Legal framework for auditing: definition, rules and procedures for auditing

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Any business entity of the market economy carries out its activities with the sole purpose of making profit from commodity-money relations. To achieve this goal, financial activities are carried out. The results of this activity, the financial performance of the enterprise are subject to systematization and analysis by independent audits. An analysis of financial statements by a third-party organization, and not by the owner of the business, allows you to objectively evaluate the effectiveness of economic activity, identify weaknesses and identify hidden reserves for increasing the financial well-being of the company. These are the goals pursued by the audit, based on the legal foundations of auditing.

When auditors appeared

With the advent of financial relations and money savings in people's lives, there was also a need for controllingevents. In ancient Rome, ancient Egypt and China, special controllers were kept at the courts, who monitored the strict observance of income and expenditure transactions with the state treasury. Initially, the functions of controllers were performed by high-ranking officials, and the legal basis for audit activities at that time consisted of a direct order from the ruler. The word "audit" comes from the English audio - to listen, since the first inspectors based their controlling function on listening to the reports of court scribes and treasury counters.

The appearance of the audit in its modern sense is attributed to England. In the 9th century in this country, a caste of auditors emerged from the class of accountants, checking the correctness and correctness of filling out accounts and conducting all economic activities in general.

Audit Development

With the opening of the American continent, the overall economic potential has increased, trade has increased, and financial flows have increased. There was a need for a large number of financially literate specialists. The development of the world economy has led to the need to standardize audit activities, to define its tasks and functions. In 1854, the Union of Accountants was created in Edinburgh, bringing together professional accountants and auditors. The legal framework for the implementation of audit activities has become mandatory for use in the activities of independent auditors.

With the appearance on the market of corporations that united several economic entities, it became necessary to form a consolidatedreporting. Accordingly, the importance of checking the reality and the correctness of its compilation has also increased.

The development of auditing in the UK and the United States was due to the need to assess the financial condition of the corporation, the effectiveness and correctness of its activities in the interests of business owners.

Beginning of audit in Russia

In Russia for a long time there were no enterprises of the organizational and legal form, involving the presence of several participants-shareholders. Merchants conducted their activities independently, without questioning their entrepreneurial and accounting abilities. Income control was exercised by the state for the purpose of levying taxes.

Before the reign of Peter the Great in Russia, there were no prerequisites for the development of audit activities by independent observers. Strict control over the correctness of the expenditures of the treasury was a function exclusively of the state. Only trusted civil servants could know and check accounts and settlements of business entities.

Under Peter I, the functions of auditors were performed mainly by military personnel and consisted in monitoring the targeted use of public money allocated to maintain the army.

The appearance of the first auditors in Russia became possible only after 1985 in the process of transition of the economy from a command form to a market one.

Prerequisites for the emergence of auditors in Russia

During the period of perestroika, the number of economic entities of various forms of ownership grew rapidly in the economy of our country. Taking advantagethe collapse of the state control system, unscrupulous businessmen prepared their own reports, made mandatory contributions and paid taxes, hiding the true volume of profits. For the state, there was an urgent need for a controlling function, with which the tax services could no longer cope on their own.

By 1993, the authorities were making attempts to issue legislative acts that would lay the legal foundations for auditing in the Russian Federation. The first audit firms aimed not only to verify the reliability of the company's financial statements, but also to advise on the optimization of business activities. Then the Provisional Rules were adopted, in which the legal framework for auditing activities is defined at the legislative level. For the first time in Russia, the goals of independent inspections, the object of analysis and the subject carrying it out have been approved.

The system of legislative regulation of the activities of auditors

Conventionally, the legislative acts that laid the legal foundations for auditing activities in the Russian Federation can be divided into five main steps:

1. Federal Law No. 307-FZ "On Auditing", adopted in 2008. This law gives a clear definition of the fundamental principles of the audit, the objectives of its conduct, establishes the requirements and control over the work of auditors. Also, the regulatory document broadly and fully describes the legal framework for audit activities in the Russian Federation
2. Federal level Rules (standards) of audit activity. They are approvedGovernment of the country in 2002. They consolidated the foundations of the legal regulation of auditing activities in the form of a set of 23 specific thematic documents. Each of the standards reveals a specific concept or direction of audit at the state level. This group includes various legislative acts of federal ministries.
3. Standards of audit activity, which were established by a commission specially created under the President of Russia. Sixteen such standards have been published. All of them were issued before the entry into force of the Law on Audit and were intended to standardize audit procedures, defining the legal basis for audit activities briefly, but revealing the nuances of the functioning of auditors as they arise.
4. Methodological recommendations. This group of documents included in the legal framework for auditing in Russia is made up of instructions, regulations and procedures that are advisory in nature. Such methodological recommendations, for example, the Code of Honor for Auditors, are issued by public associations - the Chamber of Auditors, the Commission under the Ministry of Finance.
5. Local regulation. In any audit firm, the legal basis for audit activities is defined by a document that is valid only in this organization. These can be their own developed recommendations for conducting an audit at a particular enterprise or internal rules for drawing up an audit plan.

Licensing activities

The Law governing the licensing of certain types of activities states that forthe company needs permission to carry out inspections.

A license for audit organizations is issued by the Ministry of Finance for a period of five years. This period may be extended as many times as necessary, and the license may also be revoked.

Mandatory audit

Audit is, first of all, verification of the reliability of the financial report of an economic entity. In order to control the activities of entities that have a significant impact on economic processes, the Law provides for a mandatory audit of the financial result.

For a statutory audit, the necessary criteria, as well as the legal basis for the implementation of audit activities, are defined in Article 5 of the Federal Law No. 307. A statutory audit is carried out when:

• the form of management of the enterprise provides for the presence of shares and participants;
• economic entity's securities are quoted;
• the company is an insurance company, a representative of the stock market, any fund (share or investment), is engaged in credit or clearing activities;
• an economic entity has more than 60 million rubles in assets or received more than 400 million in sales revenue for the year;
• corporation or group of companies prepares consolidated (summary) financial statements.

In these cases, every year the activity of a participant in commodity-money relations is subject to mandatory verification, and an audit report is formed based on its results.

What is a conclusion

Legal bases of auditor activity assume drawing up after check by the independent auditor of the conclusion on reliability of the data following from results of the activity which is carried out by the checked subject. This document is subject to certain legal requirements. The auditor's report is intended for the organization that was audited. The addressee, his main registration data, as well as the name of the conclusion, must be indicated in it.

Also indicated in the document:

• name of the checking company;
• volume and period of audited reporting;
• list of work carried out during the audit period;
• conclusion on the reliability of financial documents;
• check date and result.

Verification must be independent

Auditing is carried out on a contractual basis. Such activity entails making a profit. At the same time, the verification must be objective, and the conclusion must be reliable and justified.

In order to prevent any influence on the opinion of an independent expert, the law limits the ability of an audit to be carried out by persons who have economic or family ties with representatives of the audited entity responsible for the preparation of the financial report.

Remuneration for the performance of the inspection, as well as for the related services provided, is paid under the service agreement. Payment for the activities of an independent expert cannot depend on the conclusions received by him on the financialreporting of the audited enterprise.

Auditor secrecy

Any information that became known to the auditor in connection with the audit, and the documents generated as a result of it are not subject to disclosure. The auditor's conclusions are intended solely for the owner of the enterprise and cannot be transferred to another person.

Exceptions are:

1. If the verification customer agrees to the publication of information about him.
2. The very fact of an agreement to conduct an audit is disclosed.
3. The cost of the audit is publicly announced.

In order to maintain the secrecy of the audit, all verifiers sign in confidentiality.

Who can become

Each functioning auditor can work with a qualification certificate issued in accordance with the law. It is issued by a self-regulatory audit organization subject to certain conditions:

1. Successfully passed the qualifying exam.
2. At least three years of experience in accounting or auditing, including the last two years in an audit firm.

The received certificate has no validity period, and the one who received it is obliged to study annually according to the established program to maintain his qualifications.

Control of the activities of audit organizations

Self-regulatory audit organizations supervise the activities of their member organizations and independent auditors. The function of state control over the activities of firms carrying out inspections is performed byMinistry of Finance. It monitors compliance by participants in audits with the norms of the current legislation.