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Accounting audit: what is it and what is it necessary for

Accounting audit: what is it and what is it necessary for

PUBLICATIONS \ 20.07.2020

Organizations that carry out their activities are obliged to maintain accounting records and to draw up accounting reports. This requirement is enshrined at the statutory level and applies in respect of all economic entities, with the exception of business subdivisions of foreign companies and individual entrepreneurs.

Any transaction expressed in monetary terms (for example, the purchase of equipment or the payment of salaries to employees) should be recorded and documented. And the ultimate goal of accounting will be the drawing up of accounting reports reflecting information about the company’s activities, its material position and performance figures.

However, in practice, no one is perfect, and the presence of errors in the reporting may entail a violation of the principle of reliability, considerable risks and consequences for companies. Therefore, organizations conduct audit of accounting reports to minimize such risks and solve a number of other issues. Acsour’s specialists answer the question: “What is an accounting audit necessary for, and how can it be useful?”

The concept and essence of an accounting audit

Accounting audit is a special form of inspection of organizations, in which an expert examination of accounting records is carried out, an analysis of the compliance of all business transactions with the legislation of the Russian Federation and the correctness of their reflection in the reporting.

The main purpose of the audit is to express an opinion on the reliability of the company’s financial statements, and its main condition is the independence of the auditor’s opinion. Its formation is influenced by the principle of reasonable assurance in the accuracy and reliability of reporting, which the auditor is guided by during the audit. At the same time, the probability of detecting misstatements is affected not only by the methods used by the auditor, but also by the process of organizing and maintaining accounting records, as well as the quality of work of the Internal Control Department of the audited company. Therefore, the auditor is responsible for expressing an opinion, and the organization is responsible for drawing up and presenting the reporting. As you can see, these two factors are highly correlated to each other.

The auditor decides which quantitative and qualitative misstatements in the reporting are considered significant and which are not, setting a certain standard of “significance in the audit”. The lower it is, the higher is the risk of error when forming an auditor’s report. The probability of an audit error depends on:

– the nature, scope and time frames for planned procedures

– the amount of figures (assets, liabilities, income and expenses, capital structure, etc.) chosen for inspection, and their impact on the company’s activities.

Independent expert examination of accounting reports is not the only reason why companies order an audit service. For some organizations, this service is a confirmation of economic solvency before partners. For others – it is an excellent method of controlling and reducing risks, because the information obtained during the audit allows chief executives to form a correct opinion about the results of the organization’s work and make further decisions about the ways of its development. The audit also performs such tasks as:

  • assessment of the level of accounting records and professional competences of employees at the enterprise;
  • identification of promising areas of the company’s activities;
  • determination of the reserves for the company’s financial growth, and others.

The audit procedure has the following characteristics:

  • confidentiality of information received in the course of business interaction with the client;
  • guarantee of independent assessment, honesty and impartiality;
  • professional competence and integrity of the auditor.

Therefore, accounting audit allows to solve a different range of tasks that companies set for themselves. And the presence of special characteristics of this procedure guarantees the effectiveness of the result. 

Types of accounting audit

Accounting audit is divided into an internal and an external ones.

Internal audit is aimed at improving the company’s performance, assessing and reducing risks, and increasing the profitability of business processes.

Such inspections are carried out by special divisions of the company and may cover all sections of accounting, or some of its areas, such as payroll accounting, cash transactions or operations on inventory accounting, etc. An internal audit service is designed to perform control, research and information, methodological and advisory functions, which are described in more detail in the table below.

Internal audit functionContent of function
Control function– comparison of the company’s business processes with its goals – control over compliance with the procedure for conducting business transactions for internal regulations – inspection of compliance with legislative and statutory requirements in maintenance of accounting records and drawing up of reporting – assessment of the expediency of managerial decisions made based on the results of the inspection – interaction with external auditor and supervisory authorities.
Research and information function– informing management about the results of the inspection – expert examination of managerial decisions – analysis of the execution of plans and the movement of internal flows of assets of the company – detecting of faults in the risk management system
Methodological and advisory function– drawing up of internal accounting methods and their analysis for compliance with the requirements of accounting and tax legislation – analysis of the effectiveness of maintenance of management accounting (if available in the company).

The frequency of conducting of an internal audit is established by the company’s internal regulations. The inspection may be either constant (on a daily or weekly basis) or periodic (for example, once a year before submitting accounting reports). However, this procedure is recommended to be performed quarterly. This will contribute to detect and rectify errors in a timely manner, correctly reflect transactions in accounting, and make payments. Conducting an audit is confirmed by the drawing up of a report, which will be transfered to management for further decision-making.

External audit can be mandatory and voluntary. Mandatory audit differs from internal audit in the fact that it is conducted by a third-party audit firm every year and is mandatory for those companies that meet at least one of the following criteria:

  • the company’s organizational and legal form is a joint-stock company;
  • the company’s securities are eligible for on-exchange trading;
  • line of activity is credit, insurance or clearing companies, credit reference bureaus, mutual insurance associations, trade organizers, non-State pension or other funds, incorporated investment funds, management companies of incorporated investment, unit investment funds or non-State pension funds;
  • total revenue from sale of goods (performance of works, providing of services) at the end of the year preceding the reporting year exceeds 400,000,000 rubles or the volume of balance sheet assets over the same period is more than 60,000,000 rubles;
  • companies submit and (or) publish consolidated financial statements; 
  • an obligation to conduct an audit in accordance with other federal laws.

This list is not exhaustive. Each year, the Ministry of Finance of the Russian Federation publishes information on its official website specifying the cases of conducting an audit of accounting reports for the previous year.

In all other situations when an audit is not mandatory, companies can conduct it on a voluntary basis. The concept of a voluntary audit is not provided for by Russian legislation, but in practice this interpretation is more often used. It (voluntary inspection) may be carried out in the following cases:

– detecting and correcting of violations, as well as reducing the risk of being fined

– change of the chief executive or chief accountant

– business reorganization, opening or closing branches of the company

– presence of doubts in the correctness of maintenance of accounting records and professional qualifications of employees

– assessment of efficiency of resources use.

Third parties can also initiate a voluntary audit such as public authorities, business partners, credit organizations, etc.

The key difference between a voluntary audit and a mandatory one is that it is conducted by decision of the management or owners of the company at a general meeting of LLC participants or JSC shareholders. Otherwise, the procedure for conducting an audit on a voluntary basis is carried out in the same way as a mandatory audit: in accordance with the established standards of audit activities.

Methods of audit

Conducting of an external audit may be performed using the following methods:

  1. Complete method. This is the most accurate, but also the most labour-intensive method. When using it, all the source documentation for the selected period is inspected. Data on it is systematized and checked with the accounting and reporting registers.
  2. Sampling method. The basic source documents that were chosen using a point selection will be inspected. Data may be chosen from a table of random numbers, by intervals (for example, every 5th or 10th document), or in a combined method.
  3. Combined method. This method consists of a combination of a use of elements of complete and sampling audit. It is more expedient to use the complete method to study the sections with the highest degree of risk, and it is more appropriate to apply sampling for simple and typical operations that the company performs most often (for example, cash transactions). It is the combined method that is most often used by auditors in practice.

When choosing a certain method, the auditor should be sure that the methodology used will allow to sufficiently obtain proper audit evidence that affects the audit and the drawing up of the auditor’s report.

Stages of the conducting of an audit

In general, the audit procedure may be divided into three parts: planning, conducting and summing up subsequent to the results of the audit.

The first stage consists in preparation for the conducting of an audit, when the auditor:

– acquaints with the activities of the audited company

– studies its industry characteristics, financial status, organization of internal control and the level of automation of accounting processes

– acquaints with materials about the client’s financial liabilities and legal proceedings (if available)

– assesses the scope and labour inputs of forthcoming works.

After that, the parties conclude a contract for the provision of audit services. Then, the overall audit strategy is determined and a plan for forthcoming works is drawn up. When developing an overall strategy, the specifics of the audit engagement are taken into account, and the nature, time frames and volume of resources necessary for conducting the audit are set. When drawing up the plan, the schedule of the inspection, the members of the audit team, the scope and time frames of planned audit procedures are formed. Also, at this stage, the degree of the audit risk and the level of materiality are determined.

The second stage consists in the direct conducting of the audit, during which the audit evidence is collected, analyzed and assessed. During the inspection, the auditor acts on the basis of the chosen method and applies the following procedures:

  • recalculation (allows to assess the correctness of arithmetic calculations when accounting);
  • inventory (allows a clear understanding of the actual presence of the company’s property);
  • inspection the accounting methodology and documentation (allows to determine the order and correctness of works performed by the Accounts Department);
  • verification of documents (allows to assure of the reality of operations perfomed);
  • analytical procedures (inspection and comparison of financial information with data from previous periods). 

The third stage is the final one. Based on its results, the specialist draws up a report specifying violations and all necessary actions to correct them, as well as forms an auditor’s report expressing an opinion on the reliability of accounting reports. An opinion may be unmodified or modified.

An unmodified opinion may be obtained by the company if the financial statements figures are presented correctly and no violations were detected based on the results of the audit. The presence of the second category of opinion indicates the opposite situation – if there were flaws and misstatements in the conduct of business activities, drawing up of the reporting (a qualified opinion or negative opinion), or the auditor is unable to obtain evidence confirming or excluding the presence of material misstatements (disclaimer of opinion).

If a company passes a mandatory audit, it should submit the report on it and annual accounting reports to the tax authorities in electronic form. If the report is not ready for this period, it should be submitted within 10 working days from the day following the date of signing, but not later than December 31.

Also, this report should be entered in the Unified Federal register of information about the facts of legal entities’ activities (Russian acronym – Fedresurs) within three days after signing. To do so, it is necessary to obtain an electronic digital signature (EDS) in one of the certification authority from the list on the Fedresurs website.

If the organization does not provide an auditor’s report, it may face administrative liability.

Liability for failure to provide an auditor’s report 

There are no liability for failure to conduct an audit with respect to companies for which this procedure is mandatory as required by the Russian legislation.

However, when submitting annual accounting reports, organizations should indicate whether it is subject to mandatory audit. And if it turns out that companies are obliged to pass it, but the auditor’s report will not be available when submitting accounting reports, the administrative code provides for the following types of punishment, which are described in more detail in the table below.

Grounds for punishmentLiability
Failure to submit an auditor’s report to the tax authorities within the prescribed time limit.Imposition of a fine (article 19.7 of the Administrative Code of the Russian Federation): – for officers – a fine of 300 – 500 rubles – for legal entities – a fine of 3,000 – 5,000 rubles.
Unavailability of an auditor’s report for the established periods of document retention (5 years).Imposition of a fine on officers in the amount of 5,000 – 10,000 rubles (article 15.11 of the Administrative Code of the Russian Federation). For repeated violations the measures of punishment for officers are increased: – a fine of 10,000 – 20,000 rubles – or disqualification for a period between one and two years.
Late placement of the auditor’s report in the Fedresurs.Imposition of a fine on officers in the amount of 5,000 rubles (article 14.25 of the Administrative Code of the Russian Federation).
Failure to submit the auditor’s report to the Fedresurs.Imposition of a fine on officers in the amount of 5,000 – 10,000 rubles (article 14.25 of the Administrative Code of the Russian Federation). For repeated violations, the measures of punishment are increased: – a fine of 10,000 – 50,000 rubles – or disqualification for a period between one and three years.

Even if a company paid a fine, it is obliged to obtain auditor’s report. Otherwise, it will have to pay a fine again according to the article 15.11 of the Administrative Code of the Russian Federation.

We would like to draw your attention to the fact that in connection with the issuance of the administration bill on amendments to the Administrative Code of the Russian Federation to the public hearing, liability for the late submitting of the auditor’s report may be increased. Subsequently, with the introduction of article 29.28 in the Administrative Code, companies will face liability in the form of a fine.

  1. For violation of deadlines for submission of accounting reports and / or auditor’s report to the tax authorities:

– not more than 10 days – a fine of 5,000 – 10,000 rubles

– from 10 to 30 days – a fine of 20,000 – 30,000 rubles

– more than 30 days – a fine of 300,000 – 500,000 rubles.

  • Failure to submit an auditor’s report is subject to a fine of 500,000 – 700,000 rubles.

Accounting outsourcing

The audit procedure is good because it allows to assess the correctness of maintenance of accounting and drawing up of reporting with a fresh perspective, and the auditor himself or herself fully concentrates on inspection of documents.

We also mentioned earlier that the auditor’s opinion will be influenced by the principle of assurance in the reliability of reporting. That is, if the accounting process is organized  properly, and the reporting itself is drawn up correctly, then the probability of presence of violations in it may be minimized. But, it is known that the work of an accountant involves solving a vast range of issues, therefore it is possible to lose sight of some things owing to the human factor and make an error.

An alternative solution in this situation is accounting outsourcing, which provides:

  • setting up, restoring, maintaining and checking accounting records;
  • drawing up of accounting reports;
  • checking of tax accounting;
  • consulting on financial and tax accounting issues;
  • automation of accounting and implementation of information technologies in the process, and others.

Also, when ordering this service, outsourcing companies:

  • take into account the preferences of clients and their interests. In other words, minimizing the company’s risks and correcting errors is an important goal not only for the organization, but also for the accounting service provider;
  • help with the choice of auditing companies to conduct the audit procedure
  • guarantee the quality of services provided and are responsible for them

Acsour is a team of professionals who meet the above criteria and have all the necessary competences in maintenance of accounting records and drawing up of reporting. We are also ready to advise you a list of auditing companies that have proven to be reliable suppliers of audit services in the market. The factors such as experience in conducting audits in your industry, competitive ability, membership in the register of audit organizations, and so on will be taken into account during the selection. This will allow you to make sure of the quality of services provided and the accuracy of the result.

Ekaterina Lutenko

Internal Auditor