An external (statutory) audit is an independent examination of a company's financial statements by a registered auditor, giving a true-and-fair opinion for shareholders and the public record. An internal audit is a voluntary, ongoing management function that reviews the business's own controls, risk and processes. One is a formal opinion for outsiders, the other is a tool for insiders.
They sound similar and the names are almost identical, but they answer to different people, follow different rules and produce different outputs. This guide sets out the key differences, then answers the question most of our clients actually care about: does your limited company need an audit at all? For the vast majority of ecommerce sellers, contractors, landlords and owner-managed companies, the honest answer is no, and we explain exactly when that changes.
What is an external audit?
An external audit, usually called a statutory audit, is an independent check of your annual accounts carried out by a registered auditor who is separate from your business. The auditor examines your financial statements and supporting records and then issues an auditor's report stating whether the accounts show a "true and fair view" of the company's position and results.
The key features are independence and a formal opinion. The auditor is appointed by the shareholders, works to recognised auditing standards, and the report is filed at Companies House with the accounts where an audit is required. It is a point-in-time judgement on the historical numbers, not advice on how to run the business. Directors remain fully responsible for preparing the accounts in the first place, a duty we cover in our guide to director responsibilities in the UK.
What is an internal audit?
An internal audit is an in-house or outsourced function that reviews how well the business is run day to day. It looks at internal controls, risk management, fraud prevention and process efficiency, and it reports to the board or an audit committee rather than to shareholders or the public.
Internal audit is not a legal requirement for private companies. There is no standard report format, no true-and-fair opinion and nothing filed at Companies House. Instead it produces recommendations: tighten this approval process, add a second signatory here, reconcile that account monthly. It is forward-looking and continuous, whereas an external audit is periodic and backward-looking. A small company with no statutory audit obligation can still run internal audit checks, and many should.
What is the difference between internal and external audit?
The clearest way to see it is side by side. The table below compares the two across the points that matter most.
| Feature | External (statutory) audit | Internal audit |
|---|---|---|
| Purpose | Independent opinion on whether the accounts are true and fair | Improve controls, risk management and processes |
| Who runs it | A registered external auditor, independent of the company | In-house team or an outsourced firm engaged by management |
| Who they report to | Shareholders and, via Companies House, the public | The board or audit committee (management) |
| Scope | The financial statements and the records behind them | Any area of the business: controls, fraud, operations, compliance |
| Legal requirement? | Yes, unless the company qualifies for audit exemption | No, entirely voluntary for private companies |
| Frequency | Once a year, tied to the financial year end | Ongoing and continuous throughout the year |
| Output | A formal auditor's report and opinion, filed with the accounts | Internal reports and recommendations, not filed anywhere |
Who needs a statutory external audit in the UK?
A statutory audit is the default position for a UK company, and audit exemption is the relief you claim when you are small enough to qualify. So the real question is whether you fall outside the exemption. A company is generally required to have an external audit if it is too large to be small, is part of a group that is too large, sits in a sector where audits are always required, or has a shareholder who demands one.
Some companies can never be audit exempt regardless of size. These include public companies (other than dormant ones), authorised insurance companies, companies carrying on banking or insurance-market activity or issuing e-money, MiFID investment firms and UCITS management companies, companies with securities listed on a regulated market, and certain pension-scheme funders and special register bodies. If your company is in one of these categories, an audit is mandatory and the thresholds below do not help you.
Does my company need an audit?
For most owner-managed limited companies, the answer is no. Your company is exempt from a statutory audit if it qualifies as small, which means meeting at least two of these three limits for the financial year (for financial years beginning on or after 6 April 2025):
- Annual turnover of no more than £15 million
- Balance sheet total (total assets) of no more than £7.5 million
- An average of 50 or fewer employees
Meet two of those three and you are small, and small companies are audit exempt. The previous limits were lower (£10.2 million turnover and £5.1 million balance sheet), so the April 2025 uplift pulled even more growing businesses back under the exemption. Micro-entities, which are audit exempt on the same logic, sit far below this: turnover no more than £1 million, balance sheet no more than £500,000 and 10 or fewer employees (again, two of three).
The balance sheet total is easy to overlook because it counts total assets, not net worth. If you are unsure where that figure comes from, our guide on how to read a balance sheet walks through it, because a property-heavy or stock-heavy company can breach the asset limit long before its turnover does.
When a growing company does get caught
Crossing a limit for a single year does not cost you your exemption. Audit exemption is protected by a two-year rule: you generally have to breach the size limits for two consecutive years before an audit becomes mandatory. That gives a growing business a full year of headroom. You are also caught if:
- You are part of a group that exceeds the limits as a whole. A small subsidiary can still need an audit if the gross group figures top £18 million turnover, £9 million balance sheet or 50 employees.
- Shareholders holding at least 10% of shares (by number or value, or of any share class) formally request an audit in writing, at least one month before the year end. They can do this even where the company is otherwise exempt.
- You sit in one of the always-audited sectors listed above.
Worked example: an ecommerce company crossing the line
Take a growing ecommerce limited company. In year one its turnover is £9 million, comfortably under the £15 million limit, it has 30 staff and a £4 million balance sheet. It meets all three small-company tests, so it is audit exempt and files small-company accounts.
In year two it scales fast. Turnover reaches £16 million and headcount climbs to 60, so it now breaches two of the three limits (turnover and employees), even though its balance sheet is still under at around £6 million. Breaching two of the three limits would normally cost it small status, but because the company was small in year one, the two-year rule protects it and exemption still holds for year two.
In year three it stays large, with turnover of £17 million and 65 staff, breaching the same two limits again. That is two consecutive years over the limits, so the exemption falls away and the year-three accounts need a statutory audit. The lesson: watch the trend, and plan for the audit the year before you expect the second breach, not the moment turnover first spikes. Note that if the company had only ever breached a single limit, it would still meet two of the three tests and stay small, with no audit triggered at all.
What are the benefits of an external audit?
Even when it is voluntary, an external audit can be worth having. The benefits include:
- Credibility with lenders, investors and potential buyers, who trust audited figures more than unaudited ones.
- Assurance for shareholders who are not involved in running the company that the numbers are reliable.
- Error and fraud detection, because an independent review often surfaces issues management has missed.
- Smoother transactions: a sale, a fundraise or a bank facility usually goes faster when clean audited accounts already exist.
What are the benefits of internal audit?
Internal audit earns its keep by preventing problems rather than reporting on them after the fact. For an owner-managed company it typically delivers:
- Fraud prevention through segregation of duties, spending limits and regular reconciliations, which matters most in small teams where one person often controls the money.
- Stronger controls as you grow, so processes that worked for two people still work for twenty.
- Better data for decisions, because tighter controls mean cleaner management accounts.
- Audit readiness, so if you do cross the thresholds later, the eventual statutory audit is faster and cheaper.
This is why internal audit is valuable even for exempt small companies. You do not need a legal trigger to want fewer errors and less fraud risk.
Can internal and external audit work together?
Yes, and in larger organisations they are designed to. Internal audit strengthens the controls throughout the year, which gives the external auditor more to rely on and can reduce the amount of testing needed at year end. External audit, in turn, gives the board independent assurance that the controls internal audit has been improving are actually working. They are complementary, not competing: one is continuous and inward-facing, the other periodic and independent.
What if my company is audit exempt?
If you are audit exempt, you still have to prepare and file annual accounts with Companies House. You simply file small-company or micro-entity accounts without an auditor's report, and you include the statutory statement confirming the members have not required an audit. Exemption removes the audit, not your other duties: the accounts, the confirmation statement and the corporation tax return all still fall due. See our guide to limited company filing deadlines so nothing slips, and our complete guide to corporation tax for the tax side.
If your company is dormant, the rules are lighter again; our note on dormant company accounts covers what you still have to file. And if you are weighing up whether to handle any of this yourself, our piece on whether you need an accountant for a limited company is a sensible next read. When your accounts do need preparing to standard, our statutory accounts service handles the filing, and our company secretarial service keeps the Companies House side clean.
Frequently asked questions
Is an audit compulsory for a small limited company?
No. A small private company is exempt from a statutory audit if it meets at least two of the three size limits: turnover no more than £15 million, balance sheet total no more than £7.5 million, and 50 or fewer employees on average. Most owner-managed companies qualify and never need an external audit.
What is the main difference between internal and external audit?
External audit is an independent, legally driven opinion on whether your financial statements are true and fair, prepared for shareholders and the public record. Internal audit is a voluntary management function that reviews controls, risk and processes and reports to the board. External audit checks the numbers; internal audit improves the business.
Can shareholders force a company to have an audit?
Yes. Shareholders holding at least 10% of the shares, by number or value or of any class, can require an audit by writing to the company at least one month before the financial year end, even if the company would otherwise be exempt.
Should an audit-exempt company still do internal audit?
Often, yes. Internal audit is a control and fraud-prevention tool, not a legal box to tick. Even a small exempt company benefits from segregation of duties, regular reconciliations and spending limits, and having those controls in place makes any future statutory audit quicker and cheaper.
Book a free call
Not sure whether your company is caught by the audit rules, or want help getting your accounts and controls in shape before you grow into them? Book a free call with Zmartly and we will tell you plainly where you stand and what, if anything, you need to do.
