above categories and if they have a current audit-practising certificate issued by a recognised supervisory body then they may act as the company's auditor.

What and who are recognised supervisory bodies?

These are bodies recognised by the Secretary of State as having rules designed to ensure that auditors are of the highest professional competence. Each recognised body has strict regulations and a disciplinary code to govern the conduct of their registered auditors. The five recognised bodies are:

  • The Institute of Chartered Accountants of Scotland (ICAS)
  • The Institute of Chartered Accountants in England and Wales (ICAEW)
  • The Institute of Chartered Accountants in Ireland (ICAI)
  • The Association of Chartered Certified Accountants (ACCA)
  • The Association of Authorised Public Accountants (AAPA)

Appointment of auditors

How is a company auditor appointed?

The directors appoint the first auditor of the company. They then hold office until the end of the first meeting of the shareholders at which the accounts are laid before the members. At that meeting the members can re-appoint the auditor, or appoint a different one, to hold office from that date until the end of the next shareholders' meeting at which accounts are laid.

However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the company's members that must be held within 28 days of the accounts being sent to the members.

Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-introduce annual appointment or to remove them as auditor.

The process is explained in detail, step by step, with copies of all the meeting minutes and notices in our pack of documents to appoint an auditor.

Removal of auditors

How is a company auditor removed from office

The members of a company may remove an auditor from office at any time during their term of office or decide not to re-appoint them for a further term.

They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's shareholders.

If an auditor ceases for any reason to hold office, they must deposit a statement at the company's registered office. The statement should set out any circumstances connected with their ceasing to hold office that they consider should be brought to the attention of the members and creditors of the company.

If there are any such circumstances, the company must send a copy of the statement to all the shareholders unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, they must within a further 7 days send a copy of the statement to Companies House for the public record.

If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.

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