International Standards on Auditing

Global financial markets increasingly require availability of financial statements that are audited in accordance with audit standards known and accepted worldwide. The use of a common body of high quality auditing standards would simplify comparisons of companies’ financial positions and results of operations, thus facilitating cross-border investment and contributing to overall economic growth. The progress in the convergence efforts demonstrated so far by the countries has been substantial—more than 100 countries have either adopted International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC) or declared their intent to do so in the future.  

International Standards on Auditing of the International Federation of Accountants

ISAs are issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body under the auspices of the IFAC.  The objective of the IAASB is to “serve the public interest by setting high quality auditing, assurance, quality control and related services standards and by facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession.” The IFAC is a worldwide organization of accountancy profession uniting 155 members and associates from 118 countries.

During 2003–2004, the IAASB’s standard setting process focused on the revision and development of ISAs given their planned adoption for statutory audits in the European Union. During 2004, the IAASB finalized a new audit risk model which gave rise to three new ISAs and consequential amendments to many other ISAs. To assist with the implementation of ISAs, the IAASB announced that it will institute a moratorium or “calm-period” after June 2004, whereby ISAs issued after that date will generally have an implementation date after 2005. This moratorium, in part, aimed to help Member States of the EU and IFAC member bodies, regulators, practitioners, and other standard setters around the world to process the changes occurring in ISAs.  

Moreover, to ensure consistent application of ISAs and to address concerns raised by the accountancy profession, in 2003 the IAASB embarked upon a project to review the clarity of its standards. The Clarity Project entails setting overall objectives for each standard, clarifying the language, eliminating ambiguities, and improving the overall readability and understandability of the ISAs through structural and drafting improvements. In October 2007, the IAASB announced that the complete set of clarified ISAs will be effective for audits of financial statements for periods beginning on or after December 15,  2009.

Applicability of International Standards on Auditing

The IAASB issues ISAs as the standards to be applied by auditors in reporting on historical financial information. ISAs are intended for use in all audits—publicly traded companies, private business of all sizes, and government entities at all levels. The ISAs contain basic principles and essential procedures (identified in bold type lettering) together with related guidance in the form of explanatory and other material, including appendices. As of November 2007, there were 32 effective ISAs, organized under 6 major categories: (1) general principles and responsibilities; (2) risk assessment and response to assessed risks; (3) audit evidence; (4) using work of others; (5) audit conclusions and reporting; and (6) specialized areas. According to the IAASB, a professional accountant should claim compliance with ISAs only if  the requirements of all ISAs are being observed.

ISAs, as well as International Financial Reporting Standards (IFRSs), are endorsed by the World Bank, the International Monetary Fund, and other international institutions as the best practice standards for corporate financial reporting. As such, in addition to practical use by auditors, ISAs are used by the World Bank as a benchmark in preparing the Reports on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, a comprehensive assessment of accounting, financial reporting, and auditing practices within the corporate sector in a given country. The ROSC focuses on the strengths and weaknesses of accounting and auditing environment, reviews mandatory requirements against actual practices, and gives recommendations with a view to improve financial reporting environment.  As of end-June 2004, 38 Accounting and Auditing ROSC modules have been completed, of which 20 have been published.

Another important source of information are self-assessments prepared as part of the  IFAC Member Body Compliance  Program launched in November 2003 with the objective to evaluate whether and how the  Statements of Membership Obligations (SMOs)  requirements are being fulfilled. The SMOs are issued by the IFAC Board and establish requirements for members and associates to promote, incorporate, and assist in implementing international standards issued by the IFAC and the International Accounting Standards Board (IASB).  Part 2 of the Compliance Program requires members and associates to complete a self-assessment questionnaire about their best endeavors to promote and incorporate international standards issued by the IFAC and the IASB, as well as quality assurance, investigation, and discipline programs to monitor compliance with applicable professional standards. These responses are available from the IFAC website. Other sources which provide information on countries’ compliance with ISAs include publications of the major accountancy firms, self-assessments prepared by the national standard-setters, and regional and international organizations.