John Selwood's Q&As
The small companies regime is raising questions among auditors. John Selwood answers the most pressing questions regarding UK GAAP.
Q)When a small company files its accounts with Companies House using the new CA 2006 small company regime s444 exemptions, the directors are required to make various disclosures about the audit in the financial statements. What does the auditor have to do if the directors fall to make adequate disclosure? This particularly worries me if the audit report is modified yet this is not disclosed in the accounts.
A)In the new small companies regime introduced by SI 2015/980, abbreviated accounts no longer exist so the special auditors report on abbreviated accounts will no longer be relevant. Therefore, as you suggest, the accounts of small companies can, and commonly will, be Wiled using the s444 exemptions. This means that small companies can Wile their accounts having removed the directors’ report and/or profit and loss (P&L) account, sometimes called filleted accounts.
Where the P&L account is filed at Companies House, a copy of the audit report on the full financial statements will be included with the Wiled copy. Where the P&L account has been removed, there is no audit report. Note that this is different from the abbreviated accounts regime. Instead, the directors disclose various details about the audit, in the Wiled financial statements. The Act requires, in s444 5B, the following disclosures:
- whether the auditor's report was qualified or unqualified;
- where that report was qualified. disclosure the basis of the qualification;
- Where that report was unqualified, include a reference to any matters to which the auditor drew attention by way of emphasis; and
- the name of the auditor and where the auditor is a firm, the name of the person who signed the auditor's report as senior statutory auditor.
Note that the Act uses the term ‘qualified’. This should be interpreted to include any modified opinion.
Now returning to the question, I understand your concern that management might not include the correct disclosure, particularly when the audit report is modified or there is an emphasis of matter.
If the auditor is of the opinion that disclosure is inadequate or misleading, the first thing that the auditor should do is discuss the matter with management and request that they file amended financial statements. Hopefully the matter can be resolved this way. However, if management refuses to address the issue, the auditor is left with little choice but to resign.
On cessation the auditor will produce their s519 statement of circumstances – and clearly there are circumstances that need to be drawn to the attention of the shareholders and creditors. When discussing the matter with the directors initially, the auditor might mention that this will be the outcome, should the financial statements not be amended.
The audit firm might also need to consult their lawyers, particularly if it thinks that management have misrepresented the auditors' opinion in the financial statements.
The new small companies regime applies in Companies Act 2006 for periods commencing 1 January 2016, with early application from periods commencing 1 January 2015.
This is an extract from an article in the December 2015 / January 2016 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.
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