What an Audit Can Reveal About the Health of Your Business?

A properly conducted and interpreted audit can be the difference between a business that stagnates and one that moves forward with a clear vision for the future.

According to the applicable Accounting Act of the Republic of Croatia (OG 145/2024), a statutory audit is mandatory for:

• Public interest entities
• Issuers whose securities are listed on a regulated market in any EU member state
• Credit institutions
• Insurance and reinsurance companies
• Leasing companies
• UCITS and AIF management companies and the funds themselves
• Pension companies and pension funds
• Pension insurance buy-in companies
• Factoring companies
• Investment firms, stock exchanges, central depositories, operators, and other capital market participants
• Legal entities deemed of special interest to the Republic of Croatia (per government decision)
• Companies that, independently or with subsidiaries, employ an average of over 5,000 workers during the year or have assets exceeding €829,500,000 at the end of the fiscal year

All public interest entities must undergo an audit of their annual financial statements.

Large and medium-sized enterprises and parent companies of large or medium-sized groups are also subject to audit obligations.

According to Article 5 of the Act, business size classification (large, medium, small, micro) is based on three criteria:

• Total assets: €25,000,000 (large), €5,000,000 (medium)
• Revenue: €50,000,000 (large), €10,000,000 (medium)
• Average number of employees: 250 (large), 50 (medium)

A business is considered large or medium if it exceeds at least two of the three criteria as of the balance sheet date.

Additional cases requiring a mandatory audit include:

• Businesses applying to list their securities on a regulated market
• Entities involved in structural changes (mergers, acquisitions, demergers)
• Companies and legal entities where specific laws mandate an audit

Types of Audits Revealing Different Business Aspects

Depending on organizational needs and goals, different types of audits offer insight into various parts of the business. By subject, audits can be categorized as financial statement audits or operational audits, while by executor, audits may be external or internal.

• External audits focus on financial statements, verifying whether they are fair and objective, and thus a solid basis for business decision-making. These audits offer independent assurance to investors, creditors, and stakeholders that financial reports reflect the company's true financial position.
• Internal audits take a broader view. Their goal is to assess and enhance operational quality, reduce business uncertainty, manage risks, and add value. They serve as an "immune system" for the organization—continually monitoring, identifying, and responding to potential threats to business health.

What Auditors Look For in Your Business

Auditors use several key assertions when examining your business:

• Existence: Are assets and liabilities actually present as of the balance sheet date?
• Rights and obligations: Does the company hold legitimate rights to its reported assets?
• Completeness: Are all transactions and events recorded?
• Occurrence: Did reported transactions happen in the stated period?
• Measurement and valuation: Are financial figures mathematically accurate and appropriately valued?

Through these assertions, auditors ultimately seek to answer: "How financially healthy and sustainable is your business?"

Financial Indicators Revealing Strengths and Weaknesses

An audit can reveal key indicators that point to strengths or weaknesses in your operations. For example, it might identify:

• Inefficient cash flow management
• Excessive debt levels
• Poor asset utilization
• Irregularities in revenue or expense recognition

These findings can be crucial for improving performance and avoiding future problems.

Why Objective Financial Reporting Is the Foundation of a Healthy Business

Accurate and honest financial reporting is essential for informed decision-making. Misleading or incorrect reports can cause stakeholders to make flawed decisions, potentially threatening long-term stability and profitability.

The Audit Methodology: Discovering the Truth Behind the Numbers

The audit process involves a variety of procedures to gather audit evidence, forming the basis for the auditor’s opinion.

Key methods include:

• Document examination: Reviewing internal and external documents
• Asset inspection: Physically verifying assets, with proper documentation
• Observation: Monitoring company activities
• Inquiry: Interviewing management and staff
• Confirmations: Collecting written confirmations from third parties
• Reperformance: Independently performing processes either manually or via software
• Recalculation: Checking mathematical accuracy
• Analytical procedures: Evaluating financial info by comparing with non-financial data

These techniques help auditors go beyond surface-level figures and detect underlying issues not visible in day-to-day operations.

Reliability of Different Types of Audit Evidence

Not all audit evidence is equally reliable. The hierarchy of reliability includes:

• High reliability: Document and asset inspections, recalculations, and reperformance
• Medium reliability: Confirmations and analytical procedures
• Low reliability: Inquiries and observation

This framework helps auditors prioritize stronger evidence while still considering less reliable inputs in forming their opinion.

Understanding Types of Audit Opinions

Unmodified opinion: The best possible outcome. It means the financial statements present a true and fair view, prepared according to relevant standards (e.g., IFRS or Croatian GAAP), with no material misstatements.

Modified opinions are issued when issues arise, including:

• Qualified opinion: Material misstatements or limitations exist, but they are not pervasive
• Disclaimer of opinion: Significant scope limitations prevent the auditor from forming an opinion
• Adverse opinion: Financial statements contain material and pervasive misstatements

Turning Audit Findings into Business Opportunities

Audit findings can highlight areas for:

• Improved efficiency
• Cost reduction
• Better risk management
• Revenue growth

Management should view audit results not defensively but as a chance to improve operations. Each finding or recommendation can spark changes that strengthen the business long term.

Audit as an Ally, Not a Burden

Understanding the types of audits, audit procedures, and audit opinions empowers management to fully leverage the value of the audit process. Audit should be viewed as a continuous effort, not a one-time obligation—a foundation for building a financially sound and sustainable business.

In the end, audit should not be seen as a necessary evil or administrative burden, but as a valuable partner in understanding and improving your operations. A healthy organization embraces audits as opportunities for learning and growth, not as threats or check-the-box requirements.

HLB Adria – Your Trusted Audit Partner

If you’re looking for experts to help you better understand the financial health of your business, HLB Adria is your ideal partner.

Want to learn more? Contact us to schedule a consultation. We’ll help your company become stronger and more future-ready.