Auditing standards are professional guidelines promulgated either by an authorized national or international body. Any standards are based on the universally or generally adopted practices, which should serve as guidelines for auditors undertaking audit. They are usually distilled through years of practice and are of such quality that a professional should in most cases apply them indiscriminately. The aim of auditing standards is to provide guidance to professional auditors in fulfilling their professional duties and responsibilities, primarily in the process of audit of historical financial statements. As a rule, auditing standards give full consideration to professional qualities, like competence and independent reporting requirements and evidence.
The International Standards of Auditing (ISA) are promulgated by the International Federation of Accountants (IFAC) through its Audit and Assurance Standards Board (AASB). Although the intentional standards are, as a rule, not compulsory, they are considered more or less the best practice which should be upheld. National standards are developed by national bodies, and although in the past have been more associated with professional accounting organizations, in recent times the regulatory activity has been moving from a professional self-regulatory model to the model in which a publicly appointed body (representing a wide variety of stakeholders) will in fact be producing the accounting standards and taking care of their enforcement. This shift toward more government-controlled standard setting is undoubtedly the result of the falling public trust in the accounting and auditing profession following a number of high-profile scandals in the early 2000s, Enron being the most publicly covered.
The promulgation of the Sarbanes-Oxley Act in 2002 has changed the shape of the audit profession, preventing the audit companies to be in other professional relationship with their clients, if they are doing statutory audit of the firm, rotation of accountants, etc. The implementation of audit in public interest has been reemphasized and the auditors are made more aware of their assurance function. The users of financial information are primarily interested in the quality and reliability of information submitted to them by the companies, in order to make the best investment decision.
In the United States, the American Institute of Certified Public Accountants (AICPA) has developed the set of 10 generally accepted auditing standards (GAAS), which in accordance with usual national standard-setting practices focus on: (1) general standards; (2) standards of fieldwork; and (3) reporting standards. The predominant feature of GAAS is the focus on the important personal qualities that an auditor must demonstrate in professional conduct. However, with the changes in regulation, GAAS are now applied only to private companies, while those that are “public” (that is, listed on the stock exchange and whose shares are the object of trading) are required to apply the Public Company Accounting Oversight Board’s (PCAOB) standards of auditing.
The general standards require auditors to have adequate technical training to perform the audit, maintain independence in mental attitude in all matters related to the audit, and demonstrate due professional care. Standards of field work define accumulation of evidence and filing all other activities. An auditor must demonstrate adequate planning and supervision, proving that he or she can understand the firm and its environment, and sufficient evidence has to be provided. Standards on reporting require the auditor to prepare a report on the financial statements taken as a whole, including any informative disclosures.
Although IFAC promulgated ISA already in 1991 with the first standard being published, the success in ensuring the adoption worldwide is somewhat less noticed than the drive by the International Accounting Standard Board (IASB) aiming at having the International Financial Reporting Standards (IFRS) endorsed by as many countries in the world as possible (at present over 80 countries have adopted or do not oppose the application of IFRS). In the case of ISA there is more convergence with the U.S. practices than it is the case with IFRS. However, there is a noticeable increase in development and application of national auditing standards, where Anglo-Saxon countries are leading. Transitional and developing economies are more prone to endorse ISA and provide the legal base, through their national legislation, for their full application.
Auditing standards provide a professional and technical framework for actions of professional auditors undertaking auditing and assurance services for their clients. Therefore, technical and professional competence are at the center of attention in auditing standards (standards of audit). As auditors (individuals and audit firms) are to discharge the duties in a professional manner, ensuring at least the minimum level of service, they are to follow the sets of professional rules. Often auditing standards cannot be observed individually, but should be regarded as one of the pillars of professional regulations targeting the accounting and auditing profession. For instance, in the United States the professional accountancy firms (CPA firms) should not only adhere to Statements of Auditing Standards (SAS), but also to fully observe compilation and review standards (Statements on Standards for Accounting and Review Services [SSARS]), other attestation standards, consulting standards, and finally the Code of Professional Conduct. All these regulations are enacted by AICPA, as a professional accountancy body in the United States.
Review And Modification
Audit standards, regardless of which body enacted them, are a living body. They are reviewed almost on a constant, rolling basis, taking into consideration new positive practices, problems in application, acts of rules avoidance, or practices that may be regarded as improper, but are not stricto lege against the current rules and regulations. Therefore, they are published on an almost annual basis, and periodically all the standards are reviewed and modified. IFAC’s AASB even published the plan of activities on the review and modification of the existing standards, allowing the member organizations, their members, and the general public to influence the processes of modification of accounting standards. In such a manner the assurance function of international professional regulation, especially in accounting and auditing, is particularly strengthened.
It is difficult to say whether there will be further harmonization and/or convergence toward ISA, but following the example of IFRS, it is likely to happen, although probably not in the immediate future. However, this may not be an onerous process, after all, as the synergies between ISA and the U.S. regulation is currently higher than between U.S. Generally Accepted Accounting Principles (GAAPs) and IFRS.
- American Institute of Certified Public Accountants, Codification of Statements on Auditing Standards; Numbers 1 to 111 (2006);
- American Institute of Certified Public Accountants, Codification of Statements on Auditing Standards; Numbers 1 to 114 as of January 1, 2008 (2008);
- International Federation of Accountants, 2008 Handbook of International Auditing, Assurance, and Ethics Pronouncements (2008);
- International Federation of Accountants, International Standards of Auditing, redrafted (2006).
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