Accounting and Auditing Practices in Modern Business
What is the Role Assigned to Accounting in Modern Approaches to the Concept of Enterprise?
Accounting serves as a vehicle of communication between the enterprise and its surrounding environments. Accounting information acquires the character of a public good, which may be protected by the State. The State uses accounting data provided to shareholders to control the decisions of managers in an environment of separation between ownership and management.
Executives use both the external and internal accounting systems to make decisions that affect the companies they manage, a task for which they were hired.
Financial institutions use accounting data to make decisions on whether to provide or withhold funding. Customers use it to decide whether to buy, vendors to decide whether to sell, and so on.
What are the Three Purposes that Accounting Meets?
- Be an instrument of management control by the owners.
- Serve as a useful tool for decision-making, both internally and externally.
- Be the instrument to divide the surplus generated by the business operations undertaken by the company among the various participants: shareholders, directors, employees, government, etc.
What is Creative Accounting?
Creative accounting is the recourse by managers to accounting strategies, even skirting the law, that are allowed by accounting regulations and intended to reflect their own interests in the annual accounts.
Requirements to be Met by Accounting Information
- Relevance
- Reliability
- Integrity
- Comparability
- Clarity
Three Reasons Accounting Information May Lack Neutrality
- Mistake
- Deliberate omission of accounting events
- Choice of favorable accounting alternatives
What is the Significance Requirement?
- When it helps evaluate past, present, or future events.
- Or to confirm or correct past evaluations.
What is the Comparability Requirement?
- Allows contrasting the situation and profitability.
- Requires similar treatment for transactions and other economic events that occur in similar circumstances.
How Can We Define the Audit (LAC)?
It is a review or verification of processes related to a company that may differ in terms of immediate economic purpose.
Definitions
External Audit: Services provided to the audited entity itself by independent professionals.
Financial Audit: An activity that consists of checking and examining annual accounts and other accounting and financial statements to judge their reliability and reasonableness.
Operational Auditing: An activity directed to the review and evaluation of procedures and internal management systems of an organization to increase efficiency.
Full Audit: Expresses an opinion on the reasonableness of the annual accounts.
Statutory Audit: A review process required by the company’s tax law in force.
Audit by Proof: Based on a review of documents that support the audited events.
Labor Audit: An analysis of the employment relationship of a company and determination of the existing socio-labor climate.
Environmental Audit: Determines the impact on the environment of the company’s production processes.
Main Auditing Standards in Spain
- Law 19/1988 of July 12, on Auditing (LAC).
- Royal Decree 1636/1990, of December 20, which approves the regulations that develop the Audit Law (RAC).
Main Functions of the ICAC
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What is the ROAC?
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What are the Three Professional Corporations?
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Requirements to Achieve the Status of a Professional Corporation
- Its statutes must list as a single, or among their activities, the audit of accounts.
- At least 10% of auditors registered in the ROAC must belong to the corporation, either directly or through member agencies.
- At least 15% of registered practicing auditors in the ROAC must belong to the corporation.
Most Important Functions of Corporations
- Develop, adjust, and revise the technical standards of auditing on their own initiative or at the request of the Institute of Accounting and Auditing.
- Conduct examinations of professional competence.
- Organize and deliver appropriate training courses that ratify the Institute’s theoretical accounting and auditing.
- Organize training programs to be performed by members of the corporation.
- Boost cooperation between members in practical training required for the qualification examination.
The Obligation to Audit for Objective Reasons and Sizes
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Other Duties of Audit
Article 205 of the TRLSA contemplates that in those companies that have no legal obligation to audit their accounts due to their objective size, a minority of shareholders representing at least 5% of the social capital may request the Commercial Registry to appoint auditors.
The Two Ways Set in Spain to Access the Audit Profession
- Academic (official university title)
- Professional (university-level income)
The Three Types of Incompatibility for Exercising Auditing
- By relations (officials)
- By activity (keeping of accounts)
- By conflict of interest (direct financial interest)
Period Computation of Incompatibilities
It will be understood from the period in which the work is performed until the third year preceding the year to which the audited financial statements refer.
Who Appoints the Auditors and for How Long?
- The General Meeting of the company.
- The Commercial Registry.
- Established by the judge.
They can be hired for an initial period of no less than three years and no more than nine years.
Amount of the Deposit Required as Security for Auditors’ Responsibilities
The first year is €300,506 for individual auditors. For audit firms, it will be the result of multiplying that amount by the number of partners. In consecutive years, the minimum bail amount will experience an increase of 30% of the billing.
Three Types of Liability that an Auditor May Incur
- Administrative
- Civil
- Criminal
Administrative Responsibility: Examples of Infringements
Very Serious: Issuing audit reports whose content is not consistent with the evidence obtained by the auditor in his work.
Serious: Failure by an audit firm to produce contracted accounts.
Minor: Any actions or omissions involving non-compliance with technical audit standards that are not included in previous reports.
Penalties for Contraventions
Individual Auditor:
- Very Serious: A fine between €12,000 and €24,000. Temporary suspension from the ROAC for between two years and one day and five years. Permanent removal from the ROAC.
- Serious: A fine between €6,001 and €12,000. Temporary suspension from the ROAC for up to two years.
- Minor: Private admonition. A fine of up to €6,000.
Audit Society:
- Very Serious: A fine of between 10.1% and 20% of fees billed. Permanent removal from the ROAC.
SA Staff of 60, Assets of 2 Million, and Sales of 14 Million
a) Can it present an abbreviated balance sheet? No, since both the number of employees on staff and the net turnover exceed the parameters for presentation.
b) Can it present an abbreviated P&L? Yes, because it satisfies two of the three parameters required to do so.
c) Must it submit an EFE (Statement of Cash Flows)? Only companies that are exempt can submit an abbreviated balance sheet.
SA Template 40, Sales of 3 Million
a) Can it qualify for PGCPYME (General Accounting Plan for SMEs)? Yes, if it meets at least two of these requirements for two consecutive years.
b) If it can qualify, must it submit an EFE? It is not mandatory in PGCPYME.
c) Must it submit an ECPN (Statement of Changes in Equity)? Yes, but only one document.
Who is Eligible for PGCPYMES?
Companies that, for two consecutive years, meet at least two of the following requirements: total assets of 2.85 million, net turnover of 5.6 million, and an average number of employees not exceeding 50.
In PGCPYMES, What are the Documents Comprising the Annual Accounts?
Balance Sheet, P&L Account, ECPN, and Memory.
In PGC, Who Can File Abbreviated Annual Accounts?
Companies with total assets of 2.85 million, net turnover of 5.6 million, and an average number of employees of at least 50.
In PGC, Who Can Submit an Abbreviated Balance Sheet and P&L?
Companies that meet at least two of the following parameters: total assets of 11.4 million, net turnover of 22.8 million, and an average number of employees not exceeding 250.
Micro-enterprises
a) What are they from an accounting point of view? Companies with total assets of 1 million, net turnover of 2 million, and an average number of employees not exceeding 10.
b) What documents do they present? The same as those of the PGCPYME: Balance Sheet, P&L, Memory, and ECPN (one document).
The Statement of Changes in Equity (ECPN)
a) Procedures
b) Parts of the statement
Statement of Recognized Income and Expense: Collects the changes resulting from the P&L Account, income and expenses charged directly to the equity account, and transfers to the total P&L.
Total Statement of Changes in Equity: Reports all changes in equity from the total balance of recognized income and expense, variations in equity due to operations with partners or owners, and other changes in equity.
Equity Components
- Equity (capital, share premium, reserves, financial results, other inputs, interim dividend)
- Adjustments for changes in value
- Grants, donations, and bequests