Read A Comparison of U.S. Auditing Standards

answer the following questions:

1.What efforts is the Auditing Standards Board making to clarify auditing standards?

2.Describe the five key differences between ISA's and US Auditing Standards.

3.How are the efforts of the Auditing Standards Board and the International Auditing and Assurance Board similar to the Financial Accounting Standards Board and the International Accounting Standards Board?

Focus 16 APRIL 2011/THE CPA JOURNAL A Comparison of U.S. Auditing Standards with International Standards on Auditing Moving Toward Convergence By Deborah L Lindherg and Deborah L. Seifert I temational Standards on Auditing (ISA) are targeted for convergence with existing auditing standards in the United States and other countries. Undl convergence eforts are irther along, however, there are five principal areas for which differ- ences currently exist among U.S. generally accepted auditing standards (GAAS), Public Company Accounting Oversight Board (PCAOB) auditing standards, and ISAs. ISAs are issued by the Intemational Auditing and Assurance Standards Board (IAASB) of the Intemational Federation of Accountants (IFAC), the successor organization to the Intemational Auditing Practices Committee (IAPC). Similar to the manner in which the Auditing Standards Board (ASB) writes auditing and assurance standards under the auspices of the AICPA and the PCAOB issues standards that are approved by the SEC, the IAASB writes standards under the auspices of EFAC. Presently, more than 100 countries use or rely on ISAs. APRIL 2011 / THE CPA JOURNAL 17 In ih? United States, the ASB. which sets auditing standaids for nonpublicly traded entities, has launched the Clarity PR)ject in an effort to make U.S. GAAS easier to read, understand, and apply. The Clarity Project also includes the goal of working towaixl convergence of U.S. auditing stiuidards with lSAs. This convergence project is attempting to make auditing standards ctwrdinated, or comparable, tliroughout the world. At the time of this writing, the ASB's Clarity Project is still a work in progress. The PCAOB, created by the S;irbanesOxley Act of 2002 (SOX) to oversee the auditors of public companies, considers the IAASB standards in developing its own proposed standards. Some critics of the PCAOB contend that it has failed to adequately take into account or promote the need for intemational convergence of auditing standards; however, the PCAOB recently undert(X)k a major revision of its risk assessment standards. The PCAOB adopted a suite of eight auditing standards related to the auditor's assessment of, and resptmse to, risk in an audit. The eight new risk assessment standards became effective for audits of fiscal periods beginning on or after December 15, 2010, and address audit procedures from the initial planning stages through the final evaluation of audit procedures and results (see pcaobus.org/ News/Releases/Pages/08052010 AuditingSt andiirdsRiskAssessment.aspx). As a result, PCAOB auditing standards and lSAs have more similarities than ever before. cate that candidates taking the Auditing and Attestation (AUD) section of the CPA exam are now expected to demonstrate an awareness of the IAASB and its aile in establishing ISAs, the differences between U.S. auditing standcirds and intemational auditing standards, and the audit requirements under U.S. auditing standards that apply when perfonning audit prtK"edures on a U.S. entity that supports an audit report based on ISAs or the auditing standards of another country. ISAs on the CPA Exam Key Differences Beginning in January 2011, the CPA exam began testing candidates on intemational standards. Content Specification Outlines (CSO) issued in May 2009 indi- There are five principal areas where differences exist among U.S. GAAS, PCAOB auditing standards, and ISAs. These significant differences are: dcKiimentation of EXHIBIT 1 The PCAOB's Suite of Risk Assessment Standards AS Title Summary 8 Audit Risk Describes the components of audit risk and the auditor's responsibilities for reducing audit risk to an appropriately low level in order to obtain reasonable assurance that the financial statements are free of material misstatements. 9 Audit Planning Planning requirements include assessing matters that are important to the audit; the auditor must establish an appropriate audit strategy and audit plan. 10 Supervision of the Audit Engagement Sets forth requirements for supervising the work of engagement team members. 11 Consideration of Materiality in Describes the auditor's responsibilities for consideration of materiality in planning Planning and Performing an Audit and performing an audit. Identifying and Assessing Risks of Establishes requirements regarding the process of identifying and assessing risks of material misstatement of the financial statements; the risk assessment process includes information-gathering procedures to identify risks and an analysis of the identified risks. 12 Material Misstatement 13 The Auditor's Responses to the Risks of Material Misstatement The auditor must respond to the risks of material misstatement in financial statements through the general conduct of the audit and performing audit procedures regarding significant accounts and disclosures. 14 Evaluating Audit Results Establishes requirements regarding the auditor's evaluation of audit results and determination of whether the auditor has obtained sufficient appropriate audit evidence. The evaluation process includes evaluation of misstatements identified during the audit; the overall presentation of the financial statements, including disclosures; and the potential for management bias. 15 Audit Evidence Explains what constitutes audit evidence and establishes requirements for designing and performing audit procedures to obtain sufficient appropriate audit evidence to support the opinion expressed by the auditor. Source: PCAOB Adopts New Auditing Standards on Risk Assessment, pcaohus.org/News/Releases/Pages/08052010_AuditingStandardsRiskAssessmentaspx 18 APRIL 2011/THE CPA JOURNAL audit procedures; going-concem considerations; assessing and reporting on intemal control over financial reporting; risk asse.ssment and responses to assessed risks; and the use of another auditor for part of an audit. In this article, much of the discussion of the differences between PCAOB auditing standards and ISAs is drawn from a study published by the European Commission (EC). An executive summary of this study, "Evaluation of the differences between Intemational Standards on Auditing (ISA) and the standards of the US Public Company Accounting Oversight Board ( P C A O B ) " is available at ec.europa.eu/intemaLmarket/auditing/docs/ ias/evalstudy2(K)9/summary_en.pdf The study was commissioned by the EC and solicited input from intemational technical partners from each of the Big Four audit firms. Documentation of audit procedures. Conceptually, documentation requirements under U.S. auditing standards and ISAs differ: AICPA auditing standards and PCAOB auditing standards are relatively more prescriptive tlian ISAs, which are perceived as relying more on the professional judgment of the auditor. An example in the study prepared for the EC notes that rcAOB Auditing Standaid (AS) 3 requires that an "engagement completion memo" be prepared; there is no such requirement under intemational auditing standards. Retention periods of auditing workpapers also differ among the three sets of standards. The ASB requires that audit workpapers be retained for a period of at least five years, while the PCAOB mandates a retention period of at least seven years. ISA 230, Audit Documentation, requires audit firms "to establish jxjlicies and prcK'edures for the retention of engagement dK'umentation. The retention period for audit engagements ordinarily is no shorter than five years from the date of the auditor's repxjrt, or, if later, the date of the group auditor's report" (web.ifac.org/ download/aO 11 -2010-iaasb-handbookisa-23O.pdf). Going-concern considerations. When considering whether an entity has the ability to continue as a going concem into the foreseeable future, the PCAOB auditing standards define the foreseeable future as the 12 months following the end of tlie fiscal period being audited. As noted in the study commissioned for the EC, APRIL 2011/THE CPA JOURNAL when assessing going-concem considerations under ISAs, the foreseeable future is at least, but not limited to, 12 months. At the time of this writing, FASB is considering releasing guidance on the going-concem-issue that would, among other things, increase management's responsibility for preparing financial statements as a going concem to consider infonnation for at least but not limited to, 12 months x)m the end of the reporting period. In additii)n. the ASB is still discassing whether an auditor's evaluation of an entity's ability to continue as a going concem "should be limited to a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited, or should cover the same periixl as that used by management to make its assessment" (www.aiqiaorg/Interest Areas/AccountingAndAudi ting/Community/ AuditingStandardsBoard/ASBMeetings/ DownloadableDocuments/January %202010 %20ASB7r20Meeting/2010_01_ASB_ Highlights.pdf). Accordingly, it should be noted that the ASB's redraft of "The Auditor's Consideration of the Entity's Ability to Continue as a Going Concem" as part of its Clarity Project has been delayed so that the proposed standard can be aligned with the going-concem guidance under consideration by FASB. Intemal control over financial reporting. When the U.S. Congress passed SOX, it required that management of U.S. public companies assess and report on internal controls over financial reporting. Management states its assertion about the effectiveness of its controls over financial reporting in a repwrt that accompanies the audit report. The PCAOB's AS 5 requires auditors of public companies to perform an examination of an entity's intemal control over financial reporting that is integrated with an audit of its financial statements. In addition to issuing an opinion on the faimess of the financial statements, auditors of U.S. public companies must also express an opinion on the effectiveness of the entity's internal controls over financial reporting. While not required to do so, virtually all public companies (and tlieir auditors) evaluate intemal controls based on the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Neither the auditing standards issued by the ASB nor ISAs require an integrat- ed audit that expresses as opinion on the effectiveness of the client's intemal controls over financial reporting. Auditors following U.S. auditing standards, however, must obtain an understanding of the internal controls of the entity being audited in order to plan and perform the audit, includ- Under international slandanis, an auditor is lequiied tD make inquines of the intemal auditors of the oiganization obtaining a better understanding of the entity's expeiiise in assessing lisk. ing detennining the nature, extent, and timing of substantive tests to be perfbmied. Intemational auditing standards require an auditor to test the intemal controls of the organization being audited to ensure that they iire adequate and functional. Risk assessment ISAs require .specific risk as.sessment procedures in order to obtain a broad understanding of lui entity ;uid its environment, with the goal of identifying risks of material misstatement. ISAs require that the auditor obtain an understanding of an entity's business risks, such as its operating risks and its strategic risks. Auditors following ISAs must also determine how tlieir client responds to such risks as the auditor plans and conducts the audit. Moreover, under intertuitional standards, im auditor is required to m;ike inquiries of the intemal auditois of the organization being audited, witli tlic objective of obtaining a better uiiderstimding of the entity's experti.se in assessing risk. Auditors following intemational standaals should take all infbmiation regarding risks, as well as the client's responses to tlie.se risks, into consideration when as.sessiiig the risk of material misstatement Currently, auditors following auditing standards promulgated by the ASB are required to identify and assess risks of material misstatement ba.sed on an understanding of the entity and its environ- 19 ment, including the entity's intemal control. This assessinent and understanding can be aided by inquiries of the intemal auditors of the entity being audited. The ASB's redraft of "The Auditor's Consideration of the Intemal Audit Function in an Audit of Financial Statements," as part of its Clarity Project, has been delayed so that the proposed standard can be aligned with the IAASB's revisions to its clarified standard on this issue. As previously noted, the PCAOB recently completed a major revision of its risk assessment standards. Eight new auditing standards related to the auditor's assessment of, and response to, risk in an audit were adopted by the PCAOB. This suite of risk assessment standards became effective for audits of fiscal periods beginning on or after December 13, 2010. The new risk assessment standards address audit procedures from the initial planning stages through the final evaluation of audit procedures and results. Accordingly, PCAOB auditing standards and ISAs are now more similar than they are different when it comes to risk assessment and response. The eight new standards are AS 8, Audit Risk m AS 9, Aiulil Plaiminfi AS 10, Supervision of the Audit Engagement EXHIBIT 2 ISAs versus U.S. Auditing Standards: Key Comparisons 1 1 Auditing Standards PCAOB Auditing International Standards on Audit Issue Board (AICPA) Standards Auditing (ISA) Documentation of Specific, prescriptive guidance; minimum five-year Specific, prescriptive Relatively more reliance on professional guidance; minimum sevenyear retention period for judgment; retention period for audit workpapers is ordinarily no shorter than audit workpapers. five years from the date of the auditor's report. Foreseeable future defined as 12 months. Foreseeable future is at least, but not Auditors must understand an entity and its environment. including internal controls. An "integrated" audit must be performed so that the auditor can express an The auditor tests controls to determine whether they are adequate and functional. There is no requirement to express an However, there is no opinion on the effectiveness opinion on the effectiveness of the requirement to express an opinion on the effectiveness of the client's internal controls of the client's internal controls over financial client's internal controls over financial reporting. Audit Procedures retention period for audit workpapers. Going-Concern Evaluation period should be Considerations limited to a reasonable limited to, 12 months. period of time, not to exceed one year beyond the date of the financial statements being audited. Internal Control over Financial Reporting reporting. over financial reporting. Risk Assessment The ASB's approach is to support a separate fraud Before the issuance of the risk assessment standards. standard (SAS 99, Consideration of Fraud in a audit procedures were not as understanding of the entity and its specific as those under ISAs. New Auditing Standards now environment in order to identify risks of Financial Statement Audit\\; it contends that a separate standard gives the consideration of fraud more prominence than integrating it into risk assessment standards. Use of Another Auditor 20 Specific risk assessment procedures are mandated in order to obtain a broad material misstatement. address specific audit procedures to be performed. from the initial planning stages of the audit through the evaluation of audit results. In a "division of responsibility" In a "division of responsibility" audit report, the principal auditor refers to the work of audit report, the principal auditor refers to the work of another auditor. another auditor. Not permitted. APRIL 2011/THE CPA JOURNAL AS \\[, Consideration of Materialit}' in other component of the overall audit. Under standards issued by both the ASB and the Planning and Performing an Audit AS \\2. Identifying and Assessing Risks PCAOB, the principal audit finii has the option of making no reference to the of Material Misstatement AS 13, The Auditor's Responses to work performed by the other audit firm. Nevertheless, the principal auditor also has the Risks of Material Misstatement the option of issuing a "division of respon AS 14, Evaluating Audit Results sibility" audit report, referring to the work AS \\5, Audit Evidence. A summary of the key provisions of and reports of the other auditor in the audit the PCAOB's suite of eight risk standards report issued by the principal auditor. ISAs do not permit the primary auditor to is provided in Exhibit I. The approach taken by the ASB is that make any reference to the work of anothit supports a separate fraud standard. er auditor. Statement on Auditing Standards (SAS) 99, Consideration of Eraud in a Financial A Global View There is a growing global acceptance of Statement Audit, as opposed to the PCAOB's integrated strategy. The ASB Intemational Financial Reporting Standards contends that the focu.sed approach gives (IFRS), and much has been written about the consideration of fraud more prominence that topic. In the global economy, in addithan integrating it into risk assessment stan- tion to understiinding intemational accounting standards, auditors also need to be dards. Use of another auditor. In some aware of the influence of international audits, the "principal" auditor may auditing standtirds on U.S. auditing stanengage another audit fimi to perfomi some dards. ISAs represent transparent, highportion of the audit. For example, another quality auditing standards that have been audit fimi may be hired to audit a foreign gaining worldwide acceptance. This is evisubsidiary, complex inve.stments, or some dent in the United States, as the ASB's Clarity Project is converging U.S. GAAS with ISAs or establishing rea.sons for not doing so. Furthermore, the IAASB continues to make the case for acceptance of ISAs by market regulators in cross-border miu"ket offerings and reports of foreign issuers. As summarized in Exhibit 2. tliere are currently five key areas in which differences exist among standards issued by the ASB, PCAOB auditing standards, and ISAs: 1) docuinentaon of audit procedures; 2) goingconcem considerations; 3) assessing and reporting on intemal control over financial reporting; 4) risk asse.ssment; and 5) the use of another auditor for part of an audit. Until ISAs are converged with U.S. auditing standards, it is important for auditing professionals to be aware of and understand these differences. Deborah L. Lindherg, DBA, CPA, is a professor of accounting and Deborah /Seifert, PhD, CPA, CMA, is an assistant profes.sor of accounting, both at Illinois State University. Normal. III. 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