Auditing standards: The power of one

In India, there is considerable interest in converging accounting standards with the International Financial Reporting Standards; but few follow the country’s efforts to converge with the International Standards on Auditing (ISAs). Good auditing standards are important as they drive audit quality and consistency, and strengthen public confidence in audited financial statements.

Their role in creating an investment climate of trust should not be underestimated. Only when nations create trust can they raise capital locally and globally. This, in turn, is essential to provide energy, food, water, education, employment and healthcare facilities. Indeed, it is imperative to our fight against poverty.

A plethora of auditing standards worldwide creates confusion, encourages errors and facilitates frauds. A single set of high standards, such as the ISAs, promotes clarity and confidence in financial statements, and reduces cost of capital.

Strengthening the profession

International Federation of Accountants aims to strengthen the accountancy profession in the public interest and contribute to the development of strong international economies. In this it supports the International Auditing and Assurance Standards Board, which is an independent body that sets the ISAs and related standards, and facilitates the convergence of international and national standards. It, thereby, promotes quality and consistency of global audit practices.

In 2011, more than 75 jurisdictions — almost double from a year ago — were using ISAs or committed to using them soon, and many more were working towards it. The ISAs have been translated into more than 40 languages. The European Commission has proposed legislation that explicitly refers to the use of ISAs in Europe, boosting its global acceptability.

User-friendly reports

Users and regulators alike now seek more information and insights on an audited entity and its financial statements. While an audit is valued, many also believe that the auditor’s reports should communicate a lot more. This is not a straightforward issue — for example, should auditors communicate about the key risks of an entity, which hitherto was the exclusive responsibility of the company management. The IAASB is looking at ways to enhance the usefulness of the auditor’s report and find a global solution. The writing on the wall is quite clear — audit reports will have to change to cater to the requirements of users/ regulators.

Many jurisdictions exempt audit requirements for small and medium-sized entities, which have unique needs. The IAASB is taking measures to address these needs on a global level. It also attaches importance to standards that support a range of reasonable and limited assurance engagements or future engagements, such as integrated reporting or greenhouse gas statements. It works closely with the International Accounting Standards Board — which issues IFRS — to ensure the standards are in tandem with each other, and that audit and verifiability issues are addressed at the drafting stage. The IAASB working groups monitored several IASB standard-setting projects, including fair value measurement and hedge accounting.

The IAASB continually focuses on quality audits. Related to this is the exercise of professional scepticism by auditors. This is now being stressed by regulators and investors, in the light of various audit failures.

India-specific requirements

The CA Institute has been proactively engaged in converging Indian auditing standards with ISAs, although significant differences exist between the two frameworks. Some differences are inevitable — for example, ISA prescribes a five-year period for preserving audit documentation, while the Chartered Accountants Act governing Indian standards prescribes seven years. Other differences need to be critically looked into. For example, in India it is normal professional courtesy to rely on the work of a professional colleague, who is assumed to be competent and reliable. This thinking has typically supported joint audits, and audits of subsidiaries are conducted by auditors other than the parent auditor. When a group is audited by more than one auditor, the ability to understand a group in its entirety is diminished, and things could fall between cracks due to lack of co-ordination. Companies could typically take advantage of the situation.

Good and robust auditing standards are critical, but they should not be seen as a panacea to audit failures. Good auditing standards form one part of the equation; successful implementation makes up the rest.

(Dolphy D’souza is Partner and National Leader, IFRS services in a member firm of Ernst & Young Global)

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