Update on the IAASB's Activities 2005
Roger Simnett, University of New South Wales and Member IAASB
James M. Sylph, IAASB Technical Director
This update provides an overview of some of the major activities of the International Auditing and Assurance Standards Board (IAASB) during 2005. The following highlights some of the major initiatives undertaken over the past year towards achieving global convergence, highlights the process undertaken by the IAASB to improve the clarity of its Standards, outlines the Standards improved and exposure drafts issued during the year and discusses initiatives with regards translation of its pronouncements.
Global Convergence
In December 2005 The Chinese Auditing Standards Board (CASB) and the IAASB released a joint statement in which the CASB stated that the fundamental principle of drafting Chinese auditing standards was to improve the Chinese auditing standards system and to accelerate its convergence with ISAs.
A similar decision has been taken by the European Union, which will shortly be going through the process of endorsing the ISAs. And there are many other countries which have similar policies. In fact, over 70 countries around the world now use ISAs as the basis for their own national standards.
The IAASB has also developed a strong working relationship with the US PCAOB. It is hoped that no further differences will develop between the two bodies of audit standards. IAASB has based its documentation standard (see below) on the recently released PCAOB standard and PCAOB is looking closely at the IAASB's risk and quality control standards as it seeks to revise its own standards in these areas.
Canada's audit standard setters are holding nationwide consultations on their proposals to move to the adoption of ISAs in the near future. The US private company audit market is also not ignored. The IAASB is working with the US ASB to align agendas and share resources. The goal is to eliminate future differences while working to eliminate existing ones.
IAASB due processes are of a very high standard. They have recently been approved by the Public Interest Oversight Board, which required a comparison of IAASB processes with those of other comparable standard setters. The IAASB's processes stood up well to this comparison, and should give those who use the standards confidence that the ISAs will be of high quality.
The Clarity Project
In 2003 the IAASB undertook a review of its drafting conventions to identify ways to improve the clarity of its Standards and the consistency of their application (the Clarity project). The impetus for this project came primarily from regulators, who suggested that how the Standards were drafted gave rise to ambiguity regarding the level of obligation placed on auditors and other professional accountants. Although the IAASB did not necessarily share this view, it led to a consideration as to how to make the Standards clearer, and at the same time deal with the issues raised by the regulators. During 2005 the key features of the project were determined and these are discussed below.
Objectives-based Standards
Each Standard will state the objective to be achieved in relation to the subject matter of the Standard. The auditor will always be required to achieve the objective stated in each Standard, where the Standard is relevant in the circumstances of the engagement. The auditor is expected to achieve that objective by complying with the requirements of the Standard, and by performing other procedures judged necessary in the circumstances.
Clarifying Professional Requirements
Each Standard will, in a separate section, specify requirements that assist the auditor in achieving the Standard's objective. Requirements are those actions or procedures considered sufficiently important to be generally required to meet the stated objective. The auditor will meet all requirements of a Standard that are relevant in the circumstances of the engagement. Requirements will be identified by the word "shall."
In exceptional circumstances where the auditor judges it necessary to depart from a requirement to achieve its purpose, the auditor will be required to document (a) how alternative procedures achieved the requirement's purpose, and (b) unless otherwise clear, the reasons for the departure. The auditor is expected to depart from a requirement only where a specifically required procedure would be ineffective in the specific circumstances of the engagement.
Eliminating Ambiguity Arising from Use of the Present Tense
Standards will no longer use the present tense (e.g. the auditor undertakes…) to describe actions or procedures of the auditor. In applying the new drafting conventions to existing Standards, sentences describing the auditor's actions or procedures in the present tense will be redrafted either by elevating the action or procedure to a requirement, or by using words that make it clear that there is no intention to impose a requirement.
Improving Readability and Understandability
New terms or expressions will be defined in a Definitions section of a Standard. All Standards will contain the following four principal sections:
- Introduction — the scope and effective date of the Standard;
- Objective — the objective to be achieved by the auditor;
- Requirements — the requirements to be complied with, together with explanatory material necessary to make the section understandable by an experienced auditor; and
- Application Material — material, supplemented in some cases by appendices, that provides further explanation and guidance supporting proper application of the Standard.
Standards Approved in 2005
The IAASB finalized two Standards in 2005. The following highlights the significant features of these new Standards.
ISA 230 (Revised), Audit Documentation
The IAASB approved a revised ISA on audit documentation at its September 2005 meeting. The Standard introduces important changes designed to improve the quality of audit documentation the auditor prepares and retains. To establish the level and completeness of documentation, the Standard requires the auditor to prepare audit documentation sufficient to allow an experienced auditor, having no previous connection with the audit, to understand the audit work, the audit evidence, significant matters arising during the audit, and the auditor's conclusions.
The Standard also establishes new requirements for the auditor to prepare audit documentation promptly, and to close the audit files within a reasonable time. It explicitly restricts amendments to a closed audit file to certain exceptional circumstances. New documentation requirements are included for those very rare instances when an auditor finds it necessary to depart from the requirement of an ISA to achieve the objective of the audit.
ISRE 2410, Reviews of Interim Financial Information
In June 2005, the IAASB issued a new International Standard on Review Engagements (ISRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, to assist auditors in carrying out their professional responsibilities when reviewing the interim financial information of an audit client. The new Standard responds to a need in those jurisdictions that use ISAs, and that require or permit entities (primarily listed companies) to issue interim financial information that has been reviewed by their auditors.
The Standard outlines the general principles of a review of interim financial information, provides guidance on the inquiries and the analytical and other review procedures the auditor is to perform, and prescribes the content of the review report. The Standard also provides guidance on the engagement and management representation letters the auditor may obtain when performing the review, and includes illustrative review reports.
A copy of the complete handbook of ISAs can be accessed at http://www.ifac.org/Store/Category.tmpl?Category=Auditing%2C%20Assurance%20%26%20Related%20Services
Exposure Drafts Issued in 2005
The following highlights the significant elements of the proposed new or revised Standards that the IAASB exposed during the year. Copies can be found at http://www.ifac.org/Guidance/EXD-Outstanding.php
Proposed Standards Redrafted Under the Clarity Convention
As the first step in implementing the new drafting conventions under the Clarity project, the IAASB issued exposure drafts of four existing Standards in October 2005. These proposed redrafted ISAs are:
- ISA 240, The Auditor's Responsibility To Consider Fraud in an Audit of Financial Statements;
- ISA 300, Planning an Audit of Financial Statements;
- ISA 315, Obtaining an Understanding of the Entity and Its Environment and Assessing the Risks of Material Misstatement; and
- ISA 330, The Auditor's Procedures in Response to Assessed Risks.
In addition, to conform the Preface to the clarity drafting conventions, the IAASB issued an exposure draft of proposed amendments to the Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services.
Proposed New Standards on Reporting on Other Historical Financial Information and Summary Audited Financial Statements
At its June 2005 meeting, the IAASB approved the exposure drafts of the proposed new ISA 701, The Independent Auditor's Report on Other Historical Financial Information, and the proposed new ISA 800, The Auditor's Report on Summary Audited Financial Statements. In developing these proposed new standards, the IAASB made changes necessary for consistency with the recently revised ISA 700, The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements.
The proposed ISA 701 addresses auditors' reports for a wide variety of engagements, including reporting on a single financial statement, or on a specific element of a financial statement. It also provides guidance on (a) determining the acceptability of the financial reporting framework used in preparing and presenting the financial information, and (b) matters the auditor considers in forming an opinion on the financial information. It includes considerations relevant both to financial statements designed to give a true and fair view or fair presentation, and to financial statements prepared under a compliance framework.
The proposed new ISA 800 recognizes that criteria for preparing and presenting summary financial statements may not exist. It contains new standards and guidance on the criteria and procedures applicable to an engagement to report on summary financial statements.
Proposed Group Audit Standard
In March 2005, the IAASB approved for re-exposure the proposed revised ISA 600, The Audit of Group Financial Statements, designed to enhance the quality of group financial statement audits. This re-exposure draft was developed based on comments received on an earlier exposure draft. To reflect the importance placed on sufficient involvement of the group auditor in the work of other auditors participating in the group audit, the proposed Standard requires the group auditor to perform the work, or be involved in the work of other auditors, on all significant components of the group. The group auditor is also required to perform specific procedures in relation to the work performed on a component of the group by any other auditor, and to consider its adequacy for the purposes of the group audit.
Proposed Standard on Communication with Those Charged with Governance
Recognizing that sound corporate governance depends in part on a proper relationship between the auditor and those charged with governance, in March 2005 the IAASB approved for exposure proposed revised ISA 260, The Auditor's Communication with Those Charged with Governance. The proposed Standard is designed to improve the quality and relevance of the discussions between the auditor and those charged with governance.
The proposed Standard includes new guidance dealing with the communication process, reflecting its importance in audit effectiveness, and sets out a framework for communication with those charged with governance. The proposed Standard describes more specifically than the existing standard what the auditor should communicate, and why. Included in matters to be communicated are those outside the financial reporting and disclosure process that the auditor becomes aware of, and that are considered so serious as to require communication. For listed entities, it also proposes to require certain categorized disclosures about fees charged for audit and non-audit services provided by the audit firm in the previous 12 months.
Proposed Standards on Modified Opinions and Emphases of Matter
In March 2005, the IAASB also approved exposure drafts of the proposed ISA 705, Modifications to the Opinion in the Independent Auditor's Report, and the proposed ISA706, Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor's Report. These exposure drafts are intended to drive greater consistency of auditor reporting among jurisdictions.
The proposed ISA 705 establishes standards and provides guidance, including illustrative examples, on circumstances that may cause the auditor to modify the opinion on the financial statements. It aims to clarify when the opinion should be modified, explains the different possible types of modifications appropriate to the circumstances, and proposes general requirements for the form and content of modified auditors' reports.
As part of this project, the IAASB concluded that it would be clearer to separate the standards on modifications to the opinion from those dealing with emphasis of matter and other matters paragraphs in the auditor's report. The IAASB therefore also exposed the proposed ISA 706, which contains standards and guidance on when the auditor should emphasize specific matters, or bring "other matters" to users' attention, in the auditor's report. This draft includes proposals on the form and placement of the paragraphs to be used to communicate such matters in the auditor's report.
Proposed Related Parties Standard
In December 2005, the IAASB approved the exposure draft of the proposed revised ISA 550, Related Parties, drafted under the new clarity conventions. This proposed Standard sets out more extensive requirements and application material that recognize the particular risks associated with related parties, including the risks of non-identification and non-disclosure, and fraud.
The proposed Standard strengthens current practice by requiring the auditor to obtain an understanding of the nature and business rationale of an entity's related party relationships and transactions, sufficient for the auditor to identify, assess and respond to the risks of material misstatements resulting from them. It also requires the auditor to perform procedures to identify related party relationships and transactions not identified or disclosed by management.
The proposed Standard places new emphasis on evaluating the effects of related party relationships and transactions on the financial statements, even where the financial reporting framework does not establish related party accounting or disclosure requirements.
Translation of IAASB Pronouncements
To increase the worldwide accessibility of IFAC standards and guidance, and to enable high-quality translations into languages other than English, in 2004 IFAC approved a Policy Statement, Translation of Standards and Guidance Issued by the International Federation of Accountants, that outlines the procedures to be followed by external organizations in translating its pronouncements. The Policy Statement on translation can be accessed and downloaded from IFAC's website at www.ifac.org.
In the context of this effort to encourage wider translation of IFAC Standards, during 2005 IFAC signed an agreement with two of its member bodies — Compagnie Nationale des Commissaires aux Comptes (CNCC) in France and Institut des Reviseurs d'Entreprises (IRE) in Belgium — to translate the ISAs into French. This agreement is significant in light of the adoption of ISAs in the EU following the EC's recent finalization of the Eighth Company Law Directive. The success of this initiative has led to the formation of a similar working group between IRE Belgium and Royal NIVRA, aimed at producing a single, agreed translation of ISAs into Dutch. The French and Dutch translation efforts may represent appropriate models for cooperation for translation of the Standards into other languages.
During the year, IFAC also granted permission for the ISAs to be translated into Bulgarian, German, Lithuanian, Mongolian, Polish, Romanian, Russian, Serbian, Slovak, and Spanish. |
