This article was first published in the July 2011 International edition of Accounting and Business magazine.
It is over two years since the ink began drying on the 36 clarified International Standards on Auditing (ISAs). March 2009 marked the completion of a major project to improve the clarity and quality of the previous standards by updating and reformatting them. Since then, a steady momentum has been building around the world for the adoption of clarified ISAs.
The number of countries already using clarified (or clarity) ISAs, or which have indicated they will be doing so in 2011 and beyond, is growing rapidly. Professor Arnold Schilder, chairman of the International Auditing and Assurance Standards Board (IAASB), has been maintaining a list. It shows that 67 countries were clarified ISA adopters in early May 2011, with additions expected imminently.
‘Of the 27 member states of the EU, 18 have already adopted the clarity ISAs on a national basis,’ says Schilder; the UK and the Netherlands are two of the adopters. The remaining nine include Germany, France, Spain and Italy. Some member states are officially waiting for EU endorsement but are already working on transposing the requirements of the clarified ISAs into local auditing standards. Within the European Commission itself Schilder senses a recognition that the question is no longer one of whether to adopt the clarified ISAs, but how.
Elsewhere in Europe, countries such as Albania and Croatia are already clarified ISA backers, while other Eastern European nations, such as Bosnia-Herzegovina and Macedonia, are ‘on their way’, Schilder reports.
Clarified ISAs also have support in Asia. China has, for example, completed the revision of its audit standards to achieve full convergence. Take-up is encouraging in Africa and is expected to increase once Francophone countries have access to a finalised French translation. Many countries in South America are also awaiting definitive translations to Spanish and Portuguese. ‘There is a project ongoing in Argentina to use the Spanish translation developed in Europe and make that available to the full region,’ Schilder explains.
In the US, audits of private company financial statements for periods ending on or after 15 December 2010 will need to be conducted under US auditing standards updated to take account of clarified ISA requirements. As for listed US companies, the Public Company Accounting Oversight Board (PCAOB), which Schilder notes has been an ‘active observer throughout the IAASB’s clarity process’, has introduced some risk-based standards which reveal clear links with the clarified ISAs.
‘In substance there is much commonality between the PCAOB standards and the clarity ISAs,’ Schilder says, although he appreciates that more definitive convergence would help auditors.
The encouraging momentum around the world doesn’t mean that concerns have been absent. ‘One key sensitivity is the applicability for SMEs and smaller practitioners,’ Schilder notes. However, he believes that anxieties are easing in line with greater understanding of the proportionality concept – that audit approaches should be proportional to the size, complexity and nature of the entity (see box opposite).
Work in progress
ISA 600 on audits of group financial statements has caused most debate, but Schilder is optimistic that once again concerns will ease in time. The German and French standard setters, for example, had ‘intense’ discussions but ultimately felt able to adopt ISA 600 without exceptions. Nevertheless, there are still concerns elsewhere – as in India, where bank audits typically involve numerous firms. The IAASB is keen to discuss practical difficulties and look for solutions. It has not, in principle, ruled out revising a standard if major problems arise, although Schilder says: ‘We are not there yet.’
The benefits of adopting clarified ISAs should be proven in time, Schilder hopes. While some ISAs were simply rewritten in the clarified style, others were thoroughly revised ‘in a number of very important areas’. The auditing of accounting estimates including fair value estimates (ISA 540) and the communication of audit findings (ISAs 705 and 706) are among those that have been overhauled. There is also the new ISA 265 on communicating deficiencies in internal control, while ISA 200 has the new requirement for professional scepticism.
‘The revised standards address many concerns that we see coming across from critical audit inspection reports, whether in the UK, US, Netherlands or Australia,’ Schilder says. He therefore hopes that the impact of the clarified ISAs will ultimately be seen in improved audit inspection findings: ‘That benefit would certainly outweigh the cost of the investment.’
Sarah Perrin, journalist
The IAASB has taken steps to address concerns about the ability of smaller practices to apply the clarified ISAs to smaller entity audits. It has developed support material, such as a staff Q&A explaining the proportionality concept – that is, how individual audits need to be tailored to the size, complexity and nature of the entity. It also emphasises the importance of professional judgment in clarified ISAs.
IAASB chairman Schilder says: ‘As IFAC [the International Federation of Accountants] has often stated, an audit is an audit, meaning that they should all be the same high quality. But how you tailor that for an international listed company versus a small, family-owned company is quite different.’
He believes the proportionality message is increasingly being understood. Some countries have, however, recognised the greater challenge that smaller practices may face in applying the clarified ISAs. Belgium, for example, has added an extra two years to the mandatory adoption date for audits of unlisted companies. ‘That’s a fair recognition that you need to allow some parts of the market to take a bit more time.’