The need for auditors arose in Great Britain about 200 years ago when the owners of companies withdrew from everyday management and started to hire managing directors. Such work arrangements created the need for an independent controlling party – an auditor.
The task of an auditor is to provide assurance regarding the compliance of financial statements to certain rules. The management of the company to be audited is responsible for the preparation of the financial statements. The auditor does not so much examine how perfect is the accountant’s work (unless it is separately ordered from him/her) but rather that third parties would get an adequate picture of the company’s finances when reading the annual report.
How to become an auditor?
In Estonia there are about 350 authorised auditors. In order to become an authorised auditor, it is necessary to successfully pass the professional examination where in addition to knowing the rules of auditing also knowledge of accounting, taxation, finances and commercial law is required. A person can take the professional examination if he/she:
- holds at least Bachelor’s degree or an applied higher education diploma;
- has impeccable reputation;
- has practiced three years under the supervision of an authorised auditor.
According to statistics of the last 8 years, about 30-35% of people who take the exam pass the two parts of the examination successfully. In 2000-2008 the number of authorised auditors increased by 76.
What does being an auditor mean?
An important characteristic of the auditor’s profession is the acceptance of responsibility for acting in public interest. Authorised auditor shall comply with the standards of professional ethics, adherence to which is required and controlled.
In professional practice an authorised auditor is independent and unbiased. This means that the auditor has no interest in bending the financial information of his/her client in any way. The auditor cannot have any financial, professional or family ties with the auditee. For example, the auditor can neither directly nor indirectly own any shares in the client company; also, he/she cannot have been a member of the board or an employee of the auditee immediately prior to being appointed its auditor.
This also entails that the auditor cannot be an accountant or a lender for his/her audit client or prepare its annual report. Auditors may inform the auditee about circumstances that become evident in the course of the audit but they should refrain from participating in the auditee’s internal decision making process.
Authorised auditor is required to comply with the following fundamental principles:
- Integrity: an auditor should be straightforward and honest in all professional and business relationships.
- Objectivity: an auditor shall not allow bias, conflict of interest or undue influence of others to override professional or business judgments.
- Professional competence: an auditor has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services. Auditors must undergo 40 hours of in-service training per year.
- Confidentiality: an auditor shall not disclose any information acquired in the course of professional practice to third parties without proper and specific authority (unless there is a legal or professional right or duty to disclose). An auditor shall not use the information acquired during auditing activities for the personal advantage of himself/herself or third parties.
- Professional behaviour: an auditor should comply with laws and regulations and should avoid any action that discredits the auditor’s profession.
According to international standards on auditing the audit firms have the internal quality control obligation. It means that employees of the audit firm’s other department or region shall control adherence to the established rules.
An auditor is chosen by the company’s owners. Regardless of that an auditor must, in all of his/her activities and judgements, take into account the needs and interests of all users of the information provided in the annual accounts who will make conclusions regarding the client based on the financial statements and who presume that the audited financial statements present a true and fair view of the company’s financial position, financial performance and cash flows.
Auditor’s professional practice
Auditor’s professional practice comprises auditing, rendering of advisory services and fulfilment of other tasks imposed on auditors by law. Auditing rules specify different professional activities for auditors (audit, review, examination of non-monetary contribution evaluation, etc). Depending on the size of the company and public interest in the reports of companies of different size, it is prescribed by law that companies must have auditor’s reports prepared that provide different level of assurance.
Audit is an engagement that provides assurance to the public that financial statements are free of material misstatements. The outcome of an audit is a report that expresses positive assurance by stating whether the financial statements present fairly, in all material aspects the financial position, financial performance and cash flows of the company.
High quality of an audit contributes to regular functioning of economy by promoting integrity and efficiency of financial reporting. Auditor’s opinion increases the integrity of financial information. However, the audit of annual report does not exempt the management from the responsibility for truthfulness of the information or transfer the responsibility to the auditor.
In principle the audit process can be divided into three stages; not all of them are visible to the client:
- Planning – in planning stage the auditor acquires an understanding of the client’s background and activities, and develops the audit strategy and audit plan. Planning results in preparing a detailed work program;
- Collecting audit evidence – during this stage the tests, observations and analyses planned in the work program are carried out;
- Summary – in this stage the weaknesses detected during the audit are summarized and presented to the client. The audit report is submitted.
Audit fee is usually agreed upon prior to commencement of the audit and it must not depend on the final result. As a rule, the audit fee is calculated on the basis of hourly or daily fees of the specialists who render the service. Audit fee depends on:
- level of responsibility involved in the work;
- time spent on the assignment (both the complexity of the client’s activities and competence of the staff must be taken into consideration);
- knowledge and skills of the specialists who perform the work.
Audit fee cannot be related to or contingent upon rendering additional services to the auditee and cannot be based on any conditionality (for example that the unqualified auditor’s report costs 10% more).
Fee for the auditor’s work must be fair – if it is too high, the auditor may feel the wish to “please the client”; if the fee is too low, the auditor may be tempted not to perform part of the necessary work.
Quite often smaller companies and those that are under less public interest do not need such high level of assurance regarding their financial statements as provided by an audit; the service necessary for them may be a review.
Compared to an audit, a review provides lower level of assurance to the public and is used in case of entities that are under less public interest. Due to the character of the work and the amount of time spent, a review usually costs less for the client than an audit.
How is a review different from an audit? Unlike audit, a review does not involve thorough testing of the information recorded in accounting and of the control procedures used at preparing the financial statements. In case of a review the procedures to be carried out by the auditor are limited to analytical tests and interviews with key personnel.
As a result of the review of financial information the auditor shall issue a report that provides a lower level of assurance than the audit report but is prepared faster and at less cost. Compared to the opinion expressed in the usual auditor’s report, in the review report the auditor expresses his/her opinion in the so-called reversed form, through double negation. Usually the opinion section of a review report reads as follows:
Based on our review, nothing has come to our attention that causes us to believe that the annual report does not present fairly, in all material aspects, the company’s financial position as at 31.12.20xx and of its financial performance and cash flows for the reporting period then ended in accordance with Estonian Financial Reporting Standard.
Other types of professional practice
In addition to audit and review, auditors provide also other diverse services: some of them provide assurance (for example examination of non-monetary contribution evaluation), in case of others the professional competence of an auditor is utilized to get a better overview of different circumstances, transactions or operations (for example agreed-upon procedures, risk analyses, assessments of the efficiency of controls).