Audit of financial statements: legal aspects of conducting and contractual support

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Ланткевич Кирило

Lawyer

Ukraine / Dnipropetrovsk Oblast

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Publication date: 25.07.2024

I am studying in the third year of the State University of Economics and Technology.I specialize in contractual, economic and corporate law, in particular, I provide consultations and write articles.

Limited and additional liability companies (LLCs and TDVs) are capital associations where participants risk their investments. Managers and employees of such companies have a significant influence on their financial and economic activities, which can lead to various situations that threaten the interests of the participants and the company itself.

Here are some potential problems and measures to control:

• Abuse of authority: This may include unscrupulous business practices, conflicts of interest, unauthorized transactions or expenditures unrelated to the company's interests. To prevent such situations, it is necessary to establish strict internal control, conduct audits and conduct regular reviews of management activities.
• Lack of competence and errors: Inadequate qualifications of managers or employees can lead to errors in management decisions or misinterpretation of legislation. It is important to ensure constant professional training and support of personnel, as well as consulting lawyers on issues of legal regulation.
• Legal regulation: Knowledge and compliance with all relevant regulatory and legal acts helps to avoid violations and negative consequences. Legal support is important for the correct interpretation of legislation and the implementation of appropriate legal mechanisms in the company's activities.
• Management mechanisms: Effective management, including the distribution of powers, control over the implementation of decisions and establishment of internal procedures, are important elements for ensuring the stability and success of the company.

General work with risk management, implementation of internal control mechanisms and proper compliance with legal norms help reduce the likelihood of negative consequences and preserve the interests of the company's participants.

Audit of financial statements from a legal point of view:

Implementation of appropriate mechanisms for monitoring the activities of the executive body and bringing unscrupulous managers to account is an important step to ensure effective management and protection of the interests of the company's participants. One of such mechanisms is the audit of financial statements at the request of the company's members.

The main aspects of this mechanism include:

• Audit of financial statements: This process is performed by an auditing firm or an internal auditor to verify the reliability, correctness and completeness of the company's financial statements. The audit is aimed at identifying possible financial deficiencies and abuses, as well as at evaluating the effectiveness of financial control procedures.
• At the request of the participants: The participants of the company have the right to request an audit of the financial statements. This right allows them to verify the correctness of financial management and compliance with corporate governance standards.
• Audit results: After completing the audit, the auditor submits a report on his conclusions and recommendations. This report may include identified weaknesses and risks, as well as recommendations for improving financial management and control mechanisms.
• Legal responsibility: If violations or deficiencies are discovered during the audit, the responsible persons, including managers, may be held responsible according to the law. This may include fines, civil actions or criminal prosecution for serious violations.
   

The general purpose of the audit of financial statements at the request of the members of the company is to ensure the transparency of management, reduce the risks of financial abuse and protect the interests of the members. This mechanism is important for maintaining trust in the management and ensuring the stability of the company's activities.

An audit of the company's financial statements may be initiated by a company member in the following cases:

1. Dispute between the participants and the company regarding the amount of dividends: The participant may request an audit if there is a dispute regarding the amount or legality of the payment of dividends.
2. Participant's disagreement with the size of the value of the share upon leaving the company: If the participant does not agree with the determination of the value of his share upon leaving the company, he can initiate an audit.
3. Corporate dispute between members: In the event of a conflict between members of the company, an audit may be proposed to clarify the financial aspects of the dispute.
4. Disagreement of the participant with the actions of the executive body: If the participant believes that the actions of the executive body do not meet the interests of the company or violate his rights, he can request an audit of the financial statements.
5. Company management dispute: If there are conflicts over management decisions or company strategies, an audit can help clarify the financial consequences of such decisions.
6. Registration of inheritance for a share in the authorized capital: When the share of a member of the company is transferred through inheritance, it may be necessary to check the financial condition of the company.
7. Other corporate disputes: Any other disputes related to the financial aspects of the company's activities and violating the rights of participants may also become grounds for an audit.

In all these cases, the audit is aimed at ensuring transparency and openness in the management of the company, as well as protecting the interests of its participants.

Audit contract:

The agreement on the audit of the company's financial statements is an important legal document, which is concluded between the members of the company and the designated auditor (auditing firm). Here are the key aspects that should be taken into account in such a contract:

1. Subject of the contract: Determination of the object of audit (financial reporting), which is subject to audit, including specific reporting years.
2. Scope of Audit Services: A description of the specific services to be provided by the auditor, such as an audit of financial statements, an assessment of internal controls, etc.
3. Size and terms of payment: Determination of the cost of the audit and terms of payment for the auditor's services (static or dependent on working hours, volume of work, etc.).
4. Liability of the parties: Terms of liability of the parties for non-compliance with the terms of the contract or negligence in the performance of services.
5. Other conditions: Other important conditions, such as confidentiality of information, rights and obligations of the parties in case of changes to the terms of the contract, reporting procedures and submission of audit results.

According to the requirements, such an agreement must be concluded in writing and submitted to the executive body of the company together with a request for an audit. This contributes to a clear understanding of the terms and obligations of the parties, and also protects the interests of the company's participants in the process of auditing financial statements.

Lawyer advice during the audit:

The lawyer services is important when conducting an audit of the company's financial statements for many reasons:

• Legal analysis of the situation and consultation of a lawyer: A lawyer consultation can help in developing the right legal approach to the audit. This includes the analysis of legal requirements and regulations related to the preparation and submission of financial statements, as well as compliance of the company's actions with legal requirements.
• Negotiating contract terms: When concluding a contract with an auditor, a lawyers online can help determine important terms, such as the scope and types of audit services, cost of services, rights and obligations of the parties, terms of liability, confidentiality and other important aspects.
• Protection of the interests of the client: Legal counsel ensures that the interests of the company are properly protected during the audit. He can identify possible risks and problematic issues that may arise during the audit and provide recommendations for their resolution.
• Analysis of legality of actions: The types of legal services can exercise legal control over the activities of the auditor to ensure that all actions comply with the law and the requirements of the contract.
• Legal services in preparation for the audit: The lawyer services online can help in the preparation of the necessary documentation and materials for the audit, such as agreements, financial statements, contracts with counterparties and other documents that may be required for the audit.
• Services of a lawyer for the protection of rights: In case of a dispute with an auditor or a member of the company, the lawyer will help protect the rights and interests of the business, which will include a court proceedings and pre-trial settlement of conflicts.