One of the common questions directors and shareholders of UK subsidiaries ask is whether the company is required to undergo an audit. The answer differs for each business and depends on various factors.
A UK subsidiary may require an audit depending on its size, financial position, and the parent company’s structure. While small subsidiaries can qualify for audit exemption, there are exceptions, particularly when part of a larger group.
In this article, we’ll break down the key points to help you determine if your subsidiary company needs an audit and the circumstances that may affect its audit requirements.
For more detailed advice or to book our audit services, please contact Treetops Chartered Accountants.
What is classed as a UK subsidiary company?
A UK subsidiary is a company controlled by another entity, known as the parent company, which holds the majority of its shares. As the majority shareholder, the parent company has significant control over the subsidiary’s decisions and operations.
A UK subsidiary can be part of a UK parent company or overseas groups. Many UK subsidiaries form part of large international groups, which affects their audit obligations.
What does an audit entail for subsidiaries?
An audit aims to provide stakeholders, such as shareholders and regulators, with an independent assessment of the company’s financial health.
The process involves a UK statutory auditor reviewing the company’s financial statements to ensure accuracy and compliance with UK company law, including the Companies Act 2006.
Audits typically involve evaluating the subsidiary’s financial year activities, verifying assets, liabilities, and turnover, and examining the impact of consolidation adjustments where the subsidiary forms part of a larger group.
Why are subsidiaries audited?
Audits are often required to give transparency and accountability to stakeholders. For subsidiaries of overseas parent companies or worldwide groups, auditing ensures that financial records are consistent with international standards and offers assurance to investors, creditors, and regulators.
Subsidiaries in insurance, banking, or other regulated industries may also need auditing to ensure compliance with regulatory standards, manage financial risks, and provide transparency for stakeholders and customers.
What are the UK audit exemption criteria for subsidiaries?
Under the Companies Act 2006, certain small subsidiaries may qualify for audit exemption.
To qualify, they must meet at least two of the following thresholds (note: this will apply to financial years commencing on or after 1 October 2024):
- Annual turnover: Less than £15million (previously £10.2million)
- Balance sheet total: Less than £7.5million (previously £5.1 million)
- Number of employees: Fewer than 50
If a subsidiary meets these criteria, it may be classified as a small company under the small companies regime and could be exempt from audit.
Certain subsidiaries can be exempt from audits even if they are part of a larger group. For example, if the parent company prepares consolidated accounts for the whole group, including the subsidiary, and the group itself qualifies as a small group, the subsidiary may not need an individual audit.
However, it is important to note that this exemption depends on the size of both the parent company and the subsidiary’s financial metrics.
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Are there exceptions to audit exemption for subsidiaries?
Even if a subsidiary meets the exemption criteria, it may still need an audit if it’s part of a larger group.
If the parent company’s consolidated accounts show that the worldwide group exceeds the small company limits, the subsidiary may have to be audited.
Also, if the parent company is listed on the London Stock Exchange or operates in a UK-regulated market, its subsidiaries might require a statutory audit.
Due to the strict regulatory nature of the finance industry, an authorised insurance company or a banking company may also be subject to audit, regardless of its size.
Other situations where an audit may be required
Audits may also be required due to stakeholder demand. For example, creditors, investors, or regulators may ask for an audit to assess the company’s risk exposure. Stakeholders might ask for an audit when a company has outstanding liabilities or is in a high-risk industry.
This is especially true for subsidiaries involved in financial sectors such as banking or insurance market activity, where companies are subject to more scrutiny under regulations like the Banking Consolidation Directive.
Unsure whether your company requires an audit? Contact Treetops Chartered Accountants today.
Determining whether your subsidiary requires an audit can be tricky, especially if it is part of an overseas parent or a larger group. Treetops Chartered Accountants can provide expert guidance on whether your company is exempt or not to ensure compliance with UK audit regulations.
Contact Treetops Chartered Accountants today to discuss your company’s specific situation and get tailored advice.
Common questions regarding audits for UK subsidiaries
How often does a subsidiary need to be audited?
If a subsidiary is subject to an audit, it must be carried out annually. An audit covers the subsidiary’s financial year, ensuring that each set of accounts complies with UK regulations and presents a true and fair view of the company’s financial position.
Does a small UK subsidiary need an audit?
A small subsidiary may not need an audit if it meets the UK’s audit exemption criteria (see above). However, there are exceptions to audit exemption for small companies, such as if the parent group is listed on a stock exchange or involved in financial services. Also, stakeholders like creditors or regulators may still request an audit even if the company qualifies as audit-exempt.
