Audit 101

The aim of this audit is to obtain reasonable assurance in two areas - firstly, to ensure that the company's financial statements are prepared on a fair basis and that they reflect the reality of the company's activities; secondly, the auditor provides assurance that the company is preparing its accounts in accordance with applicable legislation and is therefore comparable with other companies.

The statutory audit is further defined in the Accounting Act, which also provides the criteria for a company to have its financial statements audited. All large and medium-sized enterprises (except for selected enterprises that are not public interest entities) and small enterprises that have met the following criteria in the last year (and the year immediately preceding) are required to have their financial statements audited:

• Balance sheet total of at least CZK 40 million
• Turnover of at least CZK 80 million
• The average number of employees of at least 50

The number of criteria that need to be met for the audit obligation varies from company to company - for joint-stock companies, it is sufficient to meet only one of the three conditions, for other companies it is two conditions.

Both natural persons and legal entities can carry out the audit - in both cases similar (professional) requirements for the performance of the activity apply and it is up to the company whether it appoints a natural or legal person as its auditor. Given the fact that auditing is a time-consuming activity, it is common practice for larger companies to appoint legal persons who, through their staff, have a greater capacity to carry out all the necessary activities within a reasonable timeframe. In addition, the verification of the financial statements by a well-known auditing firm can lead to greater credibility of those statements.

If a company is required to have its accounts audited by an auditor, it must bear in mind that the auditor cannot be appointed simply by anyone - the appointment must be approved by the highest authority of the company (e.g. the general meeting of shareholders in the case of a public limited company or the statutory executive in the case of a limited liability company) and the auditor must be given the appointment in writing to put in his/her file. Without the necessary appointment, the audit contract may be considered void and it is therefore a good idea to make the appointment before the end of the audited period - although the law does not set any time limits for the appointment, a late appointment may limit the scope of the auditor's work (e.g. due to the inability to attend the annual stock take), which the auditor must highlight in his report. Appointments can be made for more than one year, but it is a good idea to specify the timeframe of the appointment to avoid any doubt.

Last but not least, it is necessary to bear in mind that the audit is verification by an independent person, and the auditor must therefore be independent of the company - both from a personal point of view (e.g. the auditor cannot audit a company where his wife is in charge of the financial statements) and from the point of view of the given contract (e.g. the fee for the audit should be based on the complexity of the audit and should not, in any case, be based on its result).

In today's article, we have looked at the obligation to have the financial statements audited by an auditor - in the next article we will look more at the actual audit process.