In accordance with Russian legislation each company is required to maintain accounting records regardless of what industry the company operates in, how many full-time employees and subsidiaries it has. Some organizations are also legally bound to conduct an independent accounting assessment. This requirement is related to the specifics of economic activity.
Checking accounting is not only a tribute to legal requirements. It allows you to objectively evaluate the company’s state of affairs, get reliable and comprehensive information about the success of the business. Therefore, it is carried out on one’s initiative, even by those enterprises who are not legally bound to do it.
Who is legally bound to regularly conduct accounting expert assessment? For example, large companies whose financial affairs affect a large number of people and organizations. These may be public joint-stock companies, financial and insurance companies, or companies with an annual revenue of more than 400 million rubles. Such companies are required to undergo an independent audit of accounting and reporting annually. In addition, they submit the auditors’ report toFederal State Statistic Service.
Goals of independent accounting audit:
- checking the data correctness obtained from Finance Department;
- identification and elimination of violations and inaccuracies in documents;
- assessment of the organization’s market value;
- identification of tax, financial or legal risks.
It is necessary to assess business’ market value in order to conclude contracts with investors. This is the first information that will be requested by people planning to invest in the company. In addition, managers themselves need to know the market price in order to plan strategy and business development.
Methods of evaluating accounting correctness
To check the reliability of accounting indicators, you need to study the primary documents and records in the accounting registers. There are several ways to perform this check: solid or selective. Before starting the examination, the auditor requests preliminary information from the company and determines which method is required basing on it.
Solid method implies that the specialist will examine all documents and records in the accounting registers for certain period. In particular, the auditor will be interested in:
- operations for registering and de-registering funds and assets;
- payments to social, state funds and services;
- settlements with suppliers, buyers, and clients;
- cash and banking operations.
However, the auditor may request a wider range of documents if it deems it necessary.
The selective method is used more often, it is not so time-consuming and requires less time. It assumes that the auditor will study only part of the primary documentation. But if during the examination he/she finds serious flaws, errors, violations, the auditor will start a continuous check. Auditor is also entitled to withdraw documents confirming abuse or concealment of profits or objects from taxation.
Who conducts the accounting audit
Not every company or specialist has the right to check correctness of accounting and reporting, even if they have sufficient qualifications. This work requires high qualifications, as well as official permits. The law imposes strict requirements on auditors and audit organizations. The inspection company must be a member of the SRO, as this confirms the competence.
Another important requirement is the independence of expert and company that conducts audit. If the auditor is not independent from the legal standpoint, it does not have right to analyze reports. In what cases we cannot talk about the independence of auditors?
- Expert holds one of the leading positions in the audited organization or acts as a founder.
- Auditor is directly or indirectly responsible for accounting in the company that is undergoing the examination.
- Heads of audit company – relatives of the founders, chief accountant, or other employees of the Financial Department of the audited company.
- Organization has been doing accounting for a company that needs audit for the past few years.
Work of experts is controlled not only by law, but also by auditors’ code of professional ethics. It establishes the basic principles of behavior of specialists who analyze and evaluate documentation. The code obliges experts to be honest and objective, as well as to respect confidentiality.
How audit is conducted
Verification of accounting and reporting correctness takes place in several stages.
First, the auditor gets acquainted with the company’s activities, develops an examination plan, and negotiates it with the company’s management or representatives who are responsible for the audit. After all details are agreed, they determine the terms of cooperation and conclude a contract that specifies the scope of work, terms, and cost.
Next stage is analysis of documents: balance sheet, explanatory notes, and primary documentation. The auditor can also examine constituent documents, tax returns, and much more. He must make sure that all forms of accounting statements are available and that they do not contradict the law and internal regulations of the company. Additionally, the specialist analyzes the extent to which documents reflect the financial situation of the company.
In conclusion, the specialist summarizes the results and issues an official document: an audit report. It must specify the addressee and other key information:
- name, general state registration number, address of the company that has passed an independent examination;
- information about the auditor;
- list of verified documents and a description of the work performed;
- expert opinion on the reliability of the financial statements, specifying the circumstances that have or may have a significant impact on the reliability of the information.
The form of report and its content regulate standards of audit activity. This is an official document that can be requested by regulatory authorities. And if for some reason there was an audit, but the company cannot provide an auditor’s report, this is considered a violation.
Checking reliability of accounting and reporting helps to detect errors in accounting, to reduce or completely eliminate financial risks. Therefore, business owners are recommended to invite experts if there are suspicions that the accounting statements may not comply with current legislation. In addition to identifying errors and possible risks, the specialist will also give recommendations on how to improve the company’s accounting and financial affairs.
If organization is not legally bound to pass audit, but is planning a major transaction or attracting investment, experts recommend inviting external auditor. This will help not only create a meaningful image of the company for a potential investor or buyer, but also improve the image of the business.