Audit of accounting and tax accounting in Kyiv

An audit of financial and tax accounting is one of the tools for generating reliable financial information and tax reports.

In our new article, we will use specific examples to explain:

• When do you need such an audit and what kind of businesses or organizations would benefit from it?
• What would be the benefit of such an audit?
• What do you do with the audit - how can you use it to benefit your business?

What tasks do accounting audits solve?

Any system needs to undergo an audit to confirm that there are no anomalies or to remedy them promptly. For financial and tax accounting, an audit serves as such an inspection.

Accounting is to some extent a financial information management system. A company's financial result directly depends on the organization, correctness of accounting, and promptness of obtaining data.

The audit has a huge number of objectives, namely (without limitation):

• confirmation of the correctness of accounting and reporting;
• identification of technical and mechanical errors in the recording of data in accounting systems;
• determination of the level of risk of business operations and potential additional penalties;
• checking the completeness and correctness of the accrual and payment of taxes;
• determining the level of competency of the accounting department;
• identification of deviations within the company's structure (inconsistent work of departments or duplication of functions);
• and others.

Due to the broad scope of the objectives, each owner should determine the desired results the audit.

On the basis of its aims and objectives, audits are divided into the following types:

• mandatory audit - mandatory state-level audits (there are legally defined criteria for companies to be audited annually and to publish financial statements with an audit report; mandatory audits in liquidation and bankruptcy);
• comprehensive audit - an in-depth audit of business operations, which is carried out at the company's initiative;
• tax audit - checking the completeness of tax calculation and payment (at the company's initiative);
• express audit - a selective audit that allows a company to analyze its business operations for riskiness in a short period and to identify errors before the preparation of statements (at the company's initiative).

Each type of audit differs in the amount of information analyzed, the timing of the work, and, accordingly, its cost.

Let's say you want to make sure that your company's accounting is correct and that the tax result of your business is optimized. What type of accounting do you need? 

First and foremost you need to answer the question - is everything fine? Do I need to run costly audits, re-engineer processes, etc.? This means that at the start you need an express audit. Here is an example of how it works.

A client (an IT services exporter) approached us with a request for an accounting audit. The results of the last quarter showed unjustified rapid growth of income in the financial indicators and, consequently, profit tax. 

Accounting and tax records of the company are kept by a single accountant who is confident in the correctness of calculations and excludes technical or mechanical errors, but confirmation in the form of financial calculations can not be provided.

The client wanted to make sure that the financial data was correct as soon as possible before submitting quarterly reports to the regulatory authorities.

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Express audit. What is it, and what are its benefits?

Comprehensive and tax audits are time-consuming and costly, and our client wants to identify revenue recognition irregularities or confirm their accrual in the shortest possible time and on a tight budget. The best method for such tasks is the express audit.

We carried out the express audit of the company according to the following plan:

Step 1: Reviewed the founding documents and the operations of the company.

Step 2: Studied the accounting system and the accounting policies.

Step 3: Compared the banking operations and the accounting system.

Result: No deviations were identified.

Step 4: Studied the contracts and revenue primary documents. The documents were selected according to the cost criterion - all transactions exceeding 2 thousand dollars.

Step 5: Compared primary documents and accounting system data.

Result: No deviations were found.

Step 6: Analyzed the accounts receivable.

Result: No deviations were found.

Step 7: Analyzed operational revenues.

Result: No deviations were found.

Step 8: Analyzed currency exchange rate revenues.

Result: 5 economic operations with foreign exchange gains of UAH 4.2 mln. were identified.

Step 9: Carried out the calculation of revaluation of currency funds and compared it with the calculation of revaluation in the accounting system.

Result: Calculation of revaluation of currency funds revealed a deviation of UAH 380 K.

Step 10: Studied the contracts and costs primary documents. The documents were selected according to the cost criterion - all transactions exceeding K.

Step 11: Conducted an audit of the cost of services.

Result: Costing does not comply with accounting standards.

Step 12: Analyzed the cost items.

Result: No deviations were revealed.

Step 13: Conducted an audit of accrual and payment of salaries.

Result: No deviations were revealed.

Step 14: Carried out an audit of the correctness of accrual and payment of taxes.

Result: No deviations were revealed.

The main task of any audit is not to find an error and punish the executor; the main task is to detect deviations and provide recommendations and ways to painlessly correct the error.

Based on the results of the audit, we provided a brief written report to the client describing:

• assessment of the accounts;
• assessment of the completeness of the accrual and payment of taxes;
• the identified discrepancies in accounting;
• tax risks in relation to identified deviations.

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Our recommendations for correcting deviations identified in the express audit process

Deviation 1. Five business transactions with a foreign exchange gain of UAH 4.2 million were identified.

The foreign exchange gain arose due to non-compliance with the sequence of recording foreign exchange sale transactions in the accounting system, namely: Application for sale of currency - Writing off funds from currency account - Sale of currency - Receipt of funds to the current account.

The accountant needs to reflect the data in the accounting system according to the above sequence, after which the unconfirmed income will be eliminated.

Deviation 2. A deviation of UAH 380 thousand has been identified in the calculation of currency revaluation.

For the correct recording of data on currency transactions in the accounting system, it is necessary to regularly update changes in NBU exchange rates. Modern accounting systems have settings that perform automatic updating of NBU exchange rates (without the participation of an accountant). Our client's accounting system is not set for automatic updating, so the accountant missed the information about the change of USD rate from fixed UAH 29,2549 to UAH 36,5686. This led to an underestimation of UAH 380 thousand in income from the revaluation of the currency.

Deviation 3. The cost formation does not comply with the rules of the accounting standards.

According to accounting standards, the cost of services is accumulated in account 231 "Production" and then charged to account 903 "Cost of services sold" as services are provided to customers.

Failure to apply account 231 is treated by the supervisory authorities as an accounting irregularity and a misstatement.

Tax risks from identified deviations

Any company has the right to disregard audit findings and recommendations, but the owner must understand the risks to which the company is exposed.

In our case, identified deviations entail:

1. Overstatement of income by UAH 4.2 million, which means additional (voluntary, but unreasonable) payment of income tax in the amount of UAH 756 thousand;
2. Understatement of income associated with the revaluation of foreign currency funds in the amount of UAH 380 thousand, which means additional charges for income tax in the amount of UAH 68.4 thousand;
3. Dismissal of data in financial reporting, which results in penalties from UAH 136 to UAH 255
4. Violation of rules on bookkeeping, which results in fines of UAH 1,700 to UAH 2,550.

The benefit to the owner of the express audit:

• promptly identifying weaknesses and being able to respond to them immediately;
• confirmation of the company's performance to the founding partners;
• identification of errors before the filing of reports and the "arrival" of inspectors;
• a sufficiently budgetary and expeditious way of controlling the accounting system.

We recommend carrying out an express audit in the following cases:

• a change of responsible persons affecting the financial information (director, chief accountant);
• change of the founder, owner;
• reorganization or restructuring of the company;
• filing (quarterly or annual) financial statements;
• obtaining credit or attracting investment.

Our company offers not only tax and accounting audits for your business, but also the outsourced services of qualified accountants and lawyers. 

We will not only find possible problems in the process but also offer you the best way to fix them.

Business accounting support.

Automation and robotization of accounting processes.