The audit requirements for UK companies are primarily governed by the Companies Act 2006 and the Companies (Audit, Investigations and Community Enterprise) Act 2004. These acts establish the fundamental principles, standards, and obligations that companies must adhere to when conducting audits.

Statutory audit, also known as mandatory audit, is an independent third-party auditor who obtains reasonable assurance as to whether the company's financial statements as a whole are free from material misstatement caused by fraud or error, and expresses an audit opinion on the trueness and fairness of the financial statements based on the audit results in accordance with the provisions of auditing standards.

Not all companies are required to have an statutory audit, typically small companies can take advantage of audit exemption if they meet certain criteria. However, there are some circumstances that make audit compulsory, for example, if at any time of the year the company is a public company, a subsidiary and its group company meet the audit criteria, or a regulated insurance company, etc.

Even if a company is exempt from auditing, it must have its accounts audited at the request of shareholders holding more than 10% of the shares. Of course, companies can also be audited voluntarily, such as if there is a significant change in the company or a proposed sale of the company.

Audit can provide a true and fair assessment of a company's performance and condition. In addition to meeting legal requirements, audits may have other possible advantages, such as increased credibility, improved internal systems and controls, and increased stakeholder confidence.

Failure to comply with audit obligations may result in penalties that may have an impact on the company, depending on the extent of the violation, among other circumstances.

1. Mandatory Audit Threshold
   
   The Companies Act 2006 stipulates that all UK companies, regardless of their size, must prepare financial statements annually. However, the requirement for an audit varies depending on the size and nature of the company. Small companies have the option to take advantage of the audit exemption provided they meet certain criteria.
   
   

   (1)	An individual Company A company will be classified as “small” and is exempted from audit if it meets two or more of the following criteria: (a) annual turnover not exceeding £10.2 million, (b) balance sheet total not exceeding £5.1 million, and (c) the average number of employees not exceeding 50.
   (2)	Dormant companies A company that has been a "dormant company" since its incorporation or throughout the financial year and has prepared its accounts under the "small company" regime may enjoy audit exemption.
   (3)	A Subsidiary Company A subsidiary company of a group may be audit exempted, in summary: (a) The subsidiary has been dormant since its inception or throughout the financial year and accounts are maintained under the "small" company system and are not included in the group accounts during the financial period. (b) If the UK subsidiary and its group meet both the criteria of "small:" (c) (i)    The subsidiary itself meets the "small company" criteria, and (ii)   The group company considered on a worldwide basis is qualified as ‘small’ group, to qualify as ‘small’, the group must meet two or more of the following criteria: annual turnover not exceeding NET £10.2 million, GROSS £12.2 million; balance sheet total not exceeding NET £5.1 million, GROSS £6.1 million; the average number of employees not exceeding 50. The above NET amount refers to the amount after adjusting for intra-group transactions in accordance with the requirements of the consolidated statements, and the GROSS amount is the amount added together in the accounts of all individual companies prior to the consolidation of intra-group transactions.   (iii)    If the entire group is UK Registered: the parent company guarantee the liabilities of the subsidiary, all members of the subsidiary company agreed to the audit exemption, and the subsidiary is included in the parent company's audited consolidated statements and filed the consolidated statements to Companies House. Before the UK officially left the EU, if the parent company is an EU member state and the start date of it UK subsidiary annual accounting started on or before 31 December 2020, the parent company may apply for an audit exemption for the subsidiary under conditions (i) to (iii), otherwise the UK subsidiary will not be eligible for audit exemption.

   However, the circumstances of a UK subsidiary and its group company can be very complicated, it would be always worth taking professional advice when uncertain.
   
   
2. Companies that Must Have an Audit
   
   Companies must have an audit if when it has been one of the following business sectors:
   

   a standalone company if not fulfilling the exemption requirements, a subsidiary company if not fulfilling the exemption requirements, a public company, an authorised insurance company regulated under Financial Services and Markets Act 2000 (c. 8), carrying out insurance market activity, involved in banking, an issuer of electronic money (e-money), a Markets in Financial Instruments Directive (MiFID) investment firm, an Undertakings for Collective Investment in Transferable Securities (UCITS) management company, a corporate body and its shares have been traded on a regulated market, a funder of a master trust pensions scheme, a special register body, a pensions or labour relations body.

   
   
3. Voluntary Audit
   
   Even when a company is exempted from an audit, the company must perform an audit if formally requested by its shareholders or undergo a voluntary audit for the advantages of the company.
   
   

   (1)	Requested by shareholders Regardless of whether the shareholders are individuals or groups, if a shareholder holding more than 10% of the shares requests an audit, the company must audit its accounts. Shareholders must make the request in writing and send it to the company's registered address and should arrive at least one month before the end of the financial year.
   (2)	Significant change When a company undergoes a significant period of change, for example, if the company is entering into a new market, a voluntary audit can help to get the finances in shape before meeting the criteria for a statutory audit.   An audit can also shed light on any issues to identify a company’s weaknesses and to tackle problems ahead.
   (3)	Planning of selling It may help to secure a better selling price.  If a company is planning to sell the company, undergoing an in-depth financial review can show the new owners that the investment is safe.

   
   
4. Benefits of Auditing
   
   An audit provides an independent and objective assessment of a company's financial statements, increasing credibility and instilling confidence in stakeholders, such as investors, lenders, and regulatory bodies, and/or giving shareholders confidence.
   
   

   (1)	Enhance Credibility Independent auditors must be appointed. The auditors analyse company’s accounts change from one year to the next, check that the accounting processes are basically adequate, test samples from the underlying information, and consider the evidence that makes up the audit trail. Base on the level of confidence and sufficiency of information collected, the auditors will then give their opinion of the financial statements on an auditor report so that everybody who reads them can see that an independent audit has taken place.
   (2)	Improving internal systems and controls Auditors do not just focus on the numbers but will enable to have an overall understanding of the business management and control systems. This will enable the auditors to give recommendations in the accounting systems or controls, making a business more efficient and less prone to fraud or error.
   (3)	Giving stakeholders confidence Financial statements audit performed by independent auditors that the financial statements present a true and fair view, and in all material respects can give confidence to shareholders, banks, and other stakeholders. An independent review of the financial statements can provide transparency to the shareholders that the company is being run within their best interests.  It can also help the company seeking more funds from shareholders or banks and keeping good business relationships with other stakeholders.

   
   
5. Consequences of non-compliance
   
   It is important for companies to understand and adhere to their obligations to avoid these potential repercussions. Here are some of the consequences that may arise from non-compliance.
   
   

   (1)	Legal Penalties and Fines Failure to comply with audit requirements can result in legal penalties and fines imposed by regulatory authorities. The severity of the penalties will depend on the specific circumstances and the magnitude of the non-compliance. Worst scenario could be the company being struck off from the company registry.
   (2)	Limited Access to Capital Non-compliant companies may face difficulties in raising capital from investors and accessing loans from financial institutions. Investors and lenders often rely on audited financial statements as a basis for decision-making and assessing the financial health of a company. Lack of audited financial statements can make it challenging to demonstrate financial credibility and transparency.
   (3)	Loss of Credibility and Trust Non-compliance with audit requirements can significantly damage a company's reputation, erode stakeholder trust, and affect relationships with investors, lenders, customers, and suppliers. It may also lead to a loss of business opportunities and potential investors.