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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

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.pdf 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.pdf).

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.pdf). 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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