Revisors erklæring på årsregnskabet: En analyse af bankernes forventninger til og forståelse af den ua"ængige revisors erklæringer på årsregnskaberne for små og mellemstore virksomheder

Kasper Henriksen & Claus Fraussing Nielsen

Student thesis: Master thesis


Whether the public benefits of a mandatory audit of the smallest entities’ financial statements outweigh the regulatory costs of protecting the public interest has been subject to debate in Denmark as well as the rest of the EU for a longer period of time. Based on this debate, the Danish Government in 2006 introduced an audit exemption threshold which relieves small and medium sized entities (SMEs) from mandatory auditing. In 2011 the audit threshold was raised further. The reason for this audit exemption has been a desire to minimize the cost burdens for the SMEs, in order to stimulate their economic growth opportunity, and competitiveness. In a time of financial crisis it may have significant impact on stakeholders and users of financial statements, whether the financial statements are audited or not. Thus, there has arisen a significant difference from the credibility of audited financial statements and those without an auditors’ report. This situation in turn has heightened focus on the development and introduction of useful alternative assurance services to audit. These alternatives would ideally be less burdensome and better adapted to the needs of the smallest entities. At the same time it would give stakeholders the assurance that the financial statements are reliable. A draft of such an alternative assurance service was introduced by The Institute of State Authorized Public Accountants in Denmark (FSR) in connection with the recent increase of the audit exemption thresholds in Denmark. In Danish the service is called “Udvidet gennemgang”, which translates to “extended review”. However to the disappointment as well as the surprise of many political parties and professional business organizations, the minister of Economics and Business Affairs cancelled a planned committee that would have enabled a discussion dealing with the adoption of the FSR’s extended review assurance service. The extended review is based on the standard for engagements to review historical financial statements (RS 2400) and is provided with five supplementary procedures aimed at increasing the level of assurance in the practitioners’ opinion. Based on the political processing of the bill, it seems most likely that the main cause for the cancellation of the committee was due to pressure from banks and The Danish Bankers Association. They both perceived that the level of assurance in FSR’s draft for the alternative assurance service was too low and therefore not a valid alternative to audit. The purpose of this thesis is to examine the Danish banks’ expectations to and understanding of the independent auditor's opinions on the financial statements of SMEs. The examination is based on a questionnaire survey conducted among corporate advisers with experience in making credit risk assessment and decisions in some of the major Danish banks, and an interview with a state authorized public accountant in order to clarify the role of the auditor in SME engagements, and how the different assurance services are provided in practice. The banks’ expectations and interpretation of the auditors’ opinion on the financial statements appear to be consistent with the related audit standards. However, the banks appear to lack a thorough understanding of the review engagement (RS 2400) and also have exaggerated expectations with regards to auditors’ procedures related thereto. A significant number of corporate advisors within the banks expect that the auditors perform procedures during the review engagement similar to the procedures of an audit. This could among others be observation of physical inventory. Paradoxically, a majority of these corporate advisors do not expect the auditor to perform inquiries and analytical procedures. This despite the fact that these two procedures are the only procedures explicitly stated in RS 2400. Hence, there seem to be a significant expectation-performance gap between banks and auditors with regards to review. The banks’ perception of the level of assurance in a review engagement is 70%. This is significantly higher than both the audit profession’s level, as well as the theoretical view (around 50%). Despite the fact that the banks have high expectations for the level of assurance in a review engagement, it is only within restricted circumstances they tolerate financial statements based on a review engagement rather than based on an audit engagement. Thus, our study indicates that only an audit opinion will accommodate the banks’ needs and expectations for reliable financial information. This can explain the banking industry’s nearly universal demand for the auditing of their clients’ financial statements. As for FSR’s draft of an extended review assurance service, the results of the questionnaire show that the banks consider the five additional procedures, which must be performed by the auditor, to increase the level of assurance in the auditor's conclusions. This is compared to the procedures the auditor shall perform when conducting a review in accordance with RS 2400. Hence, it is both surprising and contradictory that the banks consider the overall level of assurance in the draft for the extended review assurance service (65%) to be at a lower level than the extant review engagement (70%). The draft therefore does not seem to meet the banks’ needs and expectations. The draft will thus have the same limited opportunities as the extant review engagement to be accepted by the banks as a useful alternative to the audit engagement. The banks perceive the level of assurance in a Compilation of Financial Statements (RS 4410) to be 42%. A very high level considering that the auditor does not express any assurance on the compiled financial information. This fact alone indicates the existence of yet another expectation gap. Overall it can be concluded that banks in general hold excessive expectations with regards to the nature and extent of the auditor's procedures in assurance services on financial statements other than audit. It seems that the banks do not have a sufficient understanding of these types of alternative engagements. Generally the results of the questionnaire indicate that auditors must be better at communicating and explaining to the financial statement users (banks included). The auditors have to explain their responsibilities and procedures needed to give an opinion on alternative assurances services to audit. Moreover auditors and audit-policymakers must, at the same time, respond to the changing needs and expectations of relevant interest groups for the provision of alternative assurance services to audit for SMEs.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2011
Number of pages222