Statutory Audit: Difference between revisions
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'''Statutory audits''' are assurance engagements that are mandated by the law or regulations. Certain entities are legally obligated to have an independent review of the accuracy of their financial statements, either annual or more frequent. Statutory audits are required either by governmental entities in various jurisdictions (for example, the European Union) or regulators of specific industries. | '''Statutory audits''' are assurance engagements that are mandated by the law or regulations. Certain entities are legally obligated to have an independent review of the accuracy of their financial statements, either annual or more frequent. Statutory audits are required either by governmental entities in various jurisdictions (for example, the European Union) or regulators of specific industries. | ||
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There is [[industry]] interest in changing statutory audit requirements for small undertakings (companies with total assets under a certain size limit) by increasing the threshold for audit exemptions in the European Union. This concept is more in line with audit requirements in the United States and Canada, which do not have statutory audit requirements for privately owned companies. The argument for the relief is to reduce regulatory burden and administrative costs, on both entity and [[government]] level. On the other hand, studies have shown that small companies benefit from statutory audits. For example, entities that have audited financial statements demonstrate on average lower [[cost]] of debt because the [[quality]] of financial reporting has an impact on pricing by lending institutions. Audited financial statements are more reliable thus lenders undertake lower [[risk]] compared to lending to entities with unreliable financial reporting, so the cost of borrowing is lower. Thus, statutory audits improve access to credit<ref>A critical analysis of raising the threshold of audit requirements (2018)</ref>. | There is [[industry]] interest in changing statutory audit requirements for small undertakings (companies with total assets under a certain size limit) by increasing the threshold for audit exemptions in the European Union. This concept is more in line with audit requirements in the United States and Canada, which do not have statutory audit requirements for privately owned companies. The argument for the relief is to reduce regulatory burden and administrative costs, on both entity and [[government]] level. On the other hand, studies have shown that small companies benefit from statutory audits. For example, entities that have audited financial statements demonstrate on average lower [[cost]] of debt because the [[quality]] of financial reporting has an impact on pricing by lending institutions. Audited financial statements are more reliable thus lenders undertake lower [[risk]] compared to lending to entities with unreliable financial reporting, so the cost of borrowing is lower. Thus, statutory audits improve access to credit<ref>A critical analysis of raising the threshold of audit requirements (2018)</ref>. | ||
{{infobox5|list1={{i5link|a=[[Bank examination]]}} — {{i5link|a=[[Non-bank financial company]]}} — {{i5link|a=[[Bridge Bank]]}} — {{i5link|a=[[Fully funded]]}} — {{i5link|a=[[Capital group]]}} — {{i5link|a=[[Bankers Bank]]}} — {{i5link|a=[[Income Shifting]]}} — {{i5link|a=[[Publicly traded companies]]}} — {{i5link|a=[[Risk]]}} }} | |||
==References== | ==References== | ||
Revision as of 03:03, 18 November 2023
Statutory audits are assurance engagements that are mandated by the law or regulations. Certain entities are legally obligated to have an independent review of the accuracy of their financial statements, either annual or more frequent. Statutory audits are required either by governmental entities in various jurisdictions (for example, the European Union) or regulators of specific industries.
Entities subject to statutory audits
Entities operating in the European Union are subject to EU Accounting Directive 2013/34/EU issue 26 June 2013, which establishes mandatory or statutory audit requirements for certain companies:
- Public interest entities, which broadly includes entities trading on regulated markets, as well as banks and insurance companies
- Medium-size and large undertakings, which are companies that exceed certain asset size (total assets)[1].
Individual EU Member States, such as Poland, may establish different audit requirements. In Poland, the following companies are subject to statutory audits as prescribed either by the law or regulations governing the industries that these entities operate in:
- Banks, insurance companies, pension and investment funds, companies managing investment funds, public entities, brokerages
- Companies that meet two of the three following factors: (1) minimum average full-time employee count of at least 50, (2) asset size at or exceeding $2.5 million Euro, (3) net sales at or exceeding $5 million Euros[2].
In the United States, companies publicly traded on one of the U.S. stock markets under the Securities Exchange Act of 1934 are subject to statutory audits by the U.S. Securities and Exchange Commission (SEC)[3]. In addition, national banks in the United States are subject to regulatory audit requirements. The Federal Deposit Insurance Company (FDIC) requires in Part 363 that banks with total assets exceeding $500 million submit audited financial statements to the primary regulator within 90 days for public companies or 120 days for private companies from the fiscal year end[4].
Statutory audits of small undertakings/companies
Individual EU Member States have the option to exempt certain entities from the EU Accounting Directive and its statutory audit requirements.
There is industry interest in changing statutory audit requirements for small undertakings (companies with total assets under a certain size limit) by increasing the threshold for audit exemptions in the European Union. This concept is more in line with audit requirements in the United States and Canada, which do not have statutory audit requirements for privately owned companies. The argument for the relief is to reduce regulatory burden and administrative costs, on both entity and government level. On the other hand, studies have shown that small companies benefit from statutory audits. For example, entities that have audited financial statements demonstrate on average lower cost of debt because the quality of financial reporting has an impact on pricing by lending institutions. Audited financial statements are more reliable thus lenders undertake lower risk compared to lending to entities with unreliable financial reporting, so the cost of borrowing is lower. Thus, statutory audits improve access to credit[5].
| Statutory Audit — recommended articles |
| Bank examination — Non-bank financial company — Bridge Bank — Fully funded — Capital group — Bankers Bank — Income Shifting — Publicly traded companies — Risk |
References
- Erns & Young (2017). Doing business in Poland, Accounting and Auditing, 150.
- Federal Deposit Insurance Corporation (2018). 2000 – Rules and Regulations, Section 363.2 Annual reporting requirements, 1.
- U.S. Securities Exchange Commission (2018). Financial Reporting Manual, Topic 4 – Independent Accountant's Involvement. Section 4200 Accountant's Reports, 1.
- Yrittajat, S., Taloushallintoliitto (2018). A critical analysis of raising the thresholds for audit exception: Evidence from Finland, Introduction, Background: 2, 5-6.
Footnotes
Author: Daniel Gaura
