Optional Auditing Standard

Date 14 mar. 2013
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On 6 December 2012, the Danish Parliament passed an amendment to the Danish Financial Statements Act and the Danish State Authorised Public Accountants Act. The amendment implies that companies subject to the reporting class B now can choose to have the auditing performed by a new, less extensive auditing standard. In the terminology of the Financial Statements Act, the new standard is called the Danish Business Authority’s Declaration Standard for Small Businesses.


Approximately 100,000 Danish companies will be able to use the new simplified auditing standard and thus reduce costs.


The new auditing standard may also be relevant to subsidiaries of large groups.


Which Companies can use the less extensive Auditing Standard?

The option to use the less extensive auditing standard is available to small businesses covered by accounting class B. In the Danish Financial Statements Act’s Section 7(2), small companies are defined as companies which do not exceed two of the amounts below at the balance sheet day for two consecutive financial years:


a) A balance of DKK 36 million

b) A net turnover of DKK 72 million

c) An average number of full-time employees of 50


If a company remains within two of the above-mentioned limits, the company may choose to have an extended review of the accounts or completely opt out of the audit.


Companies that fall within the scope of this category are generally obliged to have the accounts audited by a certified auditor.


Extended Review of the Financial Statements

Based on an amendment to the Danish Financial Statements Act, which came into force on 1 January 2013, the ordinary general meeting in companies governed by accounting class B may decide to have any future audits performed as an extended review of the financial statements adapted to the conditions for small businesses, see the Danish Statements Act, Section 135(2).


An extended review of the financial statements is generally equated with an ordinary audit.


The term extended review might at first indicate an expansion of the auditing procedures; however this is not the case. An extended review is a substantially less comprehensive declaration standard compared to the ordinary auditing and has not previously been available to the auditor if the company has an audit obligation. Thus, an extended review is intermediate between the previously well-known review and the traditional auditing standard.


The Business Authority’s Declaration Standard for Small Businesses will be based on the industry association FSR − Danish Statutory Auditors’ draft on "Extended review of financial statements" prepared by the association.


The auditor's review procedures will primarily consist of questions for the daily management and assessments of any financial information so as to obtain sufficient and appropriate evidence in order for the auditor to draw a conclusion regarding the financial statements.


Further, the auditor must perform (i) a review of the Land Register and the Registry of Persons and Motor Vehicles, (ii) obtain commitment confirmations as at the balance sheet day, (iii) obtain information on possible legal disputes, and (iv) obtain information from the Central Tax Administration.


The auditor does not do stock count. The functionality of internal controls is not tested, as may be the case in an audit, and an extended review does not include detailed testing of transactions, balances and disclosures.


An extended review therefore allows companies to save money on auditing as it is less time consuming than an ordinary audit.


The Act empowers the Danish Business Authority to issue an executive order giving effect to the Danish Statutory Auditors' Declaration Standard.


How to opt for the eased Auditing Standard Extended Review

Changing the auditing standard from the ordinary auditing standard to the less comprehensive extended review requires a decision at the annual general meeting.


As the extended review replaces the ordinary auditing standard, an amendment to the company’s Articles of Association is in principle not required. However, if the Articles of Association contain an audit obligation with specific reference to the ordinary auditing standard, it will be necessary to amend the Articles of Association.


Before a decision to audit by the less comprehensive standard extended review is made, the company should assess whether there are any business related benefits to be had in defraying expenses to a full audit. If the auditor is a valuable business advisor to the company, the extended review implies a risk that the auditor might not be able to contribute to the same extent as before in his capacity as business advisor.

Before making a decision, the company should also examine to what extent it might reduce the external costs of auditors, as well as any internal costs, if they decide to change from the ordinary audit to an extended review.


Finally, there may be a need for a prior discussion with the company’s bankers.


Group Structure

The right to use the declaration standard also applies to companies holding shares in other companies and exercising significant influence over one or more businesses. It is a condition of its application that the company and its subsidiaries jointly do not exceed two of the above limits.


The subsidiary may use the declaration standard provided that it does not exceed two of the above limits.


This means that large groups which include smaller subsidiaries that do not exceed the limits can have these subsidiaries' accounts audited by the declaration standard, which may imply a reduction in costs for the entire group.


Very small Businesses’ Option to opt Out of the Audit

Very small businesses in accounting class B with a duty to submit annual reports may still opt out of the audit if they do not exceed two of the amounts below at the balance sheet day for two consecutive financial years::


a) A balance sheet total of DKK 4 million

b) A net turnover of DKK 8 million

c) An average number of 12 fulltime employees


The option to completely opt out of the audit also applies to holding companies if the holding company and the group companies do not exceed two of the mentioned limits for two consecutive financial years, see the Danish Financial Statements Act, Section 135(3). If the entire group exceeds the mentioned limits, a holding company will not be able to opt out of the audit, even if the holding company itself remains within the limits.


If you have any questions or require additional information or an extended review, please contact Partner Christian Bredtoft Guldmann (cbg@mwblaw.dk) or Junior Associate Ted Rosenbaum (tro@mwblaw.dk).



The above does not constitute legal counseling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.