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 to be carried out on the basis of International Standards on Auditing (ISAs) as adopted by the European Commission (EC). European Union (EU) member states shall 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. In Latvia, pursuant to the Law on Sworn Auditors, statutory audits must be carried out in accordance with auditing rules set by the Latvian Association of Certified Auditors (LACA), which have to comply with ISAs. Even though the quality of the standards was high, the World Bank in its 2005 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing was concerned about the low quality of the actual statutory audits carried out in Latvia. Particularly, the World Bank recommended that Latvia should enhance enforcement mechanisms, improve systems of professional education and quality assurance, and increase public oversight of the audit profession.

General Overview

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 to be carried out on the basis of International Standards on Auditing (ISAs) as adopted by the European Commission (EC). The Directive aims at high-level -- though not full -- harmonization of statutory audit requirements. European Union (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. 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 these additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010.

Pursuant to the Law on Sworn Auditors, statutory audits must be carried out in accordance with auditing rules set by the LACA, which have to comply with ISAs. However, the World Bank in its 2005 ROSC was concerned about the low quality of statutory audits in Latvia. For example, the World Bank found misleading auditors' reports showing that some financial statements of a single company were presented in accordance with IFRSs, other financial statements of the same company, however, were not. Further, some auditors did not provide evidence supporting their audit opinion. Moreover, the international standard on fraud and error was not reflected in the Latvian auditing regime. Also, the strict application of the ISA-based related party transactions caused tension between the auditor and the management, which could result in inadequate disclosure of related party transactions.

According to the 2005 World Bank ROSC, additional audit requirements apply to banks, private pension funds, investment management companies, investment firms, and insurance and listed companies. The Financial and Capital Markets Commission (FCMC), which is the supervisory agency for listed companies, insurance companies, banks and non-financial institutions, is granted a right to veto the appointment of a statutory auditor in a bank, insurance company, and an investment company, but not in a listed company. Pursuant to the rules of the Riga Stock Exchange (OMX), the appointment of a statutory auditor of a listed company must be approved by the OMX. The Law on Sworn Auditors requires a mandatory five-yearly audit partner rotation for banks, insurance companies, investment management companies, private pension funds, and listed companies. However, the World Bank points out that the Commercial Code does not provide for any termination mechanisms, which would guarantee the auditor's independence. Therefore, a statutory auditor may resign or be dismissed to avoid an audit qualification.

The 2005 World Bank ROSC notes that the audit profession, which is represented by the LACA, is self-regulated and independent. State supervision is carried out by the Ministry of Finance (MoF). However, as of 2005, the self-regulatory regime which included the involvement of the MoF in the LACA did not comply with the public oversight system of the at that time proposed Eighth EU Directive. The Eighth Directive (2006/43 EC) requires that the system of public oversight must have the ultimate responsibility for the oversight of the approval and registration of statutory auditors and audit firms, the adoption of standards on ethics, internal quality control of audit firms and auditing, and continuous education, quality assurance and investigative and disciplinary systems. The World Bank also claimed that audit firms and their national and international networks were not transparent. Therefore, adequate monitoring of the profession could not be guaranteed.

The World Bank concluded that the effective enforcement of accounting, auditing and ethical standards needed to be enhanced. Particularly, Latvia had to enhance the quality of statutory audit, which required enhanced enforcement mechanisms, improved systems of professional education, quality assurance, and increased public oversight of the audit profession. The World Bank suggested the installation of a multi-disciplinary working group, representing public and private stakeholders. It recommended that the working group consider the auditing exemption in the Fourth and Seventh EU Directives for small and medium enterprises (SMEs) when there is no public interest requirement for the financial statements meaning that SMEs would not be required to have a statutory audit.

The LACA is an associate of the International Federation of Accountants (IFAC). It translates and publishes standards issued by the IFAC and ensures that its members receive relevant training (LACA 2006a). Latvia is an active member in the EU Accounting Regulatory Committee and the Committee of European Securities Regulators (CESR). The FCMC participates in eight EU committees, one European Central Bank (ECB) committee, and 30 working groups. The IFAC Code of Ethics for Professional Accountants was fully adopted in December 2004 (WB 2005).

The Principles

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 200 Objective and General Principles Governing an Audit of Financial Statements is effective for audits of financial statements for periods beginning on or after June 15, 2006. (IAASB 2007, p. 1)

ISA 210 Terms of Audit Engagements (effective 2006)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 210 Terms of Audit Engagements is effective for audits of financial statements for periods beginning on or after December 15, 2006. (IAASB 2007, p. 1)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 220 Quality Control for Audits of Historical Financial Information is effective for audits of historical financial information for periods commencing on or after June 15, 2005. (IAASB 2007, p. 1)

ISA 230R Documentation (effective 2006)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 230 Documentation is effective for audits of financial information for periods beginning on or after June 15, 2006. (IAASB 2007, p. 1)

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

NC

There is no publicly available information as to Latvia's compliance with this principle.

According to the 2005 World Bank ROSC, the international standard on fraud and error was not reflected in the Latvian auditing regime.

ISA 240 The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 1)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 1)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 260 Communications of Audit Matters With Those Charged With Governance is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 300 Planning an Audit of Financial Statements is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 320 Audit Materiality (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 320 Audit Materiality is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 330 The Auditor's Procedures in Response to Assessed Risks is effective for audits of financial statements for periods beginning on or after June 15, 2006. (IAASB 2007, p. 2)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 402 Audit Considerations Relating to Entities Using Service Organizations is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 500 Audit Evidence (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 500 Audit Evidence is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

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

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 501 Audit Evidence - Additional Considerations for Specific Items is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 505 External Confirmations (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 505 External Confirmations is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 510 Initial Engagements — Opening Balances (effective 2004)

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 510 Initial Engagements -- Opening Balances is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 520 Analytical Procedures (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 520 Analytical Procedures is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 530 Audit Sampling and Other Selective Testing Procedures is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 2)

ISA 540 Audit of Accounting Estimates (effective 2004)

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 540 Audit of Accounting Estimates is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 545 Auditing Fair Value Measurements and Disclosures is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

ISA 550 Related Parties (effective 2004)

II

There is no publicly available information as to Latvia's compliance with this principle.

According to the 2005 World Bank ROSC, the strict application of the ISA-based related party transactions has caused tension between the auditor and the management, which could result in inadequate disclosure of related party transactions.

ISA 550 Related Parties is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

ISA 560 Subsequent Events (effective 2006)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 560 Subsequent Events is effective for audits of financial statements for periods for periods beginning on or after December 31, 2006. (IAASB 2007, p. 3)

ISA 570 Going Concern (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 570 Going Concern is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

ISA 580 Management Representations (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 580 Management Representations is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

ISA 600 Using the Work of Another Auditor (effective)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 600 Using the Work of Another Auditor has no effective date and is deemed to be effective. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 610 Considering the Work of Internal Auditing is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 620 Using the Work of an Expert is effective for audits of financial statements for periods beginning on or after June 15, 2005. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 700 The Auditor's Report on Financial Statements is effective for auditors' reports' dated on or after December 31, 2006. (IAASB 2007, p. 3)

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

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ISA 701 Modifications to the Independent Auditor's Report is effective for audits of financial statements for periods beginning on or after December 31, 2006. (IAASB 2007, p. 3)

ISA 710 Comparatives (effective 2004)

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There is no publicly available information as to Latvia's compliance with this principle.

ISA 710 Comparatives is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 720 Other Information in Documents Containing Audited Financial Statements is effective for audits of financial statements for periods beginning on or after December 15, 2004. (IAASB 2007, p. 3)

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

II

There is no publicly available information as to Latvia's compliance with this principle.

ISA 800 The Auditor's Report on Special Purpose Audit Engagements is effective for auditors' reports' dated on or after December 31, 2006. (IAASB 2007, p. 3)