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New Audit Opinion Rules

The audit reform by the EU and the related German act implementing it (the Audit Reform Act) have changed the rules for the auditor's report in the audit opinion.

In order to inc­rease the mea­ning­ful­ness of audit opi­ni­ons, to avoid misun­der­stan­dings about the tasks and con­tent of the audit ("expec­ta­tion gap") and to ensure inter­na­tio­nally uni­form repor­ting, the inter­na­tio­nal stan­dards of the IAASB have been intro­du­ced into Ger­man law.

New Audit Opinion Rules© Thinkstock

The fol­lo­wing key fea­tu­res of future repor­ting should be noted:

  • Pre­ce­dence of the audit opi­nion
  • More detai­led break­down of the audit opi­nion
  • Sup­p­le­men­tary requi­re­ments to the audi­tor's report for capi­tal mar­ket-lis­ted and other so-cal­led PIE com­pa­nies (Key Audit Mat­ters)
  • Hier­ar­chy bet­ween the dif­fe­rent stan­dards for the audit opi­nion

Pre­ce­dence of the audit opi­nion

In con­trast to the pre­vious Ger­man rules, the opi­nion on the finan­cial sta­te­ments always comes first in the new audi­tor's reports. Con­trary to the ori­gi­nal drafts of the audit stan­dard IDW PS 400, the IDW is now pro­po­sing to com­bine the opi­nion on the audit of the finan­cial sta­te­ments with the audit of the mana­ge­ment report. This is a devia­tion from the inter­na­tio­nal approach in accor­dance with ISA 700, and is inten­ded to high­light the parti­cu­lar sig­ni­fi­cance of the mana­ge­ment report in Ger­many.

More detai­led break­down of the audit opi­nion

The exten­ded scope of the audit opi­nion com­pa­red with pre­vious practice means that the audi­tor's opi­nion will be furt­her sub­di­vi­ded in the future. The audit opi­ni­ons are fol­lo­wed by sepa­rate sec­ti­ons on the basis of the audit opi­ni­ons, Key Audit Mat­ters, any necessary dis­c­lo­sure of uncer­tain­ties in connec­tion with going-con­cern issues, and the res­pon­si­bi­li­ties for the finan­cial sta­te­ments and the audi­tor's res­pon­si­bi­li­ties, as well as any other app­lica­ble repor­ting obli­ga­ti­ons.

Key Audit Mat­ters

The con­cept of Key Audit Mat­ters is pre­scri­bed by the EU direc­tive for all audits of Pub­lic Inte­rest Enti­ties (PIE), i.e. pub­li­cly tra­ded com­pa­nies and cer­tain banks and insurance com­pa­nies, while the ISAs (ISA 701) pre­scribe the con­cept for all audits of finan­cial sta­te­ments of lis­ted com­pa­nies.

The term Key Audit Mat­ters (KAM) deri­ves from inter­na­tio­nal audi­ting practice and descri­bes the most important facts of an audit, which the audi­tor has also dis­cus­sed with the com­pany's super­vi­sory bodies. Indi­vi­dual jud­ge­ments and amend­ments to requi­red finan­cial sta­te­ment dis­c­lo­su­res are not regar­ded as con­t­ents of Key Audit Mat­ters. Rather, spe­ci­fic infor­ma­tion should be pre­sen­ted on the con­duct of the audit or on parti­cu­lar focal points of the audit.

The deli­mi­ta­tion of Key Audit Mat­ters is not unpro­b­le­matic, since there is no fixed rule indi­ca­ting which infor­ma­tion should be inclu­ded or even not dis­c­lo­sed. This mar­gin of disc­re­tion is also of great import­ance with regard to poten­tial resul­ting lia­bi­lity. Simi­larly, the repe­ti­tion of such Key Audit Mat­ters in for­mu­laic lan­guage from one report to ano­ther could also pose a pro­b­lem, since it could sim­ply turn into boi­ler­plate. To be fair, we will have to wait a while before we can tell whe­ther this assump­tion is true.

The selec­tion of Key Audit Mat­ters should be con­cei­ved as a fil­ter in which the audi­tor selects from the set of topics with the cor­po­rate bodies appo­in­ted to super­vise in a step-by-step pro­cess the infor­ma­tion to be clas­si­fied as being of grea­test import­ance for the audit.

Typi­cal audit areas that could be the sub­ject of Key Audit Mat­ters include deve­lop­ment costs, good­will, defer­red taxes, reve­nue recogni­tion and high indi­vi­dual pro­vi­si­ons, e. g. from liti­ga­tion risks.

Hier­ar­chy of the various stan­dards for the audit opi­nion

In con­trast to pre­vious Ger­man practice, the requi­re­ments for the audit opi­nion will in future be divi­ded into several stan­dards. This neces­si­ta­tes the need to dif­fe­ren­tiate the import­ance of the indi­vi­dual stan­dards. The basic stan­dard (PS 400) is fol­lo­wed by the regu­la­ti­ons on modi­fi­ca­ti­ons of the BestV (res­tric­ti­ons and denials), fol­lo­wed by the audi­tor's sta­te­ments on going-con­cern issues, which in turn are fol­lo­wed by the com­ments on Key Audit Mat­ters and the notes.

Effec­tive date

The adop­tion of the cor­res­pon­ding IDW audi­ting stan­dards is sche­du­led for Decem­ber 2017. At PIE com­pa­nies, repor­ting must already be in a new for­mat for finan­cial years ending after 16 June 2017. For all other com­pa­nies, the first-time app­li­ca­tion is plan­ned for 31 Decem­ber 2018.

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