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HMRC internal manual

Enquiry Manual

Examining Accounts: Accountants and Auditors: implication for compliance work of lack of audit

A satisfactory audit report does not mean that accounts are necessarily correct. However, the audit process normally provides us with additional reassurance.

Exemption due

The absence of an audit report where none is required by law is not a valid reason for enquiring into a company’s accounts or return.

Exemption not due

You may come across situations in which accounts which, on first consideration, ought to carry an audit report or a reporting accountant’s report carry neither, or carry a reporting accountant’s report from a seemingly unauthorised accountant. In these circumstances you should establish with the company and its accountants whether or not there has been a breach of the Companies Act and, if there has been, what the reasons are.

Although the fact that the accounts do not (incorrectly) carry an audit report is not in itself grounds for starting an enquiry the reasons for any breach may well constitute grounds for increasing any risk scores.

Modified audit reports

Companies which qualify for exemption in one year may lose entitlement in a subsequent year, for example where their turnover has increased. When this happens the audit report for the later year will necessarily be modified, reflecting the fact that the auditors will have been able to make only limited checks of certain opening balance sheet entries. Again, an audit report modified for this reason is not grounds for opening an enquiry.

Reporting accountant’s report (Charities only)

The reporting accountant’s report provides a significantly lower level of assurance than an audit report since the scope of the reporting accountant’s work is limited. In particular he or she does not have to perform any procedures designed to obtain independent evidence to support entries in the accounting records. The reporting accountant does not have to consider, for example, the adequacy of estimates or valuations made by the directors or whether assets actually exist and are owned by the company. Nor is he or she required to make a judgement on, or to form an opinion about, the financial statements as a whole including, for example, whether they form a true or fair view.

In most cases the reporting accountant will also have drawn up the accounts. There is therefore no reason why, when opening a company enquiry, you should not ask the accountant about the nature and extent of the work done in preparing the accounts, and the nature and extent of any specific steps taken in support of the report procedures.

Directors’ responsibilities

If, following enquiry, something is found to be wrong with the accounts the directors should be reminded of their responsibilities and their explanations sought for any relevant failures.