AUDITOR, AN INDEPENDENT ACCOUNTING EXPERT

Financial audits are performed to ascertain the validity and reliability of financial information (for information risk reduction purposes).

An external auditor (often referred to as a certified public accountant (for example in the United States) or chartered public accountant (for example in the UK and Canada) is an audit professional who performs an audit on the financial statements of a company, government entity, other legal entity or organization in accordance with specific laws or rules (standards) and who is independent of the entity being audited. The goal of an audit is to express an opinion of the independent accounting expert (an auditor) on the audited financial statements based on work done on a test basis. A set of financial statements is said to be true and fair when it is free of material misstatements whether due to fraud or error – a concept influenced by both quantitative (numerical) and qualitative factors. The manner of appointment, qualifications and format of reporting of an external auditor is defined by statute which varies in the jurisdictions of different countries. Usually, external auditors have to be members of a recognised professional accountancy body (e.g. Estonian Association of Auditors) and are in some kind of register (e.g. Estonian Auditing Activities Register). External auditors normally address their reports to the shareholders of an entity (in the case of a corporate entity).

INDEPENDENCEThe concept of independence of the external auditor requires the auditor to carry out his or her work freely and in an objective manner. Auditor independence refers to the independence of auditors from parties that might have a financial interest in the business being audited.

There are two necessary aspects of independence to be considered:

– Independence of mind: The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

– Independence in appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional scepticism had been compromised.

The use of the word “independence” on its own may create misunderstandings. Standing alone, the word may lead observers to suppose that a person exercising professional judgment ought to be free from all economic, financial and other relationships. This is impossible, as every member of society has relationships with others. Therefore, the significance of economic, financial and other relationships should also be evaluated in the light of what a reasonable and informed third party having knowledge of all relevant information would reasonably conclude to be unacceptable.

TRADITIONS   We could say that the auditing profession is one of the oldest one: the first accountants, and therefore possibly the first auditors, were scribers. Historically, the word “auditing” has been derived from Latin word “audire” which means “to hear” and the word “review” has been derived from Latin word “revisio”. The skills of listening and visual inspection of the evidence are still important in our days professional life.  To serve the needs of (primarily) business entities reporting on their economic activities, an auditing profession developed. This gained momentum when absentee ownership and professional management became the model for larger business enterprises. Thus, the need for independent accounting experts emerged in order the owners could be certain that their businesses and wealth is managed and accounted according to their interest.  During different regimes the representatives of the profession were called “revidendid” in earlier Estonian history (Russian language, and German / Scandinavian influence), and later on (since post-soviet era), the auditors (English influence).      PUBLIC INTEREST Once the era of laissez faire had passed into history, virtually every nation, having every variant of economic and legal systems, imposed some type of regulation over the accounting profession. This was done either by means of direct government regulation, or indirectly via professional self- regulation (often under implied threat of direct supervision should that prove unsatisfactory). Thus, the focus of auditing has been shifting from the protecting of shareholders’ interests to the broader group of stakeholders’ (governmental institutions, creditors, etc) interests’ (which is understood as public interest) protection.  The auditing services require high level professional knowledge and skills, it is heavily regulated and supervised, and quite often statutory, with strict legal requirements.  The central issue is not the shareholder’s interest but the fair representation (true and fair view) of the information in accordance with the applicable reporting framework (ie Estonian GAAP). The auditor’s opinion on financial reports audited should reflect the expectation of public interests.   Thus, the auditors profession is protecting the public interest – the stable and trustworthy economic environment relies on fair financial reporting of the companies.  FORMAL PRACTICEIn Estonia, the certified public accountant (the auditor) cannot practice as a physical person, the professional practice should be conducted via registered audit firm only. The list of certified public accountants and the registered audit firms (Estonian Auditing Activities Register) is maintained by the Ministry of Finance, and it is available at the web-site: www.audiitortegevus.ee. CERTIFIED PUBLIC ACCOUNTANT OF PUBLIC SECTOR Public interest companies, such as the listed companies, banks and other financial institutions, significant size municipal and (or) other local governments could not be audited by every certified public accountant managed audit firm. For that the auditor should pass special test module showing that he or she has sufficent knowledge about the public sector entity’s reporting requirements. The register of auditors mentioned above has special remarks in case the certified public accountant has the right to conduct the engagements in such entities.   CONFIDENTIAL INFORMATION 

Confidential information means any information that the auditor receives in the course of conducting the audit, and which pertain explicitly to the business of the client, as well as any other information that can be reasonably deemed confidential information from the client’s position. The auditor should use confidential Information solely for conducting the audit, and should not disclose confidential Information to any third person without the client’s prior written consent, unless otherwise stipulated by engagement terms or the law. 

The auditor is not obligated to treat as confidential any information disclosed by the client which the auditor has legitimately learned before such information was disclosed by the client, which the client discloses without limitation to any other natural or legal person, which the auditor prepares independently without using confidential information or relying on the same, which is or will become available to the general public without any breach of this confidentiality obligation, or which can be legitimately obtained by the auditor from any third person. The auditor should apply reasonable measures for safeguarding confidentiality of confidential information.  In connection with any regulatory requirements, risk mitigation and quality control requirements the auditor may disclose confidential information to its professional advisors and insurance companies, provided that the latter are committed to treat such information as confidential. Also, for any other commercial reasons the auditor may communicate confidential information in connection with outsourcing of services (i.a. server hosting, maintenance, support services) provided that the preservation of confidentiality of such information is guaranteed by the service provider, and that the auditor will be responsible before the client for ensuring the confidentiality of the information.

LEVEL OF ASSURANCE 

Due to constraints, an audit seeks to provide only reasonable, rather than absolute, assurance that the statements are free from material error. In case of reviews of financial information the level of assurance gained is usually lower than in case of audits – moderate (limited).

INHERENT CONSTRAINTS

There are some inherent constraints regarding the audits and reviews of financial statements. The essence of the constraints is effectively pictured by an old anecdote according to which the auditor is travelling with assistand auditor to the clients premises. As the travel is long and boring the assistant auditor tries several times to keep up the conversation, but it is unsuccesful “career attempt” one. And finally, he looks out of the window and says: “look, the flock of sheep is out there, already. And they are shorn of the wool already. So early!”. The experienced auditor looks out of the window, and says: “Yes, from this side we see it is really done”.    

ABOUT RESPONSIBILITY

The management of the audit client shall be responsible for any forecasts and decisions connected with the preparing of the financial statements, as well as for the consistent application and accuracy of the accounting principles, and disclosing the entire information required by the applicable financial reporting standards in the financial statements. The auditor (auditing firm) is responsible for conducting the engagement according the legal requrements (law on auditing and applicable professional standards).  

PUBLIC OVERSIGHT AND QUALITY PERFORMANCE REVIEWS

Conducting the professional services with due care is vital for serving public interests of (Estonian) society. Thus all the audit firms are required to follow strict requirements on service quality. Besides professional self-monitoring all the audit firms are having at least once in the six years, or once in the three years in case the audit firm has among its clients any  public interest entity, the professional quality performance review conducted under supervision of Estonian Association of Auditors. The process is monitored by the Public Accounting Oversight Board under supervision of Ministry of Finance of Republic of Estonia.