Micro audits in scope

Audit reports for micro entities should be written with care, warns Julia Penny.

May 2018

FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime provides a very basic accounting framework for micro entities to use in preparing their statutory accounts. To be eligible, the entity must be small, not excluded (certain investment entities are excluded as I have covered in a previous article, as well as charities) and meet two out of three of the criteria:

• Turnover: £632,000 or less
• Gross assets: £316,000 or less
• Employees: 10 or less

All micro entities will therefore be exempt from audit from a statutory point of view, but may need an audit for other purposes, such as demand by a lender. 

I generally advise that carrying out an audit on FRS 105 accounts is something to be avoided. This is because the FRS 105 framework is a compliance, rather than a fair presentation, framework. 

This means it has limited disclosures set out and no requirement to enhance those disclosures to give a true and fair view. However, ISAs are predicated on the accounts being prepared under a fair presentation framework, but FRS 105 accounts won’t necessarily contain the required disclosures. You cannot just sign off a normal audit report on FRS 105 accounts as giving a true and fair view, just because the law says they are ‘presumed’ to be true and fair.

ISA 210 paragraph A-38 gives limited information on alterations required to the audit report but ICAEW has now issued more helpful guidance. 

In summary, it includes the following points:

• Compliance with the Companies Act is ‘as applied by micro entities’;
• Wording must be altered throughout to ensure that statement names agree with what has been produced;
• The basis of opinion must be altered;
• An ‘Other Matter’ paragraph is required to explain that the micro-entity regime is a compliance framework and that no additional disclosures are required to give a true and fair view (see ISA 210.A38-2 for the relevant reference). 
• If there is a significant concern regarding going concern, although the financial reporting framework does not require disclosure, ISA 570 does;

Overall therefore, you need to be especially careful to ensure the wording of a micro-entity audit report is appropriate. 

Julia Penny FCA is Technical Director, SWAT UK and London ICAEW Council member. Follow Julia @JSPenny

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