Actions of the internal auditor at revealing of essential errors - Internal audit

9.3. Actions of the internal auditor at revealing of essential mistakes

The actions of the auditor in case of revealing the distortions of the accounting statements in the course of and following the audit results are determined by the Russian rule (standard) of auditing activity "Auditor actions in the event of detection of distortions in the financial statements", and Federal Standard No. 13 "Obligations of the auditor for review errors and bad faith during the audit. "

Distortion of accounting statements is recognized as incorrect reflection and presentation of accounting data due to violation of established rules for its organization and management. Distortion can be intentional and unintentional.

Intentional distortion of accounting statements is the result of deliberate actions (or inaction) of the audited entity's personnel. It is committed for mercenary purposes in order to mislead the users of financial statements. At the same time, the auditor should take into account that the conclusion about the deliberate actions (or inaction) of the audited personnel leading to the appearance of distortions in the financial statements can be made only by the authorized body.

Unintentional misstatement of financial statements is the result of unintended actions (or inaction) of the personnel of the entity being audited. It can be the result of arithmetic or logical errors in accounting records, errors in calculations, oversight in the completeness of accounting, incorrect accounting of business activities, availability and condition of property.

Both intentional and unintentional misrepresentation of the financial statements of an audited entity can be significant (that is, affecting the reliability of its financial statements to such an extent that a qualified user of these financial statements can make erroneous conclusions based on such reports or mistaken decision) or insignificant.

In the course of the audit, it is necessary to assess the risk of appearance of distortions in the financial statements and the risk of their non-detection. Here it is necessary to take into account the factors that contribute to increasing the risk of the appearance of both unintentional and deliberate distortions. Factors of the internal economic activity of the entity being audited, contributing to the appearance of distortions, include:

o significant financial investments in crisis sectors of the economy;

o mismatch in the amount of working capital to a quick report on the sales volume (production) of the entity being audited or to a significant decrease in profit;

o the person to be audited in a certain period from one or a small number of customers or suppliers;

o changes in the practice of contractual relations or in accounting policies that lead to a significant change in the amount of profit;

o atypical deals of the entity being audited, especially during the end of the year, which significantly affect the amount of financial indicators;

o availability of payments for services that clearly do not match the services provided;

o features of the organizational and management structure of the entity being audited, all shortcomings;

o features of capital structure and profit distribution:

o the existence of deviations from the established rules in the conduct of accounting and preparation of financial statements.

The factors that reflect the peculiarities of the state of a particular branch of the financial and economic activities of the entity being audited and the country's economy as a whole that contribute to the appearance of distortions include:

o state of the economy and the economy of the country as a whole - crisis, depression, recovery

o Industry specific features of insolvency (bankruptcy) of the entity being audited in connection with the crisis of the industry;

o features of the production activity of the entity being audited, technological features of production.

When conducting an audit, including when planning an audit, it is necessary to take into account the possible presence of distortions in the financial statements of the entity being audited. Based on this, audit procedures are developed and the risk of distortions in the financial statements is assessed. At the same time, it should not be in the audit process to specifically look for facts that indicate the existence of distortions in the financial statements.

When clarifying the distortions of financial statements, it is necessary to assess their impact on the reliability of the audited financial statements in all material respects. In this case, it is necessary to take into account possible types of violations leading to distortion, such as:

o deviation from the rules established by the legislation for the maintenance and organization of accounting and reporting;

o the absence or non-compliance during the reporting period of the accounting policy adopted by accounting for certain business transactions and property valuation;

o violations of civil, tax and currency legislation;

o Other violations affecting the distortion of financial statements.

In case of revealing of distortions of the accounting reporting the auditor should correct the audit procedures developed by it depending on:

o types of violations leading to distortion;

o the degree of significance of the detected distortions;

o the risk of distortions during further testing and the risk of undetectable distortions.

If there are distortions in the financial statements, the auditor should assess how effectively the current internal control system prevents the occurrence of various violations that lead to the appearance of distortions in the financial statements. In the event of a conclusion that the ability of the internal control system to lower the distortions in the financial statements is lower than previously thought, it is necessary to revise the previous assessment of the reliability of the internal control system and clarify in this connection the scope and nature of the audit procedures used.

The facts of distortions in the financial statements revealed during the audit should be reflected in detail in the working documentation issued in accordance with the established procedure.

The internal auditor is responsible for:

o the expression of an objective and well-grounded opinion on the reliability of the financial statements submitted in writing to the management of the audited entity in the report;

o the correctness and completeness of the data reflected in the auditor's report on the material misstatements of the financial statements revealed by him;

o Non-observance of the confidentiality of commercial information of the entity being audited, expressed in the disclosure of information about revealed distortions of financial statements to third parties.

The personnel of the audited entity, including his management, is responsible for:

o the occurrence of deliberate and unintended distortions in the financial statements;

o failure to take measures to prevent such distortions;

o non-elimination or untimely elimination of them. Internal audit quality assurance includes a detailed examination of all internal audit work documents. The audit includes a detailed examination of all procedures performed, calculations made, conclusions and conclusions reached.

The purpose of the audit is to establish that the items of the general plan and the audit program have been completed, and, following the results of the audit procedures, the rank-and-file executors have drawn the right conclusions.

The supervisor should verify that. that:

o the audit plan and program are fully implemented, the audit program includes notes, notations, signatures confirming its completion;

o the size of the audit sample is correctly defined;

o the findings are consistent with the results of the audit procedures;

o the execution of working papers corresponds to the internal standards of the audited entity;

o the detected distortions in the financial statements do not exceed individually or in the aggregate of the established level of materiality;

o the set of working documents of internal audit contains a sufficient number of audit evidence necessary to justify the conclusions made;

o the audit was generally conducted in accordance with the requirements of the internal standards of the audited entity.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)