Update on the IAASB's Activities 2006
Roger Simnett, University of New South Wales, and former IAASB member,
James M. Sylph, IFAC Executive Director, Professional Standards, and
Kathleen Kerrigan, IAASB Technical Manager
This update provides an overview of some of the major activities of the International Auditing and Assurance Standards Board (IAASB) during 2006, draws attention to the development of the IAASB's strategic plan for 2008-2010, and notes some of the activities of other boards and committees of the International Federation of Accountants (IFAC) that have particular relevance for auditing.
The IFAC website www.ifac.org contains links for free access to the documents mentioned in this article as well as more detailed project summaries, IAASB minutes, agenda papers, and related material.
The results of the latest self-assessments by IFAC member bodies indicate widespread recognition of International Standards on Auditing (ISAs). They suggest that more than 100 countries use ISAs, either adopted as issued by the IAASB or with local adaptation, or national standards which are compared with ISAs to eliminate differences.
ISAs are also accepted for the audits of foreign listed entities by most of the world's capital markets. The major exception is the United States, which currently requires use of the U.S. Public Company Accounting Oversight Board's auditing standards.
The past year has seen the World Federation of Exchanges (WFE) endorse the IAASB's processes for standard setting and recognize the importance of ISAs. The WFE represents 57 securities and derivatives markets that account for more than 97 percent of world stock market capitalization. Mainland China announced new auditing standards that bring their standards closer to ISAs, and Hong Kong announced full convergence to ISAs. Canada, after careful consultation, has decided to move its standards to ISAs. And in one of the most significant developments, finalization of the European Union's 8th Company Law Directive provides a platform for European-wide adoption of ISAs for statutory audits.
In July 2006, the IAASB approved new guidance for national standard setters that adopt its International Standards with limited modifications. While it is not intended to be a definitive statement on convergence, Modifications to International Standards of the International Auditing and Assurance Standards Board (IAASB)—A Guide for National Standard Setters that Adopt IAASB's International Standards but Find It Necessary to Make Limited Modifications provides guidance on the extent to which modifications to adopted International Standards are permitted, while still allowing a national standard setter to assert conformity to the International Standards.
The Clarity Project
One of IAASB's most significant projects is aimed at improving the clarity and understandability of its standards. This is a project that the European Commission has deemed essential to its adoption of ISAs for statutory audits in Europe.
The IAASB outlined an initial plan to redraft the entire set of ISAs in accordance with new clarity drafting conventions by 2011. However, in response to strong demand by stakeholders for the IAASB to accelerate that timetable, the IAASB now intends to complete both the revision of certain ISAs, and the redrafting of all other ISAs, by 2008.
The implementation approach distinguishes revision and redrafting. The IAASB currently has 32 ISAs in issue. Of these:
- 11 are under full revision and will be reissued in the clarity form;
- Nine have been revised in the last few years and are not in need of further revision, but will be redrafted in the clarity form; and
- The other 12 have not been recently revised but are considered acceptable, and will be redrafted in the clarity form without revision.
This approach allows all ISAs to be consistently drafted, and subject to a single statement of their authority and effect, while completing the clarity project within a reasonable time. It also minimizes the time the IAASB will spend on the clarification of the older ISAs and ensures that the IAASB can turn its attention to other projects as soon as practicable.
The IAASB will determine a final common effective date for all redrafted ISAs in due course, as it makes further progress on its agenda. This date will, however, not be earlier than December 15, 2008. Nonetheless, the IAASB is making the redrafted ISAs available as early as possible to assist in their translation, adoption and implementation. Academic staff will also want to consider what new teaching materials need to be developed, and may want to research issues related to the transition from old format to new.
The Preface and Four Redrafted ISAs
After extensive consultation, in September 2006 the IAASB finalized amendments to the Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services (the Preface) that establishes the new drafting conventions it will use in developing future ISAs, and the authority and obligation attaching to those conventions. The Preface is largely unchanged, though refined, from that exposed in October 2005, reflecting the broad support received from respondents.
The Preface contains important statements about the authority of the IAASB's Standards, which the IAASB intends to also include within the ISAs themselves when it revises ISA 200, Objective and General Principles Governing an Audit of Financial Statements. When ISA 200 is revised and exposed for public comment in 2007, respondents will be invited to comment on the material derived from the Preface in that new context.
Subsequent to the finalizing of the new drafting conventions, the IAASB approved the application of those conventions to the following four re-titled ISAs, which were also exposed in October 2005:
- ISA 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements;
- ISA 300, Planning an Audit of Financial Statements;
- ISA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment; and
- ISA 330, The Auditor's Responses to Assessed Risks.
The IAASB improved the consistency with which the conventions have been applied to these four ISAs and has considered, in particular, the need for the ISAs to be applicable to audits of entities of all sizes. Further improvements have also been made in specific areas where responses indicated ambiguity, or the need for additional guidance, in the extant ISAs.
The IAASB has expressed that it is satisfied that, as a result, the ISAs are clearer and the expectation of consistent application has been strengthened. It also believes that applying the new conventions will assist in their adoption around the world and facilitate international convergence. This project has provided a means to respond in a timely manner to many of the findings of the 2004 IFAC report, Challenges and Successes in Implementing International Standards: Achieving Convergence to IFRSs and ISAs.
New Exposure Drafts of Redrafted ISAs
In response to the accelerated implementation timetable, the IAASB approved the issue of the following seven exposure drafts in 2006, for comment on the application of the clarity drafting conventions only:
- ISA 230 (Redrafted), Audit Documentation;
- ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance;
- ISA 320 (Revised and Redrafted), Materiality in Planning and Performing an Audit;
- ISA 450 (Redrafted), Evaluation of Misstatements Identified during the Audit;
- ISA 560 (Redrafted), Subsequent Events;
- ISA 610 (Redrafted), The Auditor's Consideration of the Internal Audit Function; and
- ISA 720 (Redrafted), The Auditor's Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements.
Documents Closed Off
During the year, the IAASB also completed the "close off" of a further four ISAs:
- ISA 705, Modifications to the Opinion in the Independent Auditor's Report;
- ISA 706, Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor's Report;
- ISA 800 (Revised), Special Considerations—Audits of Special Purpose Financial Statements and Specific Elements, Accounts or Items of a Financial Statement; and
- ISA 805, Special Considerations When Reporting on Summary Financial Statements.
The term "close off" refers to standards that were exposed under the old drafting conventions, and have now been revised and approved in that format based on comments received on exposure. These closed off ISAs will be redrafted under the clarity conventions and exposed for comment on the application of the new drafting conventions during 2007.
Other Documents Issued in 2006
During the year the IAASB also approved the following three exposure drafts prepared under the clarity drafting conventions, and a consultation paper titled Assurance Aspects of G3 - The Global Reporting Initiative's 2006 Draft Sustainability Reporting Guidelines.
Proposed ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
The IAASB originally issued the proposed revised ISA 540, Auditing Accounting Estimates and Related Disclosures (Other Than Those Involving Fair Value Measurements and Disclosures) as an exposure draft in December 2004, to bring it into line with the revised audit risk standards. In revising the standard, the IAASB focused particularly on how to deal with significant assumptions, ranges of acceptable estimates, and the identification of possible bias in the determination of estimated amounts.
After due consultation, the final revised ISA 540 was approved for close off under the old drafting conventions in September 2006. However, as many fair value measurements are in fact estimates, the IAASB concluded that the extant ISA 545, Auditing Fair Value Measurements and Disclosures, relating to fair values should be combined with the revised ISA 540. It is anticipated that the extant ISA 545 will be withdrawn when the combined ISA 540 becomes effective as a final standard.
This proposed combination has allowed the IAASB to bring the fair value standard up to date while emphasizing to auditors that, while fair values may be new in many circumstances, the approach to their audit has much in common with the more familiar audit of estimates.
Proposed ISA 580 (Revised and Redrafted), Written Representations
Written management representations requested by auditors have become very extensive, particularly in certain jurisdictions, and there is concern that auditors may seek to rely on them more heavily than is justified. In revising this standard, the IAASB focused on those representations that are really required, and proposed requirements to ensure that these are obtained when necessary, and when obtained, that they are reliable.
The IAASB also stressed in the proposed revised standard that representations are corroborative, and do not obviate the need for the auditor to obtain satisfactory other evidence about the object of the representations.
During the project, the IAASB considered matters such as the reasons for obtaining written representations, the evidence that they provide, and from whom they should be requested. The proposals provide for general written representations regarding the financial statements, including internal control, and the completeness of information made available to the auditor, and for written representations about specific assertions in the financial statements.
Proposed ISA 600 (Revised and Redrafted), The Audit of Group Financial Statements
In March 2006, the IAASB approved for re-exposure the proposed revised and redrafted 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 earlier exposure drafts, and was drafted using the clarity conventions. Having evaluated issues around the extent to which the group auditor needs to be involved in the audit of components that are audited by other auditors, and whether the other auditors are independent of the group auditor (unrelated auditors) or belong to the group auditor's firm or network of firms (related auditors), the IAASB is now proposing that the distinction between related and unrelated auditors is not of itself a sufficient basis for determining the group auditor's work. This conclusion has given rise to substantial changes to some of the proposed requirements.
In addition, the proposed standard is drafted on the basis that a group auditor takes sole responsibility for the audit opinion on the group financial statements. Because current group audit practices vary, the IAASB considered it necessary to be reasonably specific about the steps to be taken, and the work effort required, by the group auditor to acquire sufficient appropriate audit evidence on which to base such an opinion when other auditors are involved.
The IAASB is currently considering comments on this final consultation document and anticipates approving the final revised and redrafted standard in 2007.
Future Strategy and Work Program
With the accelerated implementation timetable for the clarity project, the IAASB essentially has a full work program until mid to late 2008. It is therefore critical that a coherent work program be put in place for the period thereafter that will be responsive to the reasonable demands of the IAASB stakeholders. The IAASB has developed a broad and transparent plan that calls for consultation with its various stakeholders over the course of 2007 on areas where the IAASB could make a significant contribution to the quality of auditing and assurance. A survey questionnaire was released in January 2007 to solicit views; the results of the survey will be discussed during a number of specific consultations, including two public forums to be held in April 2007 in Sydney, Australia and June 2007 in Brussels, Belgium.
The afternoon of the first forum will specifically seek views on whether there is a demand for an alternative to the audit for SMEs. It may be that an alternative service, not based on reasonable assurance and clearly distinguished from an audit, would be sufficient for stakeholders of some smaller entities, and the discussion at the forum will serve to explore the possibilities.
The results of the consultations up to the end of June 2007 will form the basis for a strategic direction document and a proposed exposure draft of the proposed future strategy and work program. The proposed exposure draft will be reviewed by the IAASB Consultative Advisory Group and Public Interest Oversight Board, submitted for approval at the September 2007 IAASB meeting and subsequently exposed for public comment.
Membership of the IAASB for 2007
The IAASB welcomed a number of new appointments and re-appointments as of January 1, 2007 for terms ranging from two to three years:
Nominated by IFAC Member Bodies
- John Fogarty, United States (re-appointed);
- John Kellas, United Kingdom (re-appointed as Chairman);
- Professor William Kinney, The University of Texas at Austin, United States;
- Gérard Trémolière, France (re-appointed); and
- Muhammed Yusef, Pakistan.
Nominated by the IFAC Transnational Auditors Committee
- Susan Jones, Grant Thornton.
- Kjell Larsson, Sweden (re-appointed).
The IAASB's 17 volunteer members and one full-time Chairman now represent 11 countries: Australia, Canada, Denmark, France, Italy, Japan, the Netherlands, Pakistan, Sweden, the United Kingdom and the United States. In 2006, the European Commission joined the U.S. PCAOB and the Japanese Financial Services Agency as non-voting observers with speaking rights at the IAASB meetings.
Other IFAC Boards and Committees
In addition to launching www.ifacnet.com, a searchable database of leading-edge articles, good practice guidance, and tools and techniques for accountants employed in commerce, industry, the public sector, education, and the not-for-profit sector, some of the activities of other IFAC boards and committees during the year that are relevant to auditing are noted below.
International Ethics Standards Board for Accountants (Ethics Board)
The Ethics Board issued an exposure draft in December 2006 to update and strengthen the independence requirements contained in the IFAC Code of Ethics for Professional Accountants. Apart from updating the definition of a network firm in July 2006, the last substantive revisions to the Code were made in November 2001. Significant proposed modifications to the Code include:
- Splitting the Code into two sections; Section 290 setting out independence requirements for audit and review engagements and Section 291 addressing all other assurance engagements;
- Expanding the applicability of partner rotation requirements;
- Updating requirements related to the provision of non-assurance services, including setting out additional guidance on the provision of tax services to audit clients;
- Extending the independence requirements to the audits of a wider range of entities of significant public interest; and
- Expanding the restrictions on an audit partner accepting employment with an audit client.
International Accounting Education Standards Board (Education Board)
During the year, the Education Board issued:
- A new standard outlining the skills, training, professional values, and attitudes necessary for auditors to perform competently. International Education Standard (IES) 8, Competence Requirements for Audit Professionals, applies to all audit professionals, not just the audit engagement partner. It also prescribes specific competence requirements for audit professionals involved in transnational audits.
- A proposed new International Education Practice Statement (IEPS), Information Technology for Professional Accountants, which provides details of the knowledge and skills required of professional accountants.
- An information paper on Approaches to the Development and Maintenance of Professional Values, Ethics and Attitudes in Accounting Education Programs, and a related proposed new IEPS.
- An exposure draft of its Strategic and Operational Plan for the period 2007-2009.
Professional Accountants in Business (PAIB) Committee
The PAIB Committee has issued an information paper, Internal Controls - A Review of Current Developments, which summarizes key internal control frameworks, highlights recent legislative and other initiatives, and discusses the role of internal control in enhancing corporate governance. It also released an exposure draft, Guidance for the Development of a Code of Corporate Conduct, to assist professional accountants and others in establishing and implementing codes of conduct in their organizations.