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.

All of these and more are among the topics and tips covered in my November 2024 faculty webinar on audit hot topics for 2025, which is available as a recording with slides. This article focuses on four areas that created some of the most significant questions and discussions during the live online event and provides links to related ICAEW support resources that will assist firms with implementation and compliance.

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.

During the webinar, there were several questions about the new concept of component performance materiality. The starting point for this calculation is 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 group performance materiality. 

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.

There will be more guidance from ICAEW during 2025, when the faculty publishes its updated comprehensive guidance on group audits.

Revised FRC Ethical Standard

The Financial Reporting Council’s (FRC’s) Revised Ethical Standard 2024 (revised ES) takes effect from 15 December 2024 and its impact may be particularly felt by auditors during 2025. There was considerable discussion during the webinar around paragraphs 4.21 and 4.22 of the revised ES, which deal with fee dependency and the 10% and 15% thresholds. 

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” and 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 these paragraphs of the revised ES establish clear red lines, the following considerations are also important:

• the changes brought in by the paragraphs 4.21 and 4.22 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; and

• 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.

Questions were raised during the webinar about whether the fee income of ‘linked firms’ should be factored into determinations on whether the relevant threshold is breached. This merits consideration, as the FRC Glossary of Terms (Auditing and Ethics) 2024 makes clear that for the purposes of the ES, ‘firm’ includes network firms in the UK and Ireland which are controlled by the firm or its partners. Firms should look carefully at the detail in the standard and the glossary before reaching conclusions - and consult with ICAEW where necessary.

Changes to company size thresholds

The topic of deregulatory changes affecting the thresholds used to determine company sizes was on and off the agenda in the UK throughout 2024, due to the General Election. Then, in October 2024, the new government confirmed its intention to proceed with some measures proposed by the previous administration. 

These measures will result in 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). 

Lots of questions were raised during the November 2024 webinar about aspects of the changes, notably in respect of transitional arrangements. The Companies (Accounts and Reports (Amendment and Transitional Provision) Regulations published in December 2024 have provided more detail: audit exemption thresholds will increase in line with the new small company size limits.

Changes to ICAEW audit regulations

The topic that created most discussion during the webinar was changes to the ICAEW Audit Regulations and Guidance, which 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.

There are some key considerations and steps firms can take in embracing the updated regulations. 

• Check carefully who has the audit qualification. Individuals who are unsure may seek clarification from ICAEW directly by emailing aq@icaew.com

• Encourage recently qualified colleagues working in audit to apply for the audit qualification wherever possible to avoid storing up future problems. 

• Understand exactly what majority is required to make decisions that affect your firm’s constitution or overall policy matters. For a corporate practice this is likely to be 75%, the majority needed to pass a special resolution. 

• Consider whether compliance with the requirements of the updated Audit Regulations will necessitate changes to your firm’s constitution or structure. 

The deadline for firms to comply with this change is 1 April 2025. Other changes to the Audit Regulations have different effective dates.

There will be lots of messaging about the revised Audit Regulations over the coming months. Meanwhile, firms are advised to carefully read the guidance already on ICAEW’s website (including some very useful FAQs) and if more specific guidance is needed email auditregistration@icaew.com

Peter Herbert, Director, Insight Training