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Welcome to the CPA Audit Exemption Resource

Introduction

The Companies Act 2014 extended the audit exemption regime to a number of different types of company which heretofore were unable to avail of the exemption, including:

a)     Group companies - Parent and subsidiary companies are permitted, under section 360, to avail of audit exemption if they meet the criteria in section 359 ‘Main conditions for audit exemption – group situation’.

b)    Dormant companies – subject to meeting the conditions set out in section 365.

c)     Guarantee companies - Under Part 18, companies limited by guarantee which do not have a share capital - “CLGs” - can avail of audit exemption.  Such companies were deemed to be public companies under previous Companies Acts and were therefore unable to avail of audit exemption under the Companies (Amendment) (No 2) Act 1999 (‘1999 Act’), which restricted the exemption to private companies.

The new form of company established under the Companies Act 2014, the designated activity company (“DAC”) under Part 16, is also entitled to claim audit exemption, subject to similar criteria as private companies limited by shares (“LTDs”).  Private unlimited companies (‘ULCs’) are also entitled to avail of audit exemption.

The full text of the relevant legislation can be read on the CPA website at www.cpaireland.ie

 

Qualifying Conditions

Small Company

In order to avail of audit exemption, a company which is not a member of a group, must qualify as small in respect of the financial year in question in accordance with section 350.  The qualifying conditions for a small company are satisfied by a company in relation to a financial year in which it fulfils two or more of the following requirements:

  • The amount of turnover of the company does not exceed €8.8 million;
  • The balance sheet total of the company does not exceed €4.4 million;
  • The average number of employees of the company does not exceed 50 (section 350(5)).

The company must have filed it’s annual return on time with the CRO for the current and preceding year.

A company only loses ‘small’ status under CA 2014 if it does not satisfy the qualifying conditions in respect of two consecutive years.

Group situation

The Companies Act 2014 has introduced the audit exemption for group companies. Section 358(3) states that audit exemption is not available to a company that at any time during the financial year was a group company unless the group qualifies under section 359 as a small group in relation to that financial year.

The qualifying conditions for a small group are satisfied by a group in relation to a financial year in which it fulfils two or more of the following requirements:

  • The amount of the turnover[1] of the holding company and the other members of the group taken as a whole does not exceed €8.8 million;
  • The balance sheet total of the holding company and the other members of the group taken as a whole does not exceed €4.4 million;
  • The average number of employees employed by the holding company and the other members of the group taken as a whole does not exceed 50 (section 359(6)).

A group only loses ‘small’ status under CA 2014 if it does not satisfy the qualifying conditions in respect of two consecutive years.

All Irish companies in the group must have filed their annual return on time with the CRO. The annual returns of the holding company and all other members of the group for the preceding year must also have been filed on time.

 


[1] Note that section 275 has expanded the definition of ‘turnover’ to clarify that for a company “whose ordinary activities include the making or holding of investments, [turnover also] includes the gross revenue derived from such activities”.  See section 6 of Technical Release Companies Act 2014 Financial Reporting and Related Issues for further details.

Deciding to Avail of the Audit Exemption

Dormant Companies

In order to avail of the dormant company audit exemption, section 365(1) requires that the directors of the company are of the opinion that the company will satisfy the conditions set out below. The decision to avail of audit exemption is to be recorded by the directors in the minutes of the meeting at which the decision is taken.

 The conditions are that in respect of the year in question:

a)     It has no significant accounting transaction, and

b)    Its assets and liabilities comprise only permitted assets and liabilities.

“Significant accounting transaction” is defined as a transaction that is required by sections 281 and 282 to be entered in the company’s accounting records. Transactions specifically excluded from this term by section 365(8), which therefore do not trigger the audit obligation, are:

c)     A fee to the Registrar on a change of the company’s name;

d)    A fee to the Registrar on the re-registration of the company; or

e)     A fee to the Registrar for the registration of an annual return (including any fee of an increased amount by virtue of regulations under section 889(6)).

“Permitted assets and liabilities” are investments in shares of, and amounts due to or from, other group undertakings.

If a company holds a fixed asset such as property or has a bank account, a tax liability or any other non-group liability or contingent asset or liability, which do not fall within the definition of “permitted assets and liabilities”, then in accordance with section 365(1) and (2) it would not meet the requirements to avail of the dormant company audit exemption, irrespective of having no transactions.

Companies Limited by Guarantee

Companies limited by guarantee may also avail of the audit exemption. If the company is a registered charity the company should contact the Charities Regulatory Authority for further information, www.charitiesregulatoryauthority.ie

Rights of Shareholders and Members

Shareholders with not less than one-tenth of the voting rights in the company, have the option of serving notice on the company in writing under section 334 noting that they do not wish the company to avail of the audit exemption. 

This notice must be served on the company either during the financial year immediately preceding the financial year to which the notice relates, or during the financial year to which the notice relates, but not later than one month before the year end. The notice cannot be served retrospectively.

Individual members of companies limited by guarantee companies are entitled, by virtue of section 1218 (which applies section 334 to CLGs with modified wording), to serve notice on the company that they do not wish the company to avail of the audit exemption.

This notice must be served on the company either during the financial year immediately preceding the financial year to which the notice relates, or during the financial year to which the notice relates, but not later than one month before the year end. The notice cannot be served retrospectively.

Directors of companies should carefully consider the rights of shareholders/members to request that an audit be conducted when considering the availability of the audit exemption to their company.

 

31st December 2014 year ends – can a company avail of the audit exemption?

If the qualifying conditions for audit exemption are met by a company the company is entitled to avail of the audit exemption from 1st June 2015.

However the directors of the company must carefully consider the rights of the shareholders/members of the company as outlined above.

As the legislation for dormant companies is written in such a manner as to require the directors to minute their decision to avail of the audit exemption in the financial year in question in our opinion the audit exemption cannot be retrospectively availed of

 

What companies cannot avail of the audit exemption?

The following company types cannot avail of the audit exemption;

The audit exemption is not available to the following types of company, irrespective of size:

a)     Public limited companies (“PLCs”) - see section 1002 of Part 17 (which disapplies audit exemption for PLCs);

b)    Public unlimited companies (“PUCs”) - see section 1230 of Part 19 (which disapplies audit exemption for PUCs);

c)     Public unlimited companies that have no share capital (“PULCs”) - see section 1230 of Part 19 (which disapplies audit exemption for PULCs);

d)    Investment companies – see section 1387 of Part 24 (which disapplies audit exemption for investment companies);

e)     Companies falling within any provision of Schedule 5, other than a company referred to in paragraph 5 or 16 of the Schedule (see section 362);

f)     A “relevant securitisation company”, as defined in section 362(3).

In addition to these there are certain companies whose activities preclude them from availing of the audit exemption. These are set out in Schedule 5 to the Companies Act 2014, the full text of which is provided in Appendix 1.

 

Termination of the appointment of the auditor

Once the directors have made the decision to avail of the audit exemption they must terminate the appointment of the auditor.

They must serve a notice on the auditor outlining their decision and the termination of their appointment.

Within a period of 21 days beginning on the date of being notified, the auditor must serve a notice on the company containing a statement stating whether or not any circumstances exist that should be brought to the attention of the creditors or shareholders.

As soon as this notice is served on the company the auditor must write within 14 days to the CRO together with a copy of the notice.

Examples of these letters can be found in Appendix 3. 

If the statement contained in the notice from the statutory auditor includes circumstances, which the statutory auditor considers should be brought to the attention of the members of creditors of the company, the company is obliged to send, within 14 days of receiving such notice, a copy of the notice to every person (including members of the company and holders of debentures) who is entitled under section 338 to receive the statutory financial statements, directors’ report and statutory auditor’s report.

There continues to be no requirement on the part of statutory auditor, removed from office due to a company availing of audit exemption, to notify the Irish Auditing and Accounting Supervisory Authority (IAASA) of this removal.  Such a duty to notify IAASA only applies, in accordance with section 403, where the statutory auditor is removed by ordinary resolution at a general meeting (under section 394) or where the statutory auditor resigns from the office of statutory auditor to the company in accordance with section 400.


 

Annual Accounts

For audit exempt companies, annual statutory accounts must still be prepared in accordance with the Companies Acts 2014 and accounting standards. The financial statements must show a true and fair view and otherwise comply with the Companies Act 2014.

A statement must be included at the bottom of the company’s balance sheet which reads as follows:-

We as Directors of X Limited, state that:

a)     the company is availing itself of the audit exemption (and the exemption shall be expressed to be “the exemption provided for by Chapter 15 of Part 6 of the Companies Act 2014”),

b)    the company is availing itself of the exemption on the grounds that section 358 or 359, as appropriate, is complied with,

c)     no notice under subsection (1) of section 334 has, in accordance with subsection (2) of that section, been served on the company, and

d)    the directors acknowledge the obligations of the company, under this Act, to—

(i)             keep adequate accounting records and prepare statutory financial statements which give a true and fair view of the assets, liabilities and financial position of the company at the end of its financial year and of its profit or loss for such a year, and

(ii)            otherwise comply with the provisions of this Act relating to statutory financial statements so far as they are applicable to the company.

A statement of the directors’ responsibilities must be included in the financial statements and is set out in Appendix 4.

Filing Abridged Annual Accounts

There are no changes to the regime for filing accounts with the CRO. The client must still prepare accounts which give a true and fair view and otherwise comply with the Companies Act 2014. An annual return together with accounts must be filed in the normal manner.

However, an audit report will not be filed with the accounts and neither will the special auditors report.

The statement of the directors’ responsibilities are outlined in Appendix 4.

Preparation of the Financial Statements

Where the appointment of auditor has been terminated but the services of the accountant have been retained to prepare financial statements or provide additional services all financial statements must be prepared in accordance with Miscellaneous Technical Statement 14- Compiling and reporting on financial statements not subject to audit. Members should refer to the CPA website for full details.

A sample Accountants’ Report can be found in appendix 5.

Engagement Letters

A new engagement letter should be issued reflecting the change in the accountant’s appointment.

It should be clear to the client that audit services are no longer being provided. The accountant should ensure that all correspondence to the client makes this point clear e.g. fee notes to client should not state audit services etc.

A sample engagement letter can be found at Appendix 6.

Appendix 1

Schedule 5

List of Companies for Certain Purposes of Act (including, in particular, sections 142, 350, 362 and 510)

1.     A company that is an authorised investment firm within the meaning of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007).

2.     A company that is an authorised market operator.

3.     A company that is an associated undertaking or a related undertaking, of an authorised investment firm or an authorised market operator, within the meaning of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007).

4.     A company to which Chapter VII, VIII or IX of Part II of the Central Bank Act 1989 applies.

5.     A company that is engaged in the business of accepting deposits or other repayable funds or granting credit for its own account.

6.     A company that is an associated body of a building society within the meaning of the Building Societies Act 1989.

7.     A company that is an associated enterprise of a credit institution within the meaning of the European Communities (Credit Institutions) (Consolidated Supervision) Regulations 2009 (S.I. No. 475 of 2009).

8.     An investment company within the meaning of Part 24.

9.     A company that is a management company, trustee or custodian within the meaning of Part 24 or of Part 2 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005.

10.  A company that is an undertaking for collective investment in transferable securities within the meaning of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (S.I. No. 352 of 2011).

11.  A company that is a management company or trustee of an undertaking for collective investment in transferable securities within the meaning of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (S.I. No. 352 of 2011).

12.  A company that is a management company or trustee of a unit trust scheme within the meaning of the Unit Trusts Act 1990.

13.  A company that is a general partner or custodian of an investment limited partnership within the meaning of the Investment Limited Partnerships Act 1994.

14.  A company that has close links (within the meaning of the European Union (Capital Requirements) Regulations 2014 (S.I. No. 158 of 2014)) with an authorised investment firm referred to in paragraph 1 or a company referred to in paragraph 5.

15.  Any other company the carrying on of business by which is required, by virtue of any enactment or instrument thereunder, to be authorised by the Central Bank.

16.  A company that is the holder of an authorisation within the meaning of—

  1. Regulation 2 of the European Communities (Non-Life Insurance) Regulations 1976 (S.I. No. 115 of 1976);
  2. Regulation 2 of the European Communities (Non-Life Insurance) Framework Regulations 1994 (S.I. No. 359 of 1994);
  3. Regulation 2 of the European Communities (Life Assurance) Regulations 1984 (S.I. No. 57 of 1984); or
  4. Regulation 2 of the European Communities (Life Assurance) Framework Regulations 1994 (S.I. No. 360 of 1994).

17.  A company that is an insurance intermediary within the meaning of the Insurance Act 1989.

 

A company that is an excepted body within the meaning of the Trade Union Acts 1871 to 1990.

Appendix 1 – Minutes of Meeting of the Directors

Under sections 358 and 359 it is no longer necessary to have recorded the decision to avail of audit exemption in the minutes of a directors’ meeting in advance of the year end (with the exception of a dormant company). However the directors may wish to minute the decision as follows;

Minutes of meeting of the directors

Held at

On

Present

The meeting fully reviewed the financial position of the company and having reviewed the provisions of the Companies Act 2014, the Directors were satisfied that the company will fulfil the conditions specified in the Act and it was resolved that the company should avail of the audit exemption in respect of the year commencing on XXXXX.

 

Resignation of Auditor

The Company Secretary was instructed to write to the auditors of the company and to advise them that the company has decided to avail of an exemption and to request them to serve a notice on the company in accordance with Section 399.

This concluded the business of the meeting

 

Date

Chairman

 

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