Audit of accounting (financial) statements

Contents:

• When are financial documents audited?
• Procedure for accounting audit of limited liability companies (OOO)
• What is examined by auditors?
• Sanctions for failure to examine financial statements

Accounting audit is intended to ensure accuracy of financial statements, which are prepared according to the results of a calendar year. It should provide the company’s management and regulatory authorities with reliable information about the financial standing of the enterprise. The task of auditors is to make sure that statements contain correct and comprehensive data and there are no mistakes, inaccuracies or deliberate distortion.

Accounting audit is performed on the basis of source and consolidated financial documents and statements. It is an annual procedure which is obligatory for representatives of large and small business.

The companies which are obliged to be annually audited by external experts are as follows:

• Joint-stock companies.
• Enterprises willing to sell securities.
• Companies that submit financial statements for a year, exception is made only for extrabudgetary funds and state authorities.
• Companies with an annual income of over 400 million rubles, except state enterprises and agricultural cooperatives.
• Companies with assets of over 60 million, excluding agricultural cooperatives and their associations as well as state and municipal organisations.

Federal laws also stipulate several obligatory cases where companies are obliged to request accounting audit by external experts:

• Shares of a joint-stock company are federal ownership.
• An organisation is a state unitary enterprise.
• All funds excluding state extrabudgetary or international ones are also audited.

Control of financial flows is an obligatory procedure for a whole range of enterprises. The law imposes the duty of providing regularly the results of external audit of financial documents upon such companies as credit institutions, banking groups and bank holding companies as well as all associations and companies engaged in insurance. We will list the main organisations which must regularly undergo the independent audit process and keep the reports issued by experts:

• foreign agents;
• microfinance organisations;
• insurance companies and associations;
• non-governmental pension funds;
• enterprises which organise trade;
• companies engaged in lotteries and gambling;
• organisations with a capital income of over 5 million;
• management companies of mutual funds;
• enterprises engaged in purchase and sale of securities;
• regional operators and tour operators working in the area of international tourism;
• non-commercial organisations with the value of property of over 20 million rubles;
• political parties with the total amount of expenses exceeding sixty million rubles;
• credit unions of the second level and cooperatives with over 2000 members;
• political parties that received state financing or donations in the amount of sixty million rubles or more;
• developers that attract money of interest-holders to build apartment buildings and other immovable property.

Tasks of accounting audit:

In addition to the fact that audit is a statutory requirement, this procedure is beneficial for companies themselves. It helps to make a sound assessment of the financial standing of the company and its prospects and to adopt a decision regarding the further development of the enterprise on the basis of the reliable information. Audit also makes it possible to settle financing and lending issues, since this requires accurate data on solvency of parties to agreements.

At the completion of the procedure you receive a report, which provides a comprehensive view of the economic activity of the enterprise. This document helps to attract investors and creditors. Relying upon the expert report, it is possible to draw up an economic activity plan, identify hidden problems and eliminate their causes. Due to this the company can balance its financial flows.

Moreover, audit helps to set accounting in order, achieve its integrity and consistency, as well as to submit the information to the tax inspectorate. Therefore, assessment of annual financial documents by external experts helps to avoid problems during tax audits.

Objectives of accounting audit in enterprises:

• assessment of accounting and its accuracy (it may be necessary in case of change of the accountant or the financial director);
• preparation of documents to attract investment or sponsorship;
• preparation of papers to request a bank loan or participate in tenders;
• reduction of tax risks and preparation for tax statements.

When are financial documents audited?

The federal law stipulates situations where audit of financial documents and accounting is an obligatory procedure and the lack of an expert report may entail sanctions of regulatory authorities. However, audit can be not only obligatory but also voluntary – this is the procedure organised at the request of the company itself to settle internal problems and fulfil tasks that do not relate to external audit.

Please note that audit can be internal and external. The law implies that companies engage independent external experts and the main principle of audit, independence, is ensured in this way. This is why all obligatory audits are organised only with participation of external specialists.

You can use internal auditors for your own purposes. Nevertheless, if their report will be used for external transactions, you will have to prove that they observed the principle of independence, and it is extremely difficult from the legal point of view, this is why it is better to contact audit companies or individual specialists from the beginning. Then the auditors’ report will not raise any questions. Reports of internal specialists have no effect for regulatory authorities.

Cases of obligatory audit are described by us above. Companies can request audit for internal use if they are going to participate in tenders, make requests for credit, or want to optimise their financial processes. Voluntary audit can be necessary for confirmation of the accountants’ qualification as well as for internal control. It is performed in case of change of the chief accountant, so that the new employee would not inherit mistakes in statements from the predecessor.

Procedure for accounting audit of limited liability companies (OOO)

Accounting audit is performed by organisations or experts recorded in the register. Make sure that the auditor is included in the register of the Ministry of Finance of the Russian Federation – this could be checked on the official website of the Ministry.

The results of audit are recorded in the federal register. The duty of recording the data is imposed upon the customers of the services, they should supply comprehensive information about the organisation the documentation of which was examined by the auditor. The register is provided with the information which makes it possible to identify the corresponding company. The information submitted to the register also includes the data identifying auditors – their individual taxpayer identification numbers (INN) if they are private experts. Primary state registration numbers are used for organisations.

The federal law requires specification of the full list of examined financial documents during submission of the report to the register. The period of audit is to be specified as well. Correct presentation of information is an important condition, consequently, indicate the dates of audit, attach the opinion of an audit organisation or an individual expert – they must be supplemented with description of the circumstances which can affect accuracy of the statements. Please note that a heavy fine may be imposed on the company if incomplete data are submitted to the register.

Experts draw up a report according to the results of the accounting audit. It is an official document which formulates the opinion of the audit organisation or an individual auditor regarding the financial statements. This report is submitted to the regulatory authorities along with the statements. It must be presented within ten days from issue of the report. The last day of the year that follows the accounting period is the deadline for submission of the documents.

What is examined by auditors?

In the course of audit, experts assess the balance sheet and its supplements, financial statements and other source documentation. Audit specialists pay particular attention to the amounts on balance accounts and financial indices. Experts can also fulfil part of the tasks associated with inventory if it is required due to peculiarities of the company.

Specialists of VALEN Company, in addition to the obligatory procedures stipulated by law, can perform additional audit aimed at identification of financial risks and overpaid taxes. As a result, the experts determine not only risks but also possible ways to overcome the identified difficulties. These data are submitted by the specialists along with the report.

In the report, auditors describe the identified deficiencies and provide general recommendations for their elimination. There are several stages of audit:

• Determination of the cost of audit.
• Determination of the date and creation of an expert group.
• Analysis of statements by auditors.
• Provision of the report and opinions about the audit results.
• Advice on the report, answers to the customer’s questions.

Sanctions for failure to examine financial statements

It is important to remember that annual audit is an obligatory procedure, if companies fail to provide a report on financial statements, authorities will consider it as a violation of the law. This situation may entail fines of up to 10 thousand rubles. A repeated violation may result in punitive sanctions of up to 25 thousand rubles, but the court may also impose disqualification for a period of one to two years.

However, Russian laws stipulate the liability for the lack of the report rather than for the failure to organise audit of finances with the help of external experts. Consequently, you are required to submit this document rather than to prove the fact of audit. So please note that a fine may be imposed on you for the following violations:

• The company has no audit report for 5 years after the audit. This violation is most often detected during an on-site tax audit. It is this violation that entails fines of up to 10 thousand rubles.
• The enterprise fails to provide its audit report to the Federal State Statistics Service on time. It is important to meet the deadlines, otherwise justices of the peace may impose a fine of up to 5 thousand rubles. The law stipulates sanctions also for incomplete information in the statements.
• The company fails to publish the report on its official website. This is a requirement of the Central Bank of the Russian Federation, the court may fine companies one million rubles for non-compliance with it.
• The enterprise fails to record the results of audit in the Register. A heavy fine may also be imposed if you submit information to the Unified Federal Register late, this is why it is important to adhere to the deadlines stipulated by law.

Cooperate with qualified auditors to avoid fines and difficulties with tax authorities. You can also engage external accountants to ensure compliance of your financial documentation with the statutory requirements.

VALEN Company provides legal advice and accounting support to Russian business. We cooperate with large and small enterprises, international corporations and foreign business in the Russian Federation. Our qualified specialists are ready to help you to prepare financial documentation for its submission to the registers. We can also assess the state of accounting, draw up professional recommendations for optimisation of your company’s finances.

You are welcome to request advice by telephone or visit our office in Moscow.