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Auditing Standards - A Perspective

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Auditing Standards - A Perspective Vijay Kapur Director, ICAI May 11, 2010, New Delhi * * * * * * * Bridging the Expectation Gap Constructive dialogue Regulators ... – PowerPoint PPT presentation

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Title: Auditing Standards - A Perspective


1
Auditing Standards - A Perspective
Vijay KapurDirector, ICAI May 11, 2010, New
Delhi
1
2
Agenda
  1. Framework of Auditing
  2. ICAI and Auditing Initiatives
  3. Convergence with IAASB Standards
  4. Implementation of Auditing Standards
  5. Roadmap

2
3
Framework of Auditing
3
4
Rationale for Audit
  • Enhancing credibility of financial information
  • Economic consequences Impact of using
    unreliable information
  • Conflict of interest - Users vs Preparers
  • Remoteness - Physical, Legal
  • Complexity of financial Information
  • (A vital part of economy order in any country)

4
5
The Expectation Gap
Auditors Performance
SocietysExpectations
EXPECTATION GAP
ReasonablenessGap
Performance Gap
Deficient Performance
UnreasonableExpectations
DeficientStandards
Eg, Auditor fails to report on going concern
issue
Eg, Auditors confidentiality requirements
Eg, Auditor verifies every transaction
Auditors Existing Duties
Duties UnreasonablyExpected of Auditors
5
Source The Audit Process 2nd Edn (Ian Gray
Stuart Manson)
6
Myths Related to Audit/ Audit Report
  • Audit
  • guarantees efficiency effectiveness of
    management
  • guarantees future viability of entity
  • Clean Audit Report is
  • Clean chit on financial health of entity
  • Financial statements are free of fraud/ error
  • Endorsement of entitys policy decisions
  • Comment on use of entitys resources
  • Positive assurance that business is a safe
    investment
  • Guarantee that future events will not affect
    going concern status of entity

6
7
ICAI and Auditing Initiatives
7
8
Auditing Assurance Standards Board A Brief
History
  • 1955 Auditing Sub-Committee of Research
    Committee constituted
  • 1955 Audit of Accounts of General Insurers
  • 1963 Statement on Auditing Practices
  • 1983 - Auditing Practices Committee (APC)
    constituted
  • 1985 First Auditing Standards issued
  • July 2002 APC converted into Auditing
    Assurance Standards Board (AASB)

8
9
AASB - Objectives Functions
  • Review existing emerging auditing practices
  • Identify areas in which Standards can be issued
  • Formulate new/ revised Engagement Quality
    Control Standards
  • Formulate new/ review existing Guidance Notes
  • Formulate other non authoritative literature

9
10
AASB Composition
  • Sitting Council (15)
  • Co-opted members (5)
  • Regulators
  • SEBI
  • RBI
  • IRDA
  • Special Invitee
  • IIM/ Other prominent academic organisation (2)
  • Industry association (1)
  • NPO
  • Professional Organisations (3)

10
11
ICAI is the ONLY Auditing Standard Setter in
India
11
12
Relationship with IFAC
  • ICAI is a founder member of IFAC
  • Membership obligation convergence with ISAs
  • NSS Policy Paper of IAASB on convergence with
    ISAs, July,2006

12
13
IFAC Membership Obligation
  • ICAI founder member of IFAC, to comply with SMO
    3
  • Incorporate IAASB Standards in national standards
  • Assist implementation of International Standards
  • Constitution of IFAC SMO 3 acknowledge
    national standards but members to have
    convergence with IAASB Standards as central
    objective
  • ICAI is part of IAASBs Auditing NSSs since 2002

13
14
IAASB Clarity Project 2004
  • Objectives
  • Encourage greater use of IAASB Standards
  • Facilitate translation
  • New format of writing Standards
  • Requirements basic principles
  • Application Other Explanatory Material
  • Separate guidance on applicability to SME audits
  • Separate guidance on applicability to Public
    Sector audits
  • Embedded guidance on audit in IT driven client
    environment
  • Clarity ISAs applicable from December 15, 2009.
  • First Clarity ISAs issued in December 2006

14
15
Auditing Standards Important Considerations
  • Revised Preface Effective April 1, 2008
  • Harmonised with the IAASB International Standards
  • Also take into account
  • Applicable laws
  • Customs
  • Usages
  • Business environment

15
16
Effective Auditing Standards - Essentials
16
17
Drivers for Revisions/ Changes
  • Changing business environment of clients
  • Keeping pace with changes at the international
    market place
  • Meet the changing expectations of the
    stakeholders
  • Client
  • Government
  • Regulators
  • General public
  • Bridge the Expectation Gap
  • Hedge against increasing professional risk

17
18
Process for Issuing Standards
AASB identifies project
Draft submitted by study group
Study group constituted
Draft sent to Chairman for approval
Draft hosted on website
21 days
Proposed ED sent to Council members
Draft considered at AASB mtg.
10 days
ED issued
Comments considered at AASB mtg.
Comments received hosted on website
60 days
Proposed Standard placed before Council
Final Standard issued
18
19
Convergence with IAASB Standards
19
20
Present Position
  • All clarified Standards corresponding to IAASBs
    clarified Standards issued
  • 35 Standards on Auditing issued
  • ISA 600 under active consideration
  • Clarified ISQC 1 Exposure Draft under
    consideration
  • Also issued
  • SREs SRE 2400 (Revised), SRE 2410
  • SAEs SAE 3400
  • SRSs - SRS 4400, SRS 4410

20
21
Issues in Convergence
21
22
Convergence vis a vis Adoption
  • Convergence?
  • Coming together from different directions to a
    common point of intersection
  • IAASB Policy Paper (2006) on Convergence
  • Limited options in terms of changes to ISAs
  • Meet laws/ regulations of land
  • Eliminate options in ISAs
  • But objective of the ISAs requirement has to be
    met
  • No convergence till standards corresponding to
    ISQC(s) issued.
  • AASBs Standards, generally, modified within
    these parameters

22
23
Access to Auditors Working Papers
  • Many ISAs require access to other auditors
    working papers, eg
  • ISA 600
  • ISA 402
  • ISA 510
  • Access permitted under IFAC Code of Ethics
    subject to certain conditions
  • Access permissible under ICAI Code of Ethics if
  • Access informed to client in the engagement
    letter (as for Peer Review)
  • Required by Standard (since Standards carry force
    of law under CA Act 1949)
  • (clause 1 of Part I of 2nd Schedule read with
    clause 9 of Part I of 2nd Schedule)

23
24
Assessment of Professional Competence
  • ISAs require assessment of professional
    competence of any other auditor whose work is to
    be used/ relied upon. Eg
  • ISA 600
  • ISA 402
  • Hitherto, Indian auditing Standards exempt such
    assessment if such other auditor also a member of
    ICAI
  • BUT, Necessary
  • Overall experience?
  • Industry experience?
  • Eg., financial services sector

24
25
Audit of SMEs
  • ISAs adopt risk based approach
  • Restricted application for audit of SMEs?
  • Basic principles are same, only application
    guidance amplified
  • Application is scalable according to size of
    entity
  • Separate guidance for application in case of SME
    audits

25
26
Definition of Public Sector
  • IAASB definition means national/ local/ state
    Governments, ministries, departments, etc
  • Separate paragraphs in ISAs for application to
    public sector
  • AASB definition means State Owned Enterprises
    (operating as any other commercial entity)
  • We remove any specific reference to public sector
    generalise the guidance

26
27
Standards on Auditing (SAs)
  • Compliance is mandatory
  • Applied in audit of Financial Statements
  • Expression of opinion
  • Overall objective of the auditor
  • Obtain reasonable assurance about whether FS as a
    whole are free from material misstatement.
  • If auditor unable to fulfill overall objective,
    SAs requires the auditor to
  • Modify his audit opinion
  • Withdraw from the engagement
  • Materially in compliance with financial reporting
    framework
  • SA not applicable if situation outlined in SA is
    absent.
  • Document alternative procedures performed

27
28
Other Important Publications
  • 40 generic Guidance Notes on auditing
  • 04 industry specific Guidance Notes
  • Implementation Guides
  • Risk-based Audit of Financial Statements
  • SQC 1
  • Technical Guides
  • Audit of Telecom Companies Specific Aspects
  • Audit of E-Commerce
  • Other Important Publications
  • Practitioners Guide to Audit of Small Entities
  • Training Manual on Engagement Quality Control
    Standards
  • Study on Basel II
  • Brochure, What Is An Audit Understanding An
    Audit of Financial Statements

28
29
Implementation of Auditing Standards
29
30
Encouraging Compliance with Standards ICAI
Initiative
Continuing Professional Education1956
Peer Review Board2002
  • Evaluation of quality control systems in audit
    firm
  • compliance with technical standards
  • audit procedures
  • documentation
  • quality of reporting
  • office systems and procedures
  • training of staff

Mandatory for all CAs
30
31
Enforcing Compliance
Disciplinary Committee
Board of Discipline
Financial Reporting Review Board
Ist Schedule to CA Act, 1949
  • Refer case to Director (Discipline) against
    auditors
  • Inform concerned regulator regarding erring
    managements

Ist IInd Schedules to CA Act, 1949
  • Reprimand the member
  • Remove the name from the Register for 3 months
  • Impose fine up to one lakh rupees.
  • Reprimand the member
  • Remove the name of the CA from the Register of
    Members permanently
  • Impose fine up to five lakh rupees.

31
32
Roadmap
32
33
Global Benchmarking for Indian Auditing
Profession
Creating knowledge
Spreading knowledge
EQC Standards corresponding to IAASB
CPE programmes on auditing
Supporting guidance
33
34
Bridging the Expectation Gap
Constructive dialogue
Regulators
Clients
Other stakeholders
Auditors responsibilities wrt frauds in
financial statements
Absolute assurance vs reasonable assurance
  • Publications for general public
  • Direct interaction
  • Participation in Standard setting other
    activities of AASB

34
35
Projects in PipelineStandards-to be issued
  • Revised SA 600, Special Considerations ? Audits
    of Group Financial Statements (Including the Work
    of Component Auditors)
  • Revised SQC 1, Quality Control for Firms that
    Perform Audits and Reviews of Historical
    Financial Information, and Other Assurance and
    Related Services Engagements
  • SAE 3000, Assurance Engagements Other than Audits
    or Reviews of Historical Financial Information
  • SAE 3402, Assurance Reports on Controls At
    Service Organisation
  • Standards corresponding to any other Standard
    issued by IAASB

35
36
Guides to be issued
  • Implementation Guides
  • Review Engagements
  • Audit Materiality and Sampling
  • Audit of Financial Instruments
  • Auditing Standard on Reporting
  • Audit Evidence
  • SA 720
  • Risk-based Audit of Financial Statements- with
    respect to the Evaluation of Internal Control
    System
  • Other Projects
  • Technical Guide on Non-banking Finance Companies
    (NBFCs)
  • Technical Guide on Audit of Cooperative Banks
  • Revision in the Format of the LFAR in case of
    Banks and Bank Branches

36
37
Concluding Observation
  • the Sustainability of the accountancy
    profession depends upon the quality of the
    services provided by its members and on the
    professions capacity to respond effectively and
    efficiently to the demands of the economy and
    society.
  • IFAC Policy Position Regulation of the
    Accountancy Profession, December 2007
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