Accounting, Auditing, Conceptual Framework and Types of Auditor’s Opinion and Qualifications

Types of companies under accounting regulations

Companies are classified according to their size into micro, small and medium-sized enterprises (SMEs), and large companies, in accordance with accounting regulations.  

Microenterprises are companies with less than 10 employees, an annual turnover of less than 2 million euros and total assets of less than 2 million euros. Microenterprises in Spain can access tax benefits such as the simplified VAT regime and reductions in corporate tax. Simplified accounting, exemptions on audits and facilities for the presentation of accounts. 

SMEs are companies with fewer than 250 employees, an annual turnover of less than EUR 50 million and total assets of less than EUR 43 million. SMEs have certain advantages in terms of labour recruitment, access to finance and subsidies. 

What is the conceptual framework for accounting?

The conceptual accounting framework refers to a set of fundamental principles, rules and concepts that serve as the basis for the development of the applicable accounting standards. These standards are developed by the Instituto de Contabilidad y Auditoría de Cuentas (ICAC), which is the body responsible for regulating accounting in Spain. 

The conceptual accounting framework sets out the basic principles to be followed in the preparation and presentation of financial information, with the objective of making it relevant, reliable and understandable to users.  

Among the issues addressed in the conceptual framework are: 

1. Objectives of financial reporting: Defines the purpose of accounting and the intended users of the accounting information, such as investors, creditors, employees, etc. 
2. Accounting principles: These include principles such as accruals, prudence and consistency, among others, which guide the preparation of financial statements. 
3. Qualitative characteristics of financial information: sets out the qualities that accounting information should have, such as relevance, reliability, understandability and comparability. 
4. Elements of financial statements: Defines the basic components that should be present in financial statements, such as assets, liabilities, equity, income and expenses. 

The conceptual accounting framework is constantly evolving to adapt to changes in the economic and regulatory environment, as well as to harmonise with international accounting standards, especially the International Financial Reporting Standards (IFRS). This allows the financial information produced in Spain to be internationally comparable and facilitates decision-making by users. 

What are the Annual Accounts and what documents make them up?

The annual accounts are a set of financial documents that must be prepared and presented by all companies at the end of each accounting period. These annual accounts provide a clear and detailed view of the economic, financial and asset situation of the company, as well as its results during the accounting period. 

The annual accounts comprise three main documents: 

1. Balance sheet: A financial statement that shows the company’s financial position at a given point in time, i.e. the company’s assets, liabilities and equity at a given date. 
2. Profit and loss account: Also known as the income statement, this is a document that reflects the income, expenses and net result for the year, i.e. the difference between income and expenses during the accounting period.

1. Statement of changes in equity: This financial statement shows the changes in the company’s equity during the year, detailing changes due to contributions from shareholders, profit or loss for the year, and other items affecting equity.

In addition to these three main documents, the annual accounts usually include an explanatory memorandum that supplements the information provided in the financial statements by providing additional details on the accounting policies used, valuation criteria, contingencies, financial commitments and other information relevant to an understanding of the company’s situation. 

Annual accounts are mandatory for all companies in Spain and must be approved by the competent bodies of the company (such as the general shareholders’ meeting) and filed with the corresponding Mercantile Register within the deadlines established by law. This ensures the transparency and reliability of companies’ financial information, providing stakeholders (shareholders, creditors, investors, etc.) with a clear view of their economic and financial situation. 

When it is possible to present the balance sheet and the notes in a condensed form, the statement of changes in equity and the cash flow statement are not required.  

The annual accounts may be presented in abridged form where two of the following circumstances apply: 

Abridged balance sheet and notes to the financial statements: 

• Total asset items do not exceed 4 M 
• Net turnover does not exceed EUR 8 million. 
• Average number of employees is not more than 50 

Profit and loss account:  

• Total asset items do not exceed 11.4 M 
• Net turnover does not exceed 22.8 M 
• Average number of employees does not exceed 250 

Consolidation of accounts

Consolidation of accounts is the process of combining the financial information of two or more companies forming a corporate group. 

Pursuant to Article 42 of the Commercial Code, a group exists when a company has or may have, directly or indirectly, control over one or more other companies. In this sense, control is presumed to exist under these assumptions:  

1. Holds a majority of the voting rights. 
2. Have the power to appoint or dismiss the majority of the members of the management body. 
3. May dispose, by virtue of agreements concluded with third parties, of a majority of the voting rights. 
4. has appointed with its votes the majority of the members of the management body who are in office at the time the consolidated accounts are to be drawn up and during the two immediately preceding financial years.  

The consolidated accounts must be prepared by the parent company of the group. The presentation of consolidated annual accounts does not exempt group companies from preparing their own annual accounts.  

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Audit of Accounts

An audit is a process by which an independent auditor examines and evaluates the financial statements of a company or organisation to determine whether they are true and fair and in accordance with accounting principles and applicable legal and regulatory requirements. The primary objective of an audit is to provide an independent opinion on whether the financial statements present fairly the financial position, results of operations and cash flows of the audited entity. 

The ACs must be audited by an auditor appointed by the General Meeting before the end of the financial year to be audited. However, an exemption from this obligation is granted to companies that meet two of the following conditions for two consecutive financial years:  

• That the total of the asset items does not exceed two million eight hundred and fifty thousand euros. 
• The net amount of its annual turnover does not exceed five million seven hundred thousand euros. 
• The average number of employees employed during the financial year does not exceed fifty. 

A company shall lose this power if two of the above circumstances are no longer met for two consecutive financial years.  

Auditor’s report and opinion:

The CAAC audit report is a document containing the following information: 

• Identification of the audited entity, the CAAC audited, the regulatory framework used in its preparation, the persons responsible for the audit, as well as the recipients of the report. It shall also state that the CAACs were prepared by the management body of the audited entity. 
• Provide an overview of the scope of the audit performed, with reference to the auditing standards followed and any limitations encountered during the process. The auditor’s responsibility to express an opinion on the financial statements as a whole shall be highlighted. 
• Explain that the audit was planned and performed with the objective of obtaining reasonable assurance about whether the ACs are free from material misstatement, including those related to fraud. The most significant risks identified, including those related to possible fraud, as well as the actions taken by the auditor and the resulting observations, shall be detailed. 
• It shall be stated that no non-audit services were provided to the CAAC and no situations were found to affect the independence required by the relevant regulations. 
• Finally, a clear and precise technical opinion is issued on whether the ACSs present fairly the audited entity’s financial position, equity and results, in accordance with the applicable regulatory framework and the relevant accounting principles. This opinion may be favourable, qualified, unfavourable or disclaimed. 

The auditor’s opinion is the conclusion reached by the auditor on the reasonableness of a company’s annual accounts. The auditor’s opinion may be: 

• Unqualified favourable: The annual accounts are fair and present a true and fair view of the company’s assets, financial position and results of operations. 
• Favourable with qualifications: The annual accounts are reasonable, but there are some qualifications that the auditor must communicate.
• Unfavourable: The annual accounts are not fair and do not present a true and fair view of the company’s assets, financial position and results.
• Inability to express an opinion: The auditor has been unable to obtain sufficient information to form an opinion on the annual accounts.

Auditor qualifications are statements by the auditor when the auditor disagrees with an aspect of the annual accounts. The types of qualifications may include the following: 

• Qualifications on financial information: These refer to errors or inaccuracies in the annual accounts.
• Qualification of the company’s ability to continue as a going concern: This refers to the existence of doubts about the company’s ability to continue as a going concern.
• Other qualifications: These refer to other limitations encountered by the auditor in performing his work.

Similarly, qualifications that may also have an effect on the opinion are those that affect the reasonableness of the annual accounts. These qualifications may give rise to a favourable opinion with qualifications or an unfavourable opinion. When the deficiencies are material and affect the true and fair view of the annual accounts. 

• Incomplete or inaccurate information: The annual accounts do not contain all the necessary information or the information they contain is inaccurate. 
• Non-compliance with accounting standards: The annual accounts have not been prepared in accordance with the applicable accounting standards.
• Subsequent material events: Significant events have occurred after the year end that have not been reflected in the annual accounts.

On the other hand, qualifications without effect on the opinion are those that do not affect the reasonableness of the annual accounts. These qualifications may give rise to an unqualified favourable opinion. When the deficiencies are minor. 

• Limitations in the scope of the audit: The auditor has not been able to perform all the audit procedures deemed necessary. 
• Uncertainties about the continuity of the business: There is a possibility that the business may not be able to continue operating in the foreseeable future.

The auditor’s report may also contain so-called emphasis of matter paragraphs. Emphasis of matter paragraphs are the auditor’s reminders on relevant aspects of the annual accounts.

• Examples to understand the scope of an emphasis paragraph:

• • Existence of significant uncertainty about the continuity of the business. 
  • Significant ongoing litigation. 
  • Related party transactions. 

• Severity: Variable, depending on the issue at stake.

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