Audit Under Russian and International Rules
The last two years were a very difficult period for the audit community. It is due to reforms concerning the requirements for membership in self-regulatory organizations of auditors whose number of participants has increased by several times.
Let us remember that the membership in a self-regulatory organization of auditors is a mandatory requirement for individual auditors and audit organizations to carry out their activities.
Until last December there had been a threat of monopolization of the audit market by creating a single self-regulatory organization controlled by the Ministry of Finance of the Russian Federation. Fortunately, it did not happen. Two self-regulatory organizations retain control over the activities of auditors.
Last year was a year of change for Russian audit and particularly in terms of auditing standards. At the end of 2016 auditors were monitoring the process of approval of International Standards on Auditing in the Russian Federation and speculating whether lawmakers could translate the standards from English, carry out the expertise and introduce the new rules before the end of the year. The lawmakers made it in time – 48 international audit standards become effective from January 01, 2017 which imposes additional obligations on auditors.
Due to the enforcement of international standards, the auditors will have a lot of work to do on revising the procedure and principles of activities in the course of audits and audit-related services.
However, it should be noted that by introducing the international standards, the lawmakers have taken care of auditors and allowed them to perform audit under existing Russian standards on auditing, subject to conclusion of audit agreement in 2016, during the transition period (2017).
In fact, concern over the international standards began in mid-2015, when the Ministry of Finance of the Russian Federation acknowledged these standards applicable to Russian reality, but the standards were finally approved only in the autumn of 2016.
Essentially, the federal auditing standards, that are still used, have been developed according to international rules which existed in the early 2000s. However, over the past years the text of the International Standards has been substantially revised and has become largely different from the Russian standards.
Aims of Reforms
The main objectives of implementation of International Standards on Auditing in the Russian Federation are to improve the quality of Russian audit and increase the efficiency of interaction between the auditor and business owners.
Understanding of goals and purposes of audit by business owners has always been a big problem both in Russian and international practice. In Russia, the management and owners of their clients perceive auditors as inspectors who come to discredit accounting and management, despite the fact that the auditor’s activities pursue other goals. The auditor acts not for the benefit of tax or government authorities but for the benefit of the public. The auditor’s objective is to ensure that the owners understand problems and risks of their business.
Under the laws of the Russian Federation, audit is an inspection carried out to express opinion about reliability of financial statements. In practice, the auditor not only inspects accounting statements, but also points out the errors and risks identified during the audit to the management, suggests methods of correcting such errors and ways to minimize the identified risks.
Hopefully, the issue of misunderstanding of auditing purposes by the management and business owners will be solved with the introduction of International Standards on Auditing.
Who receives information in the course of auditing under international standards?
One of the most important standards for customers of auditing services is ISA 260 Communication with Those Charged with Governance.
This standard is completely dedicated to the procedure of interaction between the auditor and persons in charge of corporate management, namely – the procedure of obtaining information from such persons and informing them about audit planning, purposes, progress and results.
The persons in charge of corporate management are a person (persons) or an entity (entities), responsible for supervision of strategic direction of activities of the entity and who have responsibilities related to ensuring the accountability of the entity. These responsibilities include supervision of financial statements.
The management is a person or persons vested with executive powers and responsible for operation of the entity.
That is, the international standards clearly distinguish between “the entity management” and “persons in charge of corporate management”.
Now the responsibilities of the auditor bindingly include informing the persons in charge of corporate management at the planning stage and after completion of the audit.
Thus, at the planning state the auditor must submit the following information (international practice requires the submission of information at the stage of audit planning by way of Audit Strategy Memorandum):
- Audit purposes;
- Specifics of audit engagement;
- Business understanding (branch, the main business risks);
- Brief information about the planned scope and period of the audit, name, functions, competence and liabilities of the audit engagement manager;
- Information about the possibility to modify the opinion in the event of material misrepresentations;
- Need for information exchange with third parties;
- Statement of responsibility of the management and persons in charge of corporate management for financial (accounting) statements of the audited entity;
- Form and period of expected interaction with the management and persons in charge of corporate management (planned date of discussion of audit strategy, audit results and interim meetings, where necessary).
If securities of the customer of auditing services are admitted to organized trading (listing companies), the auditor shall also submit:
- Information about key audit issues (the most significant areas of audit);
- Statement of observing the Code of Ethics in terms of independence of the auditor, audit team and audit organization as a whole.
The auditor provides his/her vision of the audit process, warns the customer about the possible modification of the opinion in certain circumstances and his/her responsibility about the prepared accounting statements as well as about other material terms of the audit in the Audit Strategy Memorandum.
The specified document is intended to ensure the understanding of the process and purposes of the audit by persons in charge of corporate management.
Based on the results of audit (before the issue of audit opinion) the persons in charge of corporate management shall submit the following information:
- Auditor’s opinion about significant qualitative aspects of accounting practice of the entity, including estimates and disclosures in the financial statements;
- About major deficiencies in the internal control system identified in the course of the audit, including description of the deficiencies and explanation of their possible impact, description of procedure of the internal control system analysis;
- Important issues that have arisen in the course of the audit and which have already been discussed or have been the subject of correspondence with the management;
- Written statements requested by the auditor from the entity management;
- Circumstances affecting the form and content of the audit opinion, if any (planned opinion modification, important circumstances, other information);
- Identified events or conditions that may cast significant doubt upon the ability of the entity to continue as a going concern as well as disclosure of such information in financial (accounting) statements;
- Other important issues that have arisen in the course of the audit, which are relevant to supervision of preparation of the financial statements under the auditor’s professional judgment.
Thus, the persons in charge of corporate management receive information directly from the auditor, and the customer’s management is not able to conceal the identified errors from them.
In the course of audit there can be situations when the persons in charge of corporate management are informed immediately. Detection of evidence of fraud on the part of the management or facts of failure to comply with the laws and regulations may serve as an example of such situations.
The main idea of ISA 260 is the fact that the auditor is entitled to request information not only from the customer’s management, but also from the persons in charge of corporate management, but at that point informing the persons in charge of corporate management becomes a liability of the auditor.
Need for the Internal Control System
When conducting audit, the auditor often encounters the fact that customer entities do not develop internal control system, and sometimes the management and the persons in charge of corporate management have no idea about what that system is.
With the introduction of international standards the auditor not only has to analyze the reliability and efficiency of the internal control system regulated by the customer entity, but also to specify the results of this analysis in the audit report.
What is the internal control system?
The internal control system is a group of processes developed, implemented and maintained by the persons in charge of corporate management, the management and other employees of the entity to ensure reasonable assurance regarding the achievement of goals of the entity in the area of preparation of reliable financial statement, effectiveness and efficiency of the activities and compliance with the applicable laws and regulations.
First of all, the internal control system should prevent any fraud by management of the entity, its employees and third parties. The internal control system is also designed to provide accurate and complete representation of information in the financial statements of the entity.
The efficient internal control system can be arranged by carrying out the following control actions and development of the following means of control:
- Development or acquisition of high-quality and reliable information processing system;
- Division of responsibilities and powers of employees who prepare accounting statements;
- Development of methods of asset and liability recognition as well as ensuring the compliance with these methods;
- Control over preparation of accounting statements from the management of the entity and the persons in charge of corporate management;
- Development of procedures to identify the risks of fraud in the entity by the management and response to these risks, as well as the procedure of informing the persons in charge of corporate management about the said procedures;
- Development of the Code of Ethics;
- Development of methods of assessment of the entity’s ability to continue as a going concern by the management;
- Development of other control measures.
The procedure of internal control in the entity should be executed as an intra-company provision.
Besides, the development of the efficient internal control system can reduce the customer’s auditing expenses, since the scope and cost of the audit can be reduced under the auditor’s professional judgment with increased efficiency of the internal control system.
What remains unchanged?
It should be noted that the criteria for compulsory audit are currently unchanged.
Compulsory audit is conducted if:
- The entity is a joint stock company;
- Securities of the entity are admitted to organized trading;
- The entity is a credit institution, credit reference bureau, an organization which is a professional participant of the securities market, insurance company, clearing company, mutual insurance company, trade organizer, non-state pension or other fund, incorporated investment fund, management company of an incorporated investment fund, unit investment trust or non-state pension fund (except state non-budgetary funds);
- Revenue from sales of products (sales of goods, performance of works, provision of services) of the entity (except government authorities, local government bodies, government and municipal institutions, state or municipal unitary enterprises, agricultural cooperatives, unions of these cooperatives) exceeds 400 million rubles over the year preceding the reporting year or the amount of balance sheet assets exceeds 60 million rubles as at the end of the year preceding the reporting year;
- The entity (except government authorities, local government bodies, state non-budgetary funds as well as government and municipal institutions) submits and (or) discloses annual consolidated accounting (financial) statements.
If the entity meets at least one of the said criteria, audit of financial statements is a mandatory requirement for this entity.
We would also like to remind you that when the accounting statements of the entity are subject to compulsory audit, the documentation shall not only be submitted to regulatory authorities, but also shall be published with audit opinion.
Thus, 2017 is a year of changes in audit activities. However, despite the complexity of preparation of the Internal Standards of Audit for use, such changes should bring mutual understanding between the auditor and business, which is certainly a positive factor.
Hopefully, with the introduction of the international standards public confidence in audit opinion will increase along with demand for audit services.
Automatic information exchange suggests automatic transfer of certain information from the disclosing party of a foreign state to Russian authorities. Then the authorities will work with such information in ordinary course using administration measures and methods set forth in the national law of the Russian Federation.
January 20, 2017
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