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Standards Compliance Index 54.17 out of 100 21
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Estonia

International Standards on Auditing

Summary
According to the 2004 World Bank Report on the Observance of Standards and Codes on Accounting and Auditing, Estonian public interest companies are required to be audited in accordance with International Standards on Auditing (ISAs). The audits of all other companies must be carried out pursuant to Estonian Auditing Guidelines, which are based on ISAs. The World Bank pointed out, however, that the Guidelines were seriously deficient for any regulatory role. Some additional auditing requirements apply to banks, insurance, listed, and investment companies. Since Estonia is a member of the European Union, it must implement European Commission (EC) Directive 2006/43, which requires all statutory audits to be carried out on the basis of ISAs as adopted by the EC by June 29, 2008.

    General Overview

    The World Bank, in its 2004 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, states that Estonian public interest companies must be audited according to International Standards on Auditing (ISAs). All other companies must to be audited pursuant to the Estonian Auditing Guidelines, which are based on ISAs. The World Bank explains, however, that the Guidelines "are seriously deficient for any regulatory role" (p. 10). With regard to banks, insurance companies, listed companies, and investment firms, additional auditing requirements apply. These requirements concern the appointment of statutory auditors, the audit of consolidated financial statements, the contribution to the supervisory process, and the communication of matters of urgent interest to the Financial Supervision Authority (FSA).
    The 2007 KPMG Investment Guide states that, pursuant to the Commercial Code, audits are mandatory for all public limited companies. Private limited companies must be audited only if their share capital exceeds EEK 400,000 or if the audit is prescribed by law or the respective articles of association. Besides that, the Accounting Act requires audits for companies that fulfill two of the following three criteria: (1) net sales exceed EEK 10 million; (2) more than 10 employees; and (3) total assets exceed EEK 5 million. In addition to the Commercial Code and the Accounting Act, the following laws cover accounting and auditing issues as well: the Authorized Public Accountants Act, the Securities Market Act, the Credit Institutions Act, the Insurance Activities Act, the Investment Funds Act, and the Funded Pensions Act (WB 2004).
    In its 2004 ROSC, the World Bank states that, even though the quality of audits of public interest companies had improved, the quality of audits of small and medium size entities (SMEs) was still low. Since many auditors lacked knowledge of ISAs, they applied, sometimes improperly, the Estonian Auditing Guidelines. The assessment revealed the following major shortcomings: (1) a lack of documentation; (2) fraud and error; (3) a lack of understanding of accounting and internal control systems; (4) inadequate disclosure of related party transactions; and (4) a lack of audit evidence. Overall, the 2004 ROSC recommended enhancing audit regulation and practices through the improvement of professional education, quality assurance, and disciplinary mechanisms and encouraged the FSA to strengthen its enforcement of auditing standards in public interest entities.
    Besides issuing the Estonian Auditing Guidelines and monitoring auditors and auditing firms in Estonia, the Estonian Auditing Board (EAB) is responsible for the establishment of ethical requirements in the audit profession. In this regard, it included ethical standards in its Auditing Guidelines. However, in its 2004 ROSC, the World Bank pointed out that the EAB's code of professional conduct "falls short of the International Federation of Accountants (IFAC) Code of Ethics for Professional Accountants" (p. 7). In its 2006 self-assessment, the EAB states that it intends to adopt the IFAC Code of Ethics in the near future. The EAB is listed as a member on the IFAC website.
    The FSA is the common supervisor for the banking, insurance, and securities markets in Estonia. It enforces accounting standards applied by banks, investment firms, insurance companies, listed companies, management companies, and investment funds. However, as stated by the World Bank in 2004, there is "no standardized procedure for monitoring compliance with IFRSs and ISAs" (p. 11).
    Estonia became a member of the European Union (EU) on May 1, 2004, and therefore is required to comply with Directive 2006/43/EC of the European Parliament and the Council, which came into force on May 17, 2006. The Directive requires all statutory audits to be carried out on the basis of ISAs as adopted by the European Commission (EC). The Directive aims at high-level -- though not full -- harmonization of statutory audit requirements. EU member states shall adopt and publish the provisions necessary to comply with the Directive before June 29, 2008. According to the Directive, in order to achieve a maximum degree of harmonization, Member States should be allowed to impose additional national audit procedures or requirements only if these stem from specific national legal requirements relating to the scope of the statutory audit of annual or consolidated accounts, meaning that those requirements have not been covered by the adopted ISAs. The Directive provides Member States with the option to maintain those additional audit procedures until the audit procedures or requirements have been covered by subsequently adopted international auditing standards. If, however, the adopted ISAs contain audit procedures the performance of which would create a specific legal conflict with national law stemming from specific national requirements related to the scope of the statutory audit, Member States may carve out the conflicting part of the ISA as long as those conflicts exist. According to the directive, Member States may impose these additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010. The 2004 ROSC states that in general, "Estonia seeks to attain maximum compliance with the EU Directives and Recommendations on auditing and to create an environment for implementation of ISAs" (p. 14).


    The Principles

    ISA 200 Objective and General Principles Governing an Audit of Financial Statements (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 210 Terms of Audit Engagements (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 220R Quality Control for Audits of Historical Financial Information (effective 2005)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 230R Documentation (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 260 Communications of Audit Matters With Those Charged With Governance (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 300 Planning an Audit of Financial Statements (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 320 Audit Materiality (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 330 The Auditor’s Procedures in Response to Assessed Risks (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 402 Audit Considerations Relating to Entities Using Service Organizations (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 500 Audit Evidence (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 501 Audit Evidence - Additional Considerations for Specific Items (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 505 External Confirmations (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 510 Initial Engagements — Opening Balances (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 520 Analytical Procedures (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 530 Audit Sampling and Other Selective Testing Procedures (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 540 Audit of Accounting Estimates (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 545 Auditing Fair Value Measurements and Disclosures (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 550 Related Parties (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 560 Subsequent Events (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 570 Going Concern (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 580 Management Representations (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 600 Using the Work of Another Auditor (effective)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 610 Considering the Work of Internal Auditing (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 620 Using the Work of an Expert (effective 2005)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 700 The Auditor’s Report on Financial Statements (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 701 Modifications to the Independent Auditor's Report (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 710 Comparatives (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 720 Other Information in Documents Containing Audited Financial Statements (effective 2004)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

    ISA 800 The Auditor’s Report on Special Purpose Audit Engagements (effective 2006)

    There is insufficient information publicly available as to Estonia's compliance with this principle.

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    Sources of Assessment

    Estonian Auditing Board, "Assessment of the Regulatory and Standard- Setting Framework," Self-assessment prepared as part of the International Federation of Accountants' (IFAC) Member Body Compliance Program, July 2005. Available from International Federation of Accountants website. Accessed on September 6, 2007. (EAB 2005)

    Estonian Auditing Board, "Response to the IFAC Part 2, SMO Self-Assessment Questionnaire," Self-assessment prepared as a part of the International Federation of Accountants' (IFAC) Member Body Compliance Program, July 2006. Available form International Federation of Accountants website. Accessed on September 6, 2007. (EAB 2006)

    KPMG Baltics, "Investment in the Baltic States - A Comparative Guide," May 2007. Available form KPMG website. Accessed on September 6, 2007. (KPMG Baltics 2007)

    World Bank, "Estonia: Report on the Observance of Standards and Codes (ROSC) - Accounting and Auditing," May 25, 2004. Available from World Bank website. Accessed on September 6, 2007. (WB 2004)

    Relevant Organizations

    Committee of European Securities Regulators (CESR)

    Estonian Accounting Standards Board - Raamatupidamise Toimkond (EASB)

    Estonian Auditing Board - Audiitorkogu (EAB)

    European Audit Regulatory Committee (AuRC)

    European Group of Auditors' Oversight Bodies (EGAOB)

    Financial Supervision Authority - Finantsinspektsioon (FSA)

    Ministry of Finance - Rahandusministeerium (MoF)

    Nordic Exchange (TNE)



    Relevant Legislation/Regulation

    Commercial Code, 2006

    Accounting Act, 2005

    Securities Market Act, 2002

    Credit Institution Act, 1999

    Insurance Activities Act, 2005

    Investment Funds Act, 1997

    Funded Pensions Act, 2001

    Authorized Public Accountants Act, 1999 (last amended 2003)

    Auditing Guidelines, 2000

    Estonian Accounting Standards (RTJs)

    Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on Statutory Audits of Annual Accounts and Consolidated Accounts, amending Council Directives 78/ 660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (EC 2006/43)

    EU Auditing -Related Directives



    Supplementary Sources

    European Commission website. Accessed on September 6, 2007. (EC website)

    International Auditing and Assurance Standards Board, "Effective Dates of Pronouncements Issued by the International Auditing and Assurance Standards Board," January 2007. Available from International Federation of Accountants website. Accessed on September 6, 2007. (IAASB 2007)

    International Federation of Accountants website. Accessed on September 6, 2007. (IFAC website)
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