Auditing requirements in Germany are primarily contained in the German Commercial Code and non-binding auditing standards issued by the German Institute of Auditors (IDW). According to a 2005 self-assessment by the IDW these requirements are to be applied by both listed and unlisted companies, the latter subject to certain size criteria. A subsequent 2006 IDW self-assessment indicated that International Standards on Auditing (ISAs) are adopted as German Auditing Standards (AuS), modified to conform to local legal requirements. On May 17, 2006, Directive 2006/43/EC of the European Parliament and the Council came into force, requiring all statutory audits of annual and consolidated accounts be carried out on the basis of ISAs as adopted by the European Commission. European Union (EU) member states must adopt and publish the provisions necessary to comply with this Directive before June 29, 2008. Member states may impose additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010. The IDW has expressed its support for the adoption of ISAs in the EU and, per its 2006 self-assessment, is involved in the translation of the international standards in accordance with International Federation of Accountants translation policies.

General Overview

According to the 2005 self-assessment by the Institute of Auditors (Institut der Wirtschaftsprüfer, or IDW), there are two main sources that comprise the auditing framework in Germany: legislation and auditing standards. The German Commercial Code (Handelsgesetzbuch, or HGB) contains general requirements for financial-statement audits for listed and unlisted companies and forms the basis for the auditing standards. The auditing requirements specified in the HGB are supplemented by the German Limited Liabilities Company Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, or GmbHG), German Stock Corporation Act (Aktiengesetz, or AktG), German Partnership Law for Limited Liability Partnerships (Gesetz über Partnerschaftsgesellschaften Angehöriger Freier Berufe, or PartGG), German Publicity Law (Publizitätsgesetz, or PublG), Regulation for the Accounting for the Banking Sector (Verordnung über die Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute, or RechKredV), German Banking Act (Kreditwesengesetz, or KWG), Regulation for the accounting of the Insurance Sector (Verordnung über die Rechnungslegung von Versicherungsunternehmen, or Rech Vers V), German Insurance Supervisory Law (Versicherungsaufsichtsgesetz, or VAG), Cooperative Association Law (Gesetz betreffend die Erwerbs- und Wirtschaftsgenossenschaften, or GenG), and the Regulations for the Accounting for Hospitals (Krankenhaus-Buchführungsverordnung, or KHBV).

German auditing standards (AuS) are issued by the IDW and are based on the International Standards on Auditing (ISAs). The IDW adopts the pronouncements of the International Auditing and Assurance Standards Board (IAASB) as AuS, but modifies them in order to incorporate local legal requirements. As explained in the 2006 IDW self-assessment, "national standards were created based upon a line-by-line analysis of the ISAs. Differences result from legal and regulatory requirements and professional practice" (p. 21). Writing in 2004, Wong comments on this approach as it occurs in European Union (EU) member-state practice: "For example, the exposure draft of the UK [Audit Practice Board] clearly differentiates additional material from the ISA content, while in the case of the French and German auditing standards, which incorporate the ISAs, the additional material is not separately differentiated" (p. 10). Wong stated that it is preferable to clearly differentiate additional national requirements from ISA content, because this makes it easier to maintain both the adopted standards and the added national requirements, and clarifies the distinction between the two for preparers and auditors who seek to achieve IFRS or ISA compliance.

On May 17, 2006, Directive 2006/43/EC of the European Parliament and the Council came into force requiring that all statutory audits of annual and consolidated accounts 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 must 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. Member states could 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. Member states may impose additional requirements relating to the statutory audits of annual and consolidated accounts for periods expiring on June 29, 2010. The IDW has expressed its support for the adoption of ISAs in the EU and, per its 2006 self-assessment, is involved in translation of the international standards in accordance with International Federation of Accountants translation policies.

The 2006 United Nations Conference on Trade and Development (UNCTAD) report explained that, under the Accounting Enforcement Act (Bilanzkontrollgesetz, or BilKoG), a two-tier enforcement system was put in place. The German Financial Reporting Enforcement Panel (Deutsche Prüfstelle für Rechnungslegung DPR e.V., or FREP) forms the first tier. It examines consolidated and separate financial statements of entities listed in Germany to monitor infringements and ensure compliance with the accounting requirements. However, the FREP has no authority to impose sanctions. The Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin) established in 2002 as an integrated financial supervisory authority for the banking, securities, and insurance sector, forms the second-tier of the enforcement structure. The BaFin, by virtue of being a federal agency, is called upon by the FREP when further action is needed, and it has the legal authority to impose sanctions in cases of violations.

The IDW and the Chamber of Statutory Auditors (Wirschaftsprüferkammer, or WPK) are the two main professional bodies. The WPK is a public body under public supervision. Membership is mandatory. The IDW is a private body that sets the auditing requirements and membership is voluntary. The Law Regulating the Profession (Wirtschaftsprüferordnung, or WPO) contains provisions governing auditors authorized to undertake a statutory audit of financial statements. According to the WPK website, the professional oversight is performed by the Auditor Oversight Board (AOB) which was established following the Auditor Oversight Act passed by the German parliament in December 2004. It has been effective since January 1, 2005. The Board is responsible for disciplinary investigations and quality assurance. The WPK and the IDW are listed as members on the International Federation of Accountants website.

The Principles

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

ID

According to the 2006 IDW self-assessment, ISA 200 was adopted as AuS 200 and AuS 201, effective since June and November 2000 respectively. The principles have been modified to reflect German legal requirements. As explained in the assessment, "in order to take into account the legal situation in Germany, IDW AuS 200 deviates from ISA 200 to the extent that, pursuant to German legal requirements, an audit to determine whether the financial statements give a true and fair view of the net worth, financial position and results of operations in accordance with (German) principles of proper accounting is generally only applicable to corporations and other legal entities with equivalent accounting and audit obligations" (p. 5). The IAASB subsequently revised the ISAs and, at the time of the self-assessment, the revised ISA 200 was under consideration as part of the IDW work program.

ISA 210 Terms of Audit Engagements (effective 2006)

ID

According to the 2006 IDW self-assessment, ISA 210 was adopted as AuS 220, effective since July 2001, with modifications to reflect German legal requirements. As explained in the assessment AuS 210 deviates from ISA 210. The IAASB subsequently revised the ISAs and at the time of the self-assessment the revised ISA 210 was under consideration as part of the IDW work program.

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

NC

Requirements for ISA 220R are contained in VO 1/2006; however, some differences exist, according to the 2006 IDW self-assessment.

ISA 230R Documentation (effective 2006)

ID

According to the 2006 IDW self-assessment, ISA 230 was adopted as AuS 460, effective since June 2000, with modifications to reflect German legal requirements. The IAASB subsequently revised ISA 230 and at the time of the self-assessment the revised ISA 230 was under consideration as part of the IDW work program.

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

ID

According to the 2006 IDW self-assessment, ISA 240 was adopted as AuS 210, effective since May 2003, with modifications to reflect German legal requirements. Further, the IDW issued a new draft in November 2005 in compliance with the requirements of the revised ISA 240 and ISA 250.

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

ID

According to the 2006 IDW self-assessment, ISA 250 was adopted as AuS 210, effective since May 2003, with modifications to reflect German legal requirements. Further, the IDW issued a new draft in November 2005 in compliance with the requirements of the revised ISA 240 and ISA 250.

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

NC

According to the 2006 IDW self-assessment, ISA 260 was adopted as AuS 450 and AuS 470, effective since December 2005 and May 2003 respectively, with modifications to reflect German legal requirements. Differences exist and the IDW standards deviate from the international equivalent substantially.

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

ID

According to the 2006 IDW self-assessment, ISA 300 was adopted as AuS 240, effective since December 2005, with modifications to reflect German legal requirements.

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

ID

According to the 2006 IDW self-assessment, ISA 315 was adopted as AuS 230, effective since December 2005, in conjunction with IDW draft AuS 261 and AuS 230. Further, the assessment noted that the new draft IDW AuS 261, effective since December 2005, implements the requirements of ISA 315 and ISA 330. The German standards have some supplementary rules in compliance with local legal requirements.

ISA 320 Audit Materiality (effective 2004)

ID

According to the 2006 IDW self-assessment, ISA 320 was adopted as AuS 250, effective since May 2003, with modifications to reflect German legal requirements.

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

ID

According to the 2006 IDW self-assessment, requirements of ISA 330 (and ISA 315) have been implemented under the new draft AuS 261, effective since December 2005.

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

II

According to the 2006 IDW self-assessment, ISA 402 was adopted as AuS 331, effective since July 2003, with modifications to reflect German legal requirements. As noted in the report, "supplementary to ISA 402, IDW Auditing Standard 331provides that specific documentation requirements must be fulfilled in the auditor's long-form audit report" (p. 17). However, the IAASB subsequently revised the ISAs and there is no further information on whether the IDW incorporated the changes.

ISA 500 Audit Evidence (effective 2004)

ID

According to the 2006 IDW self-assessment, ISA 500 was adopted as AuS 300, effective since July 2001, with modifications to reflect German legal requirements. Further, the new draft AuS 300 was issued in December 2005 to incorporate requirements of the revised ISA 500.

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

ID

According to the 2006 IDW self-assessment, ISA 501 was adopted as AuS 300 and AuS 301, effective since July 2001 and May 2003 respectively, with modifications to reflect German legal requirements.

ISA 505 External Confirmations (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 505 was adopted as AuS 302, effective since July 2003, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information if the IDW incorporated the changes made to ISA 505.

ISA 510 Initial Engagements — Opening Balances (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 510 was adopted as AuS 205, effective since November 2000, with modifications to reflect German legal requirements. The assessment further noted that in general AuS 205 complies with ISA 510. However, deviations with regard to closing balances, disclosure of changes in valuation policies by unincorporated companies and examples for wording the auditors report exist. Also, the IAASB subsequently revised ISA 510 and there is no further information on whether these changes have been incorporated in Germany.

ISA 520 Analytical Procedures (effective 2004)

NC

According to the 2006 IDW self-assessment, ISA 520 was adopted as AuS 312, effective since July 2001, with modifications to reflect German legal requirements. The assessment noted that "in contrast to ISA 520, the IDW Auditing Standard defines audit planning, audit conduct as well as the final overall review as areas for the compulsory application of analytical audit procedures. Furthermore, it emphasizes the significance of analytical audit procedures in view of audit efficiency" (p. 21).

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

II

The requirements for ISA 530 are covered under HFA 1/1988. However according to the IDW self-assessment compliance with ISA 530 has not been analyzed in detail.

ISA 540 Audit of Accounting Estimates (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 540 was adopted as AuS 314, effective since July 2001, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether the IDW has incorporated these changes.

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

EN

According to the 2006 IDW self-assessment, ISA 545 was adopted as AuS 315, effective since December 2005, with modifications to reflect German legal requirements.

ISA 550 Related Parties (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 550 was adopted as AuS 255, effective since July 2003, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

ISA 560 Subsequent Events (effective 2006)

ID

According to the 2006 IDW self-assessment, ISA 560 was adopted as AuS 203, effective since July 2001, with modifications to reflect German legal requirements. The assessment noted that "the provisions of ISA 560.15 and ISA 560.16 on the auditor's report were not included in this IDW AuS 203 because they have already been implemented in IDW AuS 400" (p. 24). The IAASB subsequently revised the ISAs and at the time of the self-assessment, the revised ISA 560 was under consideration as part of the IDW work program.

ISA 570 Going Concern (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 570 was adopted as AuS 270, effective since May 2003, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

ISA 580 Management Representations (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 580 was adopted as AuS 303, effective since May 2002, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

ISA 600 Using the Work of Another Auditor (effective)

NC

According to the 2006 IDW self-assessment, ISA 600 was adopted as AuS 320, effective since May 2004, with modifications to reflect German legal requirements. As noted in the self-assessment, "deviating from ISA 600.7 this IDW Auditing Standard does not provide for the principal auditor to obtain information about the professional qualifications and competence of another external auditor by contacting other auditors, banks or other groups which have such information" (p. 29) and other differences also exist.

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

II

According to the 2006 IDW self-assessment, ISA 610 was adopted as AuS 321, effective since May 2002, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

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

II

According to the 2006 IDW self-assessment, ISA 620 was adopted as AuS 322, effective since May 2002, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

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

ID

According to the 2006 IDW self-assessment, ISA 700 was adopted as AuS 400, effective since October 2005, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and, at the time of the self-assessment, the revised ISA 700 was under consideration as part of the IDW work program.

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

ID

At the time of the 2006 IDW self-assessment, an equivalent national standard AuS 480 was in the draft stages.

ISA 710 Comparatives (effective 2004)

II

According to the 2006 IDW self-assessment, ISA 710 was adopted as AuS 318, effective since July 2001, with modifications to reflect German legal requirements. As noted in the assessment, "the alternative comparative financial statement has not been implemented, since it is inconsistent with German principles of proper accounting (IDW AuS 201, No. 5 et seq.)" (p. 39). However, the IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

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

II

According to the 2006 IDW self-assessment, ISA 720 was adopted as AuS 202, effective since November 2000, with modifications to reflect German legal requirements. The IAASB subsequently revised the ISAs and there is no further information on whether these changes have been incorporated.

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

II

According to the 2006 self-assessment, there is no corresponding standard in Germany, and the IDW is awaiting adoption of ISA 800 redrafted as a result of the IAASB's Clarity Project.