International Corporate Reporting: Auditing Standards and Processes

International Corporate Reporting Chapter 10 Auditing

Establishing the IAASB Independent standard-setting body, to enhance the quality and uniformity of practice throughout the world and to strengthen public confidence in the global auditing and assurance profession. Serves the public interest by setting high-quality ISAs, quality control, review, and facilitating the convergence of international and national standards. 2002 established and resourced by IFAC, building on previous arrangements.

Public Interest Oversight Board 2005 IFAC set up the mechanism for establishing PIOB to oversee IFAC's auditing and assurance, ethics, and education standard-setting activities. Aim of PIOB is to ensure that international auditing and assurance, ethics, and education standards for the accountancy profession are set in a transparent manner that reflects the public interest. PIOB nominates members of the IAASB and gives assurance on the procedures of the IAASB.

Operation of IAASB 17 volunteer members plus a full-time chair. 9 experts from around the world who have significant practitioner experience in auditing. The other 9 are non-practitioners and 3 of these are public members who reflect the wider public interest. Consultative Advisory Group to the IAASB consists of organisations with an interest in the development of international auditing standards.

Due process and transparency Operates due process in developing ISAs. Draft standards and statements are issued as exposure drafts for public review and comment. Comments received are considered prior to finalisation of the standard. IAASB meetings are open to the public, with agenda materials being publicly available.

Widening acceptance of ISAs More than 113 jurisdictions countries use auditing standards that are ISAs, either adopted as written or locally adapted, or national standards that are compared with ISAs to eliminate differences. Translated by member bodies into more than 20 languages, including French, German, Russian and Spanish. 2009: Clarified Standards - 36 ISAs and ISQC 1 (International Standard on Quality Control).

Obstacles to progress Effective regulation of audit requires government backing. Also requires an effective auditing profession, a culture of compliance and a sound base of corporate governance. World Bank ROSC reports on progress with legislation, but no guarantee it is implemented. EU has not adopted ISAs Europe-wide, leaves it to member states.

Monitoring Group International Organization of Securities Commissions (IOSCO). Basel Committee on Banking Supervision (BCBS). European Commission (EC). Financial Stability Board (FSB). International Association of Insurance Supervisors (IAIS). World Bank Group (WBG). Works with IFAC to restore confidence in standards. Consulting on more independence from IFAC.

National monitoring and review of audit firms Direct statutory control (e.g. US) PCAOB established by Congress to oversee audit of public companies Audit firms that that audit public companies with SEC obligations must register with PCAOB Independent regulator (e.g. UK) FRC authorised by Secretary of State. Professional Oversight team. Monitors audit firms directly. Profession-based self-regulation (e.g. India) ICAI Quality Review Board established under law.

Audit expectations gap contrast what the public expects or needs with what auditors can and should reasonably expect to accomplish. content of the audit report is insufficient to convey the opinion and the way it has been formed. auditors do not communicate their opinion in a way that can be understood by users of the report. Questions about going concern assumption on which financial statements are based.

Audit reporting ISA 700 INDEPENDENT AUDITOR S REPORT To the Shareholders . Report on the Audit of the Consolidated Financial Statements Opinion Basis for opinion Key audit matters Other Information Responsibilities of management and those charged with governance for the consolidated financial statements Auditor s responsibilities for the audit of the consolidated financial statements Report on other legal and regulatory requirements Name of audit partner Signature of auditor and address.

Explaining key audit matters ISA 701 Why the matter was considered to be one of most significance in the audit; How the matter was addressed in the audit; The auditor s response or approach that were most relevant to the matter; A brief overview of procedures performed; An indication of the outcome of the auditor s procedures; Key observations with respect to the matter; and Reference to the related disclosure(s).

Typical key audit matters Revenue recognition rebates, chargebacks and returns Carrying value of intangible assets Externalisation and collaboration arrangements Uncertain tax positions Litigation and contingent liabilities Impact of finance transformation and other change programs

Reporting materiality levels ISA 320 Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. ISA 320 requires information about materiality levels in the audit documentation (ISA 230).

Example of materiality disclosure Overall Group materiality: 160 million, based on 5% of profit before taxation. Overall Parent Company materiality: 75 million, based on 1% of net assets.

US -PCAOB 2017: PCAOB received approval from the SEC of its new auditing standard for the auditor s reporting model, intended to enhance the relevance and usefulness of the auditor s report by providing additional information to investors and other financial statement users. Critical audit matters are to be included for fiscal years ending on or after 30 June, 2019 for large companies, and for fiscal years ending on or after 15 December 2020 for all other companies.

US Main headings of audit report Report of Independent Registered Public Accounting Firm to the shareholders and the board of directors of X Company Opinion on the Financial Statements Basis for Opinion Critical Audit Matters [if applicable]

US audit report new section For each critical audit matter the auditor must identify the critical audit matter; describe the principal considerations that led the auditor to determine that the matter is a critical audit matter; describe how the critical audit matter was addressed in the audit; and refer to the relevant financial statement accounts or disclosures that relate to the critical audit matter.

US- internal control Within the main report (or as a separate section) the auditor expressed an opinion on internal control over financial reporting, the basis for that opinion, and the definition and limitations of internal control over financial reporting. Required by Sarbanes-Oxley Act 2003, seeking to remedy some of the causes of a series of major corporate failures.

China audit report Reflects the influence of the IAASB. 2016 CICPA released exposure drafts of new and revised China Standards on Auditing relating to audit reporting. The Ministry of Finance of the People s Republic of China approved the proposals in December 2016 to take effect from January 2017 for A and H companies and from 2018 for other entities.

China audit report (contd) The changes aim at enhancing the informational value of auditors reports, providing additional transparency about the auditing process, and improving the description of relevant responsibilities of the auditor in conducting an audit work. New audit standard is included: China Standard on Auditing 1504, Communicating Key Audit Matters in the Auditor s Report. Other standards relating to reporting are revised to reflect developments in ISAs.

China audit report (contd) In the new auditor s report, management and auditor s responsibilities regarding assessing and determining the audited entities going concern are more clearly described. The auditor is now also required to disclose if there is material uncertainty regarding the entity s going concern. The auditor s report is no longer a standard two- page report. For the A and H shares companies, the length of the new auditor s reports ranges from three to 13 pages.

Japan audit report Auditing Standards are issued by the Business Accounting Council (BAC), within the FSA. Two separate statutory audits: (1) audits required under the Financial Instruments and Exchanges Act (applying to listed companies); and (2) audits required under the Companies Act (applying to all companies over a specified size). Traditionally there have been short statements of opinion..

Japan - Audit report up to 2018 Management s Responsibility for the Consolidated Financial Statements, the auditor s responsibility and the audit opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of xxx., Ltd. and its consolidated subsidiaries as at 2017 and 2016, and their financial performance and cash flows for the years then ended in accordance with accounting principles generally accepted in Japan.

Japan, developments in report BAC of the FSA issued an exposure draft of an Opinion on the Revision of the Audit Standards in May 2018. Proposed a new requirement for Key Audit Matters (KAMS) in the independent auditor s report. KAMs would be determined by auditors through consideration of various factors, including specific risks identified

Japan developments (contd) Auditors would be required to provide additional information on these items, so that the users of the financial statements could understand the content of the KAMs, the reason for auditors identification of the KAMs, and the auditors response to the KAMs. If accepted, the Opinion will be effective on or after the reporting period ending 30 March 2021 with early adoption permitted.

Audit market concentration Concerns that lack of competition may limit quality and effectiveness of audit. Some researchers assume big 4 audit firm is an indicator of higher quality for econometric analysis. Market concentration varies across countries and in different layers of markets.

Market Index Audit firm percentage share of clients Deloitte EY KPMG PwC Other Amsterdam Euronext AEX 25 + AMX 25 31 30 28 12 0 Germany DAX 30 + MDAX 50 9 18 44 29 1 London FTSE 350 24 17 24 32 3 Italy FTSE MIB and FTSE Mid cap 16 35 14 35 1 Spain IBEX 35 and IBEX Mid cap 33 15 24 28 0 US SEC Large accelerated filers 20 28 21 22 9 US SEC accelerated filers 12 19 12 10 47 US SEC Non-accelerated filers 13 17 8 16 46 Hong Kong Main Board and GEM 19 15 9 18 38

Top 10 accounting firms, China PricewaterhouseCoopers Zhongtian Deloitte Huayong BDO China Shu Lun Pan Ernst & Young Huaming KPMG Huazhen Ruihua Pan-China Moore Stephens Da Hua Grant Thornton Zhitong ShineWing

Audit reform in EU 2014: Statutory Audit Directive and a Regulation issued. Both took effect from the middle of 2016. Directive contains requirements for statutory audit in the EU, with some choices for national regulators. Regulation relates to statutory audits of public interest entities (PIEs). These additional requirements include mandatory firm rotation and prohibit non-audit services.

Audit reform in EU (contd) Mandatory rotation requires PIEs to rotate their statutory auditor after a maximum period of twenty years, with a mandatory tender at the ten year midpoint. PIE includes all companies listed on an EU regulated market plus unlisted banking and insurance companies and groups, unless they are small. Additional requirements for audit report on PIEs relate to perceived risks and responses to risk.

Research examples Audit in private companies. Literature review of perceived costs and benefits. Suggests future research directions. Audit expectations gap. Questionnaire survey on EU proposals for improvement. Relative effect of increasing information content versus mandatory rotation and ban on non-audit services Joint audits. Do they have a beneficial effect? Questionnaire investigation. Audit firm rotation. Earnings management study.