Audit of financial statements – basic information

 What is the purpose of a financial statement audit?

The audit of financial statements aims first of all to increase the trust of financial statement users in the figures presented in the financial statements. The audit gives credibility to the information that companies present in their financial statements in order to ensure the security of business trading.

The auditor makes credible the information contained in the financial statements by issuing an independent auditor’s opinion. After conducting audit procedures, the auditor prepares a report including an opinion on financial statements.

During each audit, the auditor checks if the financial statements and the books of accounts on which they are based are free from material misstatements. It his opinion, the auditor confirms that the financial statements give a true and fair view of the company’s net worth, financial position and profit (loss). The auditor checks whether the audited company has complied with the Accounting Act and its own accounting policy and whether the financial statements have been prepared according to the laws applicable to the company and the company’s constitutional document.

Who must be audited?

According to Article 64(1) of the Accounting Act, the following entities are obliged to have their separate and consolidated financial statements audited: 

1. domestic banks, branches of credit institutions and foreign banks, insurance and reinsurance companies, main offices and branches of insurance companies, main offices and branches of reinsurance companies, branches of foreign investment companies, co-operative savings and credit banks;
2. entities operating on the basis of regulations on trading in securities and regulations on investment funds and on the management of alternative investment funds and alternative investment companies;
3. entities operating on the basis of regulations on the organisation and operation of retirement pension funds;
4. domestic payment institutions and electronic money institutions;
5. joint-stock companies, except for companies in organisation as of the balance sheet date;
6. other entities which in the prior financial year for which the financial statements were prepared met at least two of the following conditions:

• the annual average number of employees in full-time equivalents amounted to at least 50 people;
• the total assets recognised in the balance sheet as of the end of the financial year were at least the Polish zloty equivalent of EUR 2,500,000;
• the net revenue from the sales of merchandise and finished goods and the financial transactions for the financial year, were at least the Polish zloty equivalent of EUR 5,000,000.

Subject to the audit requirement are also the financial statements of acquiring companies and newly-formed companies, prepared for the financial year in which a business combination took place, as well as the annual financial statements prepared in accordance with the International Accounting Standards (IAS).

The audit requirement also applies to the annual financial statements of investment funds maintaining separate sub-funds and the separate annual financial statements of sub-funds.

Why is it worthwhile to conduct an audit?

Apart from the entities obliged under the Accounting Act to have their financial statement audited, also other entities may opt for such an audit. 

The essence of the audit should not lie in the search for those guilty of misstatements and errors. An audit is the opportunity to improve not only the quality of financial statements but also the entity's operations. The auditor verifies the information included in the financial statements, learns the company’s processes and assesses the implemented internal control system. Before issuing his opinion, the auditor recommends necessary amendments to the audited financial statements. The auditor also highlights any weaknesses of the internal controls and helps find solutions to the problems he has identified.

What are the advantages of commissioning the audit of financial statements?

1. Firstly, the audit confirms the correctness of the reported data (prepared both internally and externally).
2. Secondly, any detected weaknesses of the internal controls and imperfections of the accounting system are valuable information for the management. Professional recommendations based on audit findings help to limit the risks to which an entity is exposed if its internal controls are not efficient.
3. Last but not least, a positive opinion issued by an auditor on the financial statements sends an important message to e.g. potential investors, banks or business partners, increasing their trust in this document.