The Tacis Russian Audit Reform Project has set up a «hot line» to give expert technical support to auditors. It enables a Russian auditor to request an information on free-of-charge basis from the specialists of the project with regard to the audit approach recommended in the Russian environment to comply with the international audit standards. Mr. Nikolai Remizov, Deputy Project Manager and his colleagues (fax: (095) 737 5347, e-mail RemizovN@fbk.ru, http://www.auditreform.ru) will provide expert answers to auditors questions on the «hot line». Some recent examples are shown below.
How can an audit firm licensed by Minfin of RF gain a status and how this status shall be defined, that would give a right to an audit firm to operate at the international audit market? Which agency should be addressed? (City of Tyumen’, RF)
As far as I know, presently «the status that gives a right to operate at the international market» is not assigned in any specific manner. Currently, the International Federation of Accountants only considers an opportunity of establishing a so-called Forum of Firms that would guarantee to its participating audit firms (their subsidiaries, associated and affiliated firms) that they operate in compliance with the International Standards of Audit (ISA). Primarily the Forum will include «the Big 5» and other large international firms, such as BDO Binder, Grant Tornton, Pennel Kerr Forster, RSM International and others, that represent an audit firm network in different countries, including Russia. I am afraid that the matter of compliance of other Russian audit firms to ISA is not considered at this point.
Quality assurance conducted by the Representative office of the World Bank in Moscow may serve as a confirmation as to whether an audit firm conforms to ISA. In autumn 2000 they conducted such a quality assurance (which included only Russian audit firms that expressed their desire to audit the World Bank’s projects in Russia). Eleven firms passed that test (which is one third of all companies that claim IAS conformity), including all the «big 5» companies in Russia, and also MKD Firm from St. Petersburg, Top-audit, Rusaudit Dornhoff, Rufaudit, FBK and UNICON/MC Consulting group in Moscow. As far as I understand the last six audit firms constitute large (however, not as big and famous as the «big 5») international network of audit firms.
First thing that I recommend you should do is to get your firm work in full compliance with the standards of audit activity (SAA) approved by the Audit Activity Commission under the President of RF. By so doing you would significantly move towards ISA, since SAA is a simplified version of ISA adopted to the Russian environment. In instances of full compliance I would recommend beginning to fully or almost fully implementing ISA in your work, and then you should consider all possible ways to formalize the confirmation of this fact.
If you are interested in obtaining procedures for audit firm operations in Russia that comply with ISA, I could recommend several possibilities. Firstly, some professional Russian auditors associations (for example, the Institute of Professional Accountants in Russia, Russian Collegium of Auditors and some others) declare that all their firms operate in compliance with ISA. Therefore, these associations offer ISA training to their firms and the procedure for control and consulting firms on this matter. Secondly, within the frame of our Tacis project we provide «hot line» free consultations on audit procedures in conformity with ISA. You may ask specific questions and get a specific answer.
Our firm is primarily engaged in providing services to non-for-profit institutions (NFPI). Because of the specifics of our work I would like to know what indicators should be used to determine materiality level? I have chosen to use total of receipts, fixed assets and total assets. I would like to know your opinion on such components? (St. Petersburg).
We have distributed an instruction on the determination of materiality level during the conferences conducted by the Tacis Audit Reform Project in Russia. That document recommends, based on the experience of FBK Audit Firm, to apply 2% of the total expenses incurred by an entity when determining materiality level. It is also possible to apply total of receipts, fixed assets and total assets of an entity, however, this would require an auditor to determine a percentage of these indicators when determining materiality level and consistently use this approach during an audit.
As you know the prime purpose of determining materiality is to set the «order of magnitude» of acceptable size of an error in accounting records. Therefore, there is no absolute algorithm for such measurement and any recommendations shall be taken as advice.
During the audit of non-for-profit institutions we are often asked to audit a specific project rather than conducting a general auditing of an entity. How this fact may affect materiality level? In your opinion, is it appropriate to use percentage of total receipts on the project to determine significance? I have taken 1% of the total receipts. What do you think? (Saint-Petersburg)
Yes, the use of 1% of total receipts on the project is appropriate. I would take 2% of total receipts on the project as a more realistic approach to determine materiality as opposed to 1%. Besides, I would like to draw your attention to the fact that «the audit of a specific project» does not provide for an audit of the financial statements, but only for an accomplishment of a specific audit engagement, and consequently an auditor shall apply ISA 800 «Auditor’s Report on the Specific Engagement» (International Standards of Auditing and Code of Ethics of Professional Accountants (1999), published by ICAR, 2000, pages 296 – 312) or its local analogue SAA «Audit Firm’s Conclusion on the specific audit engagement» (Rules (standards) of audit activity: Total 38 standards, issued by FBK-PRESS, 2001, pages 364 – 379). In particular, the format of an auditor’s opinion (report) on the Special Audit Engagement shall differ from the standard format of an auditor’s opinion on the financial statement.