History of Audit Exemption in EU and Changes in UK Thresholds

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By student name
Professor
University
Date: 25 April 2018.
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Question No. 1
Question: Research the history of audit exemption in the European Union and discuss the changes in
audit exemption thresholds in the United Kingdom.
As per the resolution passed by the European Parliament in June 2013, broadly entities apart from
public interest entities (which is basically those entities whose securities are widely traded in the stock
market, lending institutions, insurance providers and any other entity which has been specifically named
as such by any of the member countries of the European Union) and medium sized or large
undertakings, are not mandated to have their statutory audit done (Axelsen, et al., 2017). This
essentially meant that all those companies, which fall under the stated definition of small undertakings,
will be exempted from the requirement of statutory audit. There have been thresholds provided as to
which are the companies that can be classified as such. A comparative analysis of the thresholds shows
that the limits for both balance sheet total and net turnover have been lowered with respected to the
figures that were stated in the 2011 and the 2006 amendments. A company to be categorized as a ‘small
undertaking’ needs to fulfil at least two out of the three thresholds. Their balance sheet total must not
exceed 4 million Euros, Net Turnover shall not exceed 8 million, or average number of employees on the
payroll of the companies during the financial year shall not exceed 50 employees. However, owing to
the peculiarities in each of the member countries, they have been an option to increase the stated
threshold to some extent, which in any case shall not exceed 6 million euros for balance sheet total, and
12 million in case of turnover of the companies. In addition to the above allowable variance, there is also
a permissible variation of 5 percent for exchange rate fluctuations between Euro and local currency of
the member countries (Belton, 2017).
Despite the provision of permitting increase in thresholds, only one third of the member countries chose
to exercise this and increase the limit. This goes to show the increased levels of trust and reliance, the
policy makers put on the role of the statutory auditors. They recognize the fact that audit is an
important aspect in regulating the economy and safeguarding the value of the stakeholders. It is
pertinent to note that it is up to the small undertakings to choose if they want to get themselves
audited, i.e., they may voluntarily decide to get statutory audit done (Alexander, 2016).
In case of UK, the thresholds limits are a little higher than the stipulated thresholds. The categories of
companies to be qualified as small companies are like those of ‘small undertakings’ classification in the
European context. However, in the UK scenario a lot of emphasis is laid out on the definition of
companies that form part of a group of companies to be eligible as small companies’ exemption. The
regulations in the UK states that those subsidiary companies which may or may not be part of a ‘small
group of companies’, if it meets all the conditions laid down under section 479A and does not fall under
the classification of companies mentioned under section 479B is also exempt from the mandatory
provisions of statutory audit. In case of UK, it is interesting to observe that UK falls under those one-
third of European Union members who have increased the threshold limits for balance sheet total and
turnover total for small company classification. The increase is significant in percentage when
represented in terms of British pounds. Prima facie, this move by the UK lawmakers aims to benefit a
large of chunk of companies by savings in audit costs, which may become a burden for some of them
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