Audit of accounting and reporting organization

Jun, 11 2020

Audit of accounting and reporting organization is designed to create an impartial view of documents’ reliability as well as information reflected by them. The law obliges legal entities to keep records and keep financial statements, so that the company will be able to provide them to partners, auditors, and employees of regulatory authorities if it is necessary.

Public authorities, including tax inspectorate, are mostly interested in accounting reports. However, managers and owners of the company may have the same interest in them. Reliability of reports is an important aspect of any organization’s activity. The goals of audit can also include understanding the organization’s system. This helps to avoid risks affecting the reliability of financial accounting statements in the future.

While the examination is held, an auditor responsible for the procedure shall make sure that the accounting system of business activities is reflected properly in the documents and there are no inaccuracies or distortions. Commonly, a whole set of information sources is used in this case. However, the examination is not necessary to be continuous: the controlling specialist is not required to view all the available documents. Generally, auditors work with selected documents:

  • financial statements;
  • tax returns;
  • incorporation documents;
  • licenses and permits;
  • primary accounting documentation;
  • staffing and job descriptions;
  • acts on the results of tax audits;
  • orders for the HR Department;
  • business contracts;
  • reconciliation statement;
  • inventory lists and much more.

If necessary, the auditor can conduct an oral interview with the company’s employees. The list of documents required for examination is usually made in advance. It is sent to the company that is planned to be checked, so that it can prepare for the audit.

The audit of accounting and reporting is conducted in accordance with the rules and requirements stipulated by civil and financial legislation. What are the main legal acts regulating the audit of legal entities? First of all, this is a number of Federal laws:

  • «On auditing»;
  • «On accounting»;
  • «On joint-stock companies»;
  • «On limited liability companies».

Specialists are also guided by the order of the Ministry of Finance “On approval of the accounting plan for financial and economic activities of companies” and international standards on auditing. The work of audit organizations and specialists is regulated by a separate Annex to the letter of the Ministry of Finance, which contains detailed recommendations for those who check the annual accounting statements.

This is an incomplete list of laws and regulations that govern audit. The specialist who checks the documentation can also be guided by other legal sources. The list reflects only the basic legislative acts. The auditor’s actions must not contradict these laws and orders.

Audit of the state of accounting: methodology

The audit methodology implies practical ways of examining and analyzing documentation in order to form an impartial view of financial statements’ reliability and correctness.

Commonly, examination methods are listed in internal documents and regulations of audit companies. They include analytical procedures aimed at checking the turnover and account balances, evaluating the accuracy of transactions’ reflection and the balance of funds in accounts. Regulations also usually state a list of standard violations under the audit program section and other audit procedures.

The auditor who examines the company’s financial statements is responsible for selecting the methods and forms of examination necessary in a particular case. The chosen strategy and tactics for analyzing documentation may include methods of organizing examination and, separately, methods of obtaining audit evidence. In the first case, we are talking about such types of examination as continuous or selective, documentary, or analytical, actual, or combined.

During the audit, specialists normally use several methods at once. Mostly, auditors use the following strategies of documentation research:

  • Continuous method. When using this method, all primary financial (accounting) documentation, compared with data from analytical accounting registers, is subject to detailed and careful examination. The next step when using the solid audit method is to compare register data with the turns and balances of synthetic registers. This method, on the one hand, is characterized by sufficient accuracy, but on the other hand, it is very time-consuming: its use in the audit of large companies and banks is impractical.
  • Selective method. In this case, we are talking about a random check of the company’s documentation, not a full audit. However, the effectiveness of such examination will depend on the clarity of selection. Data can be selected, for example, by using random number tables or in a combined way.
  • Combined (mixed) method. It involves the use of both selective and continuous audit mechanisms: in this case, the continuous mechanism is used for analyzing the riskiest areas, and the selective one is used for analyzing typical operations performed by the company on a regular basis.

The specialist who conducts the audit must provide unbiased evidence of the detected violations or mistakes. He can use the following procedures to do so:

  • Inspection. This method implies that the auditor analyzes and examines documents, acts, records, and tangible assets of the company. At the same time, he is particularly interested in the reliability of inventory documentation. He makes sure that tangible property indicated in documents actually exists, and the financial liabilities reflected in the documentation are real. Specialists also check whether inventory lists match the forms.
  • Requests. The method involves searching additional information. The auditor makes requests to third parties. Usually these are banks, debtors and creditors, tenants, landlords and other contractors of the company.
  • Recalculation. It consists of checking the accuracy of calculations in accounting records and primary documents. Another version of recalculation implies that the auditor independently recalculates all the key positions in the reports.

Other methods are often used for examination; however, the audit final stage remains unchanged: it involves analysis of mistakes detected during examination, calculation, and analysis of their impact on the reporting.

Audit of the state of accounting and reporting: stages

The audit procedure of the company’s financial accounting and reporting is carried out in several stages:

  1.  Preliminary stage

The procedure starts with preparation. The company that is being checked provides the auditors with detailed, complete information about its activity and state of affairs. Why is it necessary before the audit starts? Based on the data obtained, specialists should determine the scope of work, potential risks, as well as one of the most important issues for the company: the cost of services. Therefore, at the preliminary stage, a number of factors are considered and fixed.

  • organizational peculiarities;
  • internal control system;
  • level of activity’s automation, including accounting;
  • information about the liabilities and company’s financial position, its solvency;
  • geographical and professional characteristics of the work, including tax legislation and region conditions;
  • presence of lawsuits against the company.

As a result of collecting information, the auditor sends the company a letter of verification. This is a mandatory stage provided for by international standards. The content and form of the letter may change depending on the specifics of the audit. When the company and the auditors agree on the terms, conditions, price, and other aspects of the audit, they are required to enter into a contract. Only then the preliminary stage cam be considered complete and it is possible to proceed to the next step.

  1. Planning

This stage is necessary for examination qualitative. Audit planning can take about 20% of the total audit time and includes preliminary planning, preparation and preparation of the audit plan, and preparation of the audit program.

The planning stage considers the specifics of the company’s activity being audited, the accounting system, internal control, time costs depending on the volume of operations performed and the degree of automation of accounting systems, etc.

In agreement with the audited company, the audit schedule is drawn up, and the experts who are part of the audit group are assigned. Next, a program for the upcoming audit is created. It should include the audited goals of the financial statements and the time within which the procedure should be performed.

  1. Conducting an audit

The third stage is the main one and consists directly of company’s accounting and reporting. It consists of collecting, evaluating, systematizing, and analyzing audit evidence in relation to the company being audited.

The audit is carried out on the basis of Federal standards and regulations of the audit company performing the audit. During this stage, an inventory inspection, general inspection, document examination, and other analytical procedures are performed. However, the purpose of using analytical procedures is to detect incorrectly reported facts that require more careful analysis.

  1. Drawing up a conclusion

The final stage of audit is preparation of an audit report. This is the main document that the company receives after a detailed examination of its documentation. It also indicates that the audit was conducted, and without it, the regulatory authorities will not take the results of the audit into account. Therefore, based on the results of the audit, the auditor prepares a written summary of information that contains an opinion on the reliability of the company’s financial statements.

The law provides for several types of audit reports. For example, this document may be unmodified. This means that all reporting registers of the company accurately reflect the financial position and results of operations. There is also a modified conclusion. It is issued when there are significant factors affecting the auditors, or when the checking specialist is not able to obtain evidence of the reliability of the company’s accounting statements.

We should also mention the auditor’s report with a disclaimer of opinion. If a specialist has prepared such a document, it means that they have not received evidence on which to base their opinion.

The audit is completed when the auditor describes the procedure of recording business transactions in accounting registers, specifies the forms and methods used for summarizing information, and the procedure for preparing financial statements. The auditor is also required to identify critical areas of accounting. These are areas with a high risk of mistakes and misrepresentations. Finally, the specialist is required to bring the means of control provided for specific areas of accounting.

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