REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT REPARIS Project in Macedonia Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE

REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE

REFLECTED IN THE SLOVENIAN AUDITING ACT

REPARIS Project in Macedonia

Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE OF AUDITORS

2009.04.01, 2009.04.03

Basic regulation

• EU basis:– Directive 2006/43/ES on statutory audits of annual

accounts and consolidated accounts (Official Journal of the EU, No. L 157 - 9. 6. 2006)

• Regulation enforced in Slovenia:– Auditing Act (Offical Journal of the Republic of

Slovenia, No. 65/2008 – 30. 6. 2008; hereinafter Zrev-2)

2009.04.01, 2009.04.03 Meta Duhovnik, Ph.D.

1

HIERARCHY OF THE AUDITING RULES

AUDITING ACT (ZRev-2)

BASIC AUDITING PRINCIPLES

CODE OF PROPFESSIONAL

CONDUCT PRONOUNCEMENTS OF THE

INTERNATIONAL FEDERATION OF ACCOUNTANTS

(IFAC)

CODE OF ETHICS FOR PROFESSIONAL

ACCOUNTANTS

INTERPRETATION OF THE AUDITING ACT

(SLOVENIAN AUDITING STANDARDS)

EXPLANATIONS AND GUIDELINES OF THE AUDITING COUNCIL

METHODICAL MATERIAL OF THE INSTITUTE

POSITIONS OF THE AUDITING COUNCIL

PROFESSIONAL LITERATURE

GENERALLY ACCEPTED AUDITING ACTIONS IN

FOREIGN PRACTICE

ISQC 1

ISAs

ISAEs

ISREs

ISRSs

2009.04.01, 2009.04.03Meta Duhovnik, Ph.D.

Definitions of basic terms

• Statutory audit• An audit of annual accounts or consolidated accounts as

required by the legislation.

• Statutory auditor• A natural person approved by the competent authorities of

a Member State to carry out auditing.

• Audit firm• A legal person or any other entity regardless of its legal

form, that is approved by the competent authorities of a Member State to carry out statutory audits.


Definitions of basic terms (continuation)

• Third country audit entity• An entity, regardless of its legal form, which carries out

audits of the annual or consolidated accounts of a company incorporated in a third country.

• Third country auditor• A natural person who carries out audits of the annual or

consolidated accounts of a company incorporated in a third country.



• Group auditor• The statutory auditor or audit firm carrying out the

statutory audit of consolidated accounts.

• Network• The large structure:

– which is aimed at cooperation and to which a statutory auditor or an audit firm belongs, and

– which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, common quality-control policies and procedures, a common business strategy, the use of a common brand-name or a significant part of professional resources.



• Affiliate of an audit firm• Any undertaking, regardless of its legal form, which is

connected to an audit firm by means of common ownership, control or management.

• International auditing standards• International Standards on Auditing (ISA) and related

Statements and Standards, insofar as relevant to the statutory audit.



• Key audit partner – in the case of individual or group audit

• The statutory auditor – designated by an audit firm for a particular audit engagement as

being primarily responsible for carrying out the statutory audit on behalf of the audit firm;

– signing the audit report.


Transposition of requirements

• Directive – Article 3– A statutory audit can be carried out

only by statutory auditors or audit firms which are approved by the competent authorities of the Member State (MS) requiring the statutory audit.

– The competent authorities may be professional associations, provided that they are subject to a system of public oversight.

• ZRev-2- The Auditing Council of the Institute is The Auditing Council of the Institute is

authorized to make decisions regarding authorized to make decisions regarding the issue of licenses for auditing activities the issue of licenses for auditing activities and the tasks of a certified auditor. and the tasks of a certified auditor. (Article 15)(Article 15)

- Auditing services may only be provided Auditing services may only be provided by an audit company. On behalf of an by an audit company. On behalf of an audit company auditing services may only audit company auditing services may only be provided by persons holding a license be provided by persons holding a license to perform the tasks of a certified auditor. to perform the tasks of a certified auditor. (Article 5)(Article 5)

- The Agency for the Public Oversight of The Agency for the Public Oversight of Auditing (hereinafter: the Agency) is Auditing (hereinafter: the Agency) is responsible for the oversight of the issue responsible for the oversight of the issue of licenses. (Article 31)of licenses. (Article 31)


Transposition of requirements• Directive – Article 3

– An entity can obtain a license if:

– the natural persons who carry out statutory audits on behalf of an audit firm are approved as statutory auditors in the Member State concerned;

– a majority of the voting rights is held by audit firms in EU or natural persons with a license;

– a majority of the members of the administrative or management body represents persons with a license.

• ZRev-2 – Article 61- A company can obtain a license, if:

- auditing services are provided by persons holding a license to perform the tasks of a certified auditor (Article 5);

- the holders of shares whose joint participation in the capital and management of an audit company is at least 75%, have to be certified auditors, audit companies, and third-country audit firms or audit entities (Article 61);

- the majority of the members of the management board and the president of the management board are certified auditors (Article 65).



• Directive – Article 4

– Approval can be granted only to natural persons or firms of good repute.

• ZRev-2

– The requirement is incorporated implicitly in the articles requiring ethical behavior and professional competency.


Transposition of requirements• Directive – Article 5– Approval of a statutory auditor Approval of a statutory auditor

or an audit firm has to be or an audit firm has to be withdrawn if:withdrawn if:

– the good repute of the person the good repute of the person or firm has been seriously or firm has been seriously compromised;compromised;

– any of the conditions imposed any of the conditions imposed is no longer fulfilled. is no longer fulfilled.

• ZRev-2– The Agency has to withdraw the

license of a certified auditor if:

– the license was obtained by stating false data;

– the conditions required are no longer fulfilled;

– the person has been convicted of a crime;

– the certified auditor violates independence requirements, auditing rules or the duty of confidentiality (Article 54).


WithdrawalWithdrawal (continuation)(continuation)

• ZRev-2 – The Agency has to withdraw the license of an

audit company if:

– the license was obtained by stating false data;

– the additional measure was imposed on the audit company, and the competent body of the company failed to implement that measure or failed to rectify the violations (Article 84).


Transposition of requirements• Directive – Articles 6, 7, 8, 9 and 10

– A person carrying out statutory audit had to complete a course of theoretical instruction, undergo practical training and pass an examination of professional competence of university final or equivalent examination level, organized or recognized by the MS concerned.

– A minimum of 3 years’ practical training in auditing or accounting field (at least 2/3 with the audit firm) is required.

• ZRev-2 – Article 48– The conditions to be fulfilled to get a license

of a certified auditor are:• completed second level study program;

• minimum of five years of work experience, with a minimum of 3 years of experience (2 with the audit company) in auditing in the six years prior to submission of the application for the issue of the license;

• the examination of professional competence to carry out the tasks of a certified auditor;

• no prior withdrawal of a license;

• no conviction of a crime;

• active knowledge of Slovenian language.


Transposition of requirements• Directive – Articles 11 and

12– Possible exceptions in

connection with the education.

• ZRev-2– No exceptions.

• Directive – Articles 13• Programs of continuing

education.

• ZRev-2 – Article 48– The validity of the license can be

renewed every two years at the holder's request, provided that the holder undergoes additional professional training (60 hours) in accordance with applicable rules.




– Approval of statutory Approval of statutory auditors from other MS.auditors from other MS.

– An aptitude test in one of the An aptitude test in one of the languages permitted by the languages permitted by the language rules applicable in language rules applicable in the MS concerned.the MS concerned.

• ZRev-2 – Article 50

– A test of knowledge of Slovenian law and accounting standards in Slovenian language.


Transposition of requirements• Directive – Articles 15-20

– Public electronic register of statutory auditors and audit firms in the language of the MS:

• the data of natural or legal person;

• third-country auditors and audit entities have to be clearly indicated in the register as such and not as statutory auditors and audit firms;

• updating of registered information without undue delay;

• statutory auditors and audit firms are responsible for the data.

• ZRev-2 – Articles 77 and 78

• Notification of changes to all data entered in the register within 10 days.

– Articles 153-157 and 159-161:• Harmonization with the Directive’s

requirements.• The measures of supervision imposed

are also included in the public register.




– All statutory auditors and audit firms are subject to the principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care.

• ZRev-2

– The professional ethics is incorporated in the auditing rules and regulations based on the Zrev-2.



• Directive – Article 22• Independence and

objectivity– The absence of any direct or The absence of any direct or

indirect financial, business, indirect financial, business, employment or other employment or other relationship – including the relationship – including the provision of additional non-provision of additional non-audit services – between the audit services – between the statutory auditor, audit firm statutory auditor, audit firm or network and the audited or network and the audited entity.entity.

• ZRev-2 – Articles 44-46

– Independence of auditing

– Prohibition on the auditing of an individual legal person

– Prohibition to assume the management function until at least to years have passed following the cessation of audit work as a certified auditor or key audit partner



– MS have to ensure that all information and documents to which a statutory auditor or audit firm has access when carrying out a statutory audit are protected by adequate rules on confidentiality and professional secrecy.

• ZRev-2 – Articles 38– Exceptions:– supervision of the competent authorities (including internal)– written requirement of the competent court– reasonable suspicion that a criminal act which should be reported

has been committed– replacement of an audit company, whereby the preceding audit

company is obliged to provide the incoming audit company access to all data

– written agreement of the audited entity


Transposition of requirements• Directive – Article 24– Independence and objectivity of the Independence and objectivity of the

auditorauditor

– The owners or shareholders of an The owners or shareholders of an audit firm as well as the members audit firm as well as the members of the administrative, of the administrative, management and supervisory management and supervisory bodies of such a firmbodies of such a firm, or , or of an of an affiliated firm, shall not intervene affiliated firm, shall not intervene in the execution of a statutory in the execution of a statutory audit in any way which audit in any way which jeopardizes the independence and jeopardizes the independence and objectivity of the statutory objectivity of the statutory auditor.auditor.


– Almost the same text as in the Directive.




Fees for statutory audits – shall not be influenced or

determined by the provision of additional services to the audited entity;

– can not be based on any form of contingency.


– Almost the same text as in the Directive..



• Directive – Article 26– Auditing standardsAuditing standards

– ISAs adopted by the ISAs adopted by the Commission and Commission and published in the OJ of the published in the OJ of the EU;EU;

– MS may impose additional MS may impose additional requirements relating to requirements relating to the statutory audits of the statutory audits of annual and consolidated annual and consolidated accounts for a period accounts for a period expiring on 29 June 2010.expiring on 29 June 2010.

• ZRev-2 – Article 4– Auditing has to be carried out

in accordance with Zrev-2, the ISAs and other rules of the IFAC, basic auditing principles and other auditing rules adopted by the Institute, other laws governing the auditing of individual legal entities and other forms of auditing, and the regulations adopted on the basis thereof .



– Statutory audits of consolidated accounts– The full responsibility of the group auditor for the

audit report in relation with the consolidated accounts.

– The group auditor maintains documentation of his or her review of the audit work performed by third-country auditors, statutory auditors, third- country audit entities or audit firms for the purpose of the group audit.

– The documentation retained by the group auditor shall be such as enables the relevant competent authority to review the work of the group auditor properly.


– Almost the same text as in the Directive.




– Audit reportingAudit reporting

– The audit report has to be The audit report has to be signed by at least the signed by at least the statutory auditor carrying statutory auditor carrying out the statutory audit on out the statutory audit on behalf of the audit firm.behalf of the audit firm.


• The auditor’s report on financial statements has to be prepared and signed by a certified auditor.



The quality assurance system has to:

– be independent of the reviewed statutory auditors and audit firms;

– be subject to public oversight;

– have adequate resources – free from any possible undue influence by statutory auditors or audit firms;

– have appropriate personnel with professional education and relevant experience;

– be exclusive of the conflicts of interest;

• ZRev-2

– Article 17(5)

– Article 31

– Articles 10(3) and 30

– Article 17(2) , (4)

– Article 17 (5)


• Directive – Article 29 (continuation)

– include the quality assurance review (supported by adequate testing of selected audit files) of

• compliance with applicable auditing standards and independence requirements,

• quantity and quality of resources spent,

• the audit fees charged,

• the internal quality control system of the audit firm.

– The quality assurance review has to be the subject of a report with the main conclusions and recommendations to be followed up.

– Quality assurance reviews have to take place at least every six years.

– The overall results have to be published annually.

• ZRev-2

– Article 74(4)

– Articles 74(7) and 129(2)

– Article 74(3)

– Articles 13(2) and 29(1)


• Directive – Article 30– System of investigations and

penalties:– where statutory audits are not carried

out in conformity with the legislation;– measures taken and penalties imposed

have to be appropriately disclosed to the public;

– penalties have to include the possibility of the withdrawal of approval.

• ZRev-2

– Article 53 (certified auditors)

– Article 80 (audit companies)

– Article 152 (register )

– Article 53 (certified auditors)

– Article 80 (audit companies)




• Directive – Article 32Principles of public oversightPrinciples of public oversight– All statutory auditors and audit firms have to be subject to public oversight.– The system of public oversight is managed by non-practitioners with

appropriate knowledge on the basis of an independent and transparent nomination procedure.

– The system of public oversight has to be transparent and adequately funded.

• ZRev-2

– Article 31

– Article 20 (Slide 31)

– Articles 29 and 30


Principles of public oversightPrinciples of public oversight (continuation)

• Directive – Article 32– Ultimate responsibility for the

oversight of:

• the approval and registration of statutory auditors and audit firms,

• the adoption of auditing rules,

• continuing education,

• quality assurance,

• investigative and disciplinary system.

• ZRev-2 – Article 31The nature of

responsibility:

– indirect (rules)

– indirect (consensus)

– indirect (consensus)

– direct and indirect

– direct


Non-practitioner

• Any natural person who, for at lest three years before his or her involvement in the governance of the public oversight system

has not carried out statutory audits,has not held voting rights in an audit firm,has not been a member of the administrative or

management body of an audit firm and has not been employed by, or otherwise associated

with, an audit firm.



Cooperation between public oversight systems at EU level– Designation of competent authorities.– The principle of home-country regulation and oversight by the MS in which the statutory auditor or audit firm is approved and the audited

entity has its registered office.– The obligation of professional secrecy shall not prevent competent authorities from exchanging confidential information. – The competent authorities may refuse to act on a request for information or for an investigation, if:

• it means a breach of the national security rules,• encroachment upon judicial proceedings has already been initiated in respect of the same actions and against the same persons before the

authorities of the requested MS, • final judgment has already been passed in respect of the same actions and against the same persons by the authorities of the requested MS.

• ZRev-2

– Article 26 Article 26 (Agency) (Agency)

– Article 34Article 34• Almost the same Almost the same

text as in the text as in the Directive.Directive.


Transposition of requirements• Directive – Articles 37

Appointment and dismissal of the statutory auditor:

– Appointment – general meeting of shareholders or members of the audited entity.

– Dismissal – only where there are proper grounds.

• Article 293 of the Companies Act.

• Article 37(5) of ZRev-2

The legal person must notify the Institute and Agency in writing of the dismissal or resignation of the audit company in writing in the period for

which the appointment was valid and provide grounds for the dismissal or resignation.



SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PUBLIC-INTEREST ENTITIES (1) –Transparency report:

• legal structure and ownership; • a description of the network and its legal and structural arrangements; • a description of the governance structure of the audit firm;• a description of internal quality control system of the audit firm and a statement by the administrative or

management body on the effectiveness of its functioning;• an indication of when the last quality assurance review took place;• a list of public-interest entities audited during the preceding financial year;• a statement concerning the audit firm’s independence practices; • a statement concerning the continuing education of statutory auditors;• financial information;• Information concerning the basis for the partners’ remuneration.


• Almost the Almost the same text as in same text as in the Directive.the Directive.

See next slide


Public interest entities (PIEs)


Entities governed by the law of a MS whose transferable securities are admitted to trading on a regulated market of any MS, credit institutions and insurance undertakings.

MSs may also designate other entities as PIE, for instance entities that are of significant public relevance because of the nature of their business, their size or the number of their employees.


Public interest entities (PIEs)• Directive – Article 39MSs may exempt PIEs which have not issued

transferable securities admitted to trading on a regulated market and their statutory auditors and audit firms from one or more of the requirements regarding statutory audits of PIEs.

• ZRev-2 – Articles 74 and 79PIEs are only listed entities.



SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (2)

• Audit committee:–non-executive members of the administrative body and/or

–members of the supervisory body and/or

–members appointed by the general meeting of shareholders.

At least one member of the audit committee has to be independent and has to have competence in accounting and/or auditing.

–Main tasks:

• monitoring the financial reporting process;

• monitoring the effectiveness of the company’s internal control, internal audit where applicable, and risk management systems;

• monitoring the statutory audit;

• reviewing and monitoring the independence of the statutory auditor;

• giving proposal for the appointment of a statutory auditor.

• Companies Act Article 280 of the Companies Act

• Article 280(1):At least one member –

independent expert

All the others - members of administrative or supervisory body

• Article 280(2):Almost the same text as in Almost the same text as in

the Directive.the Directive.



• Directive – Articles 39-43SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (3)

• The statutory auditors or audit firms:–report to the audit committee on key matters arising from the statutory audit, and in particular on material weaknesses in internal control in relation to the financial reporting process;

–confirm annually to the audit committee their independence from the audited PIE;

–disclose to the audit committee any additional services provided to the audited entity;

–discuss with the audit committee the threats to their independence and the safeguards applied to mitigate those threats as documented in the audit working papers.

• ZRev-2 – Article 39(3)

• Almost the same Almost the same text as in the text as in the Directive.Directive.



• Directive – Articles 39-43SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (4)

• Rotating of the key audit partners:

–within a maximum period of seven years from the date of appointment;

–participation in the audit of the audited entity again after the period of at least two years.

• ZRev-2

– Article 45(2)

– Valid for all audited entities.



SPECIAL PROVISIONS FOR THE STATUTORY AUDITS OF PIEs (5)

• The statutory auditor or the key audit partner is not allowed to take up a key management position in the audited entity before the period of at least two years has elapsed since he or she resigned as a statutory auditor or key audit partner from the audit engagement.

• ZRev-2 ZRev-2 – Article 46 Article 46

– Valid for all Valid for all audited entities. audited entities.

• The quality assurance review of statutory auditors or audit firms auditing PIEs has to be carried out at least every three years.

- Article 74(3)Article 74(3)



• Directive – Articles 44-47INTERNATIONAL ASPECTS – AUDITORS AND AUDIT ENTITIES FROM THIRD COUNTRIES (1):

• Approval of auditors from third countries:– reciprocity;

– complying with the requirements.

• ZRev-2ZRev-2– Article 46 Article 46

– Almost the Almost the same text as in same text as in the Directivethe Directive..

• Registration and oversight of third-country auditors and audit entities auditing the financial statements of companies :

• incorporated outside EU;

• listed on a regulated market of the MS.

Article 161Article 161

– Almost the same Almost the same text as in the text as in the Directive.Directive.



• Directive – Articles 44-47INTERNATIONAL ASPECTS – AUDITORS AND AUDIT ENTITIES FROM THIRD COUNTRIES (2):

• Cooperation with competent authorities from third countries:

–working arrangements on the basis of reciprocity;

–the competent authorities of the third countries meet adequate requirements;

–MSs communicate to the Commission the working arrangements with the third countries’ competent authorities.

• ZRev-2ZRev-2– Article Article 3535

– Almost the Almost the same text as in same text as in the Directivethe Directive

– Agency is Agency is competent for competent for the co-operation.the co-operation.


Conclusions

• The Slovenian auditing profession meets all requirements of the Directive.

• There are no obstacles for mutual recognition of regulatory arrangements between MSs, and between MSs and third countries in the field of public oversight if they are conceived on the principles of the Directive.


SLOVENSKI INŠTITUT ZA REVIZIJO

SLOVENIAN INSTITUTE OF AUDITORS

Tel.: +386 568 55 [email protected]


Documents

REQUIREMENTS OF THE STATUTORY AUDIT DIRECTIVE REFLECTED IN THE SLOVENIAN AUDITING ACT REPARIS Project in Macedonia Meta Duhovnik, Ph.D., SLOVENIAN INSTITUTE