Update on the IAASB’s Activities 2008

William R. Kinney Jr., the University of Texas at Austin, and IAASB member, James M. Sylph, IFAC Executive Director, Professional Standards, and Kathleen Healy, IAASB Technical Manager

This update provides an overview of some of the major activities of the International Auditing and Assurance Standards Board (IAASB) during 2008, and draws attention to projects to be undertaken in 2009. The IAASB website, 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. 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.

The Clarity Project
The IAASB’s milestone achievement in 2008 is the completion of the Clarity Project. As a result of this project, commenced in 2003, the IAASB has now issued all its auditing standards in a consistent form. Having also revised many of the auditing standards over the past five years, the end product is a set of up-to-date high quality standards governing the audit of financial statements. The complete set of thirty-six clarified ISAs and ISQC 1 will come into effect for audits of financial statements beginning on or after December 15, 2009.
The IAASB’s focus on auditing standards in recent years responded to calls from auditors and regulators to ensure that the ISAs were high quality standards that were worthy of global acceptance and would facilitate convergence. This focus led to (1) the revision of ISAs dealing with areas of highest audit risk to ensure that they are robust and up to date, and (2) the redrafting of all standards to promote consistency in interpretation and international acceptance.

In finalizing the project during 2008, the IAASB approved one new standard, twelve revised and redrafted standards, and twelve redrafted standards that had not been revised.
ISA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, sets out the “Clarity conventions” followed in redrafting the standards and the obligations of auditors who follow the standards. Among other matters, the ISA clarifies that the auditor is required to understand the entire text of an ISA to understand its objectives and to apply its requirements properly. It also explains that, in addition to setting out objectives and requirements, ISAs contain guidance for carrying out the requirements. Such guidance may explain more precisely what a requirement means or is intended to cover, or include examples of procedures that may be appropriate. Although such guidance does not in itself impose a requirement, it is relevant to proper application of the requirements of an ISA. ISA 200 (Revised and Redrafted) also introduces new guidance in relation to professional skepticism, professional judgment, the implications of the inherent limitations of an audit, and other matters relevant to applying the ISAs.

Global Acceptance of ISAs
The clarified ISAs will facilitate adoption and convergence around the world and they provide a stable platform from which the IAASB plans to advanceconvergence.
The ISAs are widely accepted in many jurisdictions, and recognized as appropriate for many capital markets. Over the next few years, the IAASB plans to identify and address barriers to the further adoption of ISAs, and will continue to ensure that the content and breadth of proposed new standards facilitate their global acceptance and adoption. For this reason, initiatives such as developing a framework for reviewing the effectiveness of new ISAs and participating in IFAC’s work on impact assessments have been included in our work program.
The IAASB was pleased to note that the U.S. Public Company Accounting Oversight Board, in developing its recently issued exposure draft relating to seven proposed new risk assessment standards, began by considering the ISAs and achieved a degree of commonality while acknowledging certain differences deemed necessary for their purposes.
The IAASB is fully supportive of the AICPA’s Auditing Standards Board (ASB) initiative to redraft its Statements on Auditing Standards (SASs) in the Clarity format, and the recent acceleration of the timetable to do so. Two final standards have already been approved, and a number of exposure drafts, including those dealing with risk assessment, are available for public comment.
Many jurisdictions use ISAs and are proposing to adopt the clarified standards in accordance with our effective date - for example, the Canadian Auditing and Assurance Standards Board intends to adopt the ISAs as Canadian Auditing Standards (CASs), which will constitute Canadian generally acceptable auditing standards.
Although many European Union (EU) member states are also proposing to adopt the clarified standards, the IAASB has had a special interest in the possible adoption of ISAs under the EU’s 8th Company Law Directive. Such adoption would cement the consistent use of the latest ISAs for statutory audit throughout one of the world’s major economic blocs. The EU legislative and adoption processes present their own challenges, but the IAASB works constructively with the European Commission (EC) to anticipate and resolve difficulties as they have arisen. A recent draft report from the Committee on Legal Affairs of the EU Parliament has given strong encouragement to making rapid progress with the consultation and adoption. During 2009, the IAASB and IFAC will continue to work closely with the EC as it continues its initiatives toward adoption, including those related to public consultation and translation of the entire suite of clarified standards from English into 21 of the official languages of the EU.

Other Standards and Initiatives
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. Reports prepared in accordance with proposed ISAE 3402 will be capable of providing appropriate audit evidence under ISA 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Service Organization. The proposed standard will facilitate more consistent reporting on controls at service organizations, thereby assisting service organizations to meet the needs of their clients (“user entities”) and their auditors, especially for reports issued in one country to meet the requirements of auditors of user entities in other countries.
In the absence of an up-to-date IAASB pronouncement over the past years, SAS 70, developed by the AICPA’s Auditing Standards Board, has been accepted in many jurisdictions as the de facto international standard for assurance reports on controls at a third-party service organization. In November 2008, the ASB approved a proposed Statement on Standards for Attestation Engagements (SSAE), Reporting on Controls at A Service Organization, with a February 2009 comment deadline. The explanatory memorandum to this exposure draft noted that the SSAE had been drafted based on the December 2007 exposure draft of ISAE 3402. Differences between the proposed SSAE and the ISAE 3402 exposure draft, that the ASB believed were not supported by any compelling reason, were eliminated. The ASB also included an exhibit that detailed what it believed to be differences in objectives, definitions, or requirements between the proposed SSAE and ISAE 3402.
The revision of SAS 70 provides the IAASB with an opportunity to ensure that the final versions of ISAE 3402 and SAS 70 are aligned to the maximum extent possible, thereby promoting convergence in an important practice area. The IAASB’s task force intends to liaise with those working on the SSAE; both standards are expected to be issued in 2009.

Assurance on Carbon Emissions Information
The IAASB believes, and its strategy consultation in 2007 confirmed, that there is a need for timely development of an ISAE dealing specifically with carbon trading to provide a proper reference point as a global trading scheme evolves. Although a global scheme may be some time off, a global assurance standard is needed in the short term so that it can be referenced in national and other schemes, and thus evolve as the global standard in time.

As the use of carbon emissions information becomes more prevalent, the demand for a consistent approach to assurance, and thus the need for an international standard, is likely to grow. During 2008, the task force developed a consultation program to gather views of those directly involved with carbon emissions.

Four roundtables were held during 2008, jointly with IFAC member bodies, to bring together interested parties in Australasia, North America, and Europe. These roundtables allowed more broadly-based users of emissions information and others interested in emissions trading (such as regulators, lawyers, academics, NGOs, and non-accounting assurors and standard setters) to share their views on key issues in this developing area. In addition, a Project Advisory Panel was formed to provide further input. The Project Advisory Panel currently has fourteen members, predominantly from accounting firms and IFAC member bodies, but it also includes a member nominated by INTOSAI and a member from a bank that finances carbon offset projects.

Topics addressed during the IAASB’s discussions to date included the following: whether the standard should deal with both reasonable and limited assurance engagements; assertion-based versus direct-reporting engagements; application of a proposed ISAE by non-accountants; the effect of emissions inventory uncertainty; and guidance with respect to the suitability of criteria.

The IAASB will obtain wide stakeholder input before issuing an exposure draft for public comment.

Assurance on Pro Forma Financial Information
Raising international capital efficiently requires information that is understandable across borders, together with assurance designed to enhance users’ confidence in that information, regardless of where they are based. Capital markets around the world are becoming more integrated, issuers are increasingly looking to raise capital, and investors are looking to invest capital, on an international rather than a local basis. In the European Economic Area (EEA), the introduction of the Prospectus Directive gives rise to a clear need for common assurance standards throughout the EEA. Representatives from countries outside the EEA have advised the IAASB that there is a need for relevant assurance standards. Consequently, there is a desire for global harmonization of the public and private reports provided by professional accountants in connection with prospectuses – particularly to ensure consistency in the procedures the professional accountant should perform to support the report, and the form and content of that report.

The IAASB’s strategy consultations confirmed a need in this area. Accordingly, in 2008 the IAASB approved a project proposal to develop an ISAE on assurance reports on pro forma financial information. The ultimate goal of the project is to develop an internationally accepted standard for assurance engagements on pro forma information in prospectuses; however, the development approach is to use an international project task force to focus on a single market model, the EU.

Fair Value Audit Guidance
As part of the Clarity Project, the IAASB approved ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. This revised standard places more emphasis on (a) areas of higher risk, (b) accounting judgment, and (c) possible bias. Doing so will help the auditor form appropriate conclusions about the reasonableness of estimates in the context of an entity’s financial reporting framework. These areas are also of particular importance in the context of fair values and the ISA expands guidance on auditing fair value accounting estimates as compared with extant ISA 545, including audit considerations relating to (a) the proper application of the requirements of the financial reporting framework relevant to such estimates, and (b) the use of models in valuations.

In response to comments received during the course of developing the revised standard, early in 2008 the IAASB formed a task force to determine how best to approach the development of any possible further fair value auditing guidance. Later, the task force was also asked to address the recommendation received from the Financial Stability Forum that the IAASB, major national audit standard setters, and relevant regulators should consider the lessons learned during the market turmoil and, where necessary, enhance the guidance for audits of valuations of complex or illiquid financial products and their related disclosures.  The task force, which is comprised of interested parties with relevant perspectives and expertise, considered aspects of the audit of financial statements measured at fair value, including current issues and practice, and consulted with others to ensure that the IAASB’s work responded to the global needs of our stakeholders. 

As the fair values landscape evolved during 2008, the task force identified specific areas where immediate guidance was necessary. To ensure that those conducting audits were doing so with adequate professional skepticism and in accordance with the currently effective ISAs, the Staff Audit Practice Alert, Challenges in Auditing Fair Value Accounting Estimates in the Current Market Environment, a staff-prepared non-authoritative document, was issued in October 2008.  Guidance in this form, rooted in the currently effective ISAs and prepared in light of current difficulties in the credit markets, is believed to be relevant to audits of all entities that have investments in financial instruments, especially those in illiquid markets. This document, along with other responses to the global financial crisis from IFAC and other organizations, can be found on the IFAC website.

As noted in the Staff Audit Practice Alert, ongoing initiatives by the International Accounting Standards Board (IASB) to provide guidance for preparers responsible for developing fair values will also be useful to auditors. As the effects of the credit crisis and economic downturn continue to unfold, the IAASB will continue to evaluate whether more audit guidance ought to be given.

Implementation Support
To date, the IAASB has concentrated its efforts on setting clear standards and providing adequate time for their implementation. The IAASB recognizes that (a) the effective implementation of its standards is as important as their development, and (b) it has an important role in addressing the practical implementation challenges experienced by those that have adopted, or are adopting, ISAs. Meeting these challenges, however, requires a joint effort by the IAASB, other IFAC boards and committees, regional and national professional accountancy organizations, the Forum of Firms, national standard setters, regulators, and development agencies.

As the IAASB has only recently completed the Clarity Project, its thinking with regard to possible actions to support implementation is preliminary. Staff of the IAASB is currently considering whether a series of modules could be developed that target specific ISAs, mainly those that have been revised and redrafted, to highlight key concepts such as the following:

• The IAASB’s reasons for revising the ISA.
• The scope of the ISA and its objectives.
• Key points of emphasis relating to new or revised requirements (or definitions), to the extent that these will result in changes to existing practice, and major viewpoints considered by IAASB in establishing the requirements.

Our future work in this area recognizes the need to ensure that all our efforts under the Clarity Project are not wasted through inappropriate implementation.

IFAC Policy Position on International Standard Setting in the Public Interest
In December 2008, IFAC released a policy position on the international standard-setting process. This paper, International Standard Setting in the Public Interest, outlines the rationale for the regulatory arrangements put in place for setting international standards for auditing and assurance, ethics, and accounting education – arrangements in which responsibility is shared between the public sector and the private sector.
The paper identifies the underlying principles of legitimacy, independence, accountability, transparency, and performance that are key to a successful standard-setting process, and it describes how the structures and processes of IFAC’s independent standard-setting boards in the areas of international auditing, ethics, and accounting education are consistent with these principles.

In the immediate post-Sarbanes-Oxley period, IFAC and the international regulatory community took initiatives to strengthen the international auditing standard-setting process in line with these principles. Among the most important actions was the establishment of the Public Interest Oversight Board (PIOB) to provide independent public interest oversight of the key elements of the standard-setting structure and process. The PIOB, formed in 2005, oversees the IAASB as well as the International Accounting Education Standards Board, the International Ethics Standards Board for Accountants, and the IFAC Member Body Compliance Program.

Other Relevant IAASB Publications
In October 2008, staff of the IAASB issued an IAASB Clarity Project Update to help and encourage those with responsibilities relating to audits of financial statements to set in motion plans to ensure that audits will be effectively carried out under the clarified ISAs. This communication highlights matters referred to above and mentions general considerations that may be relevant to a broad group of IAASB stakeholders, including national standard setters, legislators, regulators, oversight bodies, IFAC member bodies, accounting firms, and audit practitioners. It also provides a complete listing of the standards that were revised and redrafted, or redrafted only, as a result of the Clarity Project.

To achieve the widest use and recognition of IAASB standards, the IAASB makes its pronouncements available on its website free-of-charge. IFAC and the IAASB jointly released the 2008 edition of the Handbook of International Auditing, Assurance, and Ethics Pronouncements. That handbook contains all pronouncements issued as of December 31, 2007. The ISAs that have been clarified (and which are effective for audits of financial statements for periods beginning on or after December 15, 2009) have been included as Part II of the Handbook to facilitate translation and implementation.

In 2009, the IAASB will release an updated Part II that contains the final versions of all thirty-six clarified ISAs and ISQC 1. These standards will reflect minor drafting changes to a number of finalized ISAs to enhance consistency in the use of language and style of drafting as refined over the course of the Clarity Project, and to address other matters of clarity, an initiative that was agreed by the IAASB at its December 2008 meeting.

A free PDF downloadable version of the Handbook was also released with the printed edition. Individual publications continue to be available for download free-of-charge from the website.

Membership of the IAASB for 2009
Professor Arnold Schilder, RA was appointed to serve as the Chair of the IAASB for a three-year term beginning January 1, 2009. He brings both a breadth and depth of experience and strong integrity to the position, most recently having served as the Executive Director of De Nederlandsche Bank NV, the prudential supervisor of financial institutions in the Netherlands. His service as a former member of the PIOB will benefit the IAASB as it continues to enhance its working procedures in serving the public interest. In addition, he is a part-time professor of auditing at the University of Amsterdam and is a past President of the Koninklijk Nederlands Instituut van Registeraccountants, IFAC's member body in the Netherlands.
He will be supported by the new Deputy Chair, current IAASB member John Fogarty.
In addition, the IAASB welcomed a number of new appointments and re-appointments as of January 1, 2009 for terms of three years:
Nominated by IFAC Member Bodies

• Phil Cowperthwaite, Canada(re-appointed);
• Cédric Gélard, France; and
• Ashif Kassam, Kenya.

Nominated by the IFAC Transnational Auditors Committee

• Diana Hillier, (re-appointed); and
• Dan Montgomery,

Public Members

• Steen Jensen, INTOSAI;
• Tomokazu Sekiguichi, Japan; and
• David Swanney, United Kingdom(re-appointed).

The IAASB’s seventeen volunteer members and one full-time Chairman now represent eleven countries:  Australia, Canada, China, Denmark, France, Germany, Japan, Kenya, Pakistan, 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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