The Auditors Report

Update on the IAASB's Activities 2007

William R. Kinney Jr.,
the University of Texas at Austin, and 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 2007, and draws attention to the development of the IAASB's strategic plan for 2009-2011. The IAASB website, http://www.iaasb.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.

Global Convergence
Over the last few years, the focus of the IAASB has been on the development of high-quality International Standards on Auditing (ISAs) that are accepted globally and that facilitate convergence. The results of the latest self-assessments by IFAC member bodies indicate widespread recognition of ISAs. They suggest that more than 100 countries use ISAs, either adopted as issued by the IAASB or with local adaptation, or national standards that are compared with ISAs to eliminate differences.

In 2007, the Canadian Auditing and Assurance Standards Board affirmed its decision to adopt the ISAs, and the Australian Auditing and Assurance Standards Board announced plans to revise and re-issue their national standards in a manner similar to our Clarity drafting conventions (which are discussed below).

ISAs are also accepted for audits of foreign listed entities by most of the world's capital markets. The major exception is the United States, which current requires use of the U.S. Public Company Accounting Oversight Board's (PCAOB) auditing standards. A representative of the PCAOB serves as an observer to both the IAASB and the IAASB's Consultative Advisory Group (CAG). In turn, the IAASB has observer status at the Standing Advisory Group (SAG) meetings held by the PCAOB. This cooperation provides both the IAASB and the PCAOB opportunities to keep in touch with the respective developments relating to auditing standards. Also, the US marketplace is showing signs of coming into alignment. The AICPA Auditing Standards Board has announced that it will begin a process of redrafting its auditing standards following the ISA clarity style of requirements and application guidance.

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 application of the Clarity drafting conventions makes the ISAs clearer, and by clarifying that previous guidance contained some requirements, stronger.

Improvements arising from the Clarity project broadly comprise:

  • Identifying the auditor's overall objective when conducting an audit in accordance with ISAs, setting an objective in each ISA, and establishing an obliga¬tion on the auditor in relation to those objectives;
  • Clarifying the obligations imposed on auditors by the requirements of the ISAs and the language used to communicate such requirements;
  • Eliminating any possible ambiguity about the requirements an auditor needs to fulfill; such possible ambiguity arose from the use of the present tense in the current ISAs; and
  • Improving the overall readability and understandability of the ISAs through structural and drafting improvements, including presenting the requirements and application and other explanatory material in separate sections within the ISAs.

The IAASB expects to finalize all of the redrafted or revised and redrafted standards in 2008, so that a complete set of strong, consistently presented standards will come into effect for audits of financial statements beginning on or after December 15, 2009.

Final Clarified Standards Approved in 2007
The IAASB approved three final standards redrafted under the Clarity conventions, as follows:

  • ISA 230 (Redrafted), Audit Documentation;
  • ISA 560 (Redrafted), Subsequent Events; and
  • ISA 720 (Redrafted), The Auditor's Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements.

Exposure Drafts of Redrafted ISAs
In fulfilling the commitment to complete the Clarity project by the end of 2008, the IAASB issued 16 exposure drafts of redrafted ISAs in 2007, for comment on the application of the clarity drafting conventions only:

  • International Standard on Quality Control (ISQC 1) (Redrafted), Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements;
  • ISA 210 (Redrafted), Agreeing the Terms of Audit Engagements;
  • ISA 220 (Redrafted), Quality Control for an Audit of Financial Statements;
  • ISA 250 (Redrafted), The Auditor's Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements;
  • ISA 500 (Redrafted), Considering the Relevance and Reliability of Audit Evidence;
  • ISA 501 (Redrafted), Audit Evidence Regarding Specific Financial Statement Account Balances and Disclosures;
  • ISA 510 (Redrafted), Initial Audit Engagements—Opening Balances;
  • ISA 520 (Redrafted), Analytical Procedures;
  • ISA 530 (Redrafted), Audit Sampling;
  • ISA 570 (Redrafted), Going Concern;
  • ISA 700 (Redrafted), The Independent Auditor's Report on General Purpose Financial Statements;
  • ISA 705 (Revised and Redrafted), Modifications to the Opinion in the Independent Auditor's Report;
  • ISA 706 (Revised and Redrafted), Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent Auditor's Report;
  • ISA 710 (Redrafted), Comparative Information—Corresponding Figures and Comparative Financial Statements;
  • ISA 800 (Revised and Redrafted), Special Considerations—Audits of Special Purpose Financial Statements and Specific Elements, Accounts or Items of a Financial Statement; and
  • ISA 805 (Revised and Redrafted), Engagements to Report on Summary Financial Statements.

These exposure drafts are all planned for completion in 2008, and intended to become effective for periods beginning on or after December 15, 2009. The IAASB's latest project timetable through 2008 is available on its website at
http://www.ifac.org/IAASB/downloads/Current_IAASB_Project_Timetable.doc.

Final Standards Issued by the IAASB in 2007
During the year IAASB issued the following final ISAs. Of particular interest to those teaching auditing is the Basis for Conclusions document issued at the end of each project. This explains how the IAASB dealt with the significant issues raised on exposure and why it did or did not accept the comments made by respondents. These documents can be found at http://www.ifac.org/IAASB/Resources.php#BasisForConclusions.

ISA 260 (Revised and Redrafted), Communicating with Those Charged with Governance
This ISA sets out an overarching framework for communicating with those charged with governance. It also identifies specific matters to be communicated by the auditor, including a requirement to communicate in writing about auditor independence. The ISA also acknowledges that law or regulation, or an agreement with the entity, may require communication of other matters.

New requirements and guidance for the communication process include a specific requirement for the auditor to evaluate the adequacy of the two-way communication between the auditor and those charged with governance. The IAASB approved the ISA in September.

ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
This ISA, which reflects the combination of extant ISA 540, Auditing Accounting Estimates and Related Disclosures (Other Than Those Involving Fair Value Measurements and Disclosures), as revised by the IAASB in 2006, and ISA 545, Auditing Fair Value Measurements and Disclosures, was approved by the IAASB in December. In addition to applying the Clarity conventions to the combined standard, the IAASB also tailored the application and other explanatory material to include more guidance relevant to fair value accounting estimates. Combining the standards not only allowed the IAASB to update the standard with regard to fair value measurements, but also to align the similar principles underlying the audits of fair value accounting estimates with those of routine estimates.

ISA 580 (Revised and Redrafted), Written Representations
The revision of extant ISA 580 was a challenging task for the IAASB, in part due to the jurisdictional nuances surrounding written representation letters. In the course of revising the standard, the IAASB has introduced changes aimed at promoting consistency in practice.

The description of the fundamental premise, relating to management's responsibilities, on which an audit is conducted, has been revised. In doing so, the IAASB recognized that changes were necessary to the matters set forth in proposed ISA 210 (Redrafted), Agreeing the Terms of Audit Engagements, and proposed ISA 700 (Redrafted), The Independent Auditor's Report on General Purpose Financial Statements.

Other matters addressed during the IAASB's discussions include (a) whether written representations can suffice as audit evidence, (b) the date of the written representations, and (c) cases of unreliable written representations or the refusal of management to provide them. The ISA was approved by the IAASB in December.

ISA 600 (Revised and Redrafted), Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)
One of the most significant new standards is ISA 600 (Revised and Redrafted), which the IAASB approved in July. The ISA, which was issued in October 2007 after confirmation of due process from the Public Interest Oversight Board (PIOB), was developed over a period of five years, and was influenced by the responses to three exposure drafts. The new ISA takes account of (a) regulatory and standard-setting developments around the world, (b) the interests of small entities, and (c) the expectations of various stakeholders, including those represented on the CAG. The project has not been an easy one, but the IAASB is confident that the new standard will enhance current practice and promote consistency on group audits worldwide.

Exposure Drafts Issued in 2007
In addition to the Clarity redrafting projects, the IAASB is also making significant progress on a number of other ISA projects under its current work program. Key aspects of these projects are highlighted below.

Proposed ISA 200 (Revised and Redrafted), Overall Objective of the Independent Auditor, and the Conduct of an Audit in Accordance with International Standards on Auditing
The IAASB's Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services (Preface) was reissued in January 2007 to reflect the effect of the new clarity drafting conventions. The Preface contains important statements about the authority of ISAs and the obligations of auditors who follow those standards. However, because the Preface may not be adopted in certain jurisdictions, the IAASB decided that these statements should be incorporated within the ISAs themselves. Accordingly, proposed ISA 200 (Revised and Redrafted) incorporates the provisions of the amended Preface that are relevant to ISAs. The IAASB approved this document for exposure at its April 2007 meeting.

The proposed ISA also describes the nature of an audit of financial statements and related concepts that provide the basis for a proper understanding of (a) the conduct of an audit, (b) the auditor's overall objective, and (c) the objectives and requirements of the ISAs. These explanations should be helpful to auditors, regulators, and others with an interest in audits and auditing standards.

Incorporating the relevant provisions of the Preface into this ISA gives them greater prominence, and ensures that the standards themselves directly impose on auditors using ISAs the obligation to follow all their requirements This is particularly important for any regulators adopting the ISAs, but not planning to enshrine the Preface in legislation. The final ISA is expected to be approved by the IAASB in June 2008.

Proposed ISA 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Third Party Service Organization
Many entities outsource aspects of their business to organizations that provide services ranging from (a) performing a specific task under the entity's direction, to (b) replacing one or more of the entity's business units or functions. Frequently, services provided by such organizations are integral to the entity's information system relevant to financial reporting.

Following a risk-based approach, the proposed standard deals with the auditor's responsibilities to obtain audit evidence when an entity uses one or more service organizations. This may include obtaining reports prepared by the auditors of those organizations.

Proposed ISA 505 (Revised and Redrafted), External Confirmations
Recent experience has indicated that external confirmations cannot always be considered as reliable audit evidence to the extent expected. This has led to requests for more rigorous requirements governing the auditor's use of external confirmations. The auditor's decision whether to use external confirmation procedures is based on the identification and assessment of risks of material misstatement in accordance with other ISAs, as well as the relative value of different sources of audit evidence. Proposed ISA 505 (Revised and Redrafted) is directed at the effective performance of external confirmation procedures when the auditor determines that such procedures appropriately respond to an assessed risk of material misstatement.

Proposed ISA 620 (Revised and Redrafted), Using the Work of an Auditor's Expert This revised standard deals with the auditor's use of the work of a person or organization with expertise in a field other than accounting or auditing who is employed or engaged by the auditor to assist the auditor to obtain sufficient appropriate audit evidence. It places particular emphasis on the need for the auditor to evaluate the expert's objectivity, and to jointly establish a proper understanding of that expert's responsibilities for purposes of the audit.

Re-Exposure of Proposed ISA 550 (Revised and Redrafted), Related Parties
The overall aim of this project is to enhance the auditor's consideration of related parties and related party transactions in an audit of financial statements, establishing an approach that requires the auditor to assess the risks of misstatement and to direct audit work accordingly. The proposals in the re-exposure draft are intended to make the auditor's responsibilities clearer, distinguishing those cases where the accounting framework includes disclosure and other reporting requirements, and those where it includes no or inadequate requirements.

The exposure draft includes a new definition of a "related party" to serve as a minimum level for the purposes of the audit. It also better differentiates the auditor's procedures to identify relevant risks of material misstatement from the auditor's responses to the assessed risks. The fact that different accounting frameworks define and address related parties in varied ways has led to a necessary complexity in this ISA. The proposed standard consequently emphasizes the need for the auditor to be aware of related parties and the extent to which they affect the financial statements, even where the financial reporting framework applied in preparing the financial statements does not establish requirements for related parties (or does so inadequately).

New ISA Under Development

Communicating Deficiencies in Internal Control
The IAASB commenced this project in October 2005 in response to regulatory and standard-setting developments around the world regarding internal control-related matters, including, in particular:

  • The European Union's Statutory Audit Directive that requires auditors to report identified material weaknesses in internal control to audit committees; and
  • The U.S. PCAOB's issue of an auditing standard addressing audits of internal control over financial reporting.

The proposed ISA deals with the auditor's responsibility to communicate to management and those charged with governance deficiencies in internal control the auditor has identified. It distinguishes between significant and other deficiencies in order to establish requirements to communicate to the appropriate levels within the audited entity. It also requires written communication of the significant deficiencies to those charged with governance.

This new proposed standard is intended to enhance the effectiveness of the auditor's communication of deficiencies in internal control. It does this by requiring a clearer focus on what is important to those taking ultimate responsibility for control over financial reporting. The proposed standard will require written communication of these matters on a timely basis, so that those charged with governance can take steps to strengthen internal control. The IAASB expects to finalize this standard in 2008, so that it would become effective for periods beginning on or after December 15, 2009.

New Assurance Standard Under Development

Reports on Controls at a Third Party Service Organization
Proposed International Standard on Assurance Engagements (ISAE) 3402, Assurance Reports on Controls at a Third Party Service Organization, is the first subject matter-specific standard developed under the IAASB's International Framework for Assurance Engagements. It complements proposed ISA 402 (Revised and Redrafted), in that reports prepared in accordance with proposed ISAE 3402 will be capable of providing appropriate audit evidence under the proposed ISA. It will help make reporting on controls at service organizations more consistent, thereby assisting such organizations to meet the needs of clients (“user entities”) and their auditors. In particular, it should ensure that reports issued in one country are likely to meet the requirements of the auditors of user entities in other countries.

The IAASB's Future Strategy and Work Program
To prepare for the period after 2008, the IAASB embarked on an extensive consultation program to obtain the widest possible input into determining its future priorities. Initial consultations were held with stakeholders through a strategy review survey conducted in January, meetings were held with national standards setters and European auditing standards setters during the year, and two well-attended information gathering forums were held in Sydney, Australia and Brussels, Belgium. Further consultations were also held with the CAG, the International Organization of Supreme Audit Organizations, the International Organizations of Securities Commissions, and at other member body programs and events.

The results of these consultations formed the basis for the Consultation Paper, Proposed Strategy for 2009-2011, issued in October. This paper presented a proposed strategy and possible implementation actions, and will form the basis for the IAASB's Work Programs for 2009-2011.

The IAASB intends to finalize its strategic plan and work program by the second quarter of 2008, with a focus on:

  • Contributing to the effective operation of the world's capital markets;
  • Assisting with the implementation of standards; and
  • Addressing the needs of small and medium-sized entities (SMEs).

Membership of the IAASB for 2008
The IAASB welcomed a number of new appointments and re-appointments as of January 1, 2008 for terms of three years:

Nominated by IFAC Member Bodies

  • Josef Ferlings, Germany;
  • Jianhua Tang, China; and
  • Jon Grant, United Kingdom.

Nominated by the IFAC Transnational Auditors Committee

  • Craig Crawford, KPMG (re-appointed)
  • Caithlin McCabe, Deloitte.

The IAASB's 17 volunteer members and 1 full-time Chairman now represent 10 countries: Australia, Canada, China, France, Germany, the Netherlands, Pakistan, Sweden, the United Kingdom and the United States. Representatives from the European Commission, the Japanese Financial Services Agency and the U.S. Public Company Accounting Oversight Board also serve as non-voting observers with speaking rights at the IAASB meetings.

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