Audit in Russia
Author: Evgeny Sumin, Deputy Director of the Accounting Services Department
Lots of companies in Russia encounter the need to conduct either a statutory or non-statutory audit, while their managers are not always aware of what it is and how it must be carried out. Here we are going to describe the audit procedures under Russian law.
Statutory Audit in Russia
The audit regulation requires statutory audit in many situations, in particular for the following entities:
- Joint stock companies (OAO), even if not publicly traded.
- Branches of foreign NGOs
- Companies with turnover in excess of 400 million RUB or the balance sheet total over 60 million RUB.
The main purpose of statutory audit is to protect public interests.
However, audits are useful not only for the public, but also for companies, their management and shareholders.
Audits help to timely detect problems such as:
- Financial misstatements and misrepresentation
- Tax risks
- Business regulatory violations
- Embezzlement and fraud
- Internal control weaknesses
Companies, which avoid statutory audit, will not face a penalty, because the Russian audit regulation does not stipulate any. Some managers treat the avoidance as a tolerable technical violation with no fines, but such approach can hardly be considered as professional.
Let’s compare a business with an expensive and beloved car. If the owner doesn’t perform routine maintenance then he can save some money at the beginning, but sooner or later some major problem will occur, and the cost of fixing will be many times greater than the initial saving.
Regular company auditing is a precautionary measure, something like an annual medical check-up.
The federal audit regulation requires a written contract, which documents the agreed-upon terms of the audit engagement.
An auditor can offer you provision of the service in several steps, e.g. auditing of interim financial statements for 6 months or 9 months and the second step – annual reports.
For the client the advantage of auditing in steps is that they receive the preliminary professional opinion in the current reporting period and can make corrections before the end of the period.
The audit procedures normally take place in the client’s office, this gives the auditor access to all the documents he needs.
First of all the auditor assesses client’s business and receives information from its management on internal control in the organization, important events that took place in the reporting period, etc.
It is mandatory for the auditor to assess the company’s compliance with the provisions of laws, regulations, and contracts, e.g. whether all the necessary licenses and permissions are in place or not.
Audits are conducted on a sample basis, and clients are often wary of it considering that any failure on the auditor’s part to detect a mistake can be attributed to the sample nature of the procedure. However, these concerns come only from a misunderstanding of audit procedures.
The auditor uses sampling relying on the materiality assessment. In general, this process is based on the Pareto principle, stating that 80 percent of the effects come from 20 percent of the causes.
Of course, the auditor can overlook a mistake, but with appropriate sampling design this mistake will not be material.
For the most significant operations included in the sample, the auditor reviews all the supporting documents and test for accuracy of financial statements records.
If a company has the massive size of inventory, the auditor will need to observe the physical inventory count.
As a result of the service an audit report is issued to a user of an entity's financial statements.
The typical audit report contains the following information:
- The responsibilities of the auditor and the management of the entity.
- The scope of the audit.
- The auditor's opinion of the entity's financial statements.
Alternatives to Audit
In addition to audit, simpler and less-costly alternatives exist, including review.
The difference between the audit and review is described below:
|Audit (Statutory or Non-Statutory)||Non-Audit Review|
|Scope of the tests||
|Tax risks assessment||
|Audit working papers||
Therefore, in some cases non-audit reviews can be much more beneficial for the client than audits.
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