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New conditions for auditing and review obligation

The amendment to the Auditory Activities Act [1] establishes new conditions for accounting entities regarding their auditing and review obligation. The amendments enforced in 2016 apply to annual reports for reporting periods starting on or after 1 January 2016.

According to the Auditory Activities Act, an audit of the annual accounts is compulsory for all public limited companies, state accounting entities, local authorities, legal persons governed by public law, political parties and companies receiving allocations from the state budget and foundations established by the state specified in subsection 91(4) of the Act.

An audit or review of the annual accounts is compulsory for other private companies if the indicators for the financial year exceed the following conditions:

AUDITING OBLIGATION

Unless otherwise provided for by law, an audit of the annual accounts is compulsory within the meaning of the Accounting Act for an accounting entity in whose annual accounts at least TWO of the indicators of the financial year exceed the following conditions:

• sales revenue or income: 4,000,000 euros;
• total assets as of balance sheet date: 2,000,000 euros; and
• average number of employees: 60.

A review of the annual accounts is compulsory within the meaning of the Accounting Act for an accounting entity in whose annual accounts at least one of the indicators of the financial year exceeds the following conditions:

• sales revenue or income: 12,000,000 euros;
• total assets as of balance sheet date: 6,000,000 euros; and
• average number of employees: 180.

An audit of the annual accounts is compulsory for all public limited companies, state accounting entities, local authorities, legal persons governed by public law, foundations established by the state and parties receiving allocations from the state budget.

REVIEW OBLIGATION

Unless otherwise provided for by law, a review of the annual accounts is compulsory within the meaning of the Accounting Act for an accounting entity in whose annual accounts at least TWO of the indicators of the financial year exceed the following conditions:

• sales revenue or income: 1,600,000 euros;
• total assets as of balance sheet date: 800,000 euros; and
• average number of employees: 24.

A review of the annual accounts is compulsory within the meaning of the Accounting Act for an accounting entity in whose annual accounts at least one of the indicators of the financial year exceeds the following conditions:

• sales revenue or income: 4,800,000 euros;
• total assets as of balance sheet date: 2,400,000 euros; and
• average number of employees: 72.

A compulsory review may be replaced with an audit.

SPECIFICATIONS OF CONSOLIDATING ENTITY

An accounting entity which is required to prepare a consolidated annual report pursuant to subsection 28 (1) and section 29 of the Accounting Act shall determine whether an audit or review is compulsory on the basis of the consolidated indicators.

An audit or a review of financial reporting should be part of any company’s review procedures, even if it is not prescribed by law. This way, an independent party confirms for the company’s owners and managers that their accounting and calculation processes are in order, which in turn helps to gain the trust of clients and partners.

Even if auditing or a review is not prescribed by law, it is recommended for practical reasons:

• when applying for a loan, credit institutions generally require an audited annual report;
• public procurements generally require tenderers’ audited annual reports as one condition for participation;
• audited annual reports are also needed when applying for benefits and grants from the European Union’s structural funds and other international financing organisations;

• foreign private investors pay great attention to audit results when making business decisions.