Audit readiness means having your records, reconciliations and supporting explanations complete before the statutory auditors begin fieldwork. A business that reaches audit readiness gives the audit team the evidence it needs on the first day, rather than in answer to weeks of follow-up requests.
Arriving unprepared has a practical cost. Unreconciled balances, incomplete stock records and undocumented board decisions extend fieldwork, increase fees and delay the signed accounts that lenders and Companies House are waiting for. Where evidence is missing altogether, the auditor may have to modify the audit opinion.
The reporting rules for UK companies are changing. Amendments to FRS 102 apply to accounting periods beginning on or after 1 January 2026, bringing most leases onto the balance sheet and introducing a five-step model for recognising revenue (FRC, 2024). For a company with a 31 December year end, the 2026 accounts are the first to be audited under the amended standard.
Auditors have good reason to test going concern closely. One in 200 companies in England and Wales entered insolvency in the 12 months to 31 August 2026, with 1,946 company insolvencies in August 2026 alone, according to figures published in September 2026 (Insolvency Service, 2026).
This guide sets out what to prepare, based on the requests we see most often.
Key takeaways
- Confirm your audit status: For years beginning on or after 6 April 2025, companies meeting two of three tests, including £15m turnover and a £7.5m balance sheet total, may be exempt. www
- Reconcile before fieldwork: Every material balance needs a signed schedule and supporting evidence.
- Plan the stocktake early: Agree the count date and cut-off procedures with your auditor.
- Check payroll against 2026 rates: Minimum wage and sick pay errors become liabilities the auditors will expect to see accrued.
- Document director judgements: Going concern forecasts and loan accounts need board-approved support.
Does my company still need an audit after the 2025 threshold changes?
Many growing companies no longer need a statutory audit because the small company thresholds rose by around 50% for financial years beginning on or after 6 April 2025. A company may claim audit exemption if it meets at least two of three tests: turnover up to £15 million, a balance sheet total up to £7.5 million and an average of 50 or fewer employees (GOV.UK, 2025).
Qualifying as small does not always remove the audit requirement. A company still needs an audit if its articles require one, if shareholders holding at least 10% of the shares request one in writing, or if it belongs to a group that does not qualify as small. Lenders and investors often make audited accounts a condition of funding – whatever the company’s statutory size.
The amended FRS 102 lease rules can take a company over the limits, because right-of-use assets from leases now sit on the balance sheet and count towards the balance sheet total. A distributor with £12 million turnover, 60 employees and £6.8 million of assets that capitalises £1.2 million of leases would meet only one small company test, and would need an audit if that position continued for two consecutive years.
Companies claiming audit exemption will also need to include a strengthened eligibility statement in accounts filed from April 2028 (Companies House, 2026).
Audit readiness starts with reconciliations and controls
Auditors start with the balance sheet, so every material balance should agree to a signed reconciliation before fieldwork begins. In our experience, reconciliations prepared during the audit, rather than before it, add days to the timetable.
The reconciliations we ask audit clients to complete before fieldwork are:
- Bank and cash: Every account reconciled to the year-end statement, including dormant and foreign currency accounts.
- Sales and purchase ledgers: Aged listings agreed to the ledger control accounts at the year end.
- VAT and payroll liabilities: Control accounts reconciled to VAT returns and to HMRC’s PAYE records.
- Fixed assets and leases: A fixed asset register agreed to the ledger, plus a lease register for the amended FRS 102.
- Accruals and suspense: Workings for each accrual and prepayment, with any suspense account cleared to nil.
Auditors give internal controls as much attention as the numbers, and segregation of duties is the gap we find most often in smaller finance teams. Where one person both sets up new suppliers and releases payment runs, the audit team will look for a compensating control. A common answer is a director reviewing each payment run against invoices and confirming any change to supplier bank details by calling a number already on file.
How should we prepare for the stocktake and debtor testing?
Stock and trade debtors are often the largest current assets in trading and manufacturing businesses, and auditors test both against direct evidence. Where stock is material, auditing standards normally require the auditor to attend the physical count, so agree the count date with the audit team early.
A well-prepared stocktake has written count instructions and a record of the last goods received and despatched before counting starts. Cut-off records show that purchases and sales fall in the right period. The finance team should also list slow-moving and obsolete lines, because FRS 102 requires stock to be carried at the lower of cost and estimated selling price less costs to complete and sell.
Debtor testing relies on evidence from outside the business. Auditors agree the aged debtor listing to the ledger, test cash received after the year end and may write to customers to confirm balances. A manufacturer holding £350,000 of invoices more than 120 days old should expect to explain in writing why each significant balance is recoverable, or why it has been provided for.
What payroll evidence will the auditors ask for?
Auditors test payroll by agreeing payroll reports to the nominal ledger, to Real Time Information submissions made to HMRC and to employee records. The payroll evidence to have ready includes period summaries, starter and leaver records, authorised pay changes and pension contribution schedules.
Statutory pay rates are a frequent source of audit adjustments. From 1 April 2026, the National Living Wage for workers aged 21 and over is £12.71 an hour. Statutory Sick Pay has been payable from the first day of absence since 6 April 2026. An underpayment found during the audit is a liability to be accrued in the accounts.
Minimum wage enforcement is active. On 3 September 2026, the government named around 660 employers for underpaying the minimum wage, with about £4 million repaid to more than 27,000 workers (Fair Work Agency, 2026). Common causes include deductions for uniforms or training, which take a worker paid exactly £12.71 an hour below the legal minimum however small the amount.
Benefits in kind are part of the payroll evidence that auditors review. With payrolling of benefits being phased in from April 2027, companies should reconcile their P11D data to the ledger now, as explained in our guide to preparing for payrolling benefits in kind.
Director explanations and the revised auditing standards
Directors supply evidence that no ledger can provide, such as the reasoning behind accounting estimates and the details of related party transactions. Auditors record much of it in a letter of representation, which the board signs before the audit report is issued.
Going concern is where director explanations carry most weight. Directors must assess whether the company can continue trading for at least 12 months from the date they approve the accounts, and auditors will expect a board-approved cashflow forecast, evidence of available facilities and sensitivity analysis on the main assumptions.
Auditors’ questions on fraud and going concern will become more structured. Revised versions of ISA (UK) 240 on fraud and ISA (UK) 570 on going concern apply to audits of periods beginning on or after 15 December 2026, which for most calendar-year companies means the year ending 31 December 2027 (FRC, 2026). Boards should expect more detailed enquiries on fraud risk and on their going concern conclusion.
An overdrawn directors’ loan account that is not repaid within nine months of the year end triggers a section 455 charge of 35.75% on loans made on or after 6 April 2026. The rate rose from 33.75% because the 2025 Autumn Budget increased the dividend upper rate, to which the charge is linked.
Next steps for audit readiness
Audit readiness depends on preparation that starts before the year end, not after it. Reconciled balances, a planned stocktake, tested payroll and documented director judgements allow the audit team to finish fieldwork on schedule and reduce the risk of a modified opinion. We find that the businesses which prepare earliest also get more from the audit, because the team spends its time on judgement areas rather than chasing paperwork.
Leaving preparation late carries specific risks. Private companies must file accounts at Companies House within nine months of the year end, and late filing penalties apply automatically. A delayed audit can also breach reporting covenants in bank facilities. And the first year under the amended FRS 102 will take most companies longer than a normal year.
We suggest growing businesses start audit preparation three months before the year end. Agree the timetable and stocktake date with your auditor, clear reconciliation differences, check payroll against the April 2026 rates and prepare a going concern forecast for board approval.
Tax and pay rates quoted here are those in force for 2026/27, as of the 2025 Autumn Budget. The next Budget is due on 28 October 2026, and the rates quoted should be checked again after that date.
Frequently asked questions
How far before the year end should we start preparing for an audit?
Most businesses should start preparing for their statutory audit around three months before the year end. That leaves time to agree the audit timetable with the auditor, plan the stocktake, clear reconciliation differences and prepare a going concern forecast. Companies adopting the amended FRS 102 lease and revenue rules for the first time, or integrating an acquisition, may need to start earlier.
Do auditors have to attend our stocktake?
Auditors normally attend the physical stock count when stock is material to a company’s accounts, as ISA (UK) 501 requires. Attendance allows the auditor to observe the count, perform test counts and record cut-off details. If a year-end count is impractical, the count can take place on another date, with the auditor testing stock movements between the count date and the year end.
What is a letter of representation in a UK audit?
A letter of representation is a written confirmation that a company’s directors sign before the auditor issues the audit report. It confirms that the directors have provided all relevant information, disclosed related party transactions and events after the year end, and accept responsibility for the accounts. Without it, the auditor cannot issue an unmodified opinion, so directors should check each statement carefully.
Can a small company choose to have an audit if it is exempt?
Yes. A company that qualifies for audit exemption can still choose a voluntary audit, and many do because lenders, investors or potential buyers ask for audited accounts. Shareholders holding at least 10% of the shares can also require an audit by writing to the company’s registered office at least one month before the end of the financial year.
To arrange an audit readiness review before your next year end, speak to our statutory audit team.