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Independent Financial Audit Act

Note: Present Act is shown here just for your general information and does not pretend for any accuracy, exactness or completeness. Printing mistakes are possible.

(Last amen. 12.07.2006)

Chapter one

GENERAL PROVISIONS

Article 1. This act shall regulate:

1. the objective and the principles of the independent financial audit;

2. the professional standards of organisation, documentation and implementation, as well as the conclusions of the independent financial audit

3. the acquisition of a diploma and a right to practice and the practicing of the auditor's profession by the certified public accountants;

4. the rights and the obligations of the registered auditors who perform independent financial audits;

5. the statute of the Institute of the Certified Public Accountants

Article 2. The independent financial audit shall be a sum of necessary and inter-related procedures determined by International Audit Standards, on the basis of which an independent opinion on the credibility in all the aspects of significance of the financial reports prepared in compliance of the Bulgarian accounting legislation.

Article 3. The independent financial audit shall be implemented by registered auditors who are members of the Institute of the Certified Public Accountants.

Article 4. The profession of the registered auditors shall be self-regulating and independent within the framework specified by the law.

Chapter two

OBJECTIVE AND PRINCIPLES OF THE INDEPENDENT FINANCIAL AUDIT

Article 5. (1) The objective of the independent financial audit is the expression of an independent auditor's opinion on the truthful presentation of all the aspects of significance in the financial reports of:

1. the financial status of the enterprise;

2. the reported financial result of the activity of the enterprise;

3. the cash flows of the enterprise and the changes in them;

4. the shareholders' equity of the enterprise and the changes in it.

(2) The independent auditor's opinion under paragraph 1 shall be expressed in respect of the compliance of the financial reports with the applicable accounting standards, as well as with any other nationally accepted accounting base for preparation of the financial reports.

(3) The formation and the expression of the independent auditor's opinion shall be implemented in compliance with the International Audit Standards.

Article 6. The independent financial audit shall comprise procedures for determining reasonable security by a check of:

1. the compliance with the principles of accounting;

2. the sequence of the implementation of the announced accounting policy;

3. the methodological justification of the accrual basis of accounting for comprehensive and truthful presentation of the assets, the liabilities and the activity of the enterprise, limited to the achievement of the objectives of the audit;

4. the effectiveness of the internal control, limited to the achievement of the objectives of the audit;

5 the process of the closing of the accounts;

6. the reliability and the necessary for the users comprehensiveness of the information presented in the financial report;

7. agreement between the information in the financial report and in the management report and any other information provided by the management together with the audited report.

Article 7. When performing an independent financial audit, the registered auditors shall observe the Professional Ethic Code of the Institute of the Certified Public Accountants. The ethical principles governing the professional conduct and the responsibilities of the auditors shall be:

1. independence - no connection of the registered auditors, including through their partners and staff, with the audited enterprise, with its managers or with persons connected with them in a financial, personal or some other aspect;

2. objectivity, impartiality and zero tolerance for prejudice, conflict of interests or other influence which can interfere with the objective judgement of the auditor;

3. professional competence - the possession of sufficient necessary professional knowledge in the sphere of the effective commercial, accounting and tax legislation, the International Accounting Standards and the International Audit Standards;

4 confidentiality - preserving secret the information about the activity of the enterprise obtained as result of the performed independent audit;

5. professional conduct - the auditor shall act in his professional work in a way which is in agreement with the good name of the auditor's profession and shall refrain from activities which would lead to damaging the prestige of the profession.

6. honesty - the auditor shall be honest, consistent and objective in the implementation of the audit;

7. knowledge and ability to apply the professional standards - the auditor shall implement the independent audit in compliance with the approved professional standards and national legislation;

8. responsibility - the certified public accountant shall be personally responsible for the opinions expressed by him; the specialized auditing company shall be responsible for the auditor's opinion expressed on its behalf.

Article 8. Independent financial audit shall be performed on annual, interim and other financial reports, when this is stipulated by a law, upon request of owners, state authorities and other users of financial information.

Chapter three

ORGANISATION, DOCUMENTING AND CONCLUSIONS OF THE INDEPENDENT FINANCIAL AUDIT

Article 9. (1) The independent financial audit shall be implemented on the basis of a contract between the enterprise-mandator and the certified public accountant as natural person or through his enterprise or through the specialised auditing company by designating the certified public accountant responsible for implementing the independent financial audit.

(2) The remuneration and the terms of payment of the audit service shall be negotiated between the persons under paragraph 1.

Article 10. The assuming of the obligation for implementing the independent financial audit shall be documented with a letter of acceptance of the auditing task. The contents of the letter shall be determined according to the International Audit Standards.

Article 11. The documenting of the independent financial audit and the procedures for its implementation shall be performed in compliance with the currently effective legislation and the International Audit Standards.

Article 12. The management of the enterprise shall make available to the registered auditors the prepared by the management financial report ready for the issuing of an audit report. The financial report shall be provided together with the management report and with any other information that the management provides as an attachment to the audited report, as well as with a signed confirmatory/cover letter by the management according to the International Audit Standards.

Article 13. (1) The conclusions of the registered auditor after the implemented financial audit shall be reflected in an audit report.

(2) The audit report must contain clearly expressed opinion about the audited financial reports as a whole.

(3) The audit reports can be:

1. report without reservations (unqualified report);

2. a report without reservations but with a paragraph for alerting the attention to certain aspects (modified unqualified report);

3. a report with reservations due to restrictions of the audit (modified qualified report);

4. report with reservations due to disagreement with the management of the enterprise (modified qualified report);

5. report with a refusal to express opinion because of the presence of significant limitations before the audit (modified report with a refusal to express opinion)

6. a report with expressed negative opinion due to significant disagreement with the management of the enterprise (modified report with an opinion of disagreement).

(4) The obligatory elements of the contents of the audit reports shall be specified in the International Audit Standards.

(5) The opinion expressed on the financial report shall be certified by:

1. the registered certified public accountant if he is issuing the audit report personally on his own behalf- with his signature and seal;

2. the registered specialised auditing company if it issues the audit report on its own behalf - with the signature of the person representing the enterprise, with the seal of the specialised auditing company and with the personal signature of the registered certified public accountant who is responsible for the audit.

(6). The signature and the seal shall be laid on the audit report and on the main elements (balance sheet, income statement, statement of cash flows and statement of shareholders' equity) of the audited financial reports without the appendix.

Article 14. (1) The seal of the registered certified public accountant shall be with ellipsoid shape. The name, the family name and the number of the certified public accountant in the register of the registered auditors of the Institute of Certified Public Accountants shall be written on the seal.

(2) The specialised auditing company shall use for the purposes of the audit a seal with ellipsoid shape. The following shall be written on it: specialised auditing company, its company name and headquarters and the number in the register of the registered auditors of the Institute of Certified Public Accountants.

(3) The personal seal of the registered certified public accountant and the seal of the specialised auditing company shall be used for certification of the audit of the financial reports or in other cases provided for by a law.

(4) The seals under paragraphs 1 and 2 shall be issued after acquisition of the right to sign audit reports from the Institute of Certified Public Accountants.

Chapter four

ACQUISITION OF THE RIGHT TO PRACTICE AS A CERTIFIED PUBLIC ACCOUNTANT

Article 15. Only persons who have not been convicted of a crime of general nature under Chapter Five and Section I of Chapter Six of the special part of the Penal Code are eligible to apply for the title Certified Public Accountant.

Article 16. Only persons, who meet the following requirements for completed higher education and mandatory professional experience in the field of accounting, internal, external financial audit and financial inspection, as well as experience as an employee of the National Revenue Agency and/or as a instructor in the field of accounting, control and finance, are eligible to apply for acquiring the right to practice as a certified public accountant:

1. accounting - economic education with master's degree and 4 years of experience;

2. accounting - economic education with bachelor's degree and 5 years of experience;

3. another higher economic education and 7 years of experience;

4. another higher education and 10 years of experience.

Article 17. The Institute of the Certified Public Accountants shall determine the subjects on which the candidates must have passed exams before acquiring the right to sit for the exams under Article 18. These subjects must cover:

1. fundamentals of the accounting (theory of accounting);

2. financial accounting (accounting of the enterprise);

3. managerial accounting;

4. financial statement analysis;

5. financial control and auditing standards;

6. commercial law;

7. labour and insurance law;

8. finance of the enterprise;

9. economic analysis and statistics;

10. micro-economics;

11. information systems and technologies.

Article 18. (1) A diploma of a certified public accountant shall be acquired after successful passing of written and/or oral exams before the Institute of the Certified Public Accountants in:

1. accounting;

2. commercial law;

3. independent financial audit;

4. taxes and social insurance.

(2) Before sitting for the exam in independent financial audit the candidates for certified public accountants must have at least 3 years of professional experience as an assistant auditor in a specialised auditing company or in the company of a registered certified public accountant. The experience must be proved before the Institute of the Certified Public Accountants by a certificate issued by the respective certified public accountant or by the specialised auditing company.

(3) The experience under paragraph 2 shall be included in the required experience under Article 16. In the cases when the candidate has more than 3 years of experience, these years can be deducted from the years of required experience under Article 16, as follows:

1. for the candidates with accounting and economic education and a bachelor's degree - 1 year;

2. for the candidates with another education - up to 3 years.

Article 19. (1) The persons, who have successfully passed the exams of Article 18, shall receive a diploma of a certified public accountant and shall be entered in a special register at the Institute of the Certified Public Accountants.

(2) The persons who have acquired a diploma of a certified public accountant shall acquire the right to sign audit reports with an opinion about the financial reports after three years of experience in a specialised auditing company or in a company of a registered certified public accountant and shall be entered in a separate register of the registered auditors at the Institute of the Certified Public Accountants.

Article 20. (rep.)

Article 21. (1) A person, who obtained abroad a diploma analogous to the one of a certified public accountant under this act and who is a member of a professional organisation, can acquire the right to practice as a registered auditor and to sign audit reports with an opinion about financial reports under this act, if he has successfully passed exams in Bulgarian commercial and tax law and, if necessary, in International Audit Standards and International Accounting Standards before the Institute of the Certified Public Accountants and if after passing these exams he has had at least three years of experience at a specialised auditing company or a company of a registered certified public accountant in Bulgaria.

(2) A person, who has acquired abroad the qualification necessary to sign audit reports with an opinion about financial reports, can acquire the same qualification of a registered auditor under this act as well after successful passing of exams in Bulgarian commercial and tax law, and, if necessary, in International Audit Standards and International Accounting Standards before the Institute of the Certified Public Accountants.

(3) The persons of paragraphs 1 and 2 must meet the requirements of Article 15.

Article 21a The Institute of Certified Public Accountants shall determine the conditions and procedure of recognizing the qualifications of certified public accountants acquired in a Member State of the European Union and the European Economic Space.

Article 22. The Institute of the Certified Public Accountant shall organise training and exams on the subject matter of Articles 18, 20 and 21, while determining their sequence, regularity, manner of conducting them and the system of evaluation of the knowledge necessary for practicing the profession of a certified public accountant.

Chapter five

PRACTICING THE PROFESSION OF A CERTIFIED PUBLIC ACCOUNTANT

Article 23. The exclusive rights to practice the profession of a certified public accountant shall be exercised:

1. directly;

2. through a company of a certified public accountant;

3. through participation in a specialised auditing company.

Article 24. (1) In order to exercise the right to sign audit reports with opinion about financial reports, the certified public accountant registered in the register of Article 19, paragraph 1 shall submit an application for membership and registration to the Institute of the Certified Public Accountants accompanied by a court certificate of no convictions and a declaration stating that he/she complies with the terms of this Act.

(2) In order to carry out activities as a specialised auditing company, the company shall submit an application for membership and registration to the Institute of the Certified Public Accountants accompanied by a certificate of no convictions of the partners and the managers of the company, a declaration by the managers stating that the company meets the conditions of this Act, together with documents confirming the fulfilment of the requirements of § 1, item 9.

(3) The Management Board of the Institute shall express its opinion on the applications of the candidates with a motivated decision within one month of the date of the submission of the application. The decision shall be announced in writing to the candidates and shall enter into force on the date of its adoption.

(4) In case of refusal of membership and registration the decision of the Management Board can be appealed within two weeks before the Control Board. The Control Board shall pass judgement on the appeal within two months of receiving it.

(5) The decision of the Control Board shall be subject to appeal before the court according to the procedure of Administrative Procedure Code.

Article 25. (1) On the basis of the decision of Article 24 the certified public accountant or the specialised auditing company shall become registered auditors and shall acquire the right to sign audit reports with opinion about financial reports.

(2) The Institute of the Certified Public Accountants shall compile and maintain registers of the registered auditors.

Article 26. By March 31st of each year the Institute of the Certified Public Accountants shall promulgate in the State Gazette a list of the registered auditors.

Article 27. (1) The certified public accountants included in the lists of the registered auditors shall receive a personal seal according to the model specified in Article 14, paragraph 1, by virtue of which they shall acquire the right to sign audit reports.

(2) The companies included in the lists of the registered auditors shall receive a seal according to the model, specified in Article 14, paragraph 2, by virtue of which they shall acquire the statute of a specialised auditing company.

(3) After acquiring the right to sign audit reports, the persons of paragraph 1 shall take an oath and sign an affidavit with the following content: I swear in the name of knowledge and lawfulness, that I will fulfil in good faith, independently, responsibly, impartially and with professional competence my obligations as a registered certified public accountant. I will be guided by the laws of the Republic of Bulgaria, the accepted professional audit standards and the ethic standards and principles of conduct approved by the Institute of the Certified Public Accountants. In case of violation of this oath let me be sanctioned according to the provisions of the act and the professional ethic standards of the Institute of the Certified Public Accountants.

Article 28. (1) The registered certified public accountants - accountants may not implement independent audit of the financial report of an enterprise when:

1. they work under an employment contract or under a civil service employment relation at a place different from the Institute of the Certified Public Accountants, from a specialised auditing company or carry out scientific activities or teaching;

2. they are connected persons with the enterprise, whose financial report is the subject of the independent financial audit;

3. they are directly or indirectly involved with or they participate in transactions with the enterprise whose financial report is subject to the independent financial audit, where these transactions are different from the transaction for the independent financial audit and violate his/her independence as an auditor or lead to a conflict of interests;

4. they render accounting services for the day-to-day accounting recording of the activity and for the preparation of financial reports of the audited enterprise, when they participate in the managerial decision making associated with the latter, as well as services associated with valuation of assets for the purposes of the financial report of the enterprise whose financial report is subject to the audit.

(2) The restrictions of items 2, 3 and 4 of paragraph 1 shall be applied also to all the partners and employees in the specialised auditing company.

Article 28a. The registered certified public accountants can participate in one specialised auditing company only.

Article 29. The audit practice of the registered auditors shall be subject to internal quality control according to working rules, approved by the General Meeting of the Institute of the Certified Public Accountants.

Article 30. The members of the Institute of the Certified Public Accountants and the specialised auditing companies shall pay upfront fee at the point of being accepted and annual fees determined by the Management Board of the Institute.

Chapter six

RIGHTS AND OBLIGATIONS OF THE REGISTERED AUDITORS

Article 31. The registered auditors shall have the exclusive right to perform independent financial audit of the financial reports of the enterprises.

Article 32. When performing their audit obligation, the registered auditors shall have the right to require full cooperation and information from the management of the enterprise, as well as to oversee the inventory taking of the assets and liabilities of the enterprise.

Article 33. The registered auditor shall be obliged:

1. to observe the principles of: independence, professional competence, confidentiality, honesty and objectivity;

2. to fulfil the assumed auditor obligation, unless there are objective circumstances which interfere with him/her;

3. to inform the management of the client enterprise - client of significant violations of the laws and other statutory instruments, of its acts of association and of its other internal acts, norms and procedures, as well as of any other information, to the extent that they became known to him in the process of performing the independent audit;

4. to warn the client enterprise, within his competence, of actions or omissions which can harm it, to the extent that they became known to him in the process of performing the independent audit;

5. clarify to the client enterprise the significance of certain information obtained in the process of fulfilling the auditor's obligation;

6. to present documents proving the fulfilment of the auditor's obligation and the expressed opinion;

7. to observe the International Audit Standards and the Professional Ethic Code adopted by the Institute of the Certified Public Accountants;

8. to account for its activity before the Institute of the Certified Public Accountants according to a procedure approved by it;

9. to participate in the activity of the Institute of the Certified Public Accountants and its bodies, as well as to observe the Articles of Association of the Institute;

10. to insure himself for the risks of his professional activity;

11. to cooperate with the bodies of the Institute of the Certified Public Accountants.

Chapter seven

FINANCIAL LIABILITY

Article 34. (1) The registered auditors shall be financially liable for the damages which they have inflicted on their mandators, if these damages are a direct and immediate consequence of their guilty acts or failures to act.

(2) The liability of paragraph 1 shall be enforced according to the Obligations and Contracts Act and the rules of the general action proceedings.

Article 35. (1) The registered auditors shall not be liable for violations made by the managerial bodies and by the employees of the audited enterprises.

(2) The certification of the financial reports shall not exempt from responsibility the management of the audited enterprise for the legitimacy and expedience of their actions during the audited period.

Chapter eight.

INSTITUTE OF THE CERTIFIED PUBLIC ACCOUNTANTS

Article 36. The Institute of the Certified Public Accountants shall be a self financed legal entity with headquarters in Sofia.

Article 37. (1) The Institute of the Certified Public Accountants shall ensure and regulate the practicing of the independent auditor's profession of the certified public accountants in the interest of the society.

(2) The Institute of the Certified Public Accountants shall organise and govern the professional activity of its members by:

1. organising and conducting the exams of the candidates for obtaining a diploma of a certified public accountant;

2. registering the auditors who acquired the right to practice according to the requirements of this Act;

3. organising and conducting events of different format for raising their professional qualification;

4. organising training of the candidates for certified public accountants through interaction with institutions of higher education selected by it;

5. publishing its magazine, study aids and scientific papers connected with the development and the promotion of the auditor's profession;

6. approving internal control system for the activity of its members;

7. developing, if necessary, professional auditing rules and techniques for additionally assisting and regulating the activity of its members;

8. controlling the quality of the audit activity and the professional conduct of its members;

9. organising, assisting and implementing research activities in the field of the independent financial audit, of the accounting and of the financial analysis and of other related fields.

Article 38. The Institute of the Certified Public Accountants shall represent its members before the public, the state authorities and the international organisations.

Article 39. (1) The bodies of the Institute of the Certified Public Accountants shall be:

1. General Meeting;

2. Management Board;

3. Control Board;

4. Professional Ethics Board;

5. Board for Quality Control of the Auditors' Services;

6. Disciplinary Board.

(2) The General Meeting shall approve Articles of Association, Professional Ethic Code and shall elect the members of the bodies of the institute. The Professional Ethic Code shall be developed on the basis of the Ethic Code of the professional accountants approved by the International Federation of the Accountants.

(3) The Management Board shall organise and govern on a day-to-day basis the activity of the Institute of the Certified Public Accountants and shall report to the General Meeting.

(4) The Control Board shall control the fulfilment of the resolutions of the General Meeting, the fulfilment of the budget of the Institute and the activity of Management Board.

(5) The Professional Ethics Board shall control the adherence to of the Professional Ethic Code of the Institute of the Certified Public Accountants.

(6) The Board for Quality Control of the Auditors' Services shall control the quality of the audit activity of the registered auditors according to rules and procedures approved by the General Meeting of the Institute of the Certified Public Accountants. The members of the Board shall be members of the Institute of the Certified Public Accountants according to a rotation principle.

(7) The Disciplinary Board shall review the findings of the Board for Quality Control of the Auditors' Services and of the Professional Ethics Board. On the basis of the findings of the Board for Quality Control of the Auditors' Services and of the Professional Ethics Board the members of the Disciplinary Board can draw up statements for establishing violations.

(8) The organisation and the activity of the bodies of paragraph 1 shall be regulated in the Articles of Association of the Institute of the Certified Public Accountants.

Article 40. The financing of the activity of the Institute of the Certified Public Accountants shall be raised from:

1. upfront and annual fees of the members of the institute;

2. revenues from fees for conducting courses and exams;

3. revenues from subscriptions and publishing activity;

4. revenues from rendering consultancy services;

5. revenues from sanctions imposed by the institute;

6. revenues from grants;

7. other revenues.

Chapter nine

VIOLATIONS AND SANCTIONS

Article 41. (1) A certified public accountant shall be punished with a fine from BGN 300 to 3000 or by deprivation of the right to perform independent financial audits of financial reports for a time period of up to two years, and in case of a second offence of the same type - for a time period of up to five years, when:

1. he issues an audit report under Article 13 with an opinion about a financial report and this audit report is not compatible with the reporting information submitted by the enterprise;

2. he violates the requirements of the International Audit Standards;

3. he violates the requirements of the Professional Ethic Code adopted by the Institute of the Certified Public Accountants.

(2) In case of a violation pursuant to paragraph 1, a financial sanction from BGN 500 to 5000 shall be imposed on the specialized auditing company or the latter shall be deprived of the right to perform independent financial audits of financial reports for a period of two years and in the case of a second offence of the same type - for a period of up to three years.

(3) The sanctions of paragraph 1 shall also be imposed also when a violation of paragraph 2 of Article 19, Article 28, items 8 and 10 of Article 33 and item 9 of § 1 has been committed.

(4) The statements of establishing the violations of paragraphs 1 and 2 shall be drawn up by members of the Disciplinary Board of the Institute of the Certified Public Accountants.

(5) The penal decrees shall be issued by the Chairman of the Management Board of the Institute of the Certified Public Accountants.

(6) The drawing up of statements, the issuing, the appealing and the execution of the penal decrees shall be implemented according to the Administrative Violations and Sanctions Act.

Article 42. (1) A registered auditor, who refuses to perform an audit under Article 29, shall be punished with a fine from BGN 3000 to 10 000, while for a legal entity the financial sanction imposed shall be in the amount from 5000 to 15 000 BGN pursuant to paragraphs 4, 5 and 6 of Article 41.

(2) When the violation is committed for second time, the sanction shall be in the amount from BGN 15 000 to 30 000.

SUPPLEMENTARY PROVISION

§ 1. In the context of this act:

1. A Registered auditor is a qualified to practice certified public accountant or a specialised auditing company registered in the specialised register at the Institute of the Certified Public Accountants after proving the compliance with the requirements of Article 24. He shall be liable for the opinion expressed in the audit report on a given financial report.

2. Auditor's profession is the profession of the registered certified public accountants for rendering services for independent financial audit or analogous to them services directly or through specialised auditing companies.

3. A violation of the independence of the auditor and a conflict of interests are present:

a) when the registered auditor has financial interest in the activity of the audited enterprise in the form of ownership of shares, stocks or other securities issued by the enterprise and/or participation in its principal activity;

b) when the registered auditor participates in the management of the audited enterprise;

c) when the registered auditor is in marital relations or in kinship with the management of the audited enterprise in direct line without restrictions and in collateral line up to the second degree inclusive;

d) when there is judicial dispute between the registered auditor and the audited enterprise.

4. Connected persons are the persons in the sense of item 6 of § 1 of the Accountancy Act.

5. Significance is a threshold of such a aggregate or individual mistake, deviation and/or omission found in the indicators of a financial report which can affect or change a decision of the users of the report.

6. Reasonable security is a high degree of security expressed affirmatively in the audit report as reassurance that the information subject of the audit does not contain essential omissions, errors and defects.

7. Enterprise is an enterprise in the sense of the Accountancy Act.

8. Second is the violation committed within a one year period from the issuing of the penal decree by virtue of which a sanction for the same type of violation was imposed on the offender.

9. Specialised auditing company is a company registered under Article 64, paragraph 1, items 1, 2 or 3 of the Commerce Act, with headquarters in the Republic of Bulgaria and with independent financial audit of financial reports of enterprises as the principal company purpose, which is:

a) a general partnership in which more than half of the partners are registered certified public accountants;

b) a limited partnership in which more than half of the partners with unlimited liability are registered certified public accountants;

c) a limited liability company in which more than half of the votes in the General Meeting of the partners belong to registered certified public accountants and the manager (the majority of the managers) are registered certified public accountants.

Note: If you are interested in the last version of this Act, or if you are looking for a concrete interpretation, or just have a question, our team will be more than happy to assist you. Just contact us.