Audit Exemption

Welcome to the CPA Audit Exemption Resource

Introduction

The Companies Act 2014 (CA 2014) and the Companies (Accounting) Act 2017 (which commenced on 9th June, 2017) 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 & Micro Companies

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 280A of CA 2014. 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 €12 million
  • The balance sheet total of the company does not exceed €6 million
  • The average number of employees of the company does not exceed 50 (section 280A).
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.


Late Filing and Audit Exemption

Changes introduced by the Companies (Statutory Audits) Act 2018 mean that audit exemption is lost for the following two years where an annual return is filed late and not in the current year. An annual return that is being submitted late does not lose any potential audit exemption for that year but will not be eligible for audit exemption for the following two years. (Section 363 Companies Act 2014 as amended by section 10 Companies (Statutory Audits) Act 2018). Section 10 of the 2018 Act was commenced on 21st September 2018 and applies with immediate effect.


Group situation

The Companies Act 2014 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 aggregate amount of the turnover of the group does not exceed €12 million net (or €14.4 million gross);
  • The aggregate balance sheet total of the group does not exceed €6 million net (or €7.2 million gross);
  • The aggregate average number of employees of the group does not exceed 50 (section 280B)..
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.
 

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.

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 or 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 above the directors signature/s as per section 335 which reads as follows:-
 

Balance Sheet Statement for a Small Company

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 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 company qualifies for the small companies regime on the grounds that section 280C of the Companies Act 2014 is complied with and the statutory financial statements have been prepared in accordance with the small companies regime.

e)  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 Accountants’ Report on the financial statements as set out in Appendix 5 and a Directors’ Responsibilities Statement for Small Companies or Small Groups as set out in Appendix 4.


Abridged Accounts Balance Sheet Statement

Where both audit and abridged exemption are availed of the following paragraph should be included in the abridged Balance Sheet statement:


For the small companies regime:

In preparing these abridged financial statements the directors have relied on the exemption contained in section 352 of the Companies Act 2014 on the ground that the company is entitled to the benefit of that exemption as it qualifies for the micro company regime. These abridged financial statements have been properly prepared in accordance with section 353 of the Companies Act 2014.
 

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. 
 

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. 
 

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 
 

Sample Letters of Resignation for the Auditor

 

Letter 1 - Proforma Resignation notice under Section 399 of the Companies Act 2014

The Directors, 
XYZ Limited, 
Registered Office
 
Date

We, ABC & Co., of (Address), hereby serve notice, pursuant to Section 399 of the Companies Act, 2014, that, having been requested to do so by the directors, we are resigning from the office of auditor of XYZ Limited as and from XXXXX.

We confirm that there are no circumstances in connection with our resignation that we consider should be brought to the notice of the members or creditors of the company.

As required by the Companies Act 2014 we will be forwarding a copy of this notice to the Registrar of Companies.

Yours faithfully,
 

Letter 2 – Letter to the Registrar of Companies

 
The Registrar of Companies

Date

Re: XYZ Limited (Registered No.)

Dear Sir, Pursuant to Section 399(3)(a) of the Companies Act, 2014 we are sending you a copy of our notice of resignation from the office of auditor of the above named company.

Yours faithfully,
ABC & Co.
 

Directors’ Responsibilities Statement

The directors are responsible for preparing the annual report and the statutory financial statements in accordance with applicable law and Generally Accepted Accounting Practice in Ireland, including the Accounting Standards issued by the Financial Reporting Council.

Irish company law requires the directors to prepare statutory financial statements for each financial year. Under company law, the directors shall not approve financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position, as at the end of the financial year, and profit or loss, for the financial year and otherwise comply with the Act. In preparing those financial statements, the directors are required to:
  • Select suitable accounting policies and then apply them consistently
  • Make judgements and estimates that are reasonable and prudent
  • State whether the statutory financial statements have been prepared in accordance with applicable accounting standards, identify those standards and note the effect and the reasons for any material departure from those standards
  • Prepare the statutory financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business
The directors are responsible for ensuring that the company keeps or causes to be kept adequate accounting records which correctly explain and record the transactions of the company, enable at any time the assets, liabilities, financial position and profit or loss of the company to be determined with reasonable accuracy and enable them to ensure that the statutory financial statements and directors report comply with the Companies Act 2014. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.


Directors’ declaration on unaudited financial statements

In relation to the statutory financial statements as set out on pages x to x.
  • The directors approve these statutory financial statements and confirm that they are responsible for them, including selecting the appropriate accounting policies, applying them consistently and making, on a reasonable and prudent basis, the judgements underlying them. They have been prepared on the going concern basis on the grounds that the company will continue in business
  • The directors confirm that they have made available to ABC & Co Certified Public Accountants, the company’s accounting records and provided all the information necessary for the compilation of the financial statements.
  • The directors confirm that to the best of their knowledge and belief, the accounting records reflect all the transactions of the company for the year ended 31st December 2017.
On behalf of the board
__________________                                 ____________________
Signature                                                     Signature 
A. Smith                                                       B. Murphy
Director                                                       Director
Date
 

Sample Accountants’ Report 

Small Companies Regime 

Accountants’ report to the directors on the unaudited financial statements of (Exempt Co.) Limited

We have compiled the financial statements set out on pages X to X of (Exempt Co.) Limited for the year ended [balance sheet date]. 

This report is made solely to you, in accordance with the terms of our engagement. Our work has been undertaken solely to prepare for your approval the financial statements and state those matters that we have agreed to state to you in this report in accordance with the guidance of Institute of Certified Public Accountants in Ireland. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than (insert director’s name) for our work or for this report.
 

Respective responsibilities of directors and accountants

As described on page X the company’s directors are responsible for the financial statements. It is our responsibility to compile the financial statements of (Exempt Co.) Limited from the accounting records, information and explanations supplied to us by the directors.
 

Scope of work

We compiled the financial statements in accordance with the guidance contained in M14 Compiling and reporting on financial statements not subject to audit from the accounting records and information and explanations supplied to us by the directors. 

We have not audited or otherwise attempted to verify the accuracy or completeness of such records, information and explanations and, accordingly, express no opinion on the financial statements. 
 
ABC & Co 
Certified Public Accountants 
Date:
 

Micro Companies Regime 

Accountants’ report to the directors on the unaudited financial statements of (Exempt Co.) Limited

We have compiled the statutory financial statements set out on pages x to x of (Exempt Co.) Limited for the year ended (balance sheet date). 

This report is made solely to you, in accordance with the terms of our engagement. Our work has been undertaken solely to prepare for your approval the financial statements and state those matters that we have agreed to state to you in this report in accordance with the guidance of Institute of Certified Public Accountants in Ireland. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than (insert director’s name) for our work or for this report.
 

Respective responsibilities of directors and accountants 

The company’s directors are responsible for the financial statements. It is our responsibility to compile the statutory financial statements of (Exempt Co.) Limited from the accounting records, information and explanations supplied to us by the directors.


Scope of work 

We compiled the statutory financial statements in accordance with the guidance contained in M14 (Revised) Compiling and reporting on statutory financial statements not subject to audit and Financial Reporting Standard 105 – 'The Financial Reporting Standard applicable to the Micro-entities Regime' (FRS 105), from the accounting records and information and explanations supplied to us by the directors. 

We have not audited or otherwise attempted to verify the accuracy or completeness of such records, information and explanations and, accordingly, express no opinion on the financial statements. 

ABC & Co 
Certified Public Accountants 
Date:


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