Definition

An audit is an independent, objective examination of an entity's financial statements conducted by a registered statutory auditor to express an opinion on whether those statements present a true and fair view. The requirement is set by the Companies Act 2006 (sections 475 to 539). Most small companies (turnover below £10.2m, balance sheet total below £5.1m, fewer than 50 employees — meeting two of three) are exempt, but larger companies, listed companies and regulated entities must have their accounts audited annually.

Why this matters for Accounting Principles & Procedures

  • Level 1 knowledge: you must be able to define an audit, state who is required to have one, and explain what the auditor's opinion conveys.
  • Audited accounts carry a higher level of assurance than unaudited management accounts; surveyors who rely on client accounts should understand this distinction.
  • Property companies carrying investment property at fair value rely on RICS-regulated valuers; understanding how auditors scrutinise those valuations is directly relevant to a surveyor's practice.
  • An understanding of auditing supports the Ethics competency, as auditors play a key role in financial integrity and corporate governance.

Key principles

What auditors examine

Statutory auditors examine financial statements and supporting records to gather sufficient appropriate audit evidence. For a property company, key areas include investment property valuation, rental income recognition, recoverability of rent arrears and accuracy of liabilities. Auditors use a risk-based approach, concentrating on areas where material misstatement is most likely.

Types of audit opinion

There are four possible audit opinions. An unmodified opinion states the accounts give a true and fair view (the standard outcome). A qualified opinion applies where there is a material but non-pervasive misstatement. An adverse opinion applies where misstatements are material and pervasive. A disclaimer of opinion is issued where the auditor cannot obtain sufficient evidence. Any opinion other than unmodified is a serious concern.

The role of the valuer in audits of property companies

Auditors of property companies review valuation reports prepared by external RICS-regulated valuers. Under ISA (UK) 500, they assess the competence and objectivity of the valuer, evaluate whether the methodology is appropriate for the financial reporting purpose, and challenge assumptions (yield, rental tone) against market evidence. Surveyors must be prepared to explain and defend their assumptions in line with the RICS Red Book Global Standards (effective 31 January 2022).

Auditor independence and limitations

Auditor independence is fundamental to the credibility of an audit opinion. Auditors are prohibited from holding financial interests in audit clients. An audit provides reasonable (not absolute) assurance, is based on sampling and covers the financial statements as a whole .

Relevant RICS guidance and legislation

  • Companies Act 2006 (sections 475–539) — statutory audit requirement, auditor appointment, removal and reporting obligations.
  • International Standards on Auditing (UK) (ISAs (UK)) (Financial Reporting Council) — standards auditors must follow when planning and conducting a statutory audit.
  • FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland — the financial reporting framework against which auditors assess whether accounts give a true and fair view.
  • RICS Red Book Global Standards (effective 31 January 2022) — governs valuations of investment property relied upon in audited financial statements.
  • RICS Rules of Conduct (effective 2 February 2022) — Rule 3 (integrity) requires members whose work feeds into audited accounts to act honestly and maintain the quality of their output.

Ethics and Rules of Conduct angle

Rule 3 of the RICS Rules of Conduct (integrity) requires that a surveyor preparing a financial reporting valuation ensures it is independent, objective and properly evidenced. Providing an inflated valuation to achieve a particular balance sheet outcome, or one that fails to disclose conflicts of interest, could constitute a breach of Rule 3. The RICS Red Book requires valuers to declare any conflict; auditors must then assess whether the valuer is sufficiently independent.

APC-style Q&As

Q (Level 1)What is the purpose of a statutory audit?

A statutory audit is an independent examination of a company's financial statements by a registered auditor, providing shareholders and stakeholders with reasonable assurance that the accounts give a true and fair view. It enhances the credibility of financial information used by lenders, investors and regulators.

Q (Level 1)Which UK companies are required to have a statutory audit?

Under the Companies Act 2006, all UK companies must have an audit unless they qualify for an exemption. Most small companies (turnover below £10.2m, balance sheet below £5.1m, fewer than 50 employees — meeting two of three) are exempt. Public companies, listed companies, regulated entities and companies in groups exceeding the threshold must be audited.

Q (Level 2)How do auditors evaluate a valuation of investment property included in a client's accounts?

Under ISA (UK) 500, auditors assess the competence and objectivity of the external valuer and test key assumptions (yield, ERV, vacancy rate) against independent market evidence. If they have concerns, they may require additional information or commission an independent expert before accepting the figure.

Q (Level 2)What is the difference between a qualified audit opinion and an adverse audit opinion?

A qualified opinion is issued where there is a material but non-pervasive misstatement; the accounts give a true and fair view except for the specified matter. An adverse opinion is issued where misstatements are both material and pervasive, meaning the accounts as a whole do not give a true and fair view. An adverse opinion would typically trigger significant concern amongst lenders and investors.

Q (Level 3)You are instructed to value a portfolio for financial reporting purposes. The finance director tells you the previous auditors rejected the last valuation because the yields used were below market evidence. How do you proceed?

(example) I would treat this as a red flag. I would review the previous valuation and auditors' correspondence to understand what evidence they found inadequate, then research current comparable transactions to establish a supportable yield range without allowing the client's expectation to influence my analysis. If I considered a lower yield genuinely supportable, I would defend that to the auditors; if not, I would report the yield I considered appropriate, in accordance with Rule 3 of the RICS Rules of Conduct.