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International Auditing Issues


An objective (independent), competent person. Quantifiable (and verifiable) information ... plans to adopt ISAs for all audits effective January 2007 (Sylph, 2005) ... – PowerPoint PPT presentation

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Title: International Auditing Issues

Chapter 15
  • International Auditing Issues

The Accounting and Auditing Profession
  • Auditing has 3 important requirements
  • An objective (independent), competent person
  • Quantifiable (and verifiable) information
  • Established criteria (or auditing standards)
  • Quality of auditing profession depends on
  • Reputation of the profession
  • Quality of the educational system
  • Certification process

Global Audit Services
  • Audit/Attestation and Assurance Services
  • Tax Advisory and Compliance Services
  • Consulting/Management Advisory Services
  • Standard auditing packages are difficult to use
    because of international differences

Risks in determining the scope of a multinational
audit (Hermanson, 1993)
  • Significant or unusual transactions at a sub
  • Size of sub (revenue, net income, assets)
  • Large changes in a subs net income
  • Audit committee expectations
  • Competence of subs accounting personnel
  • Research shows that risks for domestic and
    international audits are similar

Audit ChallengesLocal Business Practices
  • Predominance of cash
  • Makes tracing transactions difficult
  • Japan use of checks may not be traceable due to
    a lack of provision of cancelled checks
  • Inability to confirm accounts receivable
  • Translation into another language
  • Receiving returned confirmations is difficult
  • Auditors may be seen as intrusive

Audit Challenges Currency, Language, and Law
  • Foreign Currency
  • Auditor must determine if the choice of
    translation method is correct
  • Language and Culture
  • Translators may not give the full story
  • Knowledge of language is essential
  • Interaction of Home Country and Local Law
  • Home countries may have laws that extend to subs
    of their domestic companies that operate abroad
  • Example Sarbanes-Oxley 404 compliance by 2006

Audit Challenges Distance and Organization
  • Distance
  • Operations are not audited as frequently or as
  • Communication is slow
  • Organization
  • Firms may need to expand abroad
  • Global firm alliances are often used

Audit ChallengesDiversity, Availability,
  • Supply of Auditors
  • Differences in Training 3 models
  • Apprenticeship approach does not require
    specific university training in Accounting U.K.
  • University-based model U.S. and Germany
  • Dual track model Netherlands and France

  • General Agreement on Trade in Services
  • Addresses problems of qualifying to practice in
    other countries in two ways
  • Requires countries to administer their licensing
    rules in a reasonable, objective, and impartial
    manner and forbids countries from using licensing
    rules as disguised barriers to trade
  • Encourages countries to recognize other
    countries qualifications, either autonomously or
    through mutual recognition agreements

  • Principles for Reciprocity
  • Signed between the AICPA, NASBA, and CICA
  • Extended to Australia (ICAA)
  • A short-form exam is administered
  • Eighth Directive (EU) auditors must
  • Obtain qualifications that are deemed to be
    equivalent to the reviewing authorities in the
    host country
  • Demonstrate that they understand the laws and
    requirements for conducting statutory audits in
    the host country

  • Sarbanes-Oxley and PCAOB made reciprocity more
  • European Commission established a provision
    similar to Sarbanes-Oxley in 2004
  • Requirements include
  • Regular rotations of auditors
  • Independent audit committees at every company
  • Registration and regular inspection by the PCAOB
  • Proposal on establishing national watchdog
    organizations is still in the works

Structure of the Audit Industry
  • Statistics found in Economist, 2004
  • Big Four
  • Audit 97 of all public companies in the U.S.
    with sales over 250 million
  • Audit 80 of public companies in Japan
  • Audit two-thirds of public companies in Canada
  • Audit all of U.K.s 100-biggest public companies
  • Hold over 70 of the European market by revenue

Structure of the Audit Industry
  • Enron and Sarbanes-Oxley brought changes
  • PCAOB was established to regulate the accounting
    profession and monitor firms
  • Sarbanes-Oxley prohibits firms from providing
    many non-audit services to audit clients
    (Sarbanes-Oxley Act, 2002)
  • Risks have increased for large international
  • Compliance with Audit Standard 2 on internal
    control has been difficult and costly
  • Some firms have had to drop clients

Structure of the Audit Industry
  • Trend is to organize around industry
  • This trend results in a matrix form or
  • Industry is the primary focus
  • Functional organization is a secondary focus
  • Firms offer tax and consulting services
  • Some firms have sold some non-audit practices
  • Some firms are outsourcing services

Strategies of the Global Audit Firm
  • Companies who switch to international auditors
    give these reasons for the switch
  • The need to reflect the increasing size of
    overseas business
  • The need to have one firm auditing all companies
    within the group
  • Large audit firms have become multinational firms
    with strong global focus and control

Strategies of the Global Audit Firm
  • Mergers allow firms to gain stronger market share
    in emerging markets
  • Citron and Manalis (2001) findings indicate
  • Companies in emerging markets hire large
    international audit firms to add credibility to
    the financial statements
  • This credibility allows companies to obtain
    international financing and list on foreign
    exchange markets

Audit Standards
  • Vary considerably from country to country
  • Standards come from
  • The public sector (government) U.S. now
  • The private sector U.K., Canada
  • A combination of the two Germany
  • Requirements for a compliance audit
  • U.S. all publicly-traded companies and those
    with more than 500 shareholders and assets of
    more than 5 million
  • U.K. all limited companies must be audited

Audit Standards
  • Some audits simply test whether the financial
    statements reflect the books and records of the
  • Other audits test whether the books and records
    accurately reflect the original transactions
  • Why do standards vary?
  • Differing capital markets
  • Differing accounting professions
  • Cultural differences Japanese confirmations are
    obtained from the company as a sign of respect
    and trust

International Harmonization of Audit Standards
  • IFAC is attempting to harmonize audit standards
    and audit professions globally
  • IFAC sets standards in the following areas
  • Auditing, assurance engagements, and related
  • Quality Control
  • Code of Ethics
  • Education
  • Public Sector Accounting
  • IFAC is also involved in issues relating to small
    and medium size companies in developing countries

International Harmonization of Audit Standards
  • International Auditing and Assurance Standards
    Board (IAASB)
  • Develops ISAs and International Standards on
    Review Engagements
  • Develops International Standards on Assurance
  • Develops related practice statements
  • (IAASB Handbook, 2005)

Benefits of Developing and Enforcing
International Standards
  • Readers of financial statements have justifiable
    confidence in auditors opinion
  • Readers of financial statements have greater
    assurance that accounting standards are adhered
  • Readers are assisted in making international
    financial comparisons
  • Further incentive to improve and extend the set
    of international accounting standards

Benefits of Developing and Enforcing
International Standards
  • Increased flow of investment capital
  • Developing countries will find it easier to
    produce domestic auditing standards
  • The broader information gap between investors and
    management of MNEs is lessened

Forum of Firms and IFAC
  • Work together to improve international accounting
    and auditing standards
  • Forum of Firms requirements
  • Having policies and practices in compliance with
    ISAs and the IFAC Code of Ethics
  • Maintenance of appropriate internal control
    procedures including intra-firm practice review
  • Agreement to implement training on international
    accounting and auditing standards including the
    Code of Ethics
  • Agreement to subject assurance work to periodic
    external quality control assurance
  • Agreement to support the development of the
    professional bodies and implementation of
    international standards of accounting and
    auditing in developing countries

International Forum on Accountancy Development
  • IFAD was formed after the Asian crisis (1997)
  • IFAD works for conformity and consistency of
    national accounting standards with IAS
  • IFAD needs to globally promote education on IAS,
    ISA, and IFACs Code of Ethics

  • European Commission plans to adopt ISAs for all
    audits effective January 2007 (Sylph, 2005)
  • Gaining PCAOB collaboration is key to the success
    of IFACs initiatives
  • PCAOB may slow down harmonization in the U.S.
    (Giles et al., 2004)