| Recent
Developments in
International Auditing Standards
Roger Simnett
School of Accounting
The University of New South Wales, Australia
Member, Auditing Standards Committee
Kay Tatum
University of Miami, USA
Chair, Auditing Standards Committee
The purpose of this
article is to provide an update on international developments in auditing.
Keeping abreast of these developments is important as the profession continues
to transition towards significantly more internationalization. Most countries
today adopt in totality, or in slightly adapted form, the International
Standards on Auditing (ISAs). One of the primary drivers for this move towards
the ISAs is the possibility that they will be adopted by the International
Organization of Securities Commissions (IOSCO). If IOSCO approves the use of
ISAs then, for any cross-border filings or listings, the audit may be
undertaken in accordance with ISAs rather than having to meet the auditing
standards of each jurisdiction. This article details the most recent
developments with regard to IOSCO approval of the ISAs, as well as outlines the
other initiatives of the International Auditing Practices Committee over the
past two years.
IOSCO
Accreditation
IOSCO accreditation of the ISAs has been prolonged, with initial discussion
about this initiative beginning in 1995. To date, IOSCO has concentrated its
efforts on the endorsement of the International Accounting Standards. However,
IOSCO representatives recently advised IFAC that the IOSCO Working Party No. 1
is drafting a work plan for endorsing the ISAs, which is expected to be
submitted to the IOSCO Technical Committee early in 2001 with the hope that a
program for endorsement will be developed soon afterward. In the meantime IAPC
staff members are developing a list of what might be considered a core set of
audit standards, which they intend to present to IOSCO to establish agreement
on what should be the priority projects necessary for a speedy
endorsement.
Assurance
Services
In 1997 the IAPC issued an exposure draft (ED) on assurance services, setting
out guidance and standards for professional accountants when providing a broad
range of assurance services. The overwhelming majority of respondents commended
the IAPC for being forward-looking in developing a framework, given its
importance to the future of the profession. There were, however, some concerns
expressed including doubts about the ability of the profession to effectively
communicate the level of assurance provided. In 1999, the IAPC released a
revised exposure draft entitled “Assurance Engagements.” One of the
primary revisions from the 1997 ED was the move from providing assurance on a
continuum, to providing assurance at only the high and moderate levels.
In early 2000 the IAPC
issued the first International Standard on Assurance Engagements (ISAE), based
on this 1999 ED. The IAPC is aware of issues outstanding with regard to
assurance services, and in particular it has recently commissioned research at
the international level on how best to communicate the different levels of
assurance provided in these engagements.
Confirmations
During 1999 the IAPC revised ISA No. 501 on external confirmations. Previously
this ISA dealt only with the confirmation of accounts receivable, but
recognized that external confirmations can supply evidence regarding many other
financial statement items. The superseded standard was also seen to be
procedural in nature and not consistent with ISAs currently being issued by the
IAPC under the audit risk model. One of the major differences was the
presumption that accounts receivable would be confirmed. Under the audit risk
model approach, confirmations are only undertaken when the auditor believes
they will provide valid and reliable audit evidence in testing the assertions
at risk.
The Audit Risk
Model
In line with recent developments in new audit methodologies, the IAPC is
currently examining the appropriateness of the audit risk model with respect to
the concept of business risk. In particular the IAPC is carefully monitoring
the following developments:
- The report from The Panel on Audit
Effectiveness of the Public Oversight Board (POB).
- The recommendations of a joint
research project undertaken by the profession in Canada, the U.K. and the U.S.,
“Changing Audit Methodologies and their Impact on the Audit Risk Model and
Auditing Standards.”
The IAPC project is
working from the premise that, although the audit risk model is essentially
sound, modifications are required. As well as outlining how business risk will
be incorporated into the current model, it is expected that there will be
changes to related standards such as those on audit planning and audit
evidence.
Fraud and Error
The IAPC issued an ED on fraud and error in March 2000, with comments to be
received by June 2000. One of the differences between this ED and SAS No. 82 is
that the ED does not require a separate assessment of fraud risk, suggesting
that the IAPC is not convinced about the potential benefits arising from a
separate assessment. The IAPC recognizes that SAS No. 82 is presently being
revisited, but that that any amendments to SAS No. 82 will not likely be be
implemented in the near term. The IAPC also believes that its current ED
significantly enhances the guidance provided in the existing ISAs and
anticipates that a revised ED, incorporating the concerns raised above, will be
presented for approval in early 2001. IPAC will continue to monitor relevant
developments arising from the review of SAS No. 82.
Environmental
Reporting
IAPC is also working on an ED on environmental reporting and this ED is
expected to deal with high-level assurance only, and with the limited available
guidance about the subject matter and criteria that would support a high level
of assurance, this ED. Environmental reporting is a difficult area, and as the
first guidance issued under the umbrella of the ISAE, this ED will provide a
test of that standard’s operation.
In its environmental
deliberations the IAPC has given consideration to recent significant
developments affecting environmental reporting, and in particular the
implications of the new “Dow Jones Sustainability Group Index” (SGI)
of stocks. This index is applied to industry groups, and the criteria include
how well entities are managing environmental issues, human rights, and
corporate social responsibility. Also, consideration has been given to the
concept of “sustainability reporting” under the Global Reporting
Initiative (GRI). Supported by the UN Environment Programme, the GRI seeks to
make sustainability reports as routine and credible as financial statement
reporting in terms of comparability, rigor, and verifiability.
Information
Technology
The IAPC Subcommittee on Information Technology is currently revising ISA No.
401 “Auditing in a Computer Information Systems Environment” and
International Auditing Practices Statement IAPS No. 1008 “Risk Assessments
and Internal Control–CIS Characteristics and Considerations.” The
Subcommittee has already reviewed IAPS No. 1001 “CIS
Environments–Stand-Alone Microcomputers,” IAPS No. 1002 “CIS
Environments–Online Computer Systems,” IAPS No. 1003 “CIS
Environments–Database Systems,” and IAPS No. 1009 “CIS
Environments–Computer Assisted Audit Techniques,” These were all
issued as EDs during 2000. The comments received from the exposure process are
due for consideration in early 2001.
The IAPC acknowledges
that the current advancements in information technology call for the
development of further guidance for auditors where emerging technology is
bringing about changes in the business environment. Therefore the IT
subcommittee is also considering developing guidance, for example, on audit
issues arising from the use of customized networks, electronic commerce, and
financial reporting on the Internet. The IAPC is aware that the U.S. and Canada
have commenced work on a joint project regarding electronic reporting on the
Internet.
POB Panel Report
The IAPC has recently considered the final report issued by the U.S. POB Panel
on Audit Effectiveness. As an immediate response to concerns raised in this
report, the International Federation of Accountants (IFAC) has agreed to
establish its own Public Oversight Board and Compliance Committee.
Other Changes to ISAs
over the Past Two Years
The IAPC recently revised ISA No. 570—Going Concern. The revised ISA No.
570 is effective for audits of financial statements for periods ending on or
after December 31, 2000, and requires the auditor to evaluate management’s
assessment of the entity’s ability to continue as a going concern. It also
requires the auditor to inquire of management about its knowledge of events or
conditions beyond the period of assessment used by management that may cast
significant doubt upon the entity’s ability to continue as a going
concern.
ISA No. 260 on
communication of audit matters with those charged with governance was also
recently issued. It requires the auditor to communicate “audit matters of
governance interest” arising out of the audit of the financial statements
with those charged with governance of the entity. The matters to be
communicated outlined in the ISA are similar to matters the auditor
communicates to audit committees in an audit conducted in accordance with U.S.
auditing standards. However, the international standard applies to audits of
all entities, not just those that have an audit committee.
Conclusion
Globalization will continue to be one of the major forces motivating the
activities of IAPC. Gaining IOSCO accreditation for ISAs is one of its most
urgent tasks. Information technology and governance are also major concerns at
this current time since the guidance in the ISAs is deficient for addressing
the challenges created by advances in information technology. The challenge to
the committee is to come up with standards that can weather the continuing
evolution in this area, and to be more responsive to future developments.
Developments in the area of corporate governance are primarily being driven by
developments in specific countries, in particular the U.S. The IAPC will need
to keep abreast of these developments, and review their applicability to the
international level. This area may provide an interesting challenge for the
IAPC, as it is not clear that the IAPC stakeholders are ready for international
standards on corporate governance.
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