BIM31035 - Tax and accountancy: relevance of audit

For periods of account beginning after 6 April 1999 FA98/S42 requires that for the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation are to be computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law. The true and fair view concept is imported from the Companies Act 1985 (Companies Act 1985/S226 - 227 and Schedule 4-4A). A company's balance sheet must give a true and fair view of its affairs at the end of its financial year and its profit and loss account must give a true and fair view of its result for the year. FA98/S42 itself does not impose any audit requirement.

The company must keep such accounting records as will enable its directors to comply with those requirements (Companies Act 1985/S221 - S222).

The auditor's report, where required (see below), must state whether in the auditor's opinion the balance sheet and profit and loss account give a true and fair view of the company's affairs and of its profit or loss. If the accounts do not represent a true and fair view the auditor must qualify the report accordingly (Companies Act 1985/S235 - S237).

Audit and small companies

Certain small companies (see below) may dispense with an audit for Companies Act purposes where accounts are approved by the directors on or after 11 August 1994. The directors of such companies remain responsible for ensuring that the accounts show a true and fair view and that other Companies Act accounting, reporting and record-keeping requirements are satisfied.

The companies affected fall into two categories:

• those with a turnover below the current lower threshold are entitled to dispense with the audit without any replacement independent check,
• those with a turnover within certain threshold limits (different for charitable companies) may replace the audit with a `compilation report' signed by the `Reporting Accountant'. In principle the `compilation report' is not dissimilar to the certificate normally given to an unincorporated business prepared by an independent qualified accountant.

Small companies requiring audit

A company within the turnover limits is not entitled to dispense with the audit if it falls within a number of exclusions, most importantly, if:

• it is a PLC,
• its balance sheet gross asset value exceeds £1.4m,
• it is regulated under the Financial Services Act,
• it is grouped, and sufficient shareholders object.

The Companies Act requires the accounting policies of a company to be disclosed in its annual accounts.

For large companies the Companies Act 1985/S36A requires confirmation that accounts have been prepared in accordance with the applicable accounting standards. Particulars of any departure from this and the reasons for it should be given. Finally there are provisions in the Companies Act for the High Court, through the Financial Reporting Review Panel, to review sets of accounts to ensure that they comply with accounting standards.