How to Prepare for an Audit: Tips for UK Productions

In the UK, all companies must file publicly available financial statements with the company registrar, Companies House. For some companies—particularly inward investment film and TV production companies—these financial statements will likely need to be audited.

Read on to find out whether your production might need an audit, and the best way to approach one if it does.

Does my production need an audit?

The simplest way to assess whether an audit is required is to consider whether your company is deemed ‘small’ under UK regulations. If it is, an audit is not required.

Most UK companies that meet two of the following criteria in a 12-month accounting period will not be deemed small and will therefore require an audit:

• Revenue greater than £10.2m
• Total assets worth more than £5.1m
• More than 50 monthly employees

All of the above would be pro-rated for a shortened periods (e.g. a six-month revenue period need only exceed £5.1m).

Other criteria also apply. For example, if the UK production company is part of a wider group (i.e., owned by a company rather than individuals), the above criteria will apply to the group as a whole. So, while a company may not exceed the above totals, it will still require an audit if its – for example, US – parent company does.

There are other exemptions available and the rules are heavily interrelated, so it’s best to consult with your advisors to determine up front whether an audit is required.

What does a UK audit entail?

A UK statutory audit will entail review and testing of the amounts contained in your company’s financial statements and records. As well as testing the amounts, there will also be walkthroughs and documentation of processes around authorisation of payments, recording of journal entries, processing of payroll and other similar financial processes. 

For expenses, testing will likely take the form of agreement back to underlying invoices or contracts. For assets, it may be agreeing to payments, understanding when money (e.g., overseas tax credits) is expected to be received and other similar matters. 

Liability testing will normally involve agreement to underlying records and checking of post-year-end settlement of the liability to the creditor.

Audit requirements mean that it’s not only the largest items that will be tested; rather, an element of ‘randomness’ must be introduced, which means small items may also be tested and require the same level of support as larger items.

New audit requirements (known as ‘ISA 315’) put a greater emphasis on the auditor understanding a company’s IT systems. Therefore, there will likely be a greater focus on how accounting systems, document storage systems and other pieces of software are used, accessed and secured.

What is outside the scope of an audit?

A UK statutory audit is not designed to test every item in a company’s financial statements. It is testing done on a sample basis to determine whether the accounts are ‘true and fair’ – not to test that they are absolutely correct. Therefore, only some balances and items will be tested, and these will be determined by the auditor to introduce the element of ‘randomness’.

In the UK, an audit is not a ‘tax credit audit’. The nature of the UK incentive structure and company law means that there is no audit of just the tax credit as a standalone element; rather, it is an audit of the company as a whole and this will encompass an audit of the incentive.

In other jurisdictions, the incentive element is separate and has its own audit process which often involves the testing of every single invoice on which an incentive is being claimed. This is not the case in the UK, where the aforementioned sample-based approach to the incentive will be taken. 

How should I prepare for an audit?

The first and most important items that you will be asked for will be fully reconciled trial balances, cost reports and a bible for the production. 

Due to the nature of the UK incentive structure, a UK audit is going to cover all aspects of production including non-UK locations, so trial balances will be needed for all companies within the production structure.

Auditors will normally want the trial balances and cost reports to be run separately for each currency within each company, so it’s key to have these ready and ‘locked’ for the given audit date. Having to change reports due to backdated postings can cause significant issues for the audit and auditors.

Some items will always be requested in any audit, so it would pay to have these ready in advance as well:

• Bank reconciliation at the year-end date for all accounts; 
• Bank statements covering one month either side of the year-end date;
• Value-added tax and sales tax reconciliation and submission at the year-end date;
• Copies of commissioning agreements, production services agreements and any lending agreements for incentive financing;
• Evidence for any claims made for non-UK incentives and confirmation of if or when these were received; and
• An itemised purchase order report at year end.

Auditors will also likely look at test contracts of key cast and crew members, so make sure you have easy access to all producer, director and main cast contracts.

In the UK, there are also some reference numbers that are important to have available as your auditors are likely to need them for submissions – namely, your:

• Companies House ‘Authentication Code’; and
• Unique Taxpayer Reference (UTR) number

Finally, auditors in the UK will normally need direct confirmation from your bank regarding the balance held at year end. This is now generally done electronically (through secure direct confirmation portals) but authorisation will be required from a person on the bank mandate. Therefore, make sure you are aware of who can approve this in advance and advise them that this will be incoming – as the emails can often be dismissed as spam!

As the audit is most likely to relate to an incentive claim being made, the other key element will be to ensure that you have your Interim/Final Cultural Test certificate on hand as the incentive claim (which comes off the back of the audit) cannot be submitted without this.

Will the new AVEC impact audits?

In general, the new Audio-Visual Expenditure Credit (AVEC) regime will not significantly impact audits. This is because, as mentioned above, audits are of the company as a whole and not the incentive specifically. Therefore, it is audit regulations that govern the work rather than specific incentive rules.

However, one important element of the new AVEC guidelines is the requirement to disclose to His Majesty’s Revenue and Customs (HMRC) all transactions with ‘connected parties’.

This would include any companies that are within the same ownership group as the company being audited (which could include service or commissioning entities) any transactions made directly with statutory directors of the company or other related parties.

It is therefore a good idea to ensure that you are aware of these companies upfront at the start of production and can tag transactions with them within your accounting system to allow for ease of disclosure.

Tips for an easy audit

This may sound simple, but the biggest thing is to be prepared! If you have an agreed period end for the audit, ensure that you run cost reports and trial balances to that date as soon as possible so that you don’t have to go back and try to access reports, as some software has issues running historical reports. Alternatively, make sure your cost management system has full historical reporting functionality, like EP’s SmartAccounting. Being able to provide these documents to your auditor in good time will set you up for a smooth and efficient audit.

The other key element is to agree a timetable in advance with the auditor and to stick to it – and that goes for both sides.

Agree upfront with the auditor when you will provide the initial reports and also when they will turn around their initial requests to you. The most efficient and smooth audits tend to have agreements on turnaround times for requests as well – for instance, that you will provide all requested support one week after initial requests from the auditor and that they will then provide a final set of requests (for example) two weeks after that.

Failing to have these agreed turnaround and response times (or one party failing to stick to whatever has been agreed) will inevitably lead to delays. If information is provided late, auditors will have moved on to other assignments and may struggle to come back to the work, which will cause further delays in finishing the audit and getting the tax credit.

Similarly, you should chase the auditor! For auditors, the best production accountants and studio executives to work with tend to be those who are in constant dialogue with them, ensuring that things are running smoothly and that the auditor is holding up their end of the bargain time wise as well.

Having a well-organised and easily accessible invoice filing system is a great way to ensure the smooth process of an audit as invoices will form a major part of the requests made. SmartAccounting allows you to give your auditor secure access to your invoice filing system, which can reduce the burden on you and allow the auditor to access and obtain the information they need themselves. 

Remember, auditors do need what they ask for. The reasoning may not seem obvious – or it may be an unusual request or for a small amount – but they do still need the evidence and support. Good auditors will not generally ask for things that they don’t need, but you can of course always ask for the reasoning.

Finally, remember that the auditor has the legal right to ask for any information that they require. But they are bound by confidentiality under their engagement letters and also their professional regulations, so they cannot share any informational externally. Ultimately non-provision of information can lead to the auditor refusing to sign the financial statements, which can have significant adverse impacts on the wider company.

How EP can help you prepare for an audit

If you’re looking for support with the audit process, reach out to Lloyd Gunton and the team at FLB Accountants (an Entertainment Partners company).

As a UK-based accounting firm with expertise in media and entertainment accounting, tax and tax incentives, finance, and statutory audit, the FLB team have the skills and experience to make the audit process as straightforward as possible while helping you to meet your regulatory obligations.