When is a mandatory audit of an Estonian company required, and what exactly happens during such an audit?

For most entrepreneurs in Estonia, an audit isn’t part of the initial business setup process. They typically encounter it later, when preparing the annual report. Until then, accounting is routine, and reports are submitted annually without any additional audits.

If the statutory thresholds for an audit or review are exceeded, the annual accounts must undergo the required audit or review before the annual report is submitted. The first thought that comes to mind is usually the same: does this mean the company has problems or has come to the attention of the tax authorities?

In reality, an audit isn’t limited to identifying violations or conducting an investigation. It’s a regular procedure that confirms the accuracy of the financial statements of companies that have reached a certain level of development and scale of operations.

In other words, an audit confirms that the business has reached a scale where its financial statements should be accessible and reliable to the state and other stakeholders.

What is the purpose of an audit?

A company’s annual report is a publicly available document. It is applied to:

• Owners and investors
• Financial institutions and payment systems
• Partners
• Suppliers
• Government agencies

In small companies, risks are generally considered limited, and management’s responsibility for the accuracy of financial statements is quite high. However, as a business grows, its impact on external partners and the market as a whole increases. Loans, prepayments, and liabilities to customers and employees arise, expanding the range of potential risks.

This necessitates independent verification: a third party must confirm the accuracy of the financial statements.

The auditor does not evaluate the business’s performance, but rather verifies the accuracy and reliability of the financial data presented.

When does an audit become mandatory?

In Estonia, auditing depends on the size of the company, not the industry or nationality of the owners. There are thresholds: turnover, balance sheet, and number of employees.

Once certain indicators are met, the company is subject to independent verification.

This approach implements two levels of control:

The first stage involves a review. This is a brief procedure during which the auditor examines the financial statements and asks questions, but the number of verification procedures is limited.

As indicators continue to improve, a full-scale audit is conducted, which involves a thorough review of key financial statements and obtaining independent confirmation.

Whether an audit or review is mandatory is determined by the statutory thresholds and other applicable legal requirements.

What are the auditor’s responsibilities?

A common misconception is that the auditor will scrutinize every transaction and every invoice. In reality, an audit is based on the principles of materiality and risk assessment.

The auditor verifies whether the financial statements reflect:

• Actual revenue
• The presence of existing assets
• Reasonable expenses
• Current liabilities
• Optimal capital

Instead of recalculating the entire financial statements, they verify their accuracy. Therefore, special attention is paid to major transactions and operations that are not typical of normal business.

How is an audit conducted in practice

At the end of the financial year, a draft annual report is prepared, after which the auditor begins his work. First, it’s necessary to study the company’s activities: its industry, sources of income, and the specific risks it faces. Only then can one anticipate potential distortions.

Next, confirmation requests are made:

• Bank statements
• Large-scale contracts
• Supporting documents for customer debts
• Loan information
• Information on owners
• Capital calculations

The auditor may obtain some information from independent sources, such as banks or partners. This significantly strengthens the independence of the audit.

Based on the analysis, a report is prepared, which is an integral part of the annual report and is submitted to the register along with it.

How long does an audit take?

It’s impossible to conduct an audit in a short period of time, even for a small company. It takes weeks, as it’s performed independently and requires corroboration from various sources.

Accounting work is usually done in advance, and the auditor is involved well before the report submission date. Starting the process immediately before the deadline virtually guarantees a delay in reporting.

What are the consequences if an audit is required but has not been conducted?

If a mandatory audit or review has not been completed, the annual report does not comply with the applicable statutory reporting requirements. The lack of reporting entails some practical limitations:

• Dividend distribution is not possible.
• Banks or other counterparties may request audited financial statements or impose their own restrictions depending on their internal policies.
• Remove this statement.
• Penalties are possible.

The company has essentially failed to fulfill its financial disclosure obligations.

Should an audit be a concern?

Under normal circumstances, an audit proceeds without incident. Its purpose is not to find violations for the purpose of imposing sanctions, and it is not analogous to a tax audit. When accounting is regularly maintained and transactions make sound economic sense, the auditor’s questions are more clarifying than controlling. For many companies, an audit is a boon, enhancing their reputation with banks and partners, who begin to view the business as more transparent and reliable.