Companies above a certain size are obliged to carry out an audit of their trade balance. This audit shall be carried out by an auditor or a publicly sworn accountant as part of an annual audit. Group financial statements can also be subject to auditing. The criterion for an audit obligation is the achievement of at least two out of three parameters. They concern balance sheet total, annual turnover and the number of employees. These size criteria should be constantly monitored. As soon as one realizes that an exceedance of two of the three criteria has already occurred and is also likely in the course of the following marketing years, one should notify an auditor. It is the shareholders who select the auditor while the management carries out the commissioning. The result of the audit is finally included in an audit report. For this purpose, the auditor shall provide either an unrestricted, a restricted or no audit opinion as an attestation.

Recognizing and Avoiding Audit Obligation

1. Purpose of the audit

1.1 Key points of the audit

The purpose of auditing is to assess the financial reporting procedures used by an entity. Therefore, the focus is on the presentation of the assets, financial and profits of the company under review. It shall also monitor compliance with the accounting standards provided for. It is a requirement of the commercial law for certain companies.

The desired objective in an audit is to obtain an unrestricted audit certificate from the auditing auditor. In this way, it can be demonstrated that the figures given in the balance sheet are indeed accurate in terms of the economic situation. This information is important for both managing directors and shareholders in a company. But also possible business partners, customers as well as lenders or investors could have an interest in this. Thus, of course, the result of an audit also serves the external effect.

1.2. Development of the importance of auditing

Auditing has become increasingly important over time. Although it is not a panacea for discovering shady business practices in all cases, auditing is of great importance in this area. Nevertheless, in the past, various spectacular insolvencies of larger companies showed that the previous standards were inadequate to anticipate the collapse of the affected companies. Therefore, after such sensational bankruptcies, the legislature often also tightened the guidelines on auditing. However, as the recent Wirecard scandal reveals, even large, renowned audit firms can only partially foresee such a development within the framework of an audit.

2. In which areas does an audit take place?

2.1. Audit as part of an annual audit

Usually an audit takes place as part of an annual audit. It is therefore a question of reviewing the procedures on which the trade balance is based. Accounting is thus the focus of auditing. In particular, the guidelines for compliance with the principles for the proper maintenance and storage of books, records and documents in electronic form as well as for data access (GoBD) are subjected to a critical analysis by the auditor.

Furthermore, an evaluation of the profitability and the financial situation takes place as part of an annual audit. These aspects are also relevant with regard to the early detection of a potential insolvency.

2.2. Audit as part of a group audit

A separate audit for groups is the group audit (§ 14 PublG). This concerns the interrelated audit of related companies. However, other, albeit similar conditions apply here, which impose the obligation on a group to carry out a group audit. Furthermore, the obligation to audit the individual companies affiliated within the group remains.

In the following, we discuss the criteria that require an obligation to carry out audits or group audits. Although the regulations for this are integrated into different laws, they nevertheless have some similarities.

3.1. Criteria for auditing according to the HGB

In order to be subject to auditing as a corporation, two consecutive financial statements must meet at least two out of three criteria. These auditing criteria are key figures that a corporation exceeds in the audit case. The actual legal basis for this is § 316 HGB. There, the law refers to the size of corporations that reach the examination maturity. And this size classification into micro, small and medium-sized and large capital companies takes place in §§ 267, 276a HGB. § 316 HGB refers to § 267 HGB, because § 267a HGB refers only to micro-corporations exempted from auditing obligations.

In addition to the obligation to audit corporations, the same obligation also applies to open commercial companies and limited partnerships if a limited liability company is involved as a personally liable partner (§ 264a HGB).

3.1.1. Criteria for auditing according to the HGB: balance sheet total exceeds EUR 6.000.000

The first criterion refers to the balance sheet total. From a balance sheet total of EUR 6,000,000, a decisive parameter is exceeded, which can lead to a qualification of a company as a medium-sized company.

3.1.2. Criteria for auditing according to the HGB: Revenues exceed EUR 12.000.000

In the second criterion, we look at the revenues of the company that may have to be audited. If this point is true, then the qualification of the company as a medium-sized company depends only on the fulfilment of one of the other two criteria.

3.1.3. Criteria for auditing according to the HGB: employment of 50 or more employees

The third criterion refers to the number of employees on average per year. If it reaches or exceeds the number 50, one of the three criteria for auditing is met.

This is how you calculate the average number of employees per year: you determine the number of employees who worked for the company at the end of the previous four calendar quarters. This includes both employees at home and abroad. In contrast, trainees are left out of the count. The average is a quarter of the sum of the four results.

3.2. Criteria for auditing according to the PublG

In addition, an audit obligation may also apply to other companies (§ 6 PublG in conjunction with § 1 PublG). This applies in particular to very large commercial enterprises, such as individual enterprises. At least two out of three criteria must also be met in order to impose an audit obligation on the company. And here, too, it is about key figures from the area of annual balance sheet, revenue and number of employees per year. However, the minimum number of criteria must be met on three rather than only two consecutive reporting dates in order to require an auditing obligation.

Although these are rare cases in practice, we want to give a complete overview here. Therefore, we now practice in completeness:

3.2.1. Criteria for auditing according to the PublG: Annual balance sheet exceeds EUR 65,000,000

The annual balance sheet is also relevant for the auditing regulations of companies other than those determined according to HGB. However, the scale is quite different here. Because here an audit only comes into question if an annual balance sheet total of EUR 65,000,000 is exceeded.

Criteria for auditing according to the PublG: Revenues exceed EUR 130.000.000

If the annual balance sheet of a company which is neither a normal partnership nor a limited company is very high, then the rule on the criterion of revenue generated over the preceding 12 months is even more exceptional. Because this is about crossing the limit of EUR 130,000,000.

Criteria for auditing according to the PublG: Number of employees over 5,000

The criterion of the number of employees also corresponds qualitatively to the parameters mentioned in the HGB. However, there is also an enormous quantitative difference here. Because the PublG stipulates as a prerequisite that at least 5,000 employees are employed on average per year. However, in addition to those employed at home and abroad, apprentices also count. In addition, the method for calculating the average value differs from that in the HGB. According to the provisions of § 1 PublG, the number of employees at the end of each calendar month is decisive.

3.3. Criteria for the Group audit

Unsurprisingly, the conditions that impose the obligation to audit a group follow similar parameters as those that govern the auditing of companies. Here too, at least two out of three possible criteria are decisive. However, this must be the case for three consecutive group financial statement dates in order to impose an obligation to carry out a group audit.

In addition, there is an obligation to carry out a group audit of the company in a group that exercises the dominant role over another affiliated company. It is irrelevant whether the control is direct or indirect. However, it is important that the parent company has its headquarters in Germany.

However, if the parent company’s main office is located abroad, a group audit in Germany can still be considered. In this context, the audit obligation applies to the subsidiary based in Germany that is hierarchically closest to the parent company. For this purpose, only the conditions for the group audit for the parent must be met. However, a group audit will then take place for the subgroup subject to audit in Germany.

3.3.1. Criteria for the Group audit: balance sheet total exceeds EUR 65,000,000

A possible criterion that may trigger the obligation to carry out a group audit is bound to exceed the balance sheet total of EUR 65,000,000.

3.3.2. Criteria for the Group audit: more than EUR 130,000,000 revenue in the Group balance sheet

The second potentially decisive criterion is linked to the amount of revenue in the calendar year. If the revenues in the Group balance sheet exceed EUR 130,000,000, this can also be a trigger for the Group audit.

3.3.3. Group audit criteria: Number of employees over 5,000 per year

The number of employees also plays a potential role in the obligation of a group to audit the Group balance sheet. The average number of employees is determined by their number at the end of each calendar month. Employees and apprentices alike are also eligible, regardless of whether they are employed at home or abroad.

Advice for taxation of limited liability companies

4. Auditing process

4.1 Appointment of an auditor or group auditor

If it is apparent for the first time in the context of annual or consolidated financial statements that at least two of the three relevant criteria are met, then you should act with foresight. Because if there is reason to assume that these requirements also exist in the following final reports, then you should already contact an auditor.

As a rule, the company management is already in exchange with a tax consultancy firm for the purpose of preparing the balance sheets. A dutiful tax consultant should therefore inform about this duty that is likely to occur in the future. Under ideal circumstances, he may also recommend a suitable auditor to carry out the audit. However, certain rules apply to the appointment of an auditor.

Generally speaking, in the case of a partnership or a corporation, the shareholders choose the auditor. However, it is up to the managers to appoint him. However, there are also legal requirements that can influence the election of the auditor. Thus, such an auditor must under no circumstances be an employee of the company under audit, because he thereby loses his independence. In addition, there may be grounds for exclusion in certain cases in the public interest if an auditor has also previously had an influence as a tax consultant on aspects that are echoed in the annual accounts and are essential for this.

4.2. Audit of annual or consolidated financial statements

In the course of an audit, the auditor determines whether and to what extent the accounting principles served as a benchmark for accounting. Such different aspects as the control of the recording of incoming and outgoing invoices and the inventory come into the perspective of the auditor. In addition, as part of the audit, an auditor decides whether the trade balance has been established in accordance with the chosen standard. After all, a trade balance, in which bookings are made selectively according to different accounting standards, is hardly methodologically correct.

4.3. result of audit or group audit

The result of the audit is included in the final audit report of the auditor. In principle, there can be four different results.

On the one hand, the auditor can confirm with reasonable certainty the material accuracy of the trade balance. Thus, he gives the annual or consolidated financial statements his attestation. The technical term for this is confirmation.

On the other hand, it can also be that the auditor finds shortcomings. A distinction is made between those where the deficiencies have no significant influence on the reproduction of the actual economic situation of the company and those where this is actually the case. If there are only insignificant deficiencies, the auditor may give a limited audit report, explaining these deficiencies and their limited scope. However, if they are significant, the auditor must refuse the audit report. He then gives his reasons for this in an independent note.

In addition, an auditor must refuse the audit report if, in the course of the audit, he finds that he is unable to assess with reasonable certainty the economic situation of the company under audit. He then also mentions the reasons for this in a separate note.