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Statutory audit in SMEs: what the auditor asks for and how to prepare

ISA Italia auditing standards, representation letter, documents to prepare, timing and qualified opinions: what to expect from a statutory audit.

The statutory auditor (revisore legale) gathers sufficient appropriate audit evidence to form an opinion on whether the financial statements give a true and fair view of the company’s financial position and results of operations. The auditor follows the ISA Italia auditing standards and does not redo the bookkeeping. From the company, the auditor requires documents, access to the accounts and to staff, confirmations from banks and third parties and, before signing the report, a representation letter from the directors. If a material misstatement remains in the financial statements or audit evidence is lacking, the opinion is qualified; where the effects are pervasive to the financial statements as a whole, a misstatement leads to an adverse opinion and a lack of audit evidence to a disclaimer of opinion.

The framework

The statutory audit is governed by Legislative Decree no. 39 of 27 January 2010. Article 14, paragraph 1, assigns the auditor two tasks: to express an opinion on the financial statements in a dedicated report, and to verify during the financial year that the accounts are properly kept and that business transactions are correctly recorded. Paragraph 6 gives the auditor the right to obtain from the directors any useful documents and information and to carry out checks and inspections. The financial statements nevertheless remain the responsibility of the directors (Article 2423 of the Italian Civil Code, codice civile, c.c.).

The work is performed in accordance with the standards referred to in Article 11, paragraph 2, of the Decree, namely the ISA Italia standards adopted by the Ministry of Economy and Finance by determination of the State Accountant General (Ragioniere generale dello Stato), as updated from time to time. The auditor, even when working alone, must have an internal quality control system proportionate to the scale and complexity of the practice (Article 10-ter, paragraph 11), to be assessed and documented every year (Article 10-ter, paragraph 7), in accordance with the standards adopted by the same Ministry; the file for each audit is closed within sixty days of the report and retained for ten years (Article 10-quater, paragraph 7).

The timetable is set by the Civil Code. The financial statements must be provided to the auditor at least thirty days before the shareholders’ meeting (Article 2429, first paragraph); the auditor’s report must be kept on file at the registered office during the fifteen days preceding the meeting (Article 2429, third paragraph, referred to in Article 14, paragraph 5, Legislative Decree 39/2010) and accompanies the financial statements when they are filed with the companies register (registro delle imprese) within thirty days of approval (Article 2435). The meeting is held within one hundred and twenty days of year-end, or within one hundred and eighty days if the articles of association allow it and the conditions of Article 2364, second paragraph, c.c. are met (for srls, società a responsabilità limitata or limited liability companies, Article 2478-bis c.c.).

What changes in practice

Quality control is visible even before the engagement begins: the auditor must assess whether to accept or continue it, verify their own independence and the integrity of management, and document everything. The company therefore receives formal requests concerning shareholders, directors, equity investments and services received from other professionals: without those answers the engagement cannot be accepted.

The auditor then studies the business and its controls, sets the materiality threshold and selects the procedures. Where inventories are material, the auditor normally attends the physical count (ISA Italia 501, para. 4); writes directly to banks, customers and suppliers to obtain confirmation of balances (ISA Italia 505); and enquires about litigation and reviews correspondence with legal counsel (ISA Italia 501, para. 9).

An example. A manufacturing srl closes the year with profit before tax of 400,000 euro and the auditor sets materiality at 5 per cent, i.e. 20,000 euro (the percentage is a matter of professional judgement; ISA Italia 320 cites it as an example). In inventory, obsolete items carried at cost for 35,000 euro come to light, which can be realised for 5,000. If the directors write them down by 30,000 euro, profit before tax falls to 370,000 and, on this point, the opinion remains unqualified. If they do not correct it, the misstatement exceeds the threshold; since it concerns a single item and is not pervasive to the financial statements as a whole, the auditor expresses a qualified opinion (ISA Italia 705, para. 7) and sets out the reasons in the report (Article 14, paragraph 3).

At the end of the work comes the representation letter. The directors confirm in writing that they have prepared the financial statements in accordance with the applicable rules, that they have provided all information and that all transactions have been recorded (ISA Italia 580, paras. 10 and 11). The letter may not be dated after the date of the report (para. 14). If the letter is not signed, the auditor must issue a disclaimer of opinion (para. 20).

Practical steps

• At the outset: the shareholders’ meeting appoints the auditor on a reasoned proposal from the supervisory body, if there is one (Article 13 Legislative Decree 39/2010); the directors agree the terms of the engagement with the auditor in writing (ISA Italia 210), answer the requests concerning independence and designate a single administrative contact.
• Before year-end: agree with the auditor the date and instructions for the inventory count; prepare the list of banks, customers and suppliers to be asked to confirm balances (circularisation, circolarizzazione) and the authorisation to send the requests.
• During the financial year: corporate books, VAT registers, F24 payment forms, payslips and payment schedules remain available for the periodic checks.
• After year-end: trial balance, bank reconciliations, receivables ageing with the assessment of doubtful debts, valued inventory, fixed asset register, loan, lease and rental agreements, tax computation and list of pending litigation.
• At least thirty days before the shareholders’ meeting: the draft financial statements approved by the management body. With a year-end of 31 December 2026 and a meeting on 28 April 2027, the auditor must receive them by 29 March and the audit report must be on file at the registered office from 13 April.
• Before the report: the representation letter on letterhead, signed by the legal representative; a copy is kept with the financial statements and the engagement letter.

Mistakes to avoid

• Delivering the financial statements shortly before the shareholders’ meeting: the report may not be ready in time.
• Counting inventory without informing the auditor: alternative procedures cost more and may not be sufficient.
• Refusing to allow confirmation requests to banks or customers: the auditor must investigate the reasons for the refusal and assess its effects (ISA Italia 505, para. 8).
• Leaving small misstatements in the financial statements because they are “below the threshold”: the opinion also considers misstatements in aggregate.
• Signing the representation letter without reading it: these are statements made by the directors, who are answerable for them.
• Confusing an emphasis of matter with a qualification: the former draws attention to an issue already disclosed in the financial statements and does not constitute a qualification (Article 14, paragraph 2, letter d).

References

Legislative Decree no. 39 of 27 January 2010, Articles 10-ter, 10-quater, 11, 13 and 14

Articles 2364, 2423, 2429, 2435 and 2478-bis c.c.

ISA Italia 210, 320, 501, 505, 580 and 705