Auditing Principles, Standards, and Practices in Spain

Posted on Nov 27, 2024 in Mathematics

Personal Auditor

Independent registered professional responsible to third parties. Applies ROAC standards. Conducts activity on time. Maintains working relationship.

Internal Auditor

Dependent, makes recommendations. Proposes improvements to achieve business objectives. Conducts activity continuously.

Operational Auditor

Not subject to professional modifications. Analyzes legal organization and provides efficient improvements. Conducts activity on time.

Audit: Concept, Classes, and Evolution

External Information: Financial accounting.

Information Management: Cost accounting for management use, enabling decision-making.

Audit: Activity involving review and verification of records for reporting to third parties. The annual audit aims to provide a technical opinion on the true and fair view of the financial situation and operational results.

Features:

• Performed by qualified and independent professionals.
• Uses appropriate review and verification techniques.
• Examines accounts to express net worth, financial position, operational results, and internal control system.
• Must comply with generally accepted accounting principles.
• Issues a report for third parties.

Classes of Audit:

• External Audit: Review of annual accounts by an external auditor, usually a legal requirement.
• Internal Audit: Performed by company employees to ensure operations comply with general policy, evaluating effectiveness and proposing solutions.
• Operational Audit: Review of internal control system by qualified individuals to assess and improve performance.
• Public Audit: Developed by the Court of Auditors.
• Systems Audit: Environmental, quality, and IT audits.

Regulation and Standards of Auditing

Audit regulation began with the 1973 Trade Catalog reform, requiring verification by a university graduate. LAC: Law 19/1988 Audit of Accounts. ICAC (Institute of Accounting and Auditing) is an autonomous administrative body under the Ministry of Economy and Finance, controlling audits in Spain. ROAC (Official Register of Auditors) includes natural and legal persons authorized to conduct audits. ICJCE (Institute of Statutory Auditors of Spain) and REGA (Register of Auditor General) are also key entities.

ICAC Basic Skills:

• Setting standards.
• Establishing and monitoring ROAC.
• Determining professional examination requirements.
• Approving publication of NTAS (Technical Auditing Standards) developed by professional bodies.

To practice auditing in Spain, registration in ROAC is required, authorized by ICAC. Individuals must be of legal age, have Spanish or EU nationality, have no criminal record for intentional crimes, and obtain ICAC authorization. Practicing auditors must post a bond.

ROAC Registration for Legal Persons:

• All members must be natural persons.
• Most members must be practicing auditors, holding the majority of share capital and voting rights.
• Most managers and executives must be practicing auditors.
• Must subscribe to ROAC and provide a bond.

Trade Associations’ Functions:

• Adaptation and revision of NTAS.
• Conducting professional examinations for ROAC entry.
• Providing theoretical training for ICAC-approved examinations.
• Updating and continuing education for members.

Obligation to Audit in Spain

The LAC requires audits for companies meeting specific criteria:

• Publicly traded securities.
• Issuance of debentures in a public offering.
• Banks and credit institutions.
• Companies with a social purpose in Private Insurance Management.
• Companies receiving government grants over €600,000.
• Companies meeting two of the following: total assets over €3,080,000, net turnover over €6,160,000, or more than 50 employees.

Consolidated accounts must also be audited. Building societies’ members must still formulate their own accounts and management reports.

Technical Audit Standards

General Rules:

• Technical and professional training.
• Independence, integrity, and objectivity.
• Diligence.
• Professional liability.
• Professional secrecy.
• Fees and commissions.
• Advertising.

Guidelines to Conduct Audit Work:

• Introduction, audit contract, and letter of appointment.
• Planning, survey, and evaluation of internal control system.
• Evidence.
• Documentation of work.
• Monitoring.

Internal Control and Management Control

Internal Control: Plan of organization and methods to ensure asset protection, reliable accounting records, and effective activity development according to management guidelines.

Features:

• Safeguarding assets.
• Ensuring accurate accounting transactions and financial statements.
• Promoting operational efficiency.
• Coordinating employees to achieve goals.

Classes:

• Financial Controls: Systems for preparing financial statements and accounting, ensuring asset safeguarding and record reliability.
• Administrative Controls: Organizational plan and methods related to operational efficiency and policy adherence.

Objectives:

• Authorization: Transactions must follow policy direction.
• Security: Physical custody of assets assigned to specific persons.
• Record: All transactions recorded timely.
• Reconciliation: Comparing internal and external records.
• Rating: Reviewing figures to adjust differences according to GAAP.

Elements:

• Organizational plan defining responsibilities.
• Budgets and strategic planning.
• System of licensing and registration procedures.
• Useful information channel for decision-making.
• Qualitatively and quantitatively appropriate personnel.

Management Control

Process of feedback for efficient resource use to achieve objectives.

Conditioning:

• Environment: stable, dynamic, or variable.
• Objectives: profitability, growth, social, or environmental.
• Structure: functional or divisional.
• Size: decentralization may be necessary with increased volume.
• Culture and decisions.

Purpose:

• Inform: transmit necessary information.
• Coordinate: direct activities to achieve objectives.
• Evaluate: assess goal achievement.
• Motivate.

Instruments:

• Planning: anticipating the future.
• Budget: planning to spend resources.

Methods for Evidence

• Inspection: Review of accounting records’ coherence and consistency.
• Observing: Consider a procedure performed by others.
• Questionnaires: Obtain relevant information.
• Oral Investigation: Discussions with company officials.
• Confirmations: Written confirmation of accounting records.
• Calculations: Verify arithmetical accuracy.
• Analytical Review: Comparing recorded amounts to expectations.

Classes of Evidence

• Physical: Proving asset existence through inspection.
• Documentary: Invoices and supporting documents.
• Confirmations: Written statements from external sources.
• Testimonial: Questions and meetings with personnel.
• Analytical: Verifying calculations.
• Registration: Books and old newspapers.

Audit Risk

Auditor’s responsibility to determine safety based on materiality and risk.

• Inherent Risk: Risk of intentional wrongdoing.
• Control Risk: Risk that internal auditors fail to detect wrongdoing.
• Detection Risk: Risk that external auditors fail to detect wrongdoing.

Importance

Magnitude and nature of errors affecting decision-making.

Report Models

• No exception on annual accounts.
• No exception on accounts of two periods.
• With exception on audited annual accounts.

Adjustments and Reclassification

Adjustments: Quantitative impact on estate or results.

Reclassification: Seats for annual accounts without changing results.

Review of Subsequent Events

• Events already included, but evidence confirmed later.
• Events not included but must be communicated to stakeholders.