Changes to small company size thresholds, new rules on eligibility and ownership of audit firms, fee dependency and thresholds, and the new concept of component performance materiality will be considerations for many auditors during 2025, as recent revisions to International Standards on Auditing (ISAs), the Ethical Standard (ES) for auditors and updates to the ICAEW Audit Regulations come into effect.

ISA 600 revised

The revised ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) takes effect for accounting periods beginning on or after 15 December 2023. The new ‘top down’ approach to group audits removes the previous distinction between significant and non-significant components and requires a group level risk assessment to drive testing at the component level. The revised standard is also more prescriptive about steps group auditors must take if they are to use the work of component auditors.

Discussions on the revised Standard have focused on the new concept of component performance materiality, the starting point for which should be group performance materiality. The ISA is clear that component performance materiality must be lower than group performance materiality, but it does not need to be an arithmetical portion of it. 

Crucially, component performance materiality must take account of aggregation risk, the risk that the aggregate of uncorrected and undetected misstatements individually below materiality will exceed materiality for the financial statements as a whole. 

One factor here will be the number of group components. The greater the number, the lower the likely component performance materiality for individual components, although the figure might differ by component. Other relevant factors are likely to be the nature and diversity of operations in businesses within a group, diversity across accounting systems, the organisational structure, the involvement and number of component auditors, and the number of jurisdictions.

Revised FRC Ethical Standard

The Financial Reporting Council’s (FRC’s) Revised Ethical Standard 2024 (revised ES) takes effect from 15 December 2024. 

When accepting an appointment as a private company auditor, consideration now needs to be given to subsidiaries and to any “collection of entities with the same beneficial owner or controlling party” when determining whether the relevant threshold has been breached. Where total fees for services receivable exceed 15% of the annual fee income of the firm, it is likely that the auditor will need to resign because the resultant self-interest threat will be insurmountable.

While paragraphs 4.21 and 4.22 of the revised ES establish clear red lines, the following considerations are also important:

• The changes brought in by the above paragraphs are effective for accounting periods beginning on or after 15 December 2024, and engagements related to periods before this date can be completed under the existing 2019 rules.

• Paragraph 4.30 provides a temporary dispensation for new firms. For a period not exceeding two years, a new firm would require external independent quality control reviews for audits of non-listed entities, that are not public interest entities, that represent more than 15% of the annual fee income before the engagement report/opinion is issued.

Changes to company size thresholds

There will be a substantial increase in small company size limits for accounting periods beginning on or after 6 April 2025. These will increase to £15m turnover (from £10.2m); £7.5m balance sheet total (from £5.1m); and 50 employees (unchanged). 

The Companies (Accounts and Reports (Amendment and Transitional Provision) Regulations published In December 2024 provide more detail: audit exemption thresholds will increase in line with the new small company size limits.

Changes to ICAEW audit regulations

Changes to the ICAEW Audit Regulations and Guidance will take effect during 2024/25. For many, the most impactful of these changes concern ownership rules for audit firms. These rules have long been enshrined within company law, but are being clarified in the updated Audit Regulations.

A well-established requirement of the regulations over the years has been that individuals holding the ‘appropriate qualification’ – known commonly as the ‘audit qualification’ – need to have the majority of voting rights in UK audit firms. 

The point now being clarified is that where the law or the firm’s constitution requires a majority of more than 50% (a ‘supermajority’) to agree on matters that direct the overall policy of the firm, or that alter its constitution, qualified persons must have that proportion of the voting rights. Where persons holding the audit qualification do not have the required voting rights, the firm will not be eligible to carry out audits.

The deadline for firms to comply with this change is 1 April 2025. 

• A longer version of this is available at Audit & Beyond, the Audit and Assurance Faculty content hub.