Audit Exemptions in EU

Running Head: Audit Exemption to Small Companies
Audit Exemptions in EU

Audit Exemption to Small Companies 1
Part 1
History of audit exemptions in EU and changes in audit thresholds in UK
For many years in history, all the limited companies in UK that were holding the active status
were required to get the audit of their financial statements done by an independent auditor,
irrespective of their size. In year 1994, the state of universality of audit function was changed
when it was permitted under the provisions of EU law to provide exemption to the small
companies in respect of statutory audit (Collis, 2007).
In the initial periods, the limits of thresholds under UK law were fixed below the maxima
level provided in the EU Company Law Directive. However, there were revisions made in the
threshold limits on the upward side till such thresholds matched with the maxima level in EU.
During this entire period there were huge controversies about the adequacy and
appropriateness of thresholds and their impact on the profession of accounting and its users.
An analysis has revealed that out of 25 member states of EU, 92% countries provide audit
exemption to the small companies (Collis, 2007). Moreover, UK is one among the three
countries that is using maximum level of thresholds prevailing as of now in EU.
Since the period of recession that occurred in 1980, a considerable expansion in the number
of micro sized businesses, small businesses and the medium sized businesses. However, the
threshold limits applicable to small companies are always subject to the periodic amendments
for the purpose of indexation, by the European Commission. The size criteria to determine as
to whether an audit exemption is available to a particular company, has been based on mainly
three factors since 1999 to 2008. These factors were the turnover, balance sheet total and
average total number of employees in the organisation. In 1999, the maxima for turnover
were set at € 5 million and that for balance sheet total was set at € 2.5 million. In 2003, the
maxima in both the respects were reset. In terms of turnover, the threshold limit was set at €

Audit Exemption to Small Companies 2
7.30 million and at €3.65 million in terms of balance sheet total. In 2008, the limits were
again revised and set at €8.8 million for turnover and €4.4 million for balance sheet total.
However, the limits for average number of employees had remained same throughout the
period at 50 (Collis, 2007).
The extent of threshold has varied in the different member jurisdiction of 25 member states of
EU. However, the variations in those threshold limits have been on account of differences in
the culture, social and economic positions of those countries. The concept of audit exemption
was brought into the scope in 1994 by way of making amendment of the provisions under
section 246 A of companies act 1985 (Collis, 2010). The said section allowed the companies
to skip the requirement of statutory audit unless its turnover is up-to £90,000 and the balance
sheet has the total of £1.4m and has the average number of employees at or below 50,
provided there was no requirement of full audit by those shareholders of the company who
held minimum of 10% of the total share capital of the company. However, those companies
which have turnover in the range of £90,000 and £350,000 were given a privilege to file an
audit exemption report but this form was withdrawn in 1997 to release companies with
turnover at or below £350,000 to follow the statutory audit provisions. In 2000, the threshold
limit was increased to £1,000,000 in terms of turnover and thereafter in 2003 the said limits
were revised for the indexation purposes and were set at £5,600,000 (turnover) and
£2,800,000 (balance sheet total).