Auditing standards give important guidelines on how auditors should conduct their activities. In essence, these rules inform business stakeholders on the kind of services they should expect to get from auditors. In light of this, this paper will look at the recent efforts of the US government to realign its auditing policies to match those used by other countries. Notably, this paper will identify the reasons that may have led to the US government desire to realign its auditing policies. Accordingly, this paper will check whether these new guidelines have been effective in attaining full realignment of the auditing policies. In addition, the paper will also check if there are areas that need improvements. Finally, the paper will point out on the areas that have attained full realignment and the auditors’ duties in these areas.
Keywords: Auditor, ISA, GAAS, AU, PCAOB
Auditing standards improve the accuracy of the auditor’s financial report. Importantly, auditing standards enable auditors to use a coordinated approach to analyzing financial records. In effect, this enables them to trace various auditing procedures. Moreover, it facilitates the use of various auditing teams to jointly work on one activity. In addition, proper auditing standards facilitate for a detailed review and analysis of a company’s accounting records which leads to the disclosure of errors and frauds (PricewaterhouseCoopers, 2005). Consequently, good auditing standards are important in ensuring that business stakeholders are protected from unethical behaviors by the organization management. In brief, this paper will evaluate the differences between international and US auditing standards.
Auditing Standards Board Clarity Project
In brief, the American Auditing Standards Board (ASB) redrafted all its auditing (AU) sections in the Codification of Auditing Standards in 2011 to make them easy to read, understand, and apply (AICPA, 2016). Notably, the revised standards became effective in 2012. Noteworthy, the Generally Accepted Auditing Standards (GAAS) were made clearer on the auditors’ objectives and their obligations to abide by these standards (AICPA, 2016). In effect, the main significant changes were as follows:
- The re-codifying of auditing sections (AU) to a consistent and more readable format
- The wording of the auditor’s report was revised
- The revision of the policies of group audits
- Improvement in the clarity of the generally accepted auditing standards.
Re-codifying of Auditing Sections
Notably, the ASB re-codified its new auditing sections after the revising the audit guidelines. In some cases, the sections were renumbered on a one-to-one basis, while on others; some guidelines were regrouped and issued with new codes (AICPA, 2011). In effect, almost all categories were issued with new AU section numbers.
Changes in the Auditors Report
Basically, the new SAS has changes in the forming of an audit opinion and re-posting on the financial statements, as well as the SASA modification to the opinion in the independent Auditor’s Report. In addition, there are changes on reporting of the emphasis of matter, and other matters paragraph. Noteworthy, these changes jointly supersede prior auditing standards associated with the auditor’s report of the financial statements audit (AICPA, 2011). In brief, the changes in the auditor’s report as follows:
- Introduction paragraph. Basically, the current auditing report will no longer start with a statement of management and auditors responsibility.
- A new section that requires the title “Management Responsibility for the Financial Statements.” In essence, this section says that the management of an organization has the duty of ensuring that its financial statements are accurate. In addition, it had the duty of ensuring it has strong internal control policies.
- A new section called “Auditor’s Responsibility.” Basically, this section says the auditor’s scope in the auditing process.
- Opinion paragraph has a header called “Opinion.” Noteworthy, when the auditor issues a report other than the unqualified report, the paragraph describing the reasons for this modified report must have the “Opinion” header.
Changes in Standards for Group Audits
Noteworthy, the changes in group audit entail the introduction of the “Group Audit standards based on the revised ISA 600.” Basically, ISA 600 mentions how work of related auditors should be used in the audit of group financial statements. Notably, the standards make only little changes to this area (AICPA, 2011). Nevertheless, there are significant changes in the Statement on Auditing Standards (SAS) section and in the Special Consideration-Audit of Group Financial Statements. In essence, this section requires multi-office audit firms to assess the risk and set materiality levels in the audit of group financial statements.
Changes in Status for GAAS
In summary, the new standards were made for the GAAS rules contained in AU section 150. Basically, these rules have been incorporated into various clarified standards. Nonetheless, the old standards make the part called “clarified principles” that aims at enabling individuals understanding audit (AICPA, 2011). Notably, they are presented in the section called “Preface of the Clarified Standards.”
Differences Between International and US Auditing Standards
Basically, the US auditing standards are guided by the Public Company Accounting Oversight Board (PCAOB). Nonetheless, other countries in the world use the International Standards on Auditing (ISA). In effect, these differences in auditing regulations bring challenges when auditing businesses that operate in regions beyond the US (Taylor, 2011). In order to solve this problem, the US Accounting regulator has been aggressively realigning the country’s auditing standards to enable them to match with the ISA rules. Noteworthy, the areas that have had significant changes are as follows:
- Documentation of audit procedures
- Going-concern consideration
- Assessing and reporting on international control over financial reporting
- Assessment and response to assessed risks.
- The use of another auditor for part of an audit
Documentation of Auditing Procedures
Basically, paragraph 10 of section 230 of GAAS requires auditors to include abstract copies of significant contract used during the documentation of auditing procedure for significant contracts. On the contrary, ISA 230 does not require the inclusion of abstract copies used in such audits. Further, the PCAOB standards emphasize the need for the inclusion of the abstract copies. In effect, the US regulations require for the abstract copies be included so as to have a similarity in the accountancy approach.
Notably, section 570 of the ASB does not require the auditor to evaluate the going concern of a business. Furthermore, the ASB did not converge the rules with those of ISA 570 as it anticipated for the development of accounting standards that would give guidance on going-concern rules. On the contrary, ISA section 570 requires the management to evaluate the going concern of a business when preparing financial statements. In light of this, the differences in these two rules exist both in language and on the requirements.
Assessing and Reporting on International Control over Financial Reporting
In brief, this section discusses on procedures for acceptance of an audit engagement. Basically, paragraph 11-12 of ISA 210 give guidelines on the manner that the management may get the services of an auditor. On the contrary, the ASB posits that these situations are not applicable in the US. Accordingly, the ASB does not issue guidelines on the same (Hayes, 2014). Additionally, paragraph 11-12 of section 210 requires a new auditor to consult the predecessor auditor. Notably, ISA 210 does not have these requirements. Further, paragraph 13 of section 210 requires the auditor to remind the entity through a written document of the existing terms of engagement. On the converse, the ISA 210 does not require a returning auditor to remind the entity of continuing terms of engagement.
Assessment and Response to Assessed Risks
Basically, paragraph 20 of section 330 requires auditors to confirm the accounts receivables. Nonetheless, this section is not in the ISAs. Notably, paragraph 10 of section 330 has been expanded from the ISA terms to require auditors to assess whether the persons performing control activities has the necessary competence and authority to perform these duties.
The Use of Another Auditor for Part of an Audit
ISA 600 does not permit an auditor to refer to the financial statements of a component auditor unless required by the law. On the contrary, SAS no 1 section 543, Part of Audit Performed by Other Independent Auditors allows an auditor to rely on financial statements from a component auditor. In addition, there is a difference in language between the ISA and the GAAS rules (MARC, 2009). Notably, all ISA 600 regulations are addressed to either group engagement partner or group engagement team. On the converse, ASB paragraph 16 and 29 relate to the engagement acceptance and modification of opinion in group financial statements.
International Convergence of Accounting and Auditing Standards
Importantly, following the adoption of revised standards by PCAOB in 2010, the current regulations on auditing are now more similar (Lindeberg & Seifert, 2011). In essence, these standards are closely similar on risk assessment and response audits. Basically, the eight new standards are as follows:
- Audit risk
- Audit planning
- Supervision of the audit engagement
- Consideration of materiality in planning and performing an audit
- Identifying and assessing risks of material misstatements
- Evaluating audit results
- Audit evidence
In summary, there has been a convergence in the description of audit risk. In essence, the auditor has a duty of minimizing audit risk to a very low level in order to be able to give a reasonable assurance on the accuracy of financial statements (Braiotta et al., 2010). In addition, there has also been and a consensus on the agreement of what is necessary when planning for an audit engagement. Further, there has been realignment on the requirements needed for supervising the work of engagement team members.
On the same vein, there has been a convergence on the responsibilities of an auditor to consider materiality when planning and performing an audit (PCOAB, 2015). Similarly, all standards have established requirements requiring the auditor to assess and establish the risk of material misstatements of financial records (Anandarajan, & Gary, 2014). Basically, this requires the auditor to identify and conduct an analysis of probable risks. Moreover, the auditor must provide a response to the risks of material misstatements by conducting an audit of significant accounts and disclosures (Lindeberg & Seifert, 2011).
In addition, the auditor has a duty of evaluating audit results to determine if he/she has gathered adequate evidence to conduct the work. In brief, the evaluation process includes the analysis of misstatement, the financial records, disclosures, and potential management bias (Anandarajan, & Gary, 2014). Further, the auditor has a duty to explain what constitutes the audit evidence and to obtain sufficient appropriate evidence to support the opinion expressed in the auditor’s report.
In summary, the convergence of auditing processes is appropriate as it will facilitate for a uniform approach in the auditing process. Further, auditors will be able to easily work in countries using various accounting methods. In light of this, countries should converge their auditing methods in order to enable international businesses to have a convenient approach when preparing their financial statements.
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