Small Company Audit Exemptions in Kenya: Common Mistakes That Trigger KRA Audits in 2026

In 2026, small companies in Kenya may qualify for statutory audit exemptions under the Companies Act, but the KRA and external auditors scrutinize compliance closely. Mistakes in claiming exemptions, poor bookkeeping, or failing to maintain proper records can trigger digital audits, penalties, or director liability.

This advisory guide explains what small companies can and cannot do, common pitfalls, and how to remain compliant under 2026 regulations.

Understanding Small Company Audit Exemptions

Quick Advisory:
Small companies may be exempt from statutory audits if they meet specific turnover, asset, and employee thresholds. Exemptions reduce compliance costs but do not absolve directors from proper financial record-keeping.

Exemption criteria typically include:

Turnover below KES 50 million
Total assets under KES 50 million
Fewer than 50 employees
No public interest or shareholder restrictions

Adamjee Advisory Insight (2026):
Even exempt companies must maintain accurate bookkeeping to support tax compliance and potential audits. Our First Financial Audit Kenya guide helps small companies assess readiness.

Common Mistakes That Trigger KRA Audits

Quick Advisory:
Small companies often attract KRA scrutiny by misinterpreting exemptions, poor bookkeeping, or inconsistent tax filings.

1. Misclassifying Expenses

Claiming personal expenses as business deductions
Failing to link expenses to eTIMS-compliant invoices

2. Poor Bookkeeping Practices

Missing ledgers or delayed entries
Unreconciled bank accounts
Incorrect payroll records

3. Ignoring PAYE, NSSF, or SHIF Obligations

Late or inaccurate remittances
Misclassification of employees vs consultants

4. Filing Inaccurate Tax Returns

VAT, corporate tax, or withholding tax errors
Discrepancies between reported income and invoices

5. Overstating Exemption Eligibility

Exceeding thresholds for turnover, assets, or employees
Failing to reassess eligibility annually

Adamjee Advisory Insight:
Most small companies face KRA digital audits triggered by eTIMS discrepancies or irregularities in statutory remittances. Our KRA Audit Survival Guide shows how to avoid common triggers.

Why Bookkeeping Matters Even If You’re Exempt

Quick Advisory:
Audit exemption does not remove the requirement to maintain accurate, complete, and auditable financial records.

Bookkeeping best practices:

Record all transactions promptly
Maintain supporting documentation for every expense
Reconcile bank and cash accounts regularly
Monitor compliance with PAYE, NSSF, and SHIF

Adamjee Advisory Insight:
KRA evaluates bookkeeping quality to validate exemptions. Poor records may nullify your exemption and trigger audits. Our Bookkeeping Services help SMEs stay compliant.

Director Responsibilities Under Exemption

Quick Advisory:
Directors remain legally responsible for the company’s financial integrity, even if exempt from audits.

Responsibilities include:

Approving and reviewing financial statements
Ensuring statutory payments are made on time
Maintaining accurate records for tax purposes
Ensuring the company meets exemption thresholds

Adamjee Advisory Insight:
Directors cannot rely on exemption as a shield from liability. Our Company Secretarial Services guide directors on governance and compliance obligations.

Tips to Maintain Audit Readiness as an Exempt Company

Quick Advisory:
Exempt companies should implement controls and documentation practices to avoid KRA scrutiny.

Best practices:

Document exemption eligibility calculations annually
Ensure all eTIMS invoices are captured and reconciled
Conduct internal reviews before tax filings
Keep payroll and statutory deductions accurate

Adamjee Advisory Insight:
Proactive record-keeping and internal controls reduce the likelihood of triggering a digital audit. Our Audit and Assurance Services support SMEs in staying audit-ready.

When to Consider Voluntary Audits

Quick Advisory:
Sometimes, conducting a voluntary audit improves credibility and risk management, even if exempt.

Benefits:

Strengthens credibility with banks and investors
Validates internal controls and bookkeeping
Prepares for future growth or potential regulatory changes
Reduces the risk of penalties from KRA audits

Adamjee Advisory Insight:
Voluntary audits can be a strategic tool. Our Statutory Audit Kenya – 10 Step Guide explains how SMEs can benefit from structured audits without breaching exemptions.

Common Pitfalls for Growing SMEs

Quick Advisory:
Exemption thresholds change annually, and growth can trigger audit obligations if not monitored.

Pitfalls include:

Turnover exceeding KES 50 million mid-year
Increase in total assets or employees above thresholds
Expansion into regulated sectors with mandatory audits
Failing to adjust internal controls to handle increased complexity

Adamjee Advisory Insight:
SMEs should regularly review exemption eligibility and maintain records to demonstrate compliance. Our First Financial Audit Kenya service helps SMEs navigate this transition smoothly.

Final Thoughts: Exempt Doesn’t Mean Unregulated

Small company audit exemptions provide relief, but KRA audits, digital checks, and statutory responsibilities remain strict. Maintaining proper bookkeeping, statutory remittances, and internal controls is essential to protect both the company and its directors.

Exempt SMEs that proactively manage compliance enjoy reduced costs without sacrificing regulatory safety, while those that neglect these obligations risk audits, penalties, and reputational harm.

Gain Clarity and Confidence in Your Finances

Navigate the complexities of compliance, tax, and financial management with a trusted partner. Adamjee Auditors, a member of Santa Fe Associates International (SFAI), provides world-class audit, tax, and advisory services to help your business achieve its goals.

Schedule a consultation with our expert team in Nairobi or Mombasa to discuss your business needs.

Nairobi Office
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+254 717 908 241
madamjee@adamjeeauditors.co.ke

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