CHAPTER I
“ THE AUDIT OF INVENTORIES:
GENERAL AND INTRODUCTORY ASPECTS”
1. The company audit
The review of a company is a systematic and analytical process by which we intend to verify the
accuracy of accounting entries made in the company and to establish the financial statements
1
.
Subject of the audit is therefore the corporate financial statements, which must meet the
requirement of clarity and in accordance with the provisions of Community directives
2
, must
correctly represent the financial position and the economic performance of the company.
The suitability of the budget situation to express business could not be achieved by the Board, the
body control required by our legislation. It became, therefore, necessary to use one or more
independent professionals who have experience and expertise in accounting, i.e. the auditors. The
latter, usually operating as part of audit firms, companies whose business consists in auditing and
accounting organization of companies that are entered in a special register kept by Consob.
The development of these companies have only occurred recently in our country: the first
international audit firms began to operate in Italy thirty years ago, with control tasks on Italian
companies in which the groups had made international investments.
Besides these cases, there was not any substantial control over budgets, and still in the early '70s,
1
It is a definition of A. PESENATO, Auditing and Certification of financial statements, Cedam, Padua, 1992. With
reference to the multiple definitions of auditing, reference is also made to Various Authors, The professional
certification of financial statements, Giannini,Padua,1973; BRUNI, The company audit, Cedam,
Padua,1991;DEZZANI- PISONI-PUDDU, The certification of the financial statements, Auditing standards;
GIAPPICHELLI, Turin, 1991;MARCHI L, Auditing standards, Clueb, Bologna, 1991; PAOLONE G.,Auditing and
Certification of Financial Statements, Giappichelli, Turin, 1994.
2
These are directives no. 78/660 / EEC and no.83/349/EEC on corporate matters relating to the annual and consolidated
accounts
2
the deficiency of information on corporate issues was remarkable.
This in contrast to countries like the United States, where the audit had already received a major
boost after the Great Depression of 1929 and where, after several changes, in the ‘70s revision of
the institute had already reached the best perfection.
The main reason for the growing interest shown in recent years, towards the revision is the need to
instill confidence among traders, increasingly disoriented and wary about the information available
on business situations.
2. Revision compulsory and free review
As part of the audit, it became necessary to distinguish the mandatory review by the statutory or
voluntary or free
3
.
For legal review means the use of an audit firm under a specific legislative measure, which has
compulsory and binding nature.
Therefore, certain types of businesses, in order to protect the public, are subject by law to review.
But an audited financial statement is, however, a great business card that definitely offers a more
qualified company. So the benefits of the review goes well beyond compliance to a rule of law.
Therefore, in some cases, the review is voluntary, that is the use of an auditing firm is independently
and freely made by those who they consider certain utility and purpose.
The audited financial statements because, in addition to being useful in dealing with third parties,
increasing the bargaining power of the company, allows you to examine in detail the internal
organization of business, facilitating the management.
3
For the distinction between legal and voluntary certification, see also, DEZZANI-PISONI-PUDDU, The certification
of financial statements, The auditing principles, Giappichelli, Turin, 1991.
3
However please note a substantial difference between the statutory and the voluntary audit: while
the former must necessarily lead to the drafting of a report certified by the auditor, a document in
which he expresses his own independent
4
judgment on the budget, the second one can also conclude
with the emission of a different relationship.
The review process is not identified, in fact, with the establishment of certification, the latter is a
legal institution established by our legislature and is totally different from that set of procedures that
lead to the evaluation of the reliability of a company's financial statement.
3. The certification in Italian legal System
For a long time, the only rules in force in Italy for the audit were limited to the provisions of Law
no. 1966 of 23.11.1939 and subsequent implementation of Decree n. 531 of 22.4.1940. The law on
this matter regarding the regulated trust companies and review, outlining the tasks and sorting.
The term "certification" was, however, introduced by our legislature later, on the occasion of the
first concrete step toward the mandatory review, made by Law. 216 of 7.6.1974 on the reform of
society, that art. 2 empowered the government to issue regulations relating to audit and certify the
accounts.
In accordance with this delegation on 31.3.1975 was issued Presidential Decree No. 136; with it
were conferred audit engagements to companies registered in a special register kept by Consob
5
.
The certification was, however, made compulsory only for companies with shares listed on the
Italian Stock Exchanges. Therefore, all other companies in the possession of capital and size of
4
“Independence, in this case, should be understood not as autonomy of judgment, but as freedom to set up the work, to
assume hypotheses and data, with the corresponding responsibility that derives” (. VIGANO’, Relations between
external auditing and internal company controls in V ARIOUS AUTHORS, The professional certification of financial
statements, Giannini, Naples, page 65).
5
For further information on the functions of Consob in the context of auditing and on the control of CONSOB over the
auditing companies, please refer to DEZZANI-PISONI-PUDDU, in the cited work, GIAPPICHELLI, Turin, 1991.
4
major importance have been excluded from this legislation.
Hence the need to extend the compulsory auditing to other companies and organizations.
With the Law of 18.8.1977, n. 675, related to investment loans for industrial restructuring, the
certification has been extended to:
a) enterprises with investment of more than ten billion, financed by the Fund for the industrial
restructuring and conversion;
b) to companies controlled by the management bodies of state holdings (IRI, ENI, EFIM).
Currently, the effect of further legal regulations, are subject to certification:
1) publishers of newspapers and periodicals meeting certain requirements (Decree 416/1981);
2) local public utilities (municipal utilities - Law no. 51 of 26.02.1982);
3) the company for repair and management of the shipyards (Law no. 598 and n. 589 of 1982);
4) the management company of mutual funds and securities of the same Investment Funds (Law no.
77 of 23.03.1983)
6
.
5) the undertakings performing insurance against damage or death (Law 242/1986);
6) the brokerage companies (SIM - Law 1/1991)
7
;
7) investment companies with variable capital (SICA V - d. Lgs. 84/1992);
8) companies wishing to be admitted to stock quotes.
The importance of the institution's legal certification must be considered in light of the rules that
have implemented the directives of the European Economic Community.
It is known both as the Fourth Directive (25.07.1978) and the VII Directive (of 13.06.1983) laying
down, one for the corporations, the other for groups of companies which carry out the audit of
budget must be made by persons authorized by law to audit accounts.
In particular, the transposition of the IV EC Directive, which took place in Italian law, with the
6
For Mutual Investment Funds, as well as, for SICA V , (see point 7), the certified balance sheet finds its raison d’etre in
its fundamental role carried out by these operators; these ones, in fact, invest institutionally in financial assets and do
not bear the related financial risk which is transferred to the holders of the shares or assets, therefore their management
activity must be subject to constant control.
7
The S.I.M. as multi-functional operators must be subjected to constant accounting and budgetary control, to which is
added the supervision of the Bank of Italy and Consob.
5
d.lgs. No. 127, 09.04.1991, has introduced a new fiscal discipline that has amended certain
provisions of the Civil Code and, consequently, certain provisions of Presidential Decree No. 136.
With Leg. Aforesaid, no. 127/91, remain substantially unchanged
8
the functions assigned to auditors
regarding control of the regular accounting records and the issuing of the certification report, in
reference to quoted companies. As regards, however, control is implemented by the external
auditors, compliance with the rules for the valuation of assets by firms, it should be noted that new
rules were introduced by the new wording of Article .2426 cc which replaces the previous art. 2425.
Moreover, in the law 127/91, it is stated explicitly required for listed companies to submit to the
auditors, together with the financial statements, copies of the last full budget of the subsidiaries and
a summary of essential data of latest financial statements of associated companies, provided that
there are subsidiaries and associated companies under the new text of art. 2359 of the Civil Code
9
.
It 's also no doubt that the Board should continue to prepare the report to the budget (art. 2429 cc)
and is therefore required to report "on the results of the fiscal year and accounting", as well as to
"make observations and proposals regarding the financial statements and their approval ".
And therefore to be considered, as previously held, that the audit of the auditors does not replace
but is additional to that made by the Board, with the aim, object and effects partially different.
Another important moment in the evolution from a regulatory standpoint is the Leg. N. 88 of
27.1.1992, which was implemented with the eighth EEC Directive on the approval of persons
responsible for carrying out statutory audits of accounting documents.
This decree established the Register of Auditors at the Ministry of Justice: it has also established
8
Therefore the subsidiaries and associates acquire greater importance with respect to the D.P.R. no 136, who did not
specify the attachments to the financial statements, referring in this regard to the rules on the content of the financial
statements
9
Pursuant to Article 2359, companies in which another company:
- Has the majority of votes in the ordinary shareholders meeting;
- Or over which it exercises a dominant influence by:
a) the number of votes exercisable in the ordinary shareholders' meeting;
b) particular contractual constraints
Are considered subsidiaries associated companies in which another one exercises significant influence; the latter is
assumed when votes of
:
: at least 1/5 can be exercised in the ordinary meeting, at least 1/10 if listed on the stock
exchange.
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