Audit Exemption: A Case Study

Audit is examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm). For many enterprises, the annual statutory audit is required by law. Recently, however, the trend in European Union has been towards an exemption from the audit requirement for smaller companies. Audit is an important way to increase confidence in the information and thereby enhance confidence and stability in the economy. It is widely seen as enhancing the relationship between management and internal and external stakeholders and lowering the cost of capital (Beyond the threshold, 2007).

In the late 1970s, EU legislation provided Member States with an option of

Reporting requirements in UK have become more demanding and costly and the changes were needed. Audit exemption threshold helps to save companies £millions every year and free them to expand and develop their business, which benefits the entire British economy (Vince Cable, 2014). For small businesses that work with small income mandatory audits are tangible financial burden. Auditors take good money for services. The business owner or manager of the company usually well informed about situation in his company. Therefore, the audit is not so much to find out what is the status but more because of the law requirements. From the point of view of business owners audit exemptions can indeed be regarded as a real relief.

Defenders of the audit for small and medium enterprises have warned that banks refuse to finance the company without reliable financial statements, potentially dragging them in the cash crisis. But a number of mid-tier firms argue that this is not the case, saying the banks give more weight to robust internal reporting, and focus on the accounts or reviews from existing suppliers before turning to audits. Many banks do not understand audits anyway, and claimed the lengthy preparation process means the documents can be as many as 18 months out of date before they enter the public domain (Jonathan Russell,

A higher audit threshold will fundamentally alter the way accountancy practices offer audit services and consequently their business strategies in order to maintain profitability in a smaller but increasingly competitive market. The market for audit is about change once more. Not only has the European Union tackled the audit of publicly listed companies but it has also created a framework for changing the audit of small and medium-sized businesses (Case Ware,