An audit is a review of annual statements by persons not related to those who were involved in their preparation. The result of the annual audit of the financial statements will be a written opinion of the auditor on their reliability.
The form of such a conclusion is, in fact, a brief conclusion about the results of the work: whether the reporting is fully, partially, unreliable, or it was impossible to obtain such a conclusion due to circumstances beyond the control of the auditor (which are given in the text of the conclusion)
In the material, we will consider why an audit of annual financial statements is needed and how it is carried out.
Why do you need an audit of financial statements?
The statutory audit is regulated by clause 1 of Art. 5 ФЗ dated 30.12.2008 No. 307-ФЗ “On auditing” and is required, including from the following organizations:
- joint stock companies (subparagraph 1 of paragraph 1 of article 5 of the Federal Law of December 30, 2008 No. 307-FZ “On Auditing”);
- organizations whose revenue exceeds 400 million rubles. or the amount of assets exceeds 60 million rubles. (subparagraph 4 of paragraph 1 of article 5 of the Federal Law of December 30, 2008 No. 307-FZ “On auditing”), or constituting consolidated statements (subparagraph 5 of paragraph 1 of article 5 of the Federal Law of December 30, 2008 No. 307 -FZ “On Auditing”);
- developers who raise funds from participants in shared construction (clause 5 of article 3 of the Federal Law of December 30, 2004 No. 214-FZ);
- unitary enterprises in cases determined by the owner (clause 1 of article 26 of the Federal Law of 14.11.2002 No. 161-FZ “On state and municipal unitary enterprises”);
- self-regulatory organizations (clause 4 of article 12 of the Federal Law of 01.12.2007 No. 315-FZ “On self-regulatory organizations”);
- housing savings cooperatives (clause 1 of article 54 of the Federal Law of 12/30/2004 No. 215-FZ “On housing savings cooperatives”).
Therefore, for such organizations, a statutory audit is necessary to comply with legal requirements. But the benefits of auditing don’t stop there. Errors in accounting statements, which, according to official rules, are recognized as immaterial to change an unconditionally positive conclusion in the auditor’s report, may be important to the organization that conducted the audit.
For example, almost all amounts of underpayment of taxes, or, conversely, cases of their overpayment, can be important for an organization.
Also, the “outside view” of the financial statements, which is essentially the view of the auditor, can be extremely useful in organizing accounting and control over the conduct of business transactions, because deficiencies that have not yet led to a material error or other difficulties can lead to those in the future and further to undesirable consequences that could have been avoided.
Examples would be:
- organization of accounting and inventory of inventories;
- organization of document flow and execution of personnel records;
- compliance with the requirements of the labor or civil code, currency legislation.
An organization that is not sufficiently large in terms of revenue or assets, for which an audit is not mandatory, is often not performed. As time passes, their indicators grow and they are faced with the need to conduct an audit. In such companies, due to their previously small size, most likely, there was no internal monitoring, not only in terms of the reliability of reporting and compliance with the legislation applicable to them, but also monitoring the quality and effectiveness of the applied methods of accounting and control.
In the regime of extreme limited time after the end of the reporting year, such an organization may face the fact that its reports contain significant errors.
Therefore, before the need for a statutory audit arises, it is advisable for an organization to obtain an independent professional view on the methods of accounting, drawing up reports, calculating taxes and exercising control within the organization. This does not even require conducting an audit and obtaining an audit opinion. Such a professional view of financial statements can be obtained in another form:
- for narrowly focused and already formulated questions, these can be consultations on the basis of a subscription;
- or the audit company has followed clearly defined procedures agreed with the organization;
- for a wider range of tasks – performing an overview check of one or more sections of accounting and reporting, as well as tax calculation.
Such forms of work are likely to take less time than audits, which means they will also cost less. At the same time, work can be carried out at the most convenient time for the organization during the year, when there is no maximum load, which will allow for more effective interaction to obtain the most complete effect.
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How is accounting audited?
To reduce the costs of the organization for such an audit, the audit standards provide for the study of not every business transaction and document, but part of them. The selection of transactions and documents is made in such a way that a possible error, if it would not have been identified due to the sampling approach, would not affect the opinion of the likely user of the reporting.
Verification of transactions may include not only examining whether the transaction is recorded in accordance with the documents supporting it, but also analyzing the procedures for conducting transactions. Often, such an analysis allows you to identify an accounting defect that can lead to an error of a certain nature. A targeted search for such an individual error helps to identify it even before the partial verification begins.
There is one really tricky aspect to note here. The volume of business transactions for the specified partial check may be several times less than the volume of all transactions in the organization. And the larger the organization, the smaller the proportion of operations that are audited by the auditor. If the auditor checked all or almost all operations, then the composition of the audit team would have to be comparable with the number of employees of the organization who participated in their recording, and also the time for such a study should be comparable with the time spent by employees of the organization. Therefore, for such large volumes, mathematical statistics begins to “work”, when in order to obtain a conclusion about all operations in the financial statements, it is enough to check a relatively small part of them.
In this case, the checked number of operations is calculated in such a way that the conclusion drawn on the basis of the checked part of operations would statistically apply to all operations. The use of this approach means that the conclusion regarding all operations, made on the basis of a relatively small part, is also subject to the rules of probability theory, and therefore guarantees its infallibility also with a certain degree of probability. The official audit rules contain requirements for this level of confidence and guarantee that it is sufficiently high, although not one hundred percent (International Auditing Standard 530 “Audit Sampling” was put into effect in the Russian Federation by Order of the Ministry of Finance of Russia dated 09.01.2019 No. 2n).
For example, in some public joint stock company there may be millions of transactions per year, which are performed by a huge number of employees. At the same time, not all such operations are checked by the auditor during the accounting audit, but only a part (otherwise, the time of such an audit would take many months). In this case, the difference between the sum of verified transactions and the sum of all transactions (that is, the sum of unverified transactions) will be significant. But the number of selected transactions for validation, combined with sampling techniques, ensures that there is a high probability that there is no significant error in the unverified transactions. If an error is found, such cases are considered individually to determine whether such an error is repetitive, or it was an isolated case. For recurring errors, their total error for the year is calculated.
Alexander Titov
Senior expert consultant on audit, financial and management accounting
Before starting to define a part of operations for research, the auditor is required to perform preliminary work. This work, in particular, includes checking the fulfillment of the ratios of the totals for different groups of accounting transactions. This is control over the fulfillment of a kind of expectations based on an understanding of the specifics of the organization’s business, the accounting rules applied and the auditor’s knowledge of the legislation applicable to the organization. If any ratio is not met, the auditor marks this area for further study. This, or top-down approach, helps to highlight areas that might contain error. The auditor also identifies areas or types of business transactions that, based on the auditor’s practical experience or due to their complexity, may contain an error. Such areas are also considered separately.
If errors are found, the auditor reports them, sometimes even during work, and then the organization has the opportunity to make corrections immediately after the accounting audit or leave everything unchanged. The auditor, in accordance with the requirements for the auditor’s report, assesses whether the remaining errors are material, and accordingly forms the text part of the auditor’s report.
