Auditors Professional Oversight Third Country Auditors Glossary for Register of Third Country Audit Entities

Glossary for Register of Third Country Audit Entities

Affiliate

An ‘affiliate’ means any undertaking, regardless of its legal form, which is connected to the third country audit entity by means of common ownership, control or management, and which provides services to ‘relevant audit clients’.

Audit Directive

The EU Statutory Audit Directive 2006/43/EC.

Equivalent

An audit firm is shown as "Equivalent" where it has been registered in accordance with the UK requirements that give effect to Article 46 of the Statutory Audit Directive and of Article 1 of the European Commission Decision of 19 January 2011 (2011/30/EU) (as amended by the Commission Decisions of 13 June 2013 (2013/288/EU) and 25 July 2016 (2016/1223)) and the Commission Decision of 14 July 2016 (2016/1155). 

The audit firms classified as “Equivalent” are already subject to a system of public oversight, quality assurance, investigation and penalty systems in their home country that the EU has concluded are equivalent to the systems for auditors and audit firms of EU Member States. 

In the UK such audit firms are required to register with the FRC but in general are not then subject to further UK regulatory requirements. The FRC places reliance on the equivalent systems of audit regulation in the home country. In a small number of cases “Equivalent” audit firms audit relevant companies that are outside the scope of the home regulator. In principle such audits are subject to external review by or on behalf of the FRC but you should not assume that such a review has taken place.

Transitional

An audit firm is shown as "Transitional" where it has been accepted for registration in accordance with the UK requirements that give effect to the transitional provisions in Articles 2 and 3 of and the Annex to the European Commission Decision of 19 January 2011, as amended by the Commission Decision of 25 July 2016 (2016/1223).

The countries listed in the Annex to the Decision either already have some form of audit regulation in place or are considering changes that would put a system of audit regulation in place. However, it is important to be aware that there are wide differences in the nature and extent of audit regulation in the countries listed in the Annex.

"Transitional" status provides no assurance as to the extent to which that firm is subject to audit regulation in its home country. Nor, where the audit firm is regulated in its home country, is it necessarily the case that the specific audit(s) of the relevant issuer(s) fall within the scope of the home country regulatory regime and, for example, are liable to review in the home country.

Audit entities registered by the FRC in accordance with the transitional arrangements are not subject to external review by the FRC.

Article 45

Third country audit firms in neither of the “Equivalent” or “Transitional” categories are registered in accordance with the UK implementation of Article 45 of the Audit Directive. The status is then shown in the register as "Registered". The information that such firms have to submit on their application for registration is on Form B (Word) which should be read with the accompanying guidance. This information is subject only to limited checks at the application stage.

Firms with this status are unlikely to be subject to substantive or independent regulation in their home country. Such firms are in principle subject to periodic external inspections by or on behalf of the FRC. A programme of such inspections commenced in 2013. However, you should not assume that any such review has been undertaken and should contact the FRC if you have specific queries.

EU/EEA

Members of the EU: Austria, Belgium, Bulgaria, Cyprus, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom.

Members of the EEA that are not also members of the EU: Iceland, Liechtenstein and Norway.

Network

According to Article 2 (7) of the Statutory Audit Directive, a ‘network’ is:

  1. The larger structure which is aimed at cooperation and to which the applicant belongs, and
  2. Which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, or shares common quality-control policies and procedures, or shares a common business strategy, or shares the use of a common branch-name or shares a significant part of professional resources. 

Full (Article 45) Registration

Where the third country audit firm is from a country that is neither “Transitional” nor “Equivalent”, it must apply for registration according to Article 45 of the Audit Directive. Its status is then shown in the register as “Full (Article 45)”.  The information that such firms have to submit on their application for registration is on Form B (Word) which should be read with the accompanying guidance. This information is subject only to limited checks at the application stage.

Firms with this status are unlikely to be subject to substantive or independent regulation in their home country. Such firms are in principle subject to periodic external inspections by or on behalf of the FRC.  A programme of such inspections commenced in 2013. However, you should not assume that any such review has been undertaken and should contact the FRC if you have specific queries.

Relevant audit client

A relevant audit client is a company incorporated outside the EU/EEA whose transferable securities are admitted to trading on a regulated market of any Member State of the EU/EEA within the meaning of point 14 of Article 4(1) of EU Directive 2004/39/EC. This refers to an issuer as defined in Article 2 (1)(d) of EU Directive 2004/109/EC, except when:

1. a)   the company is an issuer exclusively of debt securities within the meaning of point (c) of Article 2 (1) of EU Directive 2004/109/EC prior to 31 December 2010, the denomination of which is at least EUR 50,000 per unit or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least EUR 50,000; or

1b)  The company is an issuer exclusively of debt securities within the meaning of point (c) of Article 2 (1) of EU Directive 2004/109/EC from 31 December 2010 and the denomination per unit is, as at the date of issue, at least EUR 100,000 or, in the case of debt securities denominated in another currency, equivalent, at the date of issue, to at least EUR 100,000; or

2. the company is an issuer exclusively of units issued by collective investment undertakings other than closed-end type, or units acquired or deposited of in such collective investment undertakings within the meaning of Article 1 (2) of EU Directive 2004/109/EC.

Third country audit entity

According to the Article 2.4 of the Audit Directive a third country audit entity is "an entity, regardless of its legal form, which carries out audits of the annual or consolidated accounts of a company incorporated in a third country".

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