Finance director's handbook 2

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Preface
The role of the finance director varies significantly between companies, depend-
ing to a large extent on the complexity and size of the business and the number
of executives and managers available to share in the responsibilities. Whilst some
finance directors will concentrate primarily on financial reporting, treasury and tax-
ation issues, others will have a much wider remit and be expected to provide exper-
tise and assistance in a variety of areas.
The field of financial reporting is becoming increasingly complex, particu-
larly for listed companies, where the emphasis is now firmly on transparency and
accountability. Accounting standards have become more conceptual in nature,
underpinned by a requirement for preparers of accounts to apply the spirit and rea-
soning behind the detailed requirements. For listed companies, the requirement to
prepare group accounts in accordance with International Accounting Standards
(IASs) has created new challenges, and the Accounting Standards Board’s plans to
converge UK accounting practice with international requirements over the coming
years, together with the adoption in the UK of International Standards on Auditing
(ISAs), means that all companies are likely to feel the increasing impact of interna-
tional harmonisation.
Listed companies also have significant additional reporting responsibilities under

the Combined Code and, if they are registered with the US Securities and Exchange
Commission (SEC), under the Sarbanes-Oxley Act 2002 and related SEC rules. The
current reporting requirements in respect of internal control have focused attention
on the issue of risk management and, whilst the detailed reporting requirements
apply only to listed companies, there is nevertheless much in the related guidance
that will be relevant to businesses of all sizes.
The gradual implementation of the Companies Act 2006 between 1 January
2007 and 1 October 2009 also brings further changes, and in the difficult transi-
tional phase particular care is needed in identifying whether the old or the new
requirements apply. The accounting and audit provisions of the Companies Act
2006 generally apply for accounting periods beginning on or after 6 April 2008,
although some of the new requirements in respect of auditors apply to appointments
and changes in appointments made on or after 6 April 2008. The general economic
downturn in late 2008 and 2009 has created further problems, with liquidity risk,
the availability of finance and going concern issues receiving particular atten-
tion. Up to date guidance on these and related issues from the Financial Reporting
Council and Auditing Practices Board is highlighted in the relevant chapters.
xl  Preface
These are all areas in which the finance director’s input to discussions and deci-
sions is likely to be significant. I therefore make no apology for the fact that the
chapters on audit, corporate governance, financial reporting and investor relations
are the most substantial sections of this book. However, in addition to guidance in
these key areas, this handbook is intended to provide an overview of other business
issues and activities that may fall within the remit of the finance director. The book
is intended as an initial source of advice and guidance rather than as a comprehen-
sive manual, and sources of further information are indicated where appropriate.
This edition is based on legal and other requirements in force as at 31 January
2009. In the fast moving world of today, very little stands still for long and an
indication of known or expected future developments is therefore given where appro-
priate. No reference work can be comprehensive in this complex and fast changing

environment, or take account of the specific circumstances of each particular case,
and finance directors should therefore always seek appropriate professional advice.
I am particularly grateful to Sonia McKay and Andrea Oates who have contrib-
uted the chapters on ‘Employment law’ and ‘Health and safety’ respectively, and to
the editorial team at Elsevier for their help and support.
Glynis D. Morris
Chartered Accountant
Abbreviations and References
  
Legislation
CA 1985  Companies Act 1985
CA 1989  Companies Act 1989
CA 2006  Companies Act 2006
COSHH  Control  of  Substances  Hazardous  to  Health  Regulations 
1999
ERA 1996  Employment Rights Act 1996
HSWA 1974  Health and Safety at Work etc. Act 1974
RIDDOR 1995  Reporting of Injuries, Diseases and Dangerous Occurrences 
Regulations 1995
TULRCA 1992  Trade Union and Labour Relations (Consolidation) Act 1992
TUPE  Transfer  of  Undertakings  (Protection  of  Employment) 
Regulations 1981
Bodies
ACAS  Advisory, Conciliation and Arbitration Service
ACCA  Association of Chartered Certified Accountants
APB  Auditing Practices Board
ASB  Accounting Standards Board
ASC  Accounting Standards Committee
CAC  Central Arbitration Committee
CIMA  Chartered Institute of Management Accountants

CIPFA  Chartered Institute of Public Finance and Accountancy
CRE  Commission for Racial Equality
EAGGF  European Agricultural Guidance and Guarantee Fund
EMAS  Employment Medical Advisory Service
EOC  Equal Opportunities Commission
ERDF  European Regional Development Fund
ESF  European Social Fund
FIFG  Financial Instrument for Fisheries Guidance
FRC  Financial Reporting Council
FRRP  Financial Reporting Review Panel
FSA  Financial Services Authority
HMRC  HM Revenue and Customs
HSC  Health and Safety Commission
xlii  Abbreviations and References
HSE  Health and Safety Executive
IASB  International Accounting Standards Board
ICAEW  Institute of Chartered Accountants in England and Wales
ICAI  Institute of Chartered Accountants in Ireland
ICAS  Institute of Chartered Accountants of Scotland
ICC  Incident Contact Centre
ICSA  Institute of Chartered Secretaries and Administrators
LEC  Local Enterprise Council
NACOSS  National Approval Council for Security Systems
NAPF  National Association of Pension Funds
PIRC  Pensions and Investment Research Consultants Limited
POB  Professional Oversight Board
PRAG  Pensions Research Accounting Group
PSO  [Inland Revenue] Pension Schemes Office
TEC  Training and Enterprise Council
UITC  Urgent Issues Task Force

Publications
AcoP  Approved Code of Practice
FRED  Financial Reporting Exposure Draft
FRS  Financial Reporting Standard
FRSSE  Financial Reporting Standard for Smaller Entities
IAS  International Accounting Standard
IFRS  International Financial Reporting Standard
ISA  International Standard on Auditing
OFR  Operating and Financial Review
SAS  Statement of Auditing Standards
SORP  Statement of Recommended Practice
SSAP  Statement of Standard Accounting Practice
Miscellaneous abbreviations
ACT  Advance corporation tax
AESOP  All-employee share ownership plan
AGM  Annual general meeting
ASP  Application Service Provider
B2B  Business to business
B2C  Business to consumer
B2G  Business to government
C2G  Consumer to government
CEO  Chief executive officer
Abbreviations and References  xliii
CFC  Controlled foreign company
CIC  Close investment-holding company
CTSA  Corporation tax self-assessment
E & OE  Errors and omissions excepted
EDI  Electronic Data Interchange
EHO  Environmental health officer
EMI  Enterprise Management Incentive

ETO  Economic, technical or organizational
ISP  Internet Service Provider
JWG  Joint Working Group
MA  Maternity Allowance
PAYE  Pay As You Earn
Plc  Public limited company
PPE  Personal protective equipment
S2P  State Second Pension
SERPS  State Earnings Related Pension Scheme
SMP  Statutory Maternity Pay
SSP  Statutory Sick Pay
UEL  Upper Earnings Limit
VAN  Value Added Network
VAT  Value added tax
VDU  Visual display unit
WFTC  Working Families Tax Credit
Law report references
ICR  Industrial Cases Reports
IRLB  Industrial Relations Law Bulletin
IRLR  Industrial Relations Law Reports
Chapter 1
Audit
1.1 The External Audit Requirement
1.2 Audit Exemption for Dormant Companies
1.8 Audit Exemption for Small Companies
1.18 Appointment of External Auditors
1.39 Changes in External Audit Appointments
1.58 Rights and Duties of External Auditors
1.70 Statutory Reporting by External Auditors
1.99 Other Reporting by External Auditors

1.106 Remuneration of External Auditors and their Associates
1.114 Auditor Liability Limitation Agreements
1.121 Internal Audit
1.145 Audit Committees
Appendix 1 Useful Websites on Audit-Related Matters
Appendix 2 Specimen Terms of Reference for an Audit Committee
1.1  The External Audit Requirement
For accounting periods beginning before 1 October 2007, under section 384(1) of
the Companies Act 1985 (CA 1985), every company must appoint an auditor or
auditors. The only exceptions to this, set out in section 388A of CA 1985, are dor-
mant companies and certain small companies, which are exempt from the obligation
to appoint auditors if they are exempt under sections 249AA and 249A, respectively,
from the provisions of CA 1985 on the annual audit of accounts.
For accounting periods beginning on or after 1 October 2007, sections 384 and
388A of CA 1985 continue to apply to public companies but are repealed in respect
of private companies and replaced by sections 485 to 488 of the Companies Act
2006 (CA 2006). Under section 485 of CA 2006, a private company must appoint
an auditor for each financial year unless the directors reasonably resolve other-
wise, on the grounds that audited accounts are unlikely to be required (for instance,
where the company is eligible for audit exemption and the directors propose to take
advantage of this).
2  Finance Director’s Handbook
For accounting periods beginning on or after 6 April 2008, sections 384 and
388A of CA 1985 are repealed in respect of public companies as well and replaced
by sections 489 to 491 of CA 2006. Section 489 of CA 2006 provides that a public
company must appoint an auditor for each financial year unless the directors rea-
sonably resolve otherwise, on the grounds that audited accounts are unlikely to be
required. For practical purposes, a public company will need to appoint auditors
each year unless it qualifies for audit exemption as a dormant company.
1.2  Audit Exemption for Dormant Companies

AT A GLANCE
n A dormant company is usually exempt from the requirement to appoint auditors and
have its annual accounts audited.
n The definition of ‘dormant’ for these purposes is set out in company law.
n Certain companies are ineligible for the exemption even if they meet the definition.
n Members of a dormant company can require an audit to be carried out in any
financial year by following the procedure laid down in company law.
n The directors must make a formal statement in the accounts in order for the
exemption to be available.
n A dormant company that acts as an agent for another party must disclose this fact in
its annual accounts.
A company that is dormant, as defined in company law, is usually entitled to
exemption from an annual audit. The exemption is automatically available to those
companies that meet the conditions set out in the legislation. The exemption relates
only to the annual audit requirement – a dormant company must still prepare annual
accounts in accordance with the accounting provisions of the legislation and deliver
a copy to the registrar.
1.3  Definition of ‘Dormant’
A company is dormant for any accounting period during which it does not have a
‘significant accounting transaction’. This is defined as any transaction that requires
an entry to be made in the accounting records, other than:
n the taking up of shares by a subscriber in pursuance of an undertaking given by
him/her in the memorandum of association;
Audit  3
n a fee payable to the registrar on a change of the company’s name;
n a fee payable to the registrar on the re-registration of the company (i.e. on a
change in status from private to public or vice versa);
n a penalty under section 242A of CA 1985 or section 453 of CA 2006, as appro-
priate, for failure to deliver accounts and
n a fee payable to the registrar for registration of the company’s annual return.

(CA 1985, section 249AA(5) to (7); CA 2006, section 1169(2) and (3))
A company that is dormant ceases to be so as soon as a significant accounting
transaction occurs.
1.4  eligibility for auDit exemption as a Dormant Company
For accounting periods ending on or after 31 December 2006, a company is ineli-
gible for audit exemption if it is:
n an authorised insurance company;
n a banking company;
n an e-money issuer;
n an ISD investment firm (or with effect from 1 N ovember 2007, a MiFID invest-
ment firm)
n a UCITS management company or
n a company that carries on insurance market activity.
(CA 1985, section 249AA(3); CA 2006, section 481)
In other cases, a dormant company is eligible for audit exemption for a financial
year if it has been dormant since:
n its formation or
n the end of the previous financial period and
l
is entitled to prepare its individual accounts in accordance with the small
companies regime (or would have been so if it had not been a public company
or a member of an ineligible group) and
l
is not required to prepare group accounts for that financial year.
(CA 1985, section 249AA(1) and (2); CA 2006, section 480)
The directors must also make a formal statement in the accounts that the com-
pany is entitled to the exemption (see 1.6 below).
4  Finance Director’s Handbook
1.5  members requiring an auDit to be CarrieD out
Any member or members of a dormant company holding not less than 10 per cent

of the issued share capital, or of any class of share capital, can require an audit to
be carried out for any financial year by depositing a written notice to this effect at
the company’s registered office no later than one month before the end of the rele-
vant financial year. Such notice cannot be given before the financial year to which it
relates. Where a company does not have a share capital, not less than 10 per cent of
the members in number terms can require an audit to be carried out.
1.6  DireCtors’ statement
For accounting periods beginning before 6 April 2008, the exemption from the
annual audit is only available to a dormant company if the balance sheet in the com-
pany’s accounts includes a statement by the directors that:
n for the year in question, the company is entitled to the exemption in section
249AA(1) of CA 1985;
n no notice has been deposited under section 249B(2) of CA 1985 requiring an
audit to be carried out for that financial year and
n the directors acknowledge their responsibilities for:
l
ensuring that the company maintains accounting records that comply with
section 221 of CA 1985 and
l
preparing accounts which give a true and fair view of the state of affairs of
the company at the end of the financial year, and of the profit or loss for that
year, in accordance with section 226 of CA 1985, and which comply with the
relevant accounting requirements of CA 1985.
(CA 1985, section 249B(4))
For accounting periods beginning on or after 6 April 2008, audit exemption is
only available to a dormant company if the balance sheet includes a statement by
the directors to the effect that:
(i) the company is entitled to the exemption for that financial year;
(ii) the members have not required the company to obtain an audit of its accounts
for the year in question in accordance with section 476 of CA 2006 and

(iii) the directors acknowledge their responsibilities for complying with the requirements
of CA 2006 with respect to accounting records and the preparation of accounts.
(CA 2006, sections 475(2) and (3) and 480(3))
The statement must be given above the director’s signature on the balance sheet.
Audit  5
1.7  Dormant Company aCting as agent
A dormant company that acts as an agent for another party must disclose this fact in
its annual accounts (CA 1985, Schedule 4, para 58A, and Schedule 8, para 51A; SI
2008 No 409, Schedule 1, para 63; SI 2008 No 410, Schedule 1, para 71). The dis-
closure must also be given in any abbreviated accounts prepared by a small company
for filing purposes (CA 1985, Schedule 8A, para 9A; SI 2008 No 409, Schedule 4,
para 10).
1.8  Audit Exemption for Small Companies
AT A GLANCE
n Exemption from an annual audit is available to companies that qualify as small
under the size criteria set out in company law.
n Certain companies are ineligible for audit exemption, even if they meet the size
criteria.
n Special provisions apply to dormant subsidiaries and to small groups who would
otherwise be ineligible for the exemption.
n For accounting periods beginning before 1 April 2008, separate total exemption
conditions apply for charitable and non-charitable companies.
n For accounting periods beginning before 1 April 2008, a charitable company that
does not meet the total exemption conditions may be exempt from a full audit if it
meets the report conditions – in this case, a special report on the accounts must be
prepared by a reporting accountant.
n With effect from 1 April 2008, small charitable companies are subject to the
external scrutiny requirements of charity law rather than those of company law.
n Members of a small company can require an audit to be carried out in any financial
year by following the procedure laid down in the legislation.

n The directors must make a formal statement in the accounts in order for the
exemption to be available.
1.9  eligibility for exemption
Audit exemption is only available to companies that qualify as small under company
law – the qualification criteria are explained in detail in 3.45 company law. Certain
companies are ineligible for small company exemptions, including audit exemption.
6  Finance Director’s Handbook
As a result, the following are not eligible for audit exemption even if they fulfil the
conditions set out in the legislation:
n a public company;
n a parent or subsidiary undertaking (except in the specific circumstances
explained in 1.10 below);
n an authorised insurance company, a banking company, an e-money issuer, an
ISD/MiFID investment firm or a UCITS management company;
n a person who carries on an insurance market activity;
n a special registered body as defined in section 117(1) of the Trade Union and
Labour Relations (Consolidation) Act 1992 or an employers’ association as
defined in section 122 of that act.
(CA 1985, section 249B(1); CA 2006, section 478)
1.10  small groups anD Dormant subsiDiaries
Audit exemption is generally not available to parent and subsidiary undertakings,
although special provisions have now been made for dormant subsidiaries and small
groups. A subsidiary that has been dormant (see 1.3 above) throughout the financial
year will be exempt from an annual audit if it satisfies the other exemption condi-
tions. Also, a parent or subsidiary undertaking will not be regarded as ineligible for
audit exemption if, throughout the period that it was a parent or subsidiary, it was
a member of a group that qualifies as a small group under section 249 of CA 1985
(for accounting periods beginning before 6 April 2008) or section 383 of CA 2006
(for accounting periods beginning on or after 6 April 2008) for the financial year
covering that period (or would so qualify if all bodies corporate in the group were

companies) and was not at any time within that year an ineligible group as defined
in section 248(2) of CA 1985 or section 384(2) and (3) of CA 2006 (as appropriate)
and the conditions set out below are also met.
For accounting periods beginning before 6 April 2008:
n if the company is not a charity, the group has an aggregate turnover in that year
of not more than £5.6 million net or £6.72 million gross;
n in the case of a company that is a charity:
l
for accounting periods beginning before 27 February 2007, the group has an
aggregate turnover in that year of not more than £350,000 net or £420,000 gross;
l
for accounting periods beginning on or after 27 February 2007 (but before 1
April 2008), the group has an aggregate turnover in that year of not more than
£700,000 net or £840,000 gross.
Audit  7
n the group has an aggregate balance sheet total for that year of not more than
£2.8 million net or £3.36 million gross.
(CA 1985, section 249B(1B) and (1C).
For accounting periods beginning on or after 6 April 2008 (when small charitable
companies are subject to the scrutiny requirements of charity law rather than com-
pany law – see below):
n the group’s aggregate turnover for the year is not more than £6.5 million net or
£7.8 million gross and
n the group’s aggregate balance sheet total for that year is not more than £3.26
million net or £3.9 million gross.
(CA 2006, section 479(2))
For accounting periods beginning on or after 1 April 2008, the accounts of small
charitable companies are brought within the scope of the independent scrutiny
requirements of charity law. Consequently, the company law audit exemption provi-
sions no longer include separate arrangements for charitable companies.

A parent or subsidiary that meets these criteria will therefore be eligible for audit
exemption provided that it also satisfies other conditions set out in the legislation.
Gross figures are those before the set-offs and adjustments normally made when
preparing consolidated accounts, and net figures are those after these adjustments
have been made. There is no requirement for the turnover and balance sheet limits
to be considered on the same basis. The rules and definitions set out in sections 247
and 249 of CA 1985 or sections 382 and 383 of CA 2006 (as appropriate) apply (see
1.12 below).
1.11  ConDitions for auDit exemption
For accounting periods beginning before 6 April 2008, section 249A of CA 1985
sets out two separate categories of conditions for audit exemption – total exemption
conditions and report conditions. A company that meets the total exemption condi-
tions in a financial year is not required to have its accounts for that year audited. A
company that meets the report conditions for a financial year is not required to have
its accounts for that year audited, provided that the directors arrange for a special
report on the accounts to be made by a reporting accountant. For practical purposes,
the report conditions only apply in the case of a company that is a charity.
For accounting periods beginning on or after 6 April 2008, similar provisions on
total audit exemption continue to apply under CA 2006 to companies that are not
charities. However, having different inspection regimes for incorporated and unin-
corporated charities was considered to be unnecessarily complex and confusing and
8  Finance Director’s Handbook
so, for accounting periods beginning on or after 1 April 2008, the separate scrutiny
regime for small charitable companies has been removed from company law under
CA 2006 and small charitable companies are instead brought within Part 6 of the
Charities Act 1993 so that they are subject to the same audit and independent exam-
ination requirements as unincorporated charities. The necessary changes have been
made by the Charities Act 2006 and:
n the Companies Act 2006 (Commencement No 6, Saving and Commencement
Nos 3 and 5 (Amendment)) Order 2008 (SI 2008 No 674);

n the Charities Act 2006 (Charitable Companies Audit and Group Accounts
Provisions) Order 2008 (SI 2008 No 527) and
n the Charities (Accounts and Reports) Regulations 2008 (SI 2008 No 629).
Also, if the accounts of a charitable company are subject to audit under company
law (i.e. the company does not qualify for audit exemption under company law), the
accounts and audit requirements of company law continue to apply.
1.12  total exemption ConDitions
For accounting periods beginning before 6 April 2008, a company that is not a char-
ity will satisfy the total exemption conditions for a financial year if:
n it qualifies as a small company for that year under section 246 of CA 1985;
n its turnover for the year is not more than £5.6 million and
n its balance sheet total for the year is not more than £2.8 million.
(CA 1985, section 249A(3))
For accounting periods beginning on or after 6 April 2008, a company that is not
a charity will qualify for audit exemption for a financial year if:
n it qualifies as a small company for that year under section 382 of CA 2006;
n its turnover for that year is not more than £6.5 million and
n its balance sheet total for that year is not more than £3.26 million.
(CA 2006, section 477, as amended by SI 2008/393)
In each case, all three conditions must be met for the company to be eligible for
audit exemption. If the financial period is more or less than one year, the turnover
limited must be adjusted proportionately. The balance sheet total is the aggregate of
Audit  9
the amounts shown as assets in the company’s balance sheet, before the deduction
of any liabilities. The directors must also make a formal statement in the accounts
that the company is entitled to the exemption for that financial year (see 1.17
below).
1.13  Charitable Companies
For accounting periods beginning before 1 April 2008, a company that is a charity
will satisfy the total exemption conditions if:

n it qualifies as a small company for that year under section 246 of CA 1985;
n its gross income for the year is not more than £90,000 and
n its balance sheet total for the year is not more than £2.8 million.
All three conditions must be met for the company to be eligible for audit exemp-
tion. Gross income is defined as ‘income from all sources, as shown in the com-
pany’s income and expenditure account’, and the limit is adjusted proportionately
if the financial period is more or less than one year. The balance sheet total is the
aggregate of the amounts shown as assets in the company’s balance sheet, before
the deduction of any liabilities. The directors must also make a formal statement
in the accounts that the company is entitled to the exemption for that financial year
(see 1.17 below).
For accounting periods beginning on or after 1 April 2008, under the new regime
for charities (see 1.11 above), the accounts of a charitable company must be subject
to a full audit where gross income is more than:
n £500,000 or
n £100,000, and the aggregate value of the charity’s assets is more than £2.8
million.
(Charities Act 1993, section 43(1) and (2))
Also, a parent charity is required to prepare group accounts where the
gross income of the group is more than £500,000 (after eliminating all group
transactions from income from the year) and to have those accounts audited
(Charities Act 1993, Schedule 5A, paras 3(2), 4(2) and 6, and SI 2008 No 629,
regulation 18).
The following requirements apply to other charitable companies:
n the trustees of a charitable company with gross income of more than £10,000
but not more than £500,000 may elect for an independent examination in place
10  Finance Director’s Handbook
of a full audit – where gross income is more than £250,000, the independent
examiner must be from one of the recognised professional bodies specified in
the legislation, and the examiner’s report must state the qualification held and

n the accounts of a charitable company with gross income of less than £10,000
will not require any independent scrutiny.
The most significant impact of this change will be on charitable companies
with gross income between £10,000 and £90,000. The accounts of such com-
panies have generally been exempt from any form of external scrutiny under
company law, but they will in future require an independent examination under
charity law.
The above applies only to charities registered in England and Wales. Separate but
similar requirements apply to charities registered in Scotland under the Charities
and Trustee Investment (Scotland) Act 2005 and related regulations.
In December 2007, the Office of the Third Sector and the Charity Commission
published a joint consultation document ‘Financial Thresholds in the Charities
Act – Proposals for Change’. This set out recommendations for changes to vari-
ous financial thresholds in the charity sector, and in some cases, invites comments
on whether the increases should be more extensive. Responses were invited by
31 March 2008. If implemented, the changes would apply to charities registered
in England and Wales. Proposals affecting charity accounting, reporting and audit
requirements include:
n increasing the income threshold above which annual accounts must be subject
to external scrutiny from £10,000 to £25,000 – views were also invited on a
possible increase to £50,000 and
n increasing the income threshold above which accruals accounts must be pre-
pared from £100,000 to £250,000.
Also, whilst no specific recommendations were put forward in the consultation
paper, views were invited on whether:
n the income threshold above which a full audit is required should be increased
from £500,000 to £1 million;
n the income trigger for the application of the assets threshold in respect of the
annual audit requirement should be increased from £100,000 to £250,000;
n the assets threshold in respect of the annual audit requirement should be

increased from £2.8 million to £3.26 million and
n the income threshold above which an independent examiner must be profession-
ally qualified should be increased.
Audit  11
1.14  report ConDitions
These conditions are now relevant only for a company that is a charity and only in
respect of accounting periods beginning before 1 April 2008. A charitable company
will satisfy the report conditions if:
n it qualifies as a small company for that year under section 246 of CA 1985;
n its gross income for the year is:
l
more than £90,000 but not more than £250,000 for accounting periods begin-
ning before 27 February 2007 or
l
more than £90,000 but not more than £500,000 for accounting periods begin-
ning on or after 27 February 2007 (and before 1 April 2008)
n its balance sheet total is:
l
not more than £1.4 million for accounting periods beginning before
27 February 2007 or
l
not more than £2.8 million for accounting periods beginning on or after
27 February 2007 (and before 1 April 2008).
All three conditions must be met for the company to be eligible for the exemp-
tion, and the same definitions and rules apply as for the total exemption conditions.
See 1.11 and 1.13 above for details of the requirements that apply to charitable
companies with effect from 1 April 2008.
1.15  speCial report by reporting aCCountants
For a charitable company which meets the report conditions to be exempt from the
annual audit for an accounting period beginning before 1 April 2008, the directors

must arrange for a special report to the members to be made by a reporting account-
ant. Section 249D of CA 1985 specifies those who are eligible to act as the report-
ing accountant. The reporting accountant may be an individual, a body corporate or
a partnership and must be:
n a member of one of the following bodies:
l
Institute of Chartered Accountants in England and Wales,
l
Institute of Chartered Accountants of Scotland,
l
Institute of Chartered Accountants in Ireland,
l
Association of Chartered Certified Accountants,
l
Association of Authorised Public Accountants,
l
Association of Accounting Technicians,
l
Association of International Accountants,
12  Finance Director’s Handbook
l
Chartered Institute of Management Accountants or
l
Institute of Chartered Secretaries and Administrators
n entitled to engage in public practice under the rules of the relevant body.
The same rules on independence apply as in the case of auditors (see 1.27 below).
The reporting accountant must express an opinion:
n on whether the accounts are in agreement with the company’s accounting records;
n on whether the accounts are drawn up in a manner consistent with the relevant
provisions of CA 1985;

n that the company satisfies the report conditions set out in section 249A of CA
1985 and
n that the company did not at any time during the year fall within any categories
not entitled to audit exemption.
1.16  members requiring an auDit to be CarrieD out
Any member or members of a company holding not less than 10 per cent of the
issued share capital, or of any class of share capital, can require an audit to be car-
ried out for any financial year by depositing a written notice to this effect at the
company’s registered office no later than one month before the end of the relevant
financial year. Such notice cannot be given before the financial year to which it
relates. Where a company does not have a share capital, not less than 10 per cent of
the members in number terms can require an audit to be carried out.
1.17  DireCtors’ statement
For accounting periods beginning before 6 April 2008, the exemption from the
annual audit is only available if the balance sheet includes a statement by the direc-
tors to the effect that:
n for the year in question, the company is entitled to the exemption granted by
section 249A(1) or (2) of CA 1985;
n no notice has been deposited under section 249B(2) of CA 1985 requiring an
audit to be carried out for that financial year and
n the directors acknowledge their responsibilities for:
l
ensuring that the company maintains accounting records that comply with
section 221 of CA 1985 and
l
preparing accounts which give a true and fair view of the state of affairs of
the company at the end of the financial year, and of the profit or loss for that
year, in accordance with section 226 of CA 1985, and which comply with the
relevant accounting requirements of CA 1985.
Audit  13

(CA 1985, section 249B(4))
For accounting periods beginning on or after 6 April 2008, audit exemption is
only available to a dormant company if the balance sheet includes the directors’
statement to the effect that:
(i) the company is entitled to the exemption for that financial year;
(ii) the members have not required the company to obtain an audit of its accounts
for the year in question in accordance with section 476 of CA 2006 and
(iii) the directors acknowledge their responsibilities for complying with the require-
ments of CA 2006 with respect to accounting records and the preparation of
accounts.
(CA 2006, sections 475(2) and (3) and 477(5)).
The statement must be given above the director’s signature on the balance sheet.
SMALL CHARITABLE COMPANY AUDIT EXEMPTION FLOWCHART
WITH EFFECT FROM 6 APRIL 2008
Does the company
qualify as
a small company?
No
No
Yes
Yes
Audit exemption
is not available
Audit
exemption
is not available
Is the company
a charity?
See separate
flowchart

Is turnover for
the year £6.5
million or less?
No
No
Yes
Yes
No
Yes
Is the balance
sheet total £3.26
million or less?
Have members holding
not less than 10% of
share capital (or any
class of share capital)
requested an audit?
Company is exempt
from the requirement
to have its annual
accoounts audited
14  Finance Director’s Handbook
SMALL CHARITABLE COMPANY AUDIT EXEMPTION FLOWCHART
WITH EFFECT FROM 1 APRIL 2008
Does the company
qualify as a small company
under company law?
No
No
Yes

Yes
No
Yes
Audit exemption
is not available
A full audit
is required
Is gross income for
the year £10,000 or
less?
Is gross income for the
year £100,000 or less?
The trustees may elect for
an independent
examination in place of an
audit–the examiner must
be professionally qualified
if gross income is more
than £250,000
Is the aggregate value
of assets £2.8 million
or less?
Is gross income for the
year £500,000 or less?
NB: This flowchart reflects the requirements for charities registered in England and Wales.
Separate but similar requirements apply to charities registered in Scotland
No independent scrutiny
of the accounts is required
Yes
YesNo

No
1.18  Appointment of External Auditors
AT A GLANCE
n The first auditors may be appointed by the directors or by the members of the
company.
n In subsequent years, separate requirements on the appointment of auditors apply
for public companies and for private companies.
n If a company fails to appoint auditors, the Secretary of State may appoint a person
to fill the vacancy.
n Either the directors or the company in general meeting can appoint auditors to fill a
casual vacancy or if the company ceases to be eligible for audit exemption.
Audit  15
n An individual or a firm is only eligible for appointment as a company auditor if they
are a member of a recognised supervisory body as defined in company law and if
they are independent of the company.
n The rules on auditor independence were subject to intense scrutiny as part of the
post-Enron review and a number of changes have been put into place.
n With effect from 6 April 2008, there is a new requirement for auditors of listed
companies and other public interest entities to publish an annual transparency report.
n With effect from 1 January 2008, the Audit Inspection Unit (AIU) will report more
widely on the results of its quality reviews of the auditors of listed companies and
other public interest entities.
n An auditor who becomes ineligible for appointment must vacate the office
immediately and give written notice to the company.
n The Secretary of State may require a second audit to be carried out if an auditor has
acted whilst being ineligible for appointment.
1.19  appointment of first auDitors
For accounting periods beginning before 1 October 2007, under section 385(3) of CA
1985, the first auditors may be appointed by the directors at any time before the first
general meeting of the company at which accounts are laid, and they hold office until

the conclusion of that meeting. Separate provisions are set out in section 385A(3) of
CA 1985 for a private company which elects to dispense with the laying of accounts.
In this case, the first auditors may be appointed by the directors at any time before:
n the end of the period of 28 days beginning with the day on which copies of the
company’s first annual accounts are sent to members under section 238 of CA
1985 or
n the beginning of that meeting, if notice is given by a member or auditor under
section 253(2) of CA 1985 requiring the laying of accounts before the company
in general meeting.
Once appointed, the auditors hold office until the end of that 28-day period or,
where relevant, the conclusion of the meeting. If the directors do not make an appoint-
ment under section 385(3) or 385A(3) of CA 1985, auditors may be appointed by the
company in general meeting.
For accounting periods beginning on or after 1 October 2007, the above provi-
sions continue to apply to public companies but are repealed in respect of private
companies and replaced by new provisions under CA 2006. Under section 485(3)(a)
of CA 2006, the directors of a private company may appoint an auditor (or auditors)
16  Finance Director’s Handbook
at any time before the company’s first period for appointing auditors (as defined in
the legislation – see 1.21). An auditor appointed in this way ceases to hold office at
the end of the next period for appointing auditors, unless reappointed (CA 2006, sec-
tion 487(1)). It should also be noted that the provisions on deemed reappointment
(see 1.21) do not apply to an auditor who has been appointed by the directors (CA
2006, section 487(2)). If the directors fail to exercise their power to appoint an audi-
tor, the members may do so by ordinary resolution (CA 2006, section 485(4)(c)).
For accounting periods beginning on or after 6 April 2008, section 385 of CA
1985 is repealed for public companies as well and replaced by new provisions under
CA 2006. Under section 489(3)(a) of CA 2006, the directors of a public company
can appoint an auditor (or auditors) at any time before the company’s first accounts
meeting (i.e. the first meeting at which accounts and reports are laid). An auditor

appointed in this way ceases to hold office at the conclusion of the next accounts
meeting, unless he is reappointed (CA 2006, section 491(1)(b)). If the directors fail
to exercise their power to appoint an auditor, the members may do so by ordinary
resolution (CA 2006, section 489(4)(c)).
1.20  appointment in subsequent years: publiC Companies
For accounting periods beginning before 6 April 2008, section 385(2) of CA 1985
requires auditors to be appointed at each general meeting of the company at which
accounts are laid. The auditors appointed hold office from the conclusion of the
meeting until the conclusion of the next general meeting at which accounts are laid.
In addition:
n either the directors or the company in general meeting may fill a casual vacancy
in the office of auditor and
n the directors may appoint an auditor following any period when the company
was exempt from audit and so had not appointed an auditor, or the company in
general meeting may do so if the directors fail to exercise this power.
(CA 1985, sections 388 and 388A)
For accounting periods beginning on or after 6 April 2008, equivalent require-
ments apply under section 489(2) of CA 2006, which requires a public company
to appoint an auditor before the end of the accounts meeting at which the compa-
ny’s annual accounts and reports for the previous financial year are laid. An auditor
holds office in accordance with the terms of his appointment, subject to the separate
provisions on the resignation and removal of auditors and also to the following:
n he does not take office until the previous auditor or auditors cease to hold
office and
Audit  17
n he holds office until the conclusion of the next accounts meeting following his
appointment, unless reappointed.
(CA 2006, section 491)
In addition:
n the directors may appoint an auditor following any period when the company

was exempt from audit and so had not appointed an auditor, or to fill a casual
vacancy in the office of auditor or
n the members may appoint an auditor by ordinary resolution if the company
should have appointed an auditor at the accounts meeting but failed to do so, or
where the directors had power to appoint an auditor but failed to do so.
(CA 2006, section 489(3) and (4))
1.21  appointment in subsequent years: private Companies
For accounting periods beginning before 1 October 2007, unless a private company
has elected under section 386(1) of CA 1985 to dispense with the annual appoint-
ment of auditors, it must:
n appoint auditors at a general meeting at which accounts are laid (in the same
way as a public company) or
n if it has elected to dispense with the laying of accounts, appoint an auditor at a
general meeting before the end of the period of 28 days beginning with the day
on which copies of the annual accounts and reports for the previous financial
year are sent out to members under section 238 of CA 1985 or
n if notice has been given by a member or auditor under section 253(2) of CA
1985 requiring the laying of accounts before the company in general meeting,
appoint an auditor before the conclusion of that meeting.
(CA 1985, sections 385 and 385A)
If the company has elected to dispense with the annual appointment of auditors,
the auditors in office are deemed to be reappointed each year unless:
n the company is eligible for audit exemption and the directors have taken advan-
tage of this or
n a resolution has been passed under section 393 of CA 1985 to the effect that the
auditors’ appointment should be brought to an end.
If the election ceases to have effect, the auditors continue in office until the con-
clusion of the next general meeting at which accounts are laid or the end of the time
18  Finance Director’s Handbook
for appointing auditors for the next financial year (depending on whether section

385 or section 385A of CA 1985 applies).
For accounting periods beginning on or after 1 October 2007, under section
485(1) of CA 2006, a private company that needs to appoint an auditor must do so
before the end of the period of 28 days beginning with:
n the end of the time allowed for sending out copies of the company’s annual
accounts and reports for the previous financial year or
n if earlier, the day on which copies of those annual accounts and reports are actu-
ally sent out.
This is defined as the period for appointing auditors (CA 2006, section 485(2)).
However, under section 487 of CA 2006, where no auditor has been appointed by
the end of the period for appointing auditors, any auditor in office immediately
before that time is deemed to be reappointed unless:
n the auditor was appointed by the directors rather than the members;
n the company’s articles require actual reappointment;
n deemed reappointment is prevented by the members – under section 488 of CA
2006, 5 per cent of the members (or less if the articles so provide) can give
notice to the company that the auditor should not be reappointed;
n the members resolve that the auditor should not be reappointed or
n the directors resolve that no auditor should be appointed for the financial year in
question (for instance, because an audit of the accounts is unlikely to be required).
An auditor holds office in accordance with the terms of his appointment, subject
to the separate provisions on the resignation and removal of auditors and also to the
following:
n he does not take office until the previous auditor or auditors cease to hold office and
n he holds office until the end of the next period for appointing auditors, unless
reappointed.
(CA 2006, section 487(1))
In addition:
n the directors may appoint an auditor following any period when the company
was exempt from audit and so had not appointed an auditor, or to fill a casual

vacancy in the office of auditor or
n the members may appoint an auditor by ordinary resolution if the company should
have appointed an auditor during a period for appointing auditors but failed to do
so, or where the directors had power to appoint an auditor but failed to do so.