Week 6 Homework

Week 6 homework

ACCT525

Week 6 Assignment

Read “A Comparison of U.S. Auditing Standards” (found in this week’s readings in the DeVry library).

In 3-4 pages (12-pt type, double-spaced) 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 exist-

ing auditing standards in the United States and other countries. Undl convergence

efïorts are ñirther 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 1 7

In ih? United States, the ASB. which
sets auditing standaids for nonpublicly trad-
ed 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 stiui-
dards 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;irbanes-
Oxley 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 ade-
quately take into account or promote the
need for intemational convergence of audit-
ing 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 pro-
cedures 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.

ISAs on the CPA Exam
Beginning in January 2011, the CPA

exam began testing candidates on intema-
tional standards. Content Specification
Outlines (CSO) issued in May 2009 indi-

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 stan-
dards, and
• the audit requirements under U.S.
auditing standards that apply when per-
fonning audit prtK”edures on a U.S. enti-
ty that supports an audit report based on
ISAs or the auditing standards of anoth-
er country.

Key Differences
There are five principal areas where dif-

ferences exist among U.S. GAAS, PCAOB
auditing standards, and ISAs. These sig-
nificant differences are: dcKiimentation of

EXHIBIT 1
The PCAOB’s Suite of Risk Assessment Standards

AS

8

9

10

11

12

13

14

15

Title

Audit Risk

Audit Planning

Supervision of the Audit Engagement

Consideration of Materiality in

Planning and Performing an Audit

Identifying and Assessing Risks of

Material Misstatement

The Auditor’s Responses to the

Risks of Material Misstatement

Evaluating Audit Results

•

Audit Evidence

Summary

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.

Planning requirements include assessing matters that are important to the audit;

the auditor must establish an appropriate audit strategy and audit plan.

Sets forth requirements for supervising the work of engagement team members.

Describes the auditor’s responsibilities for consideration of materiality in planning

and performing an audit.

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.

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.

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.

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 consider-
ations; assessing and reporting on intemal
control over financial reporting; risk asse.ss-
ment and responses to assessed risks; and
the use of another auditor for part of an
audit. In this article, much of the discus-
sion of the differences between PCAOB
auditing standards and ISAs is drawn from
a study p u b l i s h e d by the Eur opean
Commission (EC). An executive summa-
ry of this study, “Evaluation of the differ-
ences between Intemational Standards on
Auditing (ISA) and the standards of the US
Public Company Accounting Oversight
Board ( P C A O B ) ” is a v a i l a b l e at
ec.europa.eu/intemaLmarket/auditing/docs/
ias/evalstudy2(K)9/summary_en The
study was commissioned by the EC and
solicited input from intemational techni-
cal partners from each of the Big Four
audit firms.

Documentation of audit procedures.
Conceptually, documentation requirements
under U.S. auditing standards and ISAs dif-
fer: AICPA auditing s t a n d a r d s and
PCAOB auditing standards are relatively
more prescriptive tlian ISAs, which are per-
ceived as relying more on the profession-
al 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 workpa-
pers 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 man-
dates 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 engage-
ment díK’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-handbook-
isa-23O ).

Going-concern considerations. When
considering whether an entity has the
ability to continue as a going concem into
the foreseeable future, the PCAOB audit-
ing 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,

when assessing going-concem considera-
tions under ISAs, the foreseeable future is
at least, but not

limited to, 12 months.

At the time of this writing, FASB is con-
sidering releasing guidance on the going-con-
cem-issue that would, among other things,
increase management’s responsibility for
preparing financial statements as a going con-
cem to consider infonnation for at least but
not limited to, 12 months ñx)m the end of the
reporting period. In additii)n. the ASB is
still discassing whether an auditor’s evalua-
tion of an entity’s ability to continue as a
going concem “should be limited to a rea-
sonable period of time, not to exceed one
year beyond the date of the financial state-
ments 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 ). 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 con-
sideration by FASB.

Intemal control over financial report-
ing. When the U.S. Congress passed SOX,
it required that management of U.S. pub-
lic companies assess and report on inter-
nal 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 exam-
ination of an entity’s intemal control over
financial reporting that is integrated with
an audit of its financial statements. In addi-
tion 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 enti-
t y ‘ s internal controls over financial
reporting. While not required to do so, vir-
tually all public companies (and tlieir audi-
tors) 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 con-
trols over financial reporting. Auditors fol-
lowing U.S. auditing standards, however,
must obtain an understanding of the inter-
nal 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 tim-
ing 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 envi-
ronment, with the goal of identifying risks of
material misstatement. ISAs require that the
auditor obtain an understanding of an enti-
ty’s business risks, such as its operating
risks and its strategic risks. Auditors follow-
ing 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 objec-
tive 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 consid-
eration 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 under-
standing of the entity and its environ-

APRIL 2011/THE CPA JOURNAL 1 9

ment, including the entity’s intemal con-
trol. This assessinent and understanding can
be aided by inquiries of the intemal audi-
tors 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 a s s e s s m e n t s t a n d a r d s
address audit procedures from the initial

planning stages through the final evalu-
ation of audit procedures and results.
Accordingly, PCAOB auditing stan-
dards 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

Audit Issue

Documentation of

Audit Procedures

Going-Concern

Considerations

Internal Control over

Financial Reporting

Risk Assessment

Use of Another

Auditor

EXHIBIT 2 1
ISAs versus U.S. Auditing Standards: Key Comparisons 1

Auditing Standards

Board (AICPA)

Specific, prescriptive

guidance; minimum five-year

retention period for audit

workpapers.

Evaluation period should be

limited to a reasonable

period of time, not to exceed

one year beyond the date

of the financial statements

being audited.

Auditors must understand an

entity and its environment.

including internal controls.

However, there is no

requirement to express an

opinion on the effectiveness

of the client’s internal controls

over financial reporting.

The ASB’s approach is to

support a separate fraud

standard (SAS 99,

Consideration of Fraud in a

Financial Statement Audit\;

it contends that a separate

standard gives the

consideration of fraud more

prominence than integrating

it into risk assessment

standards.

In a “division of responsibility”

audit report, the principal

auditor refers to the work of

another auditor.

PCAOB Auditing

Standards
Specific, prescriptive

guidance; minimum seven-

year retention period for

audit workpapers.

Foreseeable future defined

as 12 months.

An “integrated” audit must

be performed so that the

auditor can express an

opinion on the effectiveness

of the client’s internal

controls over financial
reporting.

Before the issuance of the

risk assessment standards.

audit procedures were not as

specific as those under ISAs.

New Auditing Standards now

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”
audit report, the principal
auditor refers to the work of
another auditor.

International Standards on

Auditing (ISA)

Relatively more reliance on professional

judgment; retention period for audit

workpapers is ordinarily no shorter than

five years from the date of the auditor’s

report.

Foreseeable future is at least, but not

limited to, 12 months.

The auditor tests controls to determine

whether they are adequate and functional.

There is no requirement to express an

opinion on the effectiveness of the

client’s internal controls over financial

reporting.

Specific risk assessment procedures

are mandated in order to obtain a broad

understanding of the entity and its

environment in order to identify risks of

material misstatement.

Not permitted.

2 0 APRIL 2011/THE CPA JOURNAL

• AS \[, Consideration of Materialit}’ in
Planning and Performing an Audit
• AS \2. Identifying and Assessing Risks
of Material Misstatement
• AS 13, The Auditor’s Responses to
the Risks of Material Misstatement
• AS 14, Evaluating Audit Results
• AS \5, Audit Evidence.

A summary of the key provisions of
the PCAOB’s suite of eight risk standards
is provided in Exhibit I.

The approach taken by the ASB is that
it supports a separate fraud standard.
Statement on Auditing Standards (SAS) 99,
Consideration of Eraud in a Financial
Statement Audit, as opposed to the
PCAOB’s integrated strategy. The ASB
contends that the focu.sed approach gives
the consideration of fraud more prominence
than integrating it into risk assessment stan-
dards.

Use of another auditor. In some
a u d i t s , the ” p r i n c i p a l ” auditor may
engage another audit fimi to perfomi some
portion of the audit. For example, another
audit fimi may be hired to audit a foreign
subsidiary, complex inve.stments, or some

other component of the overall audit. Under
standards issued by both the ASB and the
PCAOB, the principal audit finii has the
option of making no reference to the
work performed by the other audit firm.
Nevertheless, the principal auditor also has
the option of issuing a “division of respon-
sibility” audit report, referring to the work
and reports of the other auditor in the audit
report issued by the principal auditor. ISAs
do not permit the primary auditor to
make any reference to the work of anoth-
er auditor.

A Global View
There is a growing global acceptance of

Intemational Financial Reporting Standards
(IFRS), and much has been written about
that topic. In the global economy, in addi-
tion to understiinding intemational account-
ing standards, auditors also need to be
aware of the influence of international
auditing standtirds on U.S. auditing stan-
dards. ISAs represent transparent, high-
quality auditing standards that have been
gaining worldwide acceptance. This is evi-
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 con-
tinues 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 cur-
rently five key areas in which differences
exist among standards issued by the ASB,
PCAOB auditing standards, and ISAs: 1)
docuinentaüon of audit procedures; 2) going-
concem 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. audit-
ing standards, it is important for auditing pro-
fessionals 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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