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Micro audits in scope

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

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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