As many of you - who concern themselves with financial statements – have noticed, there have been several changes made to what auditor’s reports of financial statements for 2016 are supposed to look like. These changes are a result of an amendment to the Auditor Act and other changes made to provisions related to auditors. These were published so that the Czech legal provisions stayed in accordance to provisions of the EU after the amendment to Directive on statutory audits (2014/56/EU) and Regulation (EU) No 537/2014 on specific requirements regarding statutory audit of public-interest entities.

The amendment to Directive on statutory audits was adopted in reaction to the financial crisis of 2008-2009 when the role of auditors and their societal responsibility was largely discussed[1]. It must be mentioned that during that time financial reports of many banks and other important establishments stated assets (especially financial) whose carrying amounts were nowhere close to reality and auditors did not mention this in their reports at all.

The amendment to Directive on statutory audits was adopted as a result of these discussions with the aim being mainly:

• To strengthen auditors’ independence
• To lay down rules for internal organization of an auditor and for a system directing quality
• To increase reliability and transparence of quality assurance reviews
• Effective public supervision
• To strengthen the role of audit committees when assuring high quality of a statutory audit

The main motto of the suggested modifications became quality and independence.

The adopted regulation No 537/2014/EU made requirements for auditors of statutory audit of public-interest entities even stricter by laying down detailed rules for assuring sufficient quality of statutory audits of public-interest entities and the auditors’ independence. These include a ban on providing certain non-audit related services to public-interest entities, enforced rotation of auditing firms and audit partners, limit of share of remuneration from one client on total income of an auditor, and a modification of rules for reviews of quality of audit direction before issuing an auditor’s opinion, and other measures.

In pursuance of establishing these rules, the above-mentioned Regulation also provides for changes in the contents of an auditor’s report on a statutory audit of public-interest entities. New requirements were established regarding the extent and contents of an auditor’s report on a statutory audit with emphasis on better quality of information were. Thus, the explanatory capacity of an auditor’s report on statutory audit is increased because the report must newly provide more information than what is contained in standardized auditor’s opinion. The report must include information about key audit matters, that means mainly appraisal of result from the point of view of the going concern principle. It is clear that the new formulation of auditor’s opinion about public-interest entities means more time necessary for auditors to put the report together and it will require more in relation to their internal proceedings.

Auditors have another new obligation in having to draw up an additional report for the audit committee that includes more detailed information about the result of a statutory audit of a public-interest entity. This report is not public.

All the adopted provisions should prevent what happened in 2008-2009 from happening again, they should help to avoid a financial crisis. The new audit provisions bring stricter requirements for auditors, especially in areas of quality and independence. However, in my opinion, they do not bring anything fundamentally new to the auditing process itself and auditors’ methods. The obligation of accounting entities to show losses from decrease of net assets value and the obligation of auditors to verify this fact were provided for in already effective provisions.

In order to harmonize the above-mentioned EU provisions with the Czech law, the amendment of the Auditor Act was adopted in 2016 and it implemented the above-mentioned modifications into the Czech law taking effect October 1^st 2016. These legislative changes subsequently required changes be made to the internal regulations of the Chamber of Auditors (mainly application clauses modifying the wording of an auditor’s report).

Part of these changes can now be seen in the forms of auditor’s reports which you can encounter these days.

The main changes made to auditor’s report are:

• Change of order in which information is listed in the report – auditor’s opinion is now newly at the beginning of the report
• Request for making the main matters of an audit public (with public-interest entities)
• More information about duties and responsibilities of auditors and management of audited companies
• Formulation modifications in the case of uncertainty about meeting the assumption of going concern
• Formulation changes regarding verification of information stated in annual report (newly “other information”)
• Stating information required by the Regulation

The concrete form of an auditor’s report is also dependent on whether the audited company is a listed company or a public-interest entity, where requirements for publishing certain information are for auditors generally bigger.

New duties of the auditor are to comment on conformity with legal provisions and with a competent financial reporting framework that provides basis for compiling financial statements, to list the most substantial risks and include his or her reactions to those, and to point out important matters which he or she considers key for users of financial statements.

The new version of an auditor’s report shall be used for auditor’s reports to financial statements for accounting period ending December 12^th 2016 and later, that is practically with all audits of financial statements to December 12^th 2016. There is a specific provision for public-interest entities and listed companies where the auditor publishes the main matters of the audit and other information required by the Regulation.

Reactions of our clients to these changes have been mainly positive. There is some appreciation for making the report clearer and better arranged by moving the opinion to the introduction of the report and also by including more information. Even though the quality of every audit is always going to be dependent on the quality of work of each auditor, I believe that the adopted changes will be beneficial and help to restore trust in auditors’ profession and will help increase credibility of financial information published by accounting entities.

Author: Milan Pašek

Revision: Michal Sikora

[1] Zelená kniha EK – Politika v oblasti auditu: Poučení z krize