This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members when considering whether to accept engagement as auditor to a company preparing its accounts under the micro-entity regime.

Members may also wish to refer to the following related guidance:

• Preparing an audit report for micro-entities

Micro-entity accounts are presumed by law to give a true and fair view. The auditor is however required by the Companies Act 2006 section 495 to state in their audit report whether the annual accounts give a true and fair view and is expressly prohibited from requiring additional disclosures that would normally be considered necessary to achieve this.

The Financial Reporting Council (FRC) acknowledges that there is a contradiction in the International Standards on Auditing (UK) (ISAs (UK)) and notes that it may lead to a risk that the ‘true and fair’ audit report may be misunderstood by users, as it may not include additional disclosures that would normally be required for the auditor to give a true and fair view.

Therefore, despite UK law presuming that financial statements prepared under the micro-entities framework give a true and fair view, this is not considered to be a fair presentation framework as defined in ISA (UK) 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with International Standards on Auditing (UK). Paragraphs A38-1 and A38-2 of ISA (UK) 210 Agreeing the Terms of Audit Engagements discuss micro-entity audit engagement issues.

Paragraph 19 of ISA (UK) 210 states that the auditor shall accept the engagement only if:

(a) Management agrees to provide additional disclosures in the financial statements required to avoid the financial statements being misleading; and
(b) It is recognised in the terms of the audit engagement that the auditor’s report on the financial statements will incorporate an Emphasis of Matter paragraph, drawing users’ attention to the additional disclosures.

Paragraph 21 requires auditors to evaluate whether users might misunderstand the assurance obtained from the audit and, if so, whether additional explanation in the auditor’s report can mitigate possible misunderstanding. It may be possible for the auditor to mitigate the potential misunderstanding through the prominent inclusion of an other matter paragraph addressing this in the auditor’s report (ISA (UK) 210 paragraph A38-2). This would need to be a documented assessment by the auditor, as to whether this is possible in the particular circumstances. If the auditor concludes that this is not possible, paragraph 21 states that they shall not accept the engagement.

If the auditor considers that they can accept the engagement, guidance explaining the main changes that are needed to the audit report of a company preparing its financial statements under the micro-entities regime can be found in the guide Preparing an audit report for micro-entities.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.