Auditing in Joint Stock Companies

Auditing, in its broadest definition, is the process of independently and professionally examining, verifying, and reporting whether an institution’s activities, financial data, and managerial decisions comply with predetermined standards, legal regulations, the articles of association, and the principle of good faith. In the law of joint stock companies, auditing is not merely an exercise in “detecting errors”; rather, it is an institutional “health check” that establishes trust among the legal entity of the company, its managers (the board of directors), and those being managed (the shareholders).

The most distinctive characteristic of joint stock companies is the separation of ownership and management. Shareholders (the owners) do not personally manage the company; instead, they delegate this authority to members of the board of directors. This separation creates a risk known as the “agency problem.” The board of directors may prioritize its own personal interests over those of the company, use resources inefficiently, or manipulate financial statements. The concept of auditing serves as the most powerful mechanism for minimizing this agency problem, while exerting both a deterrent and educational effect on the board of directors.

Philosophical and Economic Foundations of Auditing

Auditing is more than a legal obligation; it is also an economic value. A company that undergoes auditing is perceived as more trustworthy in the marketplace. Investors, lending institutions, and suppliers apply a lower risk premium to a company whose financial statements have been independently audited. As a result, the company’s cost of access to financing decreases. Therefore, auditing is a tool that enhances a company’s “reputational capital.”

The fundamental components of auditing can be grouped under four headings:

Compliance Audit

The examination of whether activities comply with laws, regulations, and internal company policies.

Financial Audit

The examination of whether financial statements accurately reflect reality and comply with accounting standards.

Performance Audit

The evaluation of how efficient managerial decisions are and whether company resources are being utilized optimally.

Risk Audit

The identification and management of risks that may threaten the existence of the company, including financial, operational, and legal risks.

Fundamental Principles of the Auditing Process

For auditing to be effective in joint stock companies, certain fundamental principles must be implemented.

The foremost principle is independence. An auditor must not have any organizational, financial, or personal ties with the board of directors or controlling shareholders of the company being audited. If the auditor receives instructions from company management, the process ceases to be an audit and becomes merely an “approval mechanism.”

The second principle is objectivity. Auditors must make decisions based solely on facts and legal standards, free from emotions and bias.

The third principle is transparency. Audit results should be reported in a manner accessible to shareholders and, where necessary, discussed at the general assembly.

Auditing and Corporate Governance

Auditing occupies a central position within the principles of corporate governance. Corporate governance is built upon four pillars: fairness, transparency, accountability, and responsibility. Auditing supports all four of these pillars.

A company’s accountability can only be demonstrated through auditing. If a company claims that it is accountable, this claim must be reflected in its audit reports.

The Transition from Traditional Auditing to Modern Auditing

Under the former legal system, auditing was largely viewed as a formalistic review process. However, companies operating in today’s global economy possess significantly more complex structures.

It is no longer sufficient to ask merely whether “the cash balance reconciles.” Modern auditing has evolved to encompass issues such as corporate sustainability, environmental and social responsibility initiatives, digitalization risks, and cybersecurity threats.

Auditing serves as a company’s “mirror.” When management looks into that mirror, it should encounter the company’s true face—with both its achievements and its shortcomings. A distorted mirror, or management’s refusal to look into it, constitutes one of the strongest indicators of a path leading toward insolvency.

Accordingly, auditing should not be regarded as a “bureaucratic burden” but rather as a form of “legal hygiene” that enhances the quality of corporate life.

In a joint stock company, the concept of auditing is an institution that protects shareholders’ property rights, safeguards the existence of the corporate legal entity, and provides confidence to all stakeholders. The proper functioning of this institution represents one of the greatest responsibilities that the legal order imposes upon joint stock companies.

Types of Audits

The complex structures of joint stock companies, the diversity of risks they face, and the conflicts of interest between shareholders and management have demonstrated that a single audit model cannot address every need. Consequently, legal systems and management literature have developed various types of audits with different objectives and focal points.

Audit types may be classified according to:

• Their field of application,
• The status of the person conducting the audit,
• Their timing.

This classification functions as a “management toolbox” that helps determine which auditing mechanism should be employed under particular circumstances.

1. Audit Types According to Their Field of Application

From this perspective, audits can fundamentally be divided into two categories:

Financial Audit

A financial audit examines whether a company’s financial statements (balance sheet, income statement, cash flow statement, and statement of changes in equity) comply with accounting standards and legal regulations and whether they present a true and fair view of the company’s financial position.

The primary objective of financial auditing is to provide reliable information to shareholders and external stakeholders, including investors, banks, and government authorities.

Such audits are generally conducted by independent auditors and culminate in an audit opinion, which may be:

• Unqualified (positive),
• Qualified,
• Adverse,
• Disclaimer of opinion.

Operational (Performance) Audit

This type of audit goes beyond financial figures. It evaluates how efficiently, effectively, and economically the company’s business processes, production lines, sales departments, and human resources management operate.

Operational audits provide strategic recommendations to the board of directors aimed at improving corporate performance.

For example, examining waste in a production facility or analyzing the return on investment (ROI) of a marketing budget falls within the scope of operational auditing.

Audit Types According to the Status of the Auditor

The identity of the person or institution conducting the audit is a determining factor in terms of both the strength of the audit and the significance of its results.

Internal Audit

Internal auditing is carried out by a unit established within the company itself and reporting directly to the board of directors or the audit committee. Internal auditors are employees of the company; however, their professional independence must be preserved.

The primary duty of internal auditing is the continuous monitoring of the company’s internal control systems, including risk management, compliance mechanisms, and internal procedures.

Internal auditing serves as the company’s mechanism for self-improvement and self-correction.

External (Independent) Audit

External auditing is performed by completely independent audit firms authorized by capital market authorities and operating outside the company.

External auditing constitutes the most important document demonstrating to third parties that the financial information disclosed by the company is accurate and reliable.

Public (Government) Audit

Public auditing refers to inspections conducted by state authorities in pursuit of the public interest.

Examples include:

• Tax audits conducted by tax authorities,
• Audits by the Capital Markets Board,
• Investigations by the Competition Authority.

These audits are generally supported by legal sanctions and the threat of penalties.

3. Audit Types According to Timing

The timing of an audit creates a critical distinction in terms of whether the audit serves a preventive or corrective function.

Preventive (Proactive) Audit

A preventive audit is conducted before a transaction occurs or at the very beginning of a process.

For example, requiring expenditures to pass through a budget approval procedure before they are made constitutes a preventive audit mechanism.

Its purpose is to prevent errors before they arise.

Concurrent (Ongoing) Audit

A concurrent audit is performed while a process is ongoing.

It involves real-time monitoring of whether the company’s day-to-day operations comply with applicable laws and regulations.

Subsequent (Reactive) Audit

A subsequent audit is conducted after activities have been completed and accounting periods have been closed.

Annual independent audits are examples of this type.

Subsequent auditing aims to identify past errors and prevent their recurrence in the future.

4. Audit Types According to Scope

Full (Comprehensive) Audit

A full audit involves a detailed examination of all company departments, financial transactions, and managerial decisions.

Although costly, it provides a complete picture of the company’s overall condition.

Limited (Specialized) Audit

A limited audit focuses only on a particular issue, department, or period.

Examples include:

• An audit conducted in response to allegations of fraud,
• An examination limited to inventory management practices.

The Complementary Role of Audit Types

An effective audit system in a joint stock company is established not by allowing these audit types to exclude one another, but by ensuring that they complement each other.

For example, if internal auditing is weak, relying solely on an annual external audit may leave the company exposed to substantial risks.

Likewise, where operational audits are absent, financial audits may merely confirm that records are properly maintained, while failing to explain why the company is incurring losses or losing market share.

For this reason, advanced corporations frequently implement the “Three Lines of Defense” model:

First Line

Operational managers and employees who are responsible for controlling their own processes.

Second Line

Risk management and compliance functions that provide an additional layer of oversight.

Third Line

Internal audit, which conducts independent and objective examinations.

External audit is then built upon these three lines and serves as the final layer that provides assurance to external stakeholders.

The Legal Dimension of Audit Types and the Turkish Commercial Code

The Turkish Commercial Code has made many of these audit types either mandatory or optional for joint stock companies.

In particular, the Turkish Commercial Code No. 6102 has transformed auditing from a mere financial obligation into a tool for enhancing the managerial quality of companies.

The diversification of audit types enables companies not only to fulfill legal obligations but also to identify managerial shortcomings and revise strategic decisions.

For a member of the board of directors, access to information derived from various audit mechanisms—such as internal audit reports, independent audit opinions, and operational analyses—constitutes one of the most important tools for fulfilling the duty of acting as a prudent manager.

In summary, audit types form a broad spectrum. Companies that effectively utilize this spectrum are better positioned to survive in global markets characterized by uncertainty.

Management teams that perceive auditing merely as a process through which “someone is checking on us” will never fully appreciate its true value.

The proper combination of audit mechanisms transforms a company from a state of potential disorder into one of systematic and sustainable operation.

Auditing of Joint Stock Companies Under Turkish Commercial Code No. 6102

Turkish Commercial Code No. 6102 introduced a fundamental paradigm shift in the auditing of joint stock companies.

Under the former Commercial Code of 1956, the auditing system largely relied on statutory auditors and often functioned as a formalistic control mechanism. In practice, auditors frequently became extensions of company management.

The new Commercial Code, however, reconstructed auditing as the heart of corporate governance and aligned transparency, accountability, and audit quality with international standards, particularly those of the European Union.

Within this framework, auditing is no longer merely a compliance tool; it is regarded as a guarantee of a company’s financial integrity and managerial discipline.

1. The Fundamental Logic of the Audit System:

From “Statutory Auditor” to “Independent Audit”

The new Turkish Commercial Code has largely abandoned the former concept of the statutory auditor and entrusted audit activities to professional independent auditors.

Under the previous system, auditors were elected by the general assembly and were not necessarily required to possess professional qualifications.

The new framework requires auditing activities to be performed exclusively by professional audit firms or certified public accountants authorized under the applicable regulations.

This change ensures that audits are conducted in accordance with capital market standards and significantly strengthens auditor independence.

The legislator no longer regards the auditor as an employee or agent of the general assembly but rather as an assurance provider serving the public interest by certifying the reliability of financial reporting.

2. Scope and Subject Matter of Auditing

Under the Turkish Commercial Code, auditing encompasses the examination of:

• Financial statements,
• Balance sheets,
• Income statements,
• Notes to financial statements,
• Annual activity reports,
• Compliance with legal regulations,
• Compliance with the articles of association.

The scope of auditing extends beyond verifying numerical accuracy.

It also includes:

• Evaluating the functioning of the financial reporting process,
• Assessing the adequacy of internal control systems,
• Reviewing the consistency of the methods employed by the board of directors in preparing financial statements.

The auditor is additionally responsible for determining whether the annual activity report is consistent with the financial statements and whether there are circumstances threatening the company’s continuity.

This obligation grants the auditor both the authority and responsibility to conduct forward-looking assessments.

Where a company faces a risk of insolvency, the auditor is required to expressly disclose this fact in the audit report.

3. Audit Reports and Their Legal Effects

The final outcome of the auditing process is the audit report.

Following the completion of audit procedures, the auditor may express one of four opinions:

• Unqualified (positive) opinion,
• Qualified opinion,
• Adverse opinion,
• Disclaimer of opinion.

The Turkish Commercial Code requires the audit report to be submitted to the general assembly.

Financial statements prepared without an audit report may be deemed legally nonexistent, even if approved by the general assembly.

This effectively transforms the audit report into a prerequisite for the legal validity of general assembly decisions relating to financial statements.

Where the auditor issues an adverse opinion or declines to express an opinion, this may significantly hinder the discharge of the board of directors and may also constitute powerful evidence supporting shareholder claims for damages against board members.

Auditing in Joint Stock Companies

Audit, in its broadest definition, is the process of independently and professionally examining, verifying, and reporting whether an institution’s activities, financial data, and managerial decisions comply with predetermined standards, legal regulations, the articles of association, and the principle of good faith. In corporate law, auditing is not merely a “fault-finding” mechanism; it is an institutional “health check” that establishes the trust relationship between the legal entity of the company, its managers (board of directors), and its owners (shareholders).

One of the most distinctive features of joint stock companies is the separation of ownership and management. Shareholders (owners) do not manage the company themselves; they delegate this authority to the board of directors. This separation creates a risk known as the “agency problem.” The board of directors may prioritize its own interests over those of the company, use resources inefficiently, or manipulate financial statements. The concept of auditing is the most powerful mechanism that minimizes this agency problem and has a deterrent and corrective effect on the board.

Philosophical and Economic Foundations of Auditing

Auditing is not only a legal obligation but also an economic value. A company that is audited is considered more reliable in the market. Investors, banks, and suppliers apply a lower risk premium to a company whose financial statements have been independently audited. This reduces the company’s cost of accessing finance. Therefore, auditing is a tool that increases a company’s “reputational capital.”

The core elements of auditing can be grouped into four categories:

• Compliance Audit: Checking whether activities comply with laws and internal regulations.
• Financial Audit: Examining whether financial statements reflect reality and comply with accounting standards.
• Performance Audit: Evaluating how efficiently managerial decisions are made and whether resources are used optimally.
• Risk Audit: Identifying and managing risks (financial, operational, legal) that may threaten the company’s existence.

Fundamental Principles of the Audit Process

For auditing to be effective in joint stock companies, certain principles must be implemented. The foremost is independence. The auditor must not have any organizational, financial, or personal ties with the company’s board or controlling shareholders. If the auditor receives instructions from management, the process is not an audit but merely an “approval mechanism.”

The second principle is objectivity. The auditor must base conclusions solely on data and law, free from emotions and bias. The third principle is transparency. Audit results must be reported in a way that shareholders can access and, when necessary, be discussed at the general assembly.

Auditing and Corporate Governance

Auditing is at the center of “corporate governance” principles. Corporate governance is built on four pillars: fairness, transparency, accountability, and responsibility. Auditing supports all four. Accountability can only be proven through auditing. A company claiming “we are accountable” must demonstrate this in audit reports.

Transition from Traditional to Modern Auditing

In the former legal system, auditing was mostly a formal review. However, in today’s global economy, companies are much more complex. Auditing is no longer limited to asking “Does the cash balance match?” Today, auditing has evolved to include sustainability, environmental and social responsibility, digital risks, and cybersecurity threats.

Auditing acts as a mirror for a company. When management looks into that mirror, it should see its true financial and operational condition. A broken mirror or refusal to look into it is one of the strongest indicators of impending failure. Therefore, auditing should not be seen as a bureaucratic burden but as a legal form of hygiene that improves corporate health.

Types of Auditing

Due to the complexity of joint stock companies, diversity of risks, and conflicts of interest between shareholders and management, different types of audits have emerged. Classifying audits according to their scope, timing, and the identity of the auditor allows a deeper understanding.

1. Types of Audit by Scope of Application

Financial Audit

This is the examination of financial statements (balance sheet, income statement, cash flow statement, equity changes) for compliance with accounting standards and whether they present a true and fair view. It is conducted by independent auditors and results in an audit opinion (unqualified, qualified, adverse, or disclaimer).

Operational Audit

This goes beyond financial data and evaluates whether business processes (production, sales, HR) are efficient and effective. It provides strategic recommendations to management, such as reducing waste or analyzing return on investment (ROI).

2. Types of Audit by the Auditor

Internal Audit

Conducted by internal units reporting to the board or audit committee. Internal auditors are employees but must remain professionally independent. It is a self-improvement mechanism for the company.

External (Independent) Audit

Performed by independent audit firms authorized by regulatory authorities. It verifies the accuracy of publicly disclosed financial information.

Public (State) Audit

Conducted by the state for public interest purposes (tax audits, regulatory inspections, competition authority reviews). It is backed by legal sanctions.

3. Types of Audit by Timing

Preventive Audit

Conducted before a transaction occurs, such as budget approval before spending. It prevents errors before they occur.

Concurrent Audit

Performed while processes are ongoing, monitoring daily compliance.

Retrospective Audit

Conducted after activities are completed, such as annual audits, aiming to identify past errors and prevent recurrence.

4. Types of Audit by Scope

Full (General) Audit

A comprehensive examination of all company operations. It is costly but provides a complete picture.

Limited (Special) Audit

Focused on a specific issue, department, or suspected irregularity.

Complementary Nature of Audit Types

Effective auditing requires combining these types. Without internal audit, external audit alone is insufficient. Without operational audit, financial audit cannot explain performance issues. Modern companies use a “three lines of defense” model:

1. Operational management
2. Risk and compliance units
3. Internal audit
   External audit serves as the final assurance layer.

Legal Dimension under Turkish Commercial Code (TTK)

The Turkish Commercial Code No. 6102 transforms auditing into a tool of corporate quality, aligning it with EU directives. It replaces traditional “auditors” with professional independent auditors, ensuring higher standards, independence, and accountability.

Auditors must assess not only financial accuracy but also internal controls and going concern risks. Audit reports have significant legal effects and are essential for general assembly approval.

Auditors are selected by the general assembly, subject to independence safeguards and rotation principles. They have strict confidentiality obligations and liability for negligence or fraud detection failures.

Independent Audit

Independent audit is the highest level of auditing under the TTK. It provides reasonable assurance that financial statements are free from material misstatement.

Auditors do not guarantee absolute accuracy but provide reasonable assurance based on sampling and professional judgment.

Audit Process:

• Planning
• Execution
• Reporting

Audit Opinions:

• Unqualified opinion
• Qualified opinion
• Adverse opinion
• Disclaimer of opinion

Going concern assessment is a critical part of independent auditing.

Independent audit enhances credibility, reduces financing costs, and increases market value.

Special Audit

Special audit is an exceptional and targeted audit mechanism designed to investigate specific suspicious transactions or events.

It is primarily a minority shareholder protection tool.

Initiation:

• Requested at the general assembly
• If rejected, shareholders holding at least 10% (5% in public companies) may apply to court

Court Appointment:

The court appoints an independent expert auditor if justified suspicion exists.

Powers:

Special auditors can examine all company records and transactions.

Legal Effect:

Their reports serve as strong evidence in lawsuits and dismissal procedures.

Cost:

Costs are borne by the company or responsible management if wrongdoing is proven.

Difference Between Independent and Special Audit

• Independent audit: general and periodic
• Special audit: specific and ad hoc
• Independent audit: financial reliability
• Special audit: managerial misconduct investigation

Special audit is the final safeguard of shareholder democracy.

Conclusion

Auditing is the central mechanism that ensures trust, transparency, and accountability in joint stock companies. The system established under TTK makes auditing not just a legal obligation but a cornerstone of modern corporate governance and economic stability.