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Bartosz Sowiński

Wirtschaftsprüfer (Polen)
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A contract for audit of the financial statements should be signed at a time that will let the auditor to participate in stocktaking. The stocktaking can start in the last quarter of the year so now is a good time to choose the service provider.

When is the best time to engage a statutory auditor?

For companies that are obliged to have the financial statements audited and whose financial year corresponds to the calendar year, the second half of the year is a very good time to start thinking about choosing a statutory auditor. The Polish Accounting Act does not provide a deadline for picking the auditor and signing a contract with him/her, however, you should choose the entity authorised to audit the annual financial statements of your company and contract it in sufficient advance to allow the auditor to perform all the necessary audit tasks.

It is best to start the audit of the financial statements before the balance sheet date.

A lot of work has to be done before the main audit, such as:

  • ssessment of the accounting and internal control system in the company;
  • identification of key items of the financial statements; and
  • identification of the related risks.

Therefore, entities authorised to audit the financial statements often divide their work into stages: an interim audit, which is usually performed in the last quarter of the financial year of the company; and the final audit, which is performed after the balance sheet date.

It is important to commence the audit of the financial statements before the annual stocktaking because the statutory auditor is obliged to observe the physical count of stock items, which companies tend to forget about.

Choosing the auditor early enough enables the company to prepare the financial statements properly and on time, as well as to duly plan the audit and have an interim audit performed. This, in turn, will help to identify the risks and eliminate misstatements before the final deadline for the preparation of the financial statements.

It is usually the owner (the body approving the financial statements) who is accountable for choosing a statutory auditor. The constitution of the reporting entity may, however, state otherwise.

Please note!

The management board of the company is not authorised to appoint a statutory auditor.

There are many audit firms on the market. Our practice shows that choosing a statutory auditor is not as easy as it may seem. To make the best decision from the company's point of view, you should take into consideration several fundamental criteria before signing a contract with the auditor.

Choosing the right statutory auditor – characteristics of a company auditor

When giving an opinion on the financial statements, the statutory auditor should be independent and impartial – see the table below. Auditor's independence means independence from the client, from the owner of the audited company, no ties between the auditor's family members and the client, etc. The independence obligation means also that the auditor must reject engagements if there are close family and financial relationships between him/her and the audited entity. The obligation to be impartial when assessing the financial statements and giving the opinion applies both to the statutory auditor performing the audit (or the body authorised to audit the financial statements) and to other persons participating in the financial statement audit, as well as members of management boards and supervisory boards of entities authorised to auditing.

A statutory auditor must be independent

Pursuant to Article 56(3) of the Act of 7 May 2009 on Statutory Auditors, their Self-Governing Body, Entities Authorised to Audit Financial Statements and on Public Oversight (Journal of Laws No. 77, Item 649), the auditor will not be independent (and thus (s)he will be unable to audit the financial statements of the company) if:

  • (s)he holds shares or other ownership rights in an entity or its associated entity, parent company, subsidiary or co-subsidiary, except for shares in a housing co-operative;
  • within the last three years (s)he was involved in keeping the books of account and preparing the financial statements of the entity whose financial statements he/she is going to audit;
  • (s)he is or was in the last 3 years an attorney of the audited entity, a member of the supervisory or management bodies or an employee of the entity or its associated entity, parent company, subsidiary or co-subsidiary;
  • (s)he earned, at least during 1 year out of the last 5 years, at least 50% of his/her annual income by providing services to the reporting entity or its parent company, its associated entities, its subsidiaries or co-subsidiaries (however, this does not apply to the first year of professional activity of the statutory auditor);
  • (s)he is a spouse, relative or lineal kin to the second degree, or a person fostered, in the custody of or under the wardship of an executive manager or a member of the supervisory bodies of an entity, or engages such people during an audit;
  • (s)he cannot be impartial and independent for other reasons – for example, because (s)he accepted gifts disproportionate to customary courtesies or received any benefits in kind or in the form of services. -

A statutory auditor should manage a team of experienced auditors

Experience, qualifications and skills of the audit team are all important aspects to consider when choosing an entity authorised to audit the financial statements. Many years of professional experience of the audit team, as well as their expertise in operation and specific nature of enterprises and complex capital transactions may affect the opinions they issue. It is also worth paying attention to the size of the auditing team and their audit experience. The team should be adequate for the size and complexity of the company as it is the team that works on site and gets to know the company and its functioning. The professionalism of the auditing team is what allows them to analyse in detail and assess the information disclosed to them.

A good auditor knows the industry

When choosing the entity authorised to audit the financial statements it is worth considering the entity's and its auditing team's knowledge of the industry in which the audited company operates. Specialist knowledge of the sector may significantly influence the correct assessment of the financial statements. By choosing an entity hiring a large number of specialists knowing the industry regulations, the audited company may use their experience to optimise its own processes.

Audit services are of high standard if:

  • the agreed deadline for the engagement completion is met,
  • the presented data and reports are high quality,
  • the communication is good.

Punctuality is key in the financial statement audit (especially in the case of public companies), so it is a good idea to define an audit schedule and scope together with the auditor. During the audit itself, the auditor should clearly communicate his/her remarks and information about areas that may require adjustment. After the audit, it is a standard procedure to draw up a Management Letter. It usually includes the most significant audit findings and recommendations of actions necessary for or beneficial to the company. Communication with key personnel in the company should always be regular and clear, both at the planning stage and during the interim and main audits.

The right approach of the statutory auditor

Planning and approach to the audit should be adapted to the specificity of the audited entity. When discussing the proposal for the financial statement audit, the auditor should explain to the management board all the stages of the process and the way in which he/she is going to communicate with the accounting team and the management. During the planning stage, the auditor should meet with the management board and with key people in the company. The purpose of those meetings is to properly understand the functioning and the strategy of the entity to be audited, as well as to discuss current problems and the potential risks. Presenting the plan and the scope of the audit is a key element of the audit methodology. That is why we recommend having an interim audit performed before the balance sheet date, as mentioned at the beginning of this article.

Smooth collaboration between the statutory auditor and the client

The cooperation between the client and the contractor is very important in the audit process. Professional, friendly and understanding approach of both parties to the audit facilitates information flow and allows the auditor to get to know the intricacies of the entity's operations and the potential risks well. That is because most of important information can be obtained during interviews with people and not from the document reviews.

Example

What will the statutory auditor want to ask us about? 

Here is the list of frequent questions that auditors ask during their visit in the entity:

  • Are all the tangible assets used?
  • What production capacity do you achieve?
  • Have any guaranties or warranties been granted?
  • Is there a need for any improvements in the warehouse?
  • Do the employees identify any risk of theft or fraud?
  • What is the customer situation?
  • What incidental situations did you have or plan to have?
  • What areas cause the largest number of problems and disputes?

Using experts' knowledge will streamline the auditing process

An option to consult experts in the areas of taxes, law, finance, IT and internal control is always an added value to an efficient and effective audit. The audited entity may use the help of experts, especially in the areas that often cause problems in day-to-day operations of the company. Very often the financial statement audit reveals various legal and tax risks which require the entity to take corrective action before the audit is finished. Therefore, access to specialists is an additional advantage which not only streamlines the audit process, but also prevents the company from making mistakes in the future.

The most frequent types of legal and tax risks:

  • no transfer pricing documentation,
  • the wording of the company's articles of association not fully compliant with the Code of Commercial Companies,
  • problems with accounting for triangular transactions,
  • doubts on how to treat specific, incidental expenses in terms of taxes,
  • problems with determining income earned from business run in special economic zones,
  • additional capital contributions and their refund,
  • optimisation of financing business activity of the company,
  • additional assessment of income earned in a foreign parent entity (primary adjustment) and consequences in the Polish subsidiary (other state’s adjustment),
  • identification and valuation of an organised part of the enterprise,
  • withholding tax (tax at source).

Globalisation makes it necessary to report the financial statements

Poszerzająca się globalizacja gospodarcza (wzrost liczby spółek z kapitałem zagranicznym) powoduje konieczność dodatkowego raportowania/sporządzania sprawozdań finansowych na potrzeby grupy kapitałowej. Dlatego międzynarodowe spółki audytorskie, oprócz doświadczenia w raportowaniu według innych standardów niż krajowe, posiadają dostęp do specjalistów z całego świata, co może być dodatkowym atutem przy badaniu sprawozdań finansowych spółek z kapitałem zagranicznym. W tym zakresie ważny jest również poziom znajomości języków obcych, którymi posługuje się audytor, zwłaszcza gdy zakres prac obejmuje raportowanie czy przygotowanie pakietu konsolidacyjnego dla grupy lub audytora grupowego w innym kraju.

Price and quality of the financial statements

All of the aspects described above affect the auditor's fee. Therefore, the fee should not be the decisive factor when choosing an auditor. Low price usually means understaffed audit teams, engagement performed by people who do not have the necessary experience, or shorter auditing process at the client's company. In effect, the quality of work suffers and the risks to which the company is exposed are not identified.

Use the auditor's time in the company wisely

It is often said that the audit of the financial statements is a necessary evil imposed by the lawmakers and it is a waste of time. Some companies choose the cheapest auditors to obtain the opinion on the audit of the financial statements quickly and without any problems along the way. Unfortunately, sometimes it is not until several years later when a tax inspection comes when the company find outs that the financial statements contained mistakes that now trigger penalties. And they could have been avoided had the company chosen to use the services of properly qualified auditors.

Statutory auditor as an adviser on all significant issues

It is worth noting that in addition to performing the traditional audit, the auditing entity should act as an adviser on all significant issues related to economics of enterprises, taxes, law and strategic planning. And the traditional audit of the financial statements may be a significant added value to the company's operations.

Therefore, when choosing the auditor, it is a good idea to prioritise your criteria:

No. Criterion Yes No
1. Independence Yes No
2. Team experience Yes No
3. Knowledge of the industry Yes No
4. High quality of services Yes No
5. Approach to the audit and communication Yes No
6. Co-operation Yes No
7 Access to experts Yes No
8. Knowledge of foreign regulations Yes No
9. Knowledge of foreign languages Yes No
10. Price Yes No

The most important aspects should be the audit methodology, the standards of auditor's services, the experience of the audit team members, knowledge of the industry and the access to experts. Unfortunately, some of these assumptions may not be verifiable until you actually start working with your chosen auditor and his team.

We would be glad to offer more information if you are interested in this subject. In addition, our auditors and audit consultants remain at your service in our offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw, Wroclaw to answer all questions about financial audit in Poland.