IFRS & US GAAP Advisory
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Did you know an auditor can provide many more services to you than just audit? You did not? Let us try and take a little test.
Do you not know what to imagine under the term audit? Have you found out from the financial statement that you have met some criteria for performing statutory audit? Have you received instruction from you parent company to perform an audit, although you have not met the criteria for statutory audit? Are you using a bank loan, which has the condition of verification of data and criteria in the financial statement? Are you using grants/subsidies? Are you having doubts and you would like to check, if everything or a certain area is alright at your company? Are you buying or would you like to buy a new company as a means of investment? Are you planning on a transaction, such as a merger, spin-off or restructuring? Are you part of a group and does consolidation apply to you? Do you need confirmation of a receivable, which will then be set off against a partner's deposit?
Have you given a positive answer to at least one of the questions? If so, you should pay attention to the following article, which will attempt to explain to you briefly but clearly what services and auditor can provide to you and what result you can expect from them. The services stated below are not always perceived correctly by the public, which may lead to unnecessary higher financial costs of the company. Even if you have not found your situation in our little test, the article may still be beneficial for your future decisions or planning. You never know where you will be in a few months or years and what decisions you will be facing.
An auditor can provide the following types of services to you. They are divided into assurance engagements, related services and other services.
Assurance engagements include verification of information, whether historical financial information (verification of financial sums describing what has already happened), or other than historical financial information (for example verification of checks at the company). And what to imagine under these terms? We will discuss this below along with the specific services belonging to the respective category.
The term audit conceals a number of various services, from financial audit, to quality audit, forensic audit, up to environmental impact audit or security audit. An audit may be performed by a person or a legal entity, which has a licence from the Chamber of Auditors to perform this activity. Therefore, every company (accounting entity), which will need certain audit services, can check the audit company or the auditor publicly in advance.
In practice, though, the term audit is often perceived incorrectly by the public. The client does not know, what he/she can expect from audit, how it proceeds, and often he/she has no idea about what he/she has ordered and what output he/she will receive. In addition to the financial statement, the auditor also verifies the annual report and the report on relations.
An audit should be performed in compliance with the act on auditors, the ISA international standards on auditing and related application clauses of the Chamber of Auditors of the Czech Republic. It can therefore be said that the procedure of performing an audit is strictly given and subject to certain rules. Thus is cannot merely be performed in any way, which also has an impact on its price as such. The price also relates to the quality, with which the audit is performed, its output and presentation of the company itself.
The audit itself serves for verification of information and data, which the given company stated in its financial statement, with the aim of verifying, if they are true and reliable, i.e. if the financial statement represents, what should be represented. There is statutory and voluntary audit. A statutory audit is a statutory audit, in most cases based on article 20 of act no. 563/1991 Coll., on accounting. A company, for which the audit is statutory, is obliged to appoint an auditor, who will perform the given audit, and have him/her approved by the governing body at a general meeting in case of a company, and at a meeting of members in case of cooperatives.
The audit itself requires planning. The auditor does not verify all supporting documents of the company, only a selected part (samples). He works based on determining a level of significance of potential shortcomings in the financial statement, so-called determination of materiality, based on which he examines selected samples of accounting documents. In addition, the risk of fraud is assessed, the internal control system, the accounting methods used and the adequacy of the used estimates with their evaluation and effect on the financial statement. Based on these presented documents, the auditor is able to assess the current state of a company with a very high degree of certainty (so-called adequate certainty) and the assumption of its further development. Audit is therefore one of the most expensive services.
For voluntary audit, the same rules apply as for statutory audit. Therefore, if the client does not need such a high level of assurance, the auditor may perform a review for him/her, which provides a limited level of certainty. In the case of audit and review, the auditor proceeds according to different regulations and verifies a different amount of data, which, among other things, also influences the price of the service.
The result of verification (an audit) of a financial statement is an audit opinion, in which the auditor expresses his/her opinion on whether or not the given company keeps accounts and compiles its financial statement in compliance with accounting rules, and if therefore the financial statement gives a true and fair image.
Further, before the audit opinion is issued, the client should be familiarised with the conclusions of the audit, should be able to understand them, so he could possibly eliminate or adjust them in the future years. Communication and feedback is the main benefit for the client from a high-quality auditor. The audit itself therefore should not be a mere fulfilment of a certain obligation for the client. The resulting report of the auditor is intended not only for the client, but also for third parties and is published in the collection of documents.
From the perspective of the client, a review may seem to be nearly the same thing as the above-described audit. It is true that they have many characteristics in common. On the other hand, though, there are fundamental differences and they should be perceived as such by the client as well as by the auditor. A review is performed according to International Standards on Review Engagements (ISRE). In case of a review, too, the auditor verifies the financial statement.
Nevertheless a review may also include verification of an incomplete financial statement, a selected part of the financial statement or reports, an interim financial statement etc. The procedures used when performing a review include for example acquiring knowledge about the business activity of the accounting entity, inquiring about the accounting methods and procedures used, inquiring about the compilation of the financial statement, analytical procedures (comparing financial statements for the previous periods or comparing the expected results and the expected financial position).
Similarly as with an audit, the output is an auditor's report about the performed review. The aim of the review is for the auditor to note that he did not notice any fact that would lead the assumption that the financial statement does not give a true and fair image of reality. The review provides the auditor as well as the client with a lower degree of certainty (so-called limited assurance) compared to an audit. For that reason, too, a review is usually less expensive than an audit. A review mainly serves for the management of the company to acquire limited assurance about the financial statement.
Expected financial information works with future events, i.e. something which may only just occur at the company. It works with hypotheses and frequently with estimates, sometimes even with a combination of the two. It serves mainly to present a picture of the company to a third party, for example future owners, i.e. buyers or investors, or it may serve as a supporting document for obtaining or drawing down a loan. The “business plan”, for example, which is compiled by the company for several years ahead and serves for example as a supporting document for drawing a loan, is often verified in this way. The bank usually requires a statement from a competent and unbiased party regarding the compilation and relevance of the business plan. In this case the auditor also issues and audit report, in which he only describes the assessed financial information, though, and issues no opinion regarding this fact.
Service organizations are understood to mean companies, which keep accounting, the payroll agenda or provide other services to their clients. During this verification engagement, the auditor familiarises himself with the operation of the service organization including its set-up checks, examines it and attempts to come up with procedures for resolving shortcomings. The auditor should have sufficient qualification to perform this engagement. During the verification, the setup and functioning of these checks is verified. The aim of the engagement is assurance from the auditor of the user's accounting entity, which has the accounting, the payroll agenda or other services processed by a service organization, if internal checks correspond to the specified requirements. The output is a report, which may serve as means of evidence during an audit of the user's accounting entity.
Other services include assurance engagements other than the above-mentioned. Verification of the drawing of subsidies can also be included among these services. Here it is often a combination of verification of historical financial information (accounting for subsidies) and verification of their lawfulness (if they are in compliance with legal and other regulations and contracts). For the first part, the ISA or ISRE standard will be applied (it may be an audit or a review) and for the second part, the ISAE 3000 standard will be applied. On the other hand, it is possible to approach this engagement on the basis of agreed-upon procedures. The aim is a conclusion about the result of assessment of the verified fact, which contains a conclusion that provides adequate or limited certainty and describes the basis, on which this conclusion is based.
Related services include agreed-upon procedures and compilation of the financial statement. The ISRS needs to be observed when performing them, among other things.
This is very popular engagement among clients, for example in case of acquisitions or transactions, when the accounting and taxes of the other party need to be verified prior to entering in the transaction. In the case of agreed-upon procedures, the auditor gives no assurance, it is only a verification of the financial area or another area, if the auditor's knowledge permits him/her to do so. The procedure is the same as if the auditor were performing an audit. Unlike the audit, here it is not necessary for the auditor to be independent of the company, he is not responsible for selecting procedures for acquiring sufficient and suitable information. He only verifies the required information and documents agreed on with the client at the beginning of the engagement. The aim is a report summarising facts, there is no conclusion. The resulting report is intended only for the client of the engagement.
In the case of compilation of a financial statement, there is no verification of information, only a mere compilation of information. With this type of engagement, the auditor has no responsibility for the financial statement or for verification of information, which he does in case of an audit or review. At the same time, he does not adjust the procedure for how to compile the financial statement or how to keep the client's accounts. The auditor observes the code of ethics here, as with other audit engagements, because the financial statement serves as a document for third parties.
Other services mean such services provided by an auditor, which are not presented to third parties. These are all types of consulting, e.g. accounting, tax, economic, forensic surveys, due diligence or compilation of expertise, although in some cases it needs to be verified, if these services would not eventually belong among assurance engagements or related services.
In this article, we tried to provide information to you about all the different types of services that an auditor can provide for you. There are many more of them than just an audit. We believe that this article has helped you, clarified many things and that you know already what specifically your company currently needs or why you actually need to do it. What to say at the end? Perhaps that the right and high-quality expert is one, who is able to advise you and resolve everything you need with a customized engagement.
ISRE – International Standards on Review Engagements
ISAE – International Standards on Assurance Engagements
ISRS – International Standard on Related Services
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