International Auditing and Assurance Standards Board IAASB Update Phil Cowperthwaite, Member, IAASB SMP Forum Beijing, China 28 October 2009 1

International Auditing and Assurance Standards Board

IAASB UpdateIAASB Update

Phil Cowperthwaite, Member, IAASB

SMP Forum

Beijing, China

28 October 20091

• Adoption and International ConvergenceAdoption and International Convergence

• The IAASB Clarity ProjectThe IAASB Clarity Project

• IAASB Current and Forward AgendaIAASB Current and Forward Agenda

Agenda

Adoption and International ConvergenceAdoption and International Convergence

• 100+ countries adopt or use ISAs in some form

• Stronger transparency and accountability

– Higher quality and consistency of audits

– Reduced cost of capital and other costs arising from differing standards

• Facilitates efficient education and training

A Perspective on Adoption & Convergence

The IAASB Clarity ProjectThe IAASB Clarity Project

• Key aimsKey aims

– Understandability of ISAs, and thereby their Understandability of ISAs, and thereby their consistent applicationconsistent application

– Facilitate convergenceFacilitate convergence

• Completed March 2009Completed March 2009

• Suite of 36 ISAs and ISQC 1Suite of 36 ISAs and ISQC 1

– Effective for audits of financial statements for Effective for audits of financial statements for periods beginning on or after Dec. 15, 2009periods beginning on or after Dec. 15, 2009

The IAASB Clarity Project

The IAASB Clarity ProjectThe IAASB Clarity Project

• New structure and conventionsNew structure and conventions

– Objective, definitions, requirements and guidance Objective, definitions, requirements and guidance provided in separate sections, to improve provided in separate sections, to improve readabilityreadability

– Requirements and guidance revisited to eliminate Requirements and guidance revisited to eliminate any ambiguity about what is required of auditorsany ambiguity about what is required of auditors

• Nearly half of 36 ISAs fundamentally revisedNearly half of 36 ISAs fundamentally revised

– New requirements and guidance that aim to New requirements and guidance that aim to improve practice in a variety of respectsimprove practice in a variety of respects

Outcome

Clarity ISAsClarity ISAs

• Objectives and obligation for their useObjectives and obligation for their use

– Use to evaluate whether more needs to be done; Use to evaluate whether more needs to be done; Standards cannot anticipate all possibilitiesStandards cannot anticipate all possibilities

– Strengthen the ‘thinking audit’Strengthen the ‘thinking audit’

• Risk assessment and evidence gatheringRisk assessment and evidence gathering

– Estimates and fair valuesEstimates and fair values

– Related partiesRelated parties

– Service organizationsService organizations

Some Highlights


• Engagement acceptance and continuance (ISA 210)

• Fraud and error (ISA 240)

• Communications

• Planning (ISA 300)

• Risk assessment and response (ISAs 315 and 330)

• Communications (ISAs 260 and 265)

• Reporting (ISAs 700, 705, 800 and 805)

Some Highlights for SMPs


• Successful implementation essential to realizing Successful implementation essential to realizing full benefits of Clarity ISAsfull benefits of Clarity ISAs

• Impacts onImpacts on

– National standards/legislation and guidanceNational standards/legislation and guidance

– Audit methodologies, programs and manualsAudit methodologies, programs and manuals

– Translation and training programsTranslation and training programs

– Education curriculumsEducation curriculums

Implications

• Broad membership of IAASB (incl. Mr. Jianhua Tang)

• Working in partnership with national auditing standard setters

– CICPA is a key participant

• Continual dialogue with stakeholders

– IAASB Consultative Advisory Group and others

• Specific initiatives to support implementation

How is IAASB Helping Deal with Challenges?



• Moratorium on new ISAs for next two yearsMoratorium on new ISAs for next two years

• Translation support, through IFAC resourcesTranslation support, through IFAC resources

• IAASB Clarity CenterIAASB Clarity Center

– Background and information on Clarity ProjectBackground and information on Clarity Project

– Individual ISAs and Basis of ConclusionsIndividual ISAs and Basis of Conclusions

– Staff Updates, Alerts, FAQs, Q&A, etc.Staff Updates, Alerts, FAQs, Q&A, etc.

– ISA ModulesISA Modules

IAASB Support

Clarity Center: Clarity Center: www.ifac.org/clarity-center/index

http://www.ifac.org/clarity-center/indeix

• Short videos and supporting slidesShort videos and supporting slides

– Main thrust of revised ISA and significant changesMain thrust of revised ISA and significant changes

– First release Q4 2009, free of charge from CenterFirst release Q4 2009, free of charge from Center

ISA Modules


• Concern in some quarters about:Concern in some quarters about:

– Applicability of ISAs to smaller auditsApplicability of ISAs to smaller audits

– Audit documentation burdenAudit documentation burden

– Undue inspection requirementsUndue inspection requirements

• IAASB Staff Q&A issued August 2009IAASB Staff Q&A issued August 2009

– Explains proportionality of ISAs in SME contextExplains proportionality of ISAs in SME context

– Emphasizes importance of professional judgment Emphasizes importance of professional judgment

Proportionality of Application of the ISAs


• Application of ISAs designed to be proportionateApplication of ISAs designed to be proportionate

– Proportionate to size, level of complexity, nature of Proportionate to size, level of complexity, nature of entityentity

– Proportionality ≠ modification of requirementsProportionality ≠ modification of requirements

• Differences between SMEs and larger entities Differences between SMEs and larger entities recognized by ISAsrecognized by ISAs

– Not every audit needs to be performed the same wayNot every audit needs to be performed the same way

– Audit approach will vary with circumstances Audit approach will vary with circumstances (simpler/more complex)(simpler/more complex)

– Work effort affected by entity’s activities/accountingWork effort affected by entity’s activities/accounting

Proportionality of Application of the ISAs


• Through the requirements, e.g.Through the requirements, e.g.

– ISA 260, where management = TCWGISA 260, where management = TCWG

– ISA 315, absence of formal risk assessment processISA 315, absence of formal risk assessment process

– ISA 540, choice of responses to assessed risksISA 540, choice of responses to assessed risks

• Through the application materialThrough the application material

– Many considerations specific to smaller entitiesMany considerations specific to smaller entities

How do ISAs Demonstrate Proportionality?


• Basic obligation in the ISAsBasic obligation in the ISAs

– Comply with all ISAs relevant to the auditComply with all ISAs relevant to the audit

• When can compliance with ISAs be claimed?When can compliance with ISAs be claimed?

– Only when all relevant ISAs have been complied withOnly when all relevant ISAs have been complied with

• However, not all ISAs may be relevant in an SME However, not all ISAs may be relevant in an SME audit, e.gaudit, e.g..

– ISA 402, if SME does not use a service organizationISA 402, if SME does not use a service organization

– ISA 600, if SME audit is not a group auditISA 600, if SME audit is not a group audit

– ISA 610, if SME has no internal audit function ISA 610, if SME has no internal audit function

Compliance with All ISAs?


• Even if an ISA is relevant, not all its requirements Even if an ISA is relevant, not all its requirements may be relevantmay be relevant

– Conditional requirements need not be applied if Conditional requirements need not be applied if conditions do not existconditions do not exist

• ExamplesExamples

– Engagement team discussionEngagement team discussion

– Performing substantive and other follow-up Performing substantive and other follow-up procedures in context of unidentified related partiesprocedures in context of unidentified related parties

– Determining whether material uncertainty exists in Determining whether material uncertainty exists in context of going concerncontext of going concern

Compliance with All Requirements?


• Appropriate documentation need not be burdensomeAppropriate documentation need not be burdensome

• Documentation of significant professional Documentation of significant professional judgments helps to reinforce their quality judgments helps to reinforce their quality

• Application designed to be proportionate, efficient Application designed to be proportionate, efficient and effectiveand effective

– Experienced auditor testExperienced auditor test

– Requires professional judgment, not checklist approachRequires professional judgment, not checklist approach

– Helpful illustrations of how to apply requirementsHelpful illustrations of how to apply requirements

Documentation Requirements


• Continued development of the ISAs

• Development of a full suite of reporting services

• Development of other assurance standards

• Other areas of public interest

IAASB Current and Forward Agenda

• ISRE 2400 and ISRS 4410 are increasingly relevant in meeting needs of those entities exempt from statutory audit requirements

• Project approved March 2009; IAASB progressing discussion of issues

• Project considerations– Review and compilation services must be clearly

distinguishable as to level of assurance, work effort and cost

– Communication to promote user understanding

Reviews & Compilations

IAASB Current and Forward AgendaIAASB Current and Forward Agenda

• Monitoring experiences of implementation of the clarified ISAs by countries and firms

• Post-implementation review of the clarified ISAs

Monitoring Implementation of the ISAs



Impact Analysis

Analysis of impacts (costs, benefits, etc.) of proposed new or Analysis of impacts (costs, benefits, etc.) of proposed new or revised standards, as part of due process considerationsrevised standards, as part of due process considerations

• Staff Audit Practice Alerts– Auditing Fair Value Accounting Estimates

(October 2008)

– Going Concern (January 2009)

– External Confirmations (forthcoming Fall 2009)

• Liaison activity with others– International Accounting Standards Board

Initiatives in the Current Environment


Resources

www.iaasb.org

• IAASB Strategy and Work Program, 2009 – 2011IAASB Strategy and Work Program, 2009 – 2011

• Project timetablesProject timetables

• Meeting information and agenda materialMeeting information and agenda material

• Project historiesProject histories

• Exposure Drafts of StandardsExposure Drafts of Standards

http://www.iaasb.org/

International Auditing and Assurance Standards Board

IAASB Update

Phil Cowperthwaite, Member, IAASB

SMP Forum

Beijing, China

28 October 2009

Documents

International Auditing and Assurance Standards Board IAASB Update Phil Cowperthwaite, Member, IAASB SMP Forum Beijing, China 28 October 2009 1