Audit Obligation

Abstract

The purpose of this master’s thesis is to provide an overview of the regulations regarding the obligation to undergo auditing, as well as investigate why the quantitative criteria net turnover, balance sheet total, and the average number of employees are used in the legislation instead of other quantitative or qualitative criteria. Furthermore, the thesis aims to contribute to the discussion on the criteria regarding the obligation to undergo auditing, as well as the criteria for describing the company’s size and risk. The thesis is among other based on studies of current and previous legislation and its preparatory work. Interviews with four experts, each with their own perspective on the obligation to undergo auditing, have been conducted, in addition to analyzing financial data from public limited companies (PLC) and private limited companies (ltd) that are below the thresholds for mandatory auditing. Data from 933 companies in bankruptcy and 2.297 companies in normal operation have been analyzed in an attempt to find suitable quantitative criteria to describe a company’s size and risk. Moreover, the thesis discusses whether qualitative criteria could be better at describing the complexity and risk of companies. The thesis concludes that net turnover, balance sheet total, and the average number of employees have been used for categorizing companies for as long as it has been possible to trace back, and no evidence has been found to question whether these are the best quantitative criteria for describing a company’s size and complexity. Based on the analysis of company data, the thesis suggests that equity, solvency ratio, and total debt obligations are alternative criteria that can be used to describe a company’s risk. It also notes that qualitative criteria cannot stand alone and replace the use of quantitative criteria in legislation regarding audit obligations. Furthermore, the thesis shows that the time not yet ready for a public system that combines already reported data in one system, which can be used to assess the company’s need for auditing.