Auditing Standards

Introduction

Chapter 4 discussed the general role of audit regulators and the impact of specific audit regulations on audit quality and the audit market. One important function of audit regulators is to set auditing standards because standards provide guidance to auditors and lay out specific regulator}' requirements for audit services. In this chapter, we focus on the economics of setting auditing standards. We will discuss the role of professional standards on audit operations from both theoretical and empirical perspectives, in particular the role of auditing standards on audit practices, including the impact on audit effort and particular audit procedures. We will also review and discuss research on how standards can be characterized and how they affect auditor behavior

Auditing standards provide the objectives to be achieved in an audit and the methods to be used by an auditor. They relate to the auditor’s qualifications, the performance of his or her examination, and the preparation of his or her report. Auditing and assurance standards boards around the world have established various standards to regulate auditors, such as ethical and independence standards, quality-control standards, and audit performance and reporting standards. In this chapter, we focus specifically on auditing standards relating to audit performance and reporting.

Auditing standards around the world

Auditing standards were initially issued on a voluntary basis in order to provide guidance to professional accountants. However, these standards were not able to prevent auditors from being involved in a few prominent financial scandals. To re-instill public confidence, government regulators stepped in to develop auditing standards. For example, as discussed in the previous chapter, in the U.S., auditing standards for public companies were issued by the American Institute of Certified Public Accountants (AICPA) until 2002 when the Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). The PACOB oversees the audits of public companies. It sets auditing standards and inspects audit firms. It has investigative authority to identify serious audit deficiencies and has disciplinary authority to impose sanctions for those deficiencies. As another example, in China, the Chinese Institute of Certified Public Accountants (CICPA) and the Chinese Association of Certified Public Auditors issued some auditing standards in the 1980s (Xiao et al. 2000). In 1995, these two organizations were unified as CICPA. CPA regulations were upgraded to become CPA law. This established the Chinese Auditing Standards Board (CASB) to issue Chinese independent auditing standards (CIAS).

The International Auditing and Assurance Standards Board (IAASB)

As the development of global business and the Internet matures, more demand is created for comparable financial information across capital markets in different countries. Many countries adopt International Financial Reporting Standards (IFRS) to prepare financial statements and correspondingly adopt International Standards of Auditing (ISAs) to perform audits of financial statements.

The ISAs are set by the International Auditing and Assurance Standards Board (IAASB). IAASB was founded in March 1978. It was previously known as the International Auditing Practices Committee (IAPC). Up to December 15, 2017, 128 jurisdictions had adopted or committed to using ISAs in the near future, such as the United Kingdom, Canada, and China.¹ The countries in the European Union adopted these in 2005, while Canada adopted them in 2009. China achieved full convergence in 2010.

The IAASB is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services, by facilitating the convergence of international and national standards. In doing so, the IAASB enhances the quality and uniformity of practice throughout the world and strengthens public confidence in the global auditing and assurance profession.

The IAASB follows a rigorous due process in developing its pronouncements. Input is obtained from a wide range of stakeholders including the lAASB’s Consultative Advisory Group of national auditing standard setters. International Federation of Accountants (IFAC) member bodies and their members, regulatory and oversight bodies, firms, governmental agencies, investors, preparers, and the general public. Exposure drafts of proposed pronouncements are posted on its website and comments are invited; final pronouncements are accompanied by a Basis for Conclusions with respect to comments received. The Public Interest Oversight Board (PIOB) oversees the work of the IAASB and its Consultative Advisory Group (CAG) to ensure that the activities of the IAASB follow due process and are responsive to the public interest.

Members of the IAASB can be nominated by any stakeholder, including I FAC member organizations, the Forum of Firms, international organizations, government institutions, and the general public. As of 2019 there were 18 members, two observers, and 16 technical advisers for the members on the board. Of the 18 members, three were from the U.S., two from Australia, one from Singapore, two from Canada, one from the U.K., one from Norway, one from China, one from Japan, one from Germany, one from New Zealand, one from Mexico, one from The Netherlands, one from France, and one from South Africa.

Auditing standards evolve over time as economies develop. For example, auditing standards boards from different countries try to improve the clarity of auditing standards. In 2004, the IAASB began a comprehensive program to enhance the clarity of its ISAs.² This program involved the application of new drafting conventions to all ISAs, either as part of a substantive revision or through a limited redrafting, to reflect the new conventions and matters of clarity generally.

On February 27, 2009, the Clarity Project reached its completion when the Public Interest Oversight Board approved the due process for the last several clarified ISAs. Auditors worldwide now have access to 36 newly updated and clarified ISAs and a clarified International Standard on Quality Control (ISQC). All clarified ISAs are effective for audits of financial statements for periods beginning on or after December 15, 2009.

Improvements arising from the Clarity Project broadly comprise the following:

• • Identifying the auditor's overall objectives when conducting an audit in accordance with ISAs.
• • Setting an objective in each ISA and establishing the auditor's obligation in relation to that objective.
• • Clarifying the obligations imposed on auditors by the requirements of the ISAs and the language used to communicate such requirements.
• • Eliminating any possible ambiguity about the requirements an auditor needs to fulfill.
• • Improving the overall readability and understandability of the ISAs through structural and drafting improvements.

Auditors and others should look to ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, for assistance in understanding the purpose and scope of an audit. This ISA sets out how the objectives, requirements, and guidance in all ISAs are to be understood.

Similar to the IAASB, in 2006, the Canadian Auditing and Assurance Standards Board set out changes to improve the clarity of the auditing standards. In 2007, the AICPA Auditing

Standards Board started to improve the clarity of their standards. These boards also try to improve the clarity of auditing standards by adding objectives for each standard, and making structural improvements that lead to greater ease of reading and understanding.