Audit and Assurance · External audits

Statutory Audit, Exemptions and Auditor Appointment in ACCA Audit and Assurance

Updated 11 October 2026 · Fact-checked

A statutory audit is an audit required by law, usually for companies above a size or public interest threshold. Small companies can often claim exemption. Auditors are normally appointed by shareholders, can be removed by shareholders, and may resign, giving a statement of circumstances. Always apply the rules of the jurisdiction in the question.

Understand Statutory Audit, Exemptions and Auditor Appointment

A statutory audit is an audit that the law requires. It gives shareholders and other users an independent opinion on whether the financial statements give a true and fair view, or are presented fairly, in line with the reporting framework.

Not every company needs one. Many countries exempt small companies, because the cost of the audit can outweigh the benefit when owners also run the business. Typical exemption tests look at turnover, total assets and average number of employees. A company usually has to be under a set number of these limits, and the figures differ between countries. ACCA does not expect you to memorise local limits. The question will give them, or it will test the principle.

Exemption is rarely automatic for every small company. Public companies, listed companies, banks, insurers and other public interest entities are normally required to be audited whatever their size. Shareholders holding a certain proportion of shares may also be able to demand an audit. Some countries allow a company to choose a voluntary audit, for example because a lender or investor asks for one. A voluntary audit is not statutory, but it still gives assurance.

Auditor appointment is normally made by the shareholders, often at the general meeting where the accounts are presented. Directors may appoint the first auditor, or fill a casual vacancy, until the shareholders next meet. This protects independence, because the people being audited (management) do not choose the auditor in the long term. The auditor may be reappointed each year, sometimes automatically unless the shareholders object.

Removal is by shareholder resolution, normally an ordinary resolution with special notice. The auditor can make written representations and ask to speak at the meeting. Resignation is allowed, but the auditor must deposit a notice at the company. It must include a statement of the circumstances connected with the resignation that should be brought to members' and creditors' attention, or a statement that there are none. The auditor may also ask for a meeting of shareholders. On any change, the outgoing auditor must be given a fair chance to respond, and the incoming auditor must communicate professionally with the outgoing auditor before accepting.

Key rules to remember

Audit exemption test: Exempt only if the company meets the size limits given (turnover, total assets, employees) and is not excluded; Check any exclusion first (public, listed, regulated, public interest). Then apply the thresholds supplied in the question.
Who appoints: Shareholders appoint; directors fill the first appointment or a casual vacancy; Directors' appointment lasts only until the shareholders next act.
Removal: Shareholder resolution (special notice) + auditor's right to make representations and to be heard; Management or directors alone cannot remove the auditor.
Resignation: Written notice + statement of circumstances (or statement that there are none); The auditor may also request a shareholder meeting.
Change in auditor: Incoming auditor must request permission to contact outgoing auditor, then ask about reasons and facts; If the client refuses permission, consider declining the appointment.

How to solve Statutory Audit, Exemptions and Auditor Appointment questions

Use this approach for any question on who needs an audit, or on appointment, removal and resignation.

1Identify the entity type: public, private, listed, regulated, not-for-profit or group.
2Check for exclusions from exemption first, such as public interest entities, public companies or regulated businesses.
3Apply the thresholds given in the question. Compare each figure and state how many limits are met and how many are required.
4State the conclusion clearly: audit required, exempt, or voluntary audit possible. Note any shareholder right to demand an audit.
5For appointment, name who appoints, when, and who fills gaps. Explain that shareholder appointment protects independence.
6For removal or resignation, set out the process, the rights of the auditor and the statement of circumstances.
7For a change of auditor, add the ethical steps: request permission, communicate with the outgoing auditor and review the reasons.
8Finish with a short reason linked to the scenario, such as independence or user needs.

Quickest way: Exclusions, thresholds, conclusion

When to use it: Use for Section A or OT case questions asking whether a company needs an audit or who appoints or removes the auditor.

Scan for words such as public, listed, bank, insurer or group member. These usually block exemption.
Tick each size limit against the figures given. Check how many must be met.
Pick the answer with the right appointing body: shareholders, not directors, for the ongoing role.
For resignation, look for the statement of circumstances. For removal, look for the shareholder resolution.

Common mistakes in Statutory Audit, Exemptions and Auditor Appointment

Claiming exemption because the company is small, ignoring the type of company.
Students focus on size figures and forget exclusions.
Fix: Always check type and regulation first, then size.
Saying directors appoint and remove the auditor.
Directors run the company, so it seems natural.
Fix: Remember that shareholders appoint and remove to protect independence. Directors only fill the first appointment or a casual vacancy.
Forgetting the statement of circumstances on resignation.
Students think resignation is a simple letter.
Fix: State that the notice must include the statement of circumstances, or a statement that there are none.
Mixing up the thresholds, for example needing all limits instead of the number the question states.
Rushing through the numbers.
Fix: Write out each limit, tick it, and count against the required number.
Treating a voluntary audit as a statutory audit.
Both produce an auditor's report.
Fix: Statutory means required by law. Voluntary is chosen, though ISAs may still be applied.
Ignoring professional steps when taking over from another auditor.
Students stop at the legal rules.
Fix: Add the ethical clearance: ask the client for permission to contact the outgoing auditor, then enquire about the reasons for the change.

Worked examples

Example 1

Bramley Ltd is a private company in a country where a company is exempt from audit if it meets at least two of these: turnover not more than $10m, total assets not more than $5m, average employees not more than 50. Bramley has turnover of $9.2m, total assets of $5.6m and 48 employees. It is not regulated and has no public interest status. Is it exempt?

Show the solution

Check exclusions: it is private, not regulated, and not a public interest entity, so exemption is possible.
Turnover: $9.2m is not more than $10m, so the limit is met.
Total assets: $5.6m is more than $5m, so the limit is not met.
Employees: 48 is not more than 50, so the limit is met.
Two limits are met, which is the number required.

Answer: Bramley Ltd qualifies for audit exemption, as it meets two of the three limits. Shareholders with the right to demand an audit could still require one, and the company could choose a voluntary audit.

Example 2

The auditor of Corvin Co has found that the finance director has been overriding controls. The directors want to replace the auditor. Explain how the auditor can be removed, and what the auditor can do if it decides to resign instead.

Show the solution

Removal: the directors cannot do it alone. The shareholders must pass a resolution, with special notice given.
The auditor has the right to make written representations, which the company should send to members, and to speak at the meeting.
Resignation: the auditor gives written notice to the company.
The notice must include a statement of the circumstances that should be brought to the attention of members and creditors, or a statement that there are none.
The auditor may ask for a meeting of shareholders to explain the circumstances.
Ethically, the auditor should consider whether a report to a regulator is needed and keep the duty of confidentiality, unless law or ethics allow disclosure.

Answer: Removal needs a shareholder resolution with the auditor able to make representations. If the auditor resigns, it must give notice with a statement of circumstances covering the control override, and may request a shareholder meeting.

Exam tips

In OT cases, read the exclusion words before doing any arithmetic on size limits.
In constructed response answers on resignation or removal, give the process and the auditor's rights as separate points, so each earns a mark.
If a question mentions a new auditor, bring in professional clearance and communication with the outgoing auditor.
Link every legal rule to its reason: independence for appointment, user protection for the statement of circumstances.
Use the limits given in the question rather than limits you remember from another country.

Statutory Audit, Exemptions and Auditor Appointment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Statutory Audit, Exemptions and Auditor Appointment: frequently asked questions

Which companies need a statutory audit?

Usually larger private companies, and public, listed and regulated companies whatever their size. Small private companies may be exempt if they meet the size limits and are not excluded. Always apply the rules given in the question.

Who appoints the external auditor?

The shareholders appoint the auditor, normally at the general meeting. Directors may appoint the first auditor or fill a casual vacancy until shareholders next act. This keeps the auditor independent of management.

Can directors remove the auditor?

No. Removal needs a shareholder resolution, and the auditor has the right to make representations and to be heard. Directors can only propose it.

What is a statement of circumstances?

It is a statement the resigning auditor sends with the notice of resignation. It sets out any circumstances that members and creditors should know about, or says that there are none.