Financial Auditing – Purpose & Legislative Provisions for High Quality Financial Auditing
The success of any business relies on the careful inspection of all key areas, from sales and marketing to supply chains and inventory management, using analysis and reports based in most cases on data from the accounting department. Financial auditing offers credibility to financial statements, both in the eyes of shareholders and other users. Auditors periodically verify and analyze a company’s performance with the aim of determining whether the financial reporting provides a true and fair view. Financial auditing plays a very important role from many perspectives, actively contributing to business development, performance growth, and increased transparency. In this article, you will find out everything you need to know about financial auditing – how financial audit fees are calculated, what a financial auditor does, and why you need to appoint financial auditors beyond complying with statutory requirements.
What is Financial Auditing?
Companies regularly prepare financial statements containing information about their financial position and performance. This information is used by a wide range of interested parties (e.g., investors) when making economic decisions. As a rule, the owners of a business, the shareholders, are not its managers. Consequently, the owners (as well as other interested parties, such as banks, suppliers, and customers) rely on independent verification that the financial statements correctly reflect their company’s financial position and performance in all significant respects.
A financial audit, also known as an audit of financial statements, is an objective assessment of a company’s financial statements.
What Legislation Regulates Financial Auditing?
Financial auditing in Romania is regulated by various laws and emergency ordinances, the most important of which are as follows:
- Law 162/2017 on the statutory auditing of annual financial statements and consolidated annual financial statements. This law regulates the statutory auditing of annual financial statements and consolidated annual financial statements drawn up in compliance with accounting law and applicable accounting regulations.
- Emergency Ordinance 75/1999 on the performance of financial auditing, as modified and supplemented over time to bring it into line with international standards and European Union requirements.
- Emergency Ordinance 137/2024 on the modification of Law 162/2017 and other normative acts. This ordinance was published in the Official Gazette of Romania no. 1215 on 3 December 2024 and introduces important changes in the field of financial auditing, including provisions on sustainability reporting (ESG).
Together, these laws and ordinances create the legal framework for the performance of financial auditing activities, including the requirements for financial auditors, audit procedures, and the reporting of results.
For Which Companies is Financial Auditing Mandatory?
A financial audit can be undertaken voluntarily, as the submission of financial statements accompanied by an audit report is not mandatory for all companies. The annual financial statements of medium and large enterprises, as well as those of national companies, fully or majority state-owned companies, and autonomous regies are audited by one or more statutory auditors or audit firms. Auditing is also mandatory for companies that, on the balance sheet date, exceed the limits of at least two of the following three criteria:
- Total assets of more than RON 16,000,000
- Net turnover in excess of RON 32,000,000
- Average number of employees of 50 or more
Auditing becomes mandatory when companies exceed these limits for two consecutive financial years. Conversely, companies are exempted from the mandatory auditing of their annual financial statements if the limits of two of the aforementioned three criteria are not exceeded for two consecutive financial years.
Companies whose annual financial statements are subject to statutory auditing must set up and ensure the execution of internal audits according to a multi-annual plan. In addition, financial institutions and banks are obliged to carry out statutory auditing and internal auditing as part of their activities and obligations in the public sphere. Public entities and companies working in the area of insurances and private pensions regulated by the Financial Supervisory Authority (ASF) are also obliged to carry out financial auditing of their activities.
Financial Auditing – Purpose & Objectives
The main purpose of financial auditing is to provide an independent opinion on the correctness of the disclosures contained in statutory financial statements. This involves an examination, by means of specific tests, of the evidence supporting the amounts and disclosures contained in financial statements, an assessment of the accounting principles used and of the most important estimates made by the management, as well as an assessment of the overall presentation of the financial statements.
The Objectives of a Financial Audit
A financial audit is a very useful tool that allows a business to develop harmoniously, form partnerships, and attract investors precisely because the financial transparency of its processes will be improved as a result of an audit.
The objectives of financial auditing include the following:
- Ensuring financial statements are presented correctly and faithfully, in keeping with accounting standards and the applicable regulations.
- Evaluating the efficiency and effectiveness of the internal control systems implemented by management.
- Identifying and evaluating significant risks that could impact financial statements.
- Providing recommendations for the improvement of internal processes and internal control systems.
Types of Audit
There are many different types of audit, each with a specific role in ensuring the financial transparency and compliance of an organization. Here are some of the more common types of financial auditing:
- Financial Auditing: This is the best-known type of audit and it involves the inspection and assessment of a company’s financial statements in order to ensure they are correct and in compliance with the applicable accounting standards.
- Auditing of National and European-Funded Projects: This type of audit is specific to projects with national or European funding and its aim is to verify that allocated funds are used correctly and efficiently.
- Internal Auditing: This is an independent, objective assurance and consulting activity that helps organizations achieve their objectives by using a systematic and disciplined approach to evaluate and improve the efficiency of governance, risk management, and internal control processes.
These types of auditing are essential in ensuring the financial transparency and integrity of an organization, thus helping improve governance and overall performance.
Financial Auditing
A financial audit is an independent and objective evaluation of the financial statements of a company. The main purpose of a financial audit is to verify the correctness and compliance of financial statements with accounting standards and the applicable legislation. It provides an opinion on whether financial statements are presented correctly and faithfully in all significant respects.
Auditing of National and European-Funded Projects
An audit of national and European-funded projects involves verification of the reality, legality, and eligibility of expenses in reimbursement claims, the respecting of expenditure amounts approved under the project budget, and the correct application of acquisition procedures.
This type of audit is aimed at organizations and entities that manage and implement European-funded projects. Auditing is essential for national authorities, donors, beneficiaries, and other interested parties wishing to ensure funds have been used correctly and efficiently.
Internal Auditing
An internal audit is an independent, objective assurance and consulting activity that helps organizations achieve their objectives and improve their performance. It involves an objective assessment of the overall activity of an organization with a view to providing an independent evaluation of risk management, control, and management processes.
Financial Auditing – Stages
A financial audit is an extensive process consisting of a number of essential stages. The licensed auditor is responsible for managing this process as well as producing the audit report after the audit has been completed.
Selecting the Audit Team
The selection of the audit team is an essential process in ensuring the quality and efficiency of the audit. This process involves multiple criteria intended to ensure the audit team has the skills and experience required to conduct the audit properly.
Planning the Audit
After selecting the audit team, the following stage involves planning the audit period so that the auditor is provided with all the documents needed during the verification process.
Designing an Audit Strategy and Plan
Every successful audit is accompanied by a strategy according to which the audit follows an efficient workflow. This stage involves designing work processes and may also include establishing a time frame or schedule for the testing, depending on the audit deadline.
Testing Internal Control Processes
An audit provides a very good means of analyzing internal procedures implemented to ensure compliance with industry regulations and standards and to identify possible weaknesses or opportunities for improvement. It may include an evaluation of the efficiency of internal control processes, verification that internal procedures and policies are being respected, and ensuring operational processes are optimized to achieve organizational objectives. An audit can also provide valuable recommendations for the improvement of performance and risk mitigation.
Collecting and Evaluating Evidence
As part of an audit, it is necessary to collect, organize, and analyze documents and information, but also to hold discussions with the persons responsible for different activities (organizing accounting documents, submitting balance sheets, tax declarations, etc.). This stage may also involve corroborating accounts with returns by performing tests of details. In the case of companies with complex operations and running large databases, it is essential to select a team of auditors that employs advanced tools and techniques to analyze and process accounting data with a view to improving the quality of the audit. This allows the audit firm to test more efficiently the large quantities of data processed by its clients’ IT systems. These instruments can also be used to assess risks, test control processes, and perform tests of details, all with a view to carrying out a high-quality audit.
Writing and Presenting the Audit Report
After the auditor has completed their analysis, after verifying the correctness of statements of financial and non-financial information, accounts, procedures, and the results of internal controls, the auditor presents their results to the management together with recommendations meant to mitigate the risks the company may be exposed to in terms of credibility, reputation, and efficiency.
The audit report contains: a) An introduction that will at a minimum identify the financial statements subject to a statutory audit, together with the financial reporting framework applied in their preparation. b) A description of the scope of the statutory audit that will at a minimum mention the auditing standards to which the statutory audit was performed. c) An audit opinion that may be unqualified, qualified, or adverse and which clearly states the opinion of the statutory auditor. Where the statutory auditor is not able to express an audit opinion, this will be stated so in the report. d) A reference to any matters the statutory auditor would like to draw attention to by way of emphasis, without qualifying the audit opinion. e) An opinion and declaration concerning: (i) the consistency of the administrator’s report with the financial statements for the same financial year; and (ii) the drawing up of the administrator’s report in compliance with the applicable legal requirements.
The audit report shall be signed and dated by the statutory auditor.
What are the Responsibilities of an Auditor?
A financial auditor has the responsibility of planning and carrying out the audit engagement, obtaining sufficient and appropriate evidence to provide a basis for the audit opinion. The auditor’s objectives include obtaining reasonable assurance that the financial statements are free from material misstatement, whether the result of fraud or error, and expressing an opinion on them.
The auditor will need to identify and evaluate the risk of a material misstatement of financial statements, to plan and execute audit procedures in response to this risk, and to obtain sufficient and appropriate audit evidence to provide a basis for their opinion.
The auditor must also understand the internal control process relevant to the audit, evaluate the completeness of the established accounting policies and regulations used, and evaluate the overall presentation of the financial statements.
A certified auditor is a professional with the means and capacity to analyze the data presented for auditing and, as well as expressing an audit opinion, present a detailed report on any irregularities, including solutions for their mitigation.
The responsibilities of an auditor thus include the following:
- Planning an efficient and effective audit.
- Testing the financial and accounting documents made available by the company.
- Understanding and testing the internal control processes of a company and identifying weaknesses.
- Identifying any significant differences and verifying them.
- Providing recommendations to remedy problems and reduce the risk of fraud.
- Respecting International Standards on Auditing.
- Respecting data confidentiality.
- Ongoing training of the audit team.
- Writing audit reports.
- Maintaining constant communication with the management team.
How Do You Choose an Auditor?
When choosing a financial auditor, you must first do a couple of things, such as checking the audit firm or statutory auditor is on the public electronic register (https://www.aspaas.gov.ro/registrul-public-electronic) of the Statutory Audit Public Oversight Authority (ASPAAS). The ASPAAS is responsible for overseeing statutory auditing in the public interest and exercises its powers in accordance with Law 162/2017.
When choosing a financial auditor, it is also important to consider reputation and experience in the field, estimated fee for performing the audit, and the auditor’s access to modern audit technology, their availability, and communication skills.
What are the Risks of Not Doing a Financial Audit?
Not performing a financial audit may have many risks and negative consequences for a company. Besides the fact that a failure to audit financial statements by a company for which this process is mandatory constitutes a contravention and is punishable with a fine, by not doing a financial audit a company may lose the confidence of investors, creditors, and other interested parties. A financial audit helps identify and prevent fraud and errors in financial reporting. Without performing this process, the company is more vulnerable to financial malpractice, which may lead to significant financial losses. Failure to conduct a financial audit may also result in non-conformity with the regulations and standards of the industry in which the company operates, potentially attracting additional penalties and impacting the company’s reputation negatively.
Frequently Asked Questions About Financial Auditing
Who carries out a financial audit? A financial audit can be carried out by a specialized audit firm such as TPA Romania, which offers a wide range of audit services, including the auditing of annual financial statements, auditing for companies that report according to IFRS standards, auditing of non-profit organizations.
The audit firm and financial auditor belong to the Chamber of Financial Auditors of Romania (CAFR). The public electronic register of auditors is available from the ASPAAS website at https://www.aspaas.gov.ro/registrul-public-electronic.
What constitutes audit documentation? According to international standards on auditing (ISA), audit documentation includes data and information prepared by the auditor or made available to them on different media (paper, film, electronic, etc.). Working papers may include data and information on the organizational and legal structure of the company, copies/excerpts of relevant legal documents, audit planning documents, an evaluation of internal control and risk management processes, balance and turnover evaluation documents, and communication/confirmation documents sent to or received from third parties and the company management. Audit documentation is essential to support the auditor’s opinion and to ensure the transparency and integrity of the audit process.
What role does financial auditing play in preventing fraud? Although the responsibility for safeguarding a company’s assets and preventing fraud rests with its management, a financial audit is planned in such a way that there is a reasonable likelihood of detecting material errors and fraud.
Financial auditing helps prevent fraud by identifying and assessing the risk of material misstatement of financial statements, whether as a result of fraud or human error. Auditors plan and execute audit procedures in response to these risks and obtain sufficient and appropriate evidence to provide a basis for their opinion.
What is the difference between an internal audit and an external audit? An internal audit is an independent, objective activity that provides organizations with assurance in terms of the degree of control they hold over their operations. It focuses on evaluating the efficiency and effectiveness of operations, verifying compliance with internal policies and procedures, and identifying opportunities to improve an organization’s risk management and operations. On the other hand, an external audit is carried out by independent auditors and its main objective is to provide an objective opinion on the correctness and compliance of financial statements with the applicable accounting standards.
How much does an audit cost? The cost of a financial audit or internal audit depends on various essential factors which determine the complexity and duration of the audit mission. These include the size of the entity being audited, the type of entity being audited (listed companies or those operating in specifically regulated fields require more complex auditing procedures, which implies greater cost), the field of activity of the entity, complexity and associated risks, all of which influence the number of hours required to carry out the audit mission. The cost of the audit is calculated on the basis of the budgeted time required to carry out the audit mission, taking into account the qualifications of the audit team members and the number of hours required by each team member, depending their seniority level.
