Assurance Standards Board Research Articles

How hours allocated to year-round auditing procedures affect audit quality

PurposeThis paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.Design/methodology/approachUsing a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.FindingsThe initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.Originality/valueTo the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.

Climate risk disclosures and auditor expertise

Many jurisdictions are establishing requirements for corporations to disclose climate-related risks, and for those disclosures to be audited. One of the first jurisdictions to do so is Australia, where the Australian Accounting Standards Board (AASB) and Auditing and Assurance Standards Board (AUASB) issued a Joint Bulletin in 2018 stating that both preparers and auditors should consider the impact of climate risks on the company's financials. Utilising the Australian setting, this paper introduces a new measure of audit partner expertise, namely expertise in climate-related issues, and examines whether it is associated with the client company's climate risk reporting. We define audit partner expertise in climate-related issues based on their client portfolio composition in terms of greenhouse gas emissions. We find that the likelihood and quality of climate risk disclosures is higher when the audit partner has climate risk expertise, and this finding is driven by clients in industries with material climate risks.

Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 570 (Revised) Going Concern

AbstractThe International Auditing and Assurance Standards Board (IAASB) issued for public comment Proposed International Standard on Auditing 570 (Revised) Going Concern. The Australian Auditing and Assurance Standards Board (AUASB) and New Zealand Auditing and Assurance Standards Board (NZAuASB) also called for comments. The Auditing and Assurance Standards Committee of AFAANZ prepared a submission, based on the findings reported in extant research, informing a number of the questions asked by the IAASB. This technical note presents the formal submission made to the IAASB.

Comments on Exposure Draft for Proposed ISSA 5000, sustainability assurance engagements by the Auditing and Assurance Standards Committee of AFAANZ

AbstractThe Exposure Draft for Proposed International Standard on Sustainability Assurance (ISSA) 5000 has been issued by the International Auditing and Assurance Standards Board (IAASB) because there is increasing demand by stakeholders for assurance of sustainability information. Our recommendations include: (i) a more flexible approach to ethics and quality management instead of the requirements for standards that are at least as demanding as the accounting profession's standards; (ii) more differentiation between the requirements for limited as opposed to reasonable assurance and (iii) more cautious use of the term materiality and clearer definitions of the different materiality concepts to avoid potential confusion.

Innovation in Audit and Assurance: A Global Study of Disruptive Technologies

ABSTRACT The study at hand develops the Audit and Assurance Value Chain as a structured framework with four categories: accessing information and data, verifying information, protecting information, and assessing internal controls. After development of the Audit and Assurance Value Chain, it was utilized to categorize emerging technologies derived out of investigations of more than 100 technology innovator companies and interviews with 23 organizations comprising audit and assurance practitioners, regulators, associations, and national standard-setters. The study is based on global data coverage to identify emerging technologies that have not been connected to audit and assurance services before, bringing new insights to the field. Additionally, it emphasizes the importance of the International Auditing and Assurance Standards Board convening power and influence in promoting the adoption of emerging technologies. JEL Classification: M40; M41; M42; O30; O32; O33.

A COMPREHENSIVE ANALYSIS OF THE IMPACT OF GLOBALIZATION ON AUDITING STANDARDS

This article examines the profound impact of globalization on auditing standards, unraveling the complexities faced by auditors in an increasingly interconnected global economy. As businesses extend their operations across borders, auditors grapple with diverse regulatory frameworks, cultural nuances, and evolving business practices. The literature review reveals a compelling narrative, highlighting the imperative for harmonized auditing standards in the face of globalization. The International Auditing and Assurance Standards Board (IAASB) plays a pivotal role in formulating and updating standards to align with the intricacies of a borderless economy. Technological advancements, particularly in data analytics and artificial intelligence, are transforming audit methodologies, enhancing efficiency, and addressing global financial challenges. Challenges emerge in adapting to local variations, requiring auditors to strike a delicate balance between standardization and cultural adaptability. Collaboration and communication among auditors, regulators, and standard-setting bodies emerge as critical elements for success in this dynamic global auditing landscape.

Evaluating the Use of International Standards for Assurance Engagements by Nonaccounting Practitioners

SUMMARY When last revising the International Standard for Assurance Engagements (ISAE) 3000, the International Auditing and Assurance Standards Board (IAASB) determined that it is in the “public interest” for all competent practitioners (including nonaccounting practitioners) to use the ISAEs. The IAASB imposed conditions on such use, that an engagement’s underpinning ethics and quality control frameworks should be disclosed in the assurance report. Although this explicit determination may encourage wider use of ISAEs by nonaccounting practitioners, the conditions imposed may also act as a deterrent. Using a pre-post design on 2,282 international assurance engagements undertaken by nonaccounting practitioners, we identify increased use of ISAEs and greater disclosure of underpinning ethics and quality control frameworks, although some breaches remain. We further find that switches to ISAEs by nonaccounting practitioners have resulted in enhanced transparency of assurance procedures and independence in the assurance report and an increased share of the assurance services market.

Non-financial information assurance: a review of the literature and directions for future research

PurposeThis study aims to review the literature on non-financial information (NFI) assurance including external assurance of sustainability reports (SRA) and integrated reports (IRA). The objectives are as follows: provide an overview of academic research; understand the nature of NFI assurance engagements by organising the literature around the five key elements of an assurance engagement; develop a framework for understanding NFI assurance; and provide directions for future research.Design/methodology/approachThe study undertakes a structured literature review of 179 articles published from 1999 to 2023.FindingsThe review identified 324 researchers located in 35 different countries who published 179 articles on SRA and IRA. The researchers, their locations, journals, methods, theories and themes are examined. The literature is structured around the definition of an assurance engagement including a tripartite arrangement, subject matter, a suitable criterion, sufficient appropriate evidence and a written assurance report. A framework for understanding NFI assurance is offered. Avenues for future research, structured around the five elements of an assurance engagement, are presented.Practical implicationsResearchers will benefit from an overview of the literature and guidance on areas for future research. Lecturers can use the findings to develop content for their auditing courses. Reporting managers will benefit from a better understanding of this new form of assurance. Regulators can use this study’s insights to better inform the development of laws and corporate governance codes mandating NFI assurance. Standard setters can use these findings to guide the emergence of the new assurance standards. Assurance practitioners may use this research to inform practice.Social implicationsThe findings may prove useful in addressing capture, which deters NFI assurance from enhancing disclosure credibility and fulfilling its transparency and accountability role. This is to the detriment of the wider society.Originality/valueThe consolidation of the literature around the five key elements of an assurance engagement is unique. The framework devised offers useful insights into the dynamics of assurance generally and NFI assurance more specifically. The study is timely given the new European Union regulations on NFI reporting and assurance and the work of the International Audit and Assurance Standards Board in developing a specialist NFI assurance standard.

Audit evidence, technology, and judgement: A review of the literature in response to ED‐500

AbstractIn October 2022, the International Auditing and Assurance Standards Board (IAASB) issued Exposure Draft 500 (ED‐500). This is focused on revising and integrating the standard auditors use when evaluating audit evidence during an external audit. This study contributes to the ongoing discourse as the IAASB evaluates feedback to ED‐500 and executes its standard‐setting agenda. We review academic literature published in the past 10 years to synthesize extant knowledge specifically on the use of technology and the application of professional skepticism during audit evidence evaluation. Our review offers factors the IAASB should consider when seeking to modernize and future‐proof its standards, suggesting improvements to the proposed ED‐500. We also identify fruitful avenues for future academic research.

The Quality Management System – A New Approach to The Continuous Improvement of The Quality of Audit Missions

Regulatory norms are periodically renewed. In this regard, International Standards on Auditing (ISA), including quality standards, are no exception as they continue to generate increased interest in the current context. Therefore, the International Auditing and Assurance Standards Board (IAASB) has published a set of new and revised standards on their website, to be implemented starting from December 15, 2022.

The influence of sustainability assurance report format and level on nonprofessional investors’ judgments

PurposeThis paper aims to examine the influence of sustainability assurance report format (separate versus combined with financial information assurance) and level (limited versus reasonable) on nonprofessional investors’ judgments.Design/methodology/approachThis study uses a 2 × 2 between-participants experiment with 436 US nonprofessional investors. The authors manipulate sustainability assurance report format and level to identify differences in judgments of information credibility, investment desirability and investment amount.FindingsThis study finds that sustainability assurance level influences participants’ judgments only when the financial and sustainability assurance reports are presented separately. Specifically, participants assess sustainability performance information as more credible and make higher investment judgments when presented with a separate limited, as opposed to reasonable, assurance sustainability report.Practical implicationsThe International Auditing and Assurance Standards Board expressed concerns regarding whether assurance reports accompanying emerging forms of extended external reporting (EER) effectively communicate the level of assurance provided by the independent practitioner. The result that assurance level does not influence investor judgments in the combined reporting format appears contrary to the idea that integrated reporting should provide connectivity between financial and sustainability information. The finding that investors make higher investment and credibility judgments with limited assurance is inconsistent with the intent of sustainability assurance professional guidance and recent research results. Together, the findings suggest that investors may not be able to distinguish between differing levels of sustainability assurance when this information is presented in a combined report format.Social implicationsStandard setters should consider how sustainability assurance report format and assurance level impact nonprofessional investor judgments.Originality/valueResearch on the effects of EER assurance report format is sparse. The results indicate that even slight changes in assurance report wording may cause investors to perceive that a limited assurance report conveys a higher assurance level than a reasonable assurance report.

Audit of non-financial reporting: what standard should be used?

A business entity of whatever kind seeks to operate in long-term perspective by achieving the strategies set out by it, including the strategies pertaining to social justice, environmental protection, friendly use of natural resources and their renewal. It is also a matter of the society’s concern. It is for this reason that non-financial reporting for sustain­able development, provided by business entities, is demanded by users. The verification of non-financial information is assigned to independent auditors. Although auditors use the International Standard 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” for the verification purposes, the International Standard 3410 “Assurance Engagements on Greenhouse Gas Statements” can also be applied for specialized spheres. When non-financial information is submitted together with financial re­porting, the International Standard 720 (revised) “The auditor’s responsibilities relating to other information” will be applicable. On the request of international donor organizations, an auditor is allowed to use the International Standard 4400 “Agreed-upon procedures engagements”. Given that the International Standard 3000 is the most demanded among the auditors, the International Auditing and Assurance Standards Board provided a guid­ance on its application. The phases of non-financial reporting audit and their content were clarifi ed on the basis of the International Standard 3000. The choice of an international standard depends on the conditions of an engagement and relies on the professional judg­ment of an auditor. Irrespective of a chosen standard, an auditor bears the responsibility for the assessment of published non-financial reports for sustainable development. Real­izing the responsibility before users of non-financial reporting, an auditor must assure the quality of his services in keeping with the requirements of the International Standard on Quality Management (ISQM 1). The working document of an auditor “Quality assessment of assurance engagements other than audits or reviews of historical financial information (non-financial reporting)” was elaborated, which would help assure the internal control of auditing at engagement level. This document is standardized and can be used in the auditing practice.

Comments of the AFAANZ Auditing and Assurance Standards Committee on Proposed International Standard on Auditing 500 (Revised) Audit Evidence

AbstractThe International Auditing and Assurance Standards Board (IAASB) issued for public comment Proposed International Standard on Auditing 500 (Revised) Audit Evidence. The Australian Auditing and Assurance Standards Board (AUASB) and New Zealand Auditing and Assurance Standards Board (NZAuASB) also called for comments. The Auditing and Assurance Standards Committee of AFAANZ prepared a submission, based on the findings reported in extant research, responding to a number of the questions asked by the IAASB (and AUASB/NZAuASB). This technical note presents the formal submission made to the IAASB.

An analysis of comment letters on a new, stand-alone standard for audits of less complex entities’ financial statements

PurposeThe objective of this paper is to extend the debate on audit quality in the less complex entity (LCE) context by analyzing comment letters submitted to the International Auditing and Assurance Standards Board (IAASB). The IAASB has drafted a new, stand-alone standard for audits of LCEs’ financial statements.Design/methodology/approachThe Gioia method is utilized to conduct the qualitative analysis. This enables the material to shine and provide a comprehensive picture of the important aspects of the comment letters about the International Standard on Auditing (ISA) for LCEs. A content analysis of the 145 comment letters is conducted to identify the extent of the support for and the arguments against the new, stand-alone draft standard for audits of LCEs’ financial statements. In addition, this study considers how the comment letters describe the respondents’ views on audit quality in relation to the new standard. Finally, the tone of the comment letters and audit quality arguments is investigated.FindingsThe findings provide a useful framework of the most frequently used arguments supporting and opposing the ISA for LCEs. Within the themes identified, a wide variety of issues and concerns are discussed. The results reveal that the arguments in the comment letters are contradictory. For instance, when discussing audit quality, those interest groups that perceived many positive opportunities in the adoption of the ISA for LCEs thought that the audit quality would increase. Conversely, those interest groups that were skeptical about the success of the ISA for LCEs argued that the audit quality could be compromised by the general prejudice that the ISA for LCEs might be perceived as a lower-quality audit with fewer procedures.Originality/valueThis paper is, to the best of the authors’ knowledge, the first to examine the content of comment letters in the context of a new, stand-alone standard for audits of LCEs. The international audience can utilize the results in the context of the widely discussed issue of reducing LCEs’ auditing obligations. This study aims to contribute to the two streams of accounting literature concerning audit quality and political lobbying.

The impact of changes to auditors' reporting and audit committee strength on bank directors' perceptions and decisions: An experimental investigation

This study investigates the impact of two changes to the auditor's report—a separate section addressing going concern uncertainties (GCU section [GCUsec]) and information on management and auditor responsibilities—and the characteristics of the audit committee on bank directors' perceptions and decisions. In a 2 × 2 × 2 between‐subjects experimental design with 85 German bank directors, we observe that a GCUsec in the auditor's report leads to more unfavourable decisions. Contrarily, explanations of responsibilities and different characteristics of the audit committee do not significantly impact on bank directors' perceptions and decisions. We thus confirm the effectiveness of the International Auditing and Assurance Standards Board (IAASB)'s revision of the International Standard on Auditing (ISA) 570 to enhance the informational value and decision usefulness of the auditor's report.

Herbal Pharma Inc.: Conducting an Effective Group Audit*

ABSTRACTAs the relative weight of global economic activity continues to shift toward non‐OECD countries (OECD 2018), audit firms are more likely to encounter clients with significant business operations in foreign jurisdictions. The associated need to engage and oversee local component auditors in these jurisdictions can lead to challenges arising from different business cultures and the resulting intra‐audit miscommunications. Audit deficiencies related to these challenges have been detected by regulators (PCAOB 2011, 2010; CPAB 2012, 2015). Standard setters such as the IAASB and the Auditing and Assurance Standards Board (AASB) have responded by issuing an exposure draft proposing revisions to ISA 600 (IAASB 2020) and CAS 600 (AASB 2020) to strengthen the auditor's approach and provide enhanced guidance to practitioners. In light of this evolving area of assurance, this case was developed to deepen students' understanding of both group and component audits in an international context. The case takes the perspective of the group auditor and features an audit senior in a specialized role overseeing the component audit of a client's increasingly material Chinese subsidiary. Deficiencies in the prior year component audit, along with a change in the component auditor, further underlines the importance of robust risk analysis for the upcoming engagement.

The Impact of the Implementation of Key Audit Matters in the 2022 Independent Auditor Report of PT Bank Amar Indonesia Tbk

The International Auditing and Assurance Standards Board (IAASB) implemented new auditing standards which became effective on December 15, 2016, which require auditors to disclose Key Audit Matters (KAM) in their reports. KAM was initiated by the International Auditing and Assurance Standards Board (IAASB) as an international auditing standard setting body, which aims to increase the transparency of audited financial reports. This study uses qualitative and quantitative methods which use secondary data sources. The secondary data used in this study is in the form of financial reports obtained from the Indonesia Stock Exchange (IDX) via the internet. Based on the results of data analysis of the financial statements of PT Bank Amar Indonesia Tbk Q2 of 2022, in the independent auditor's report, the main audit item disclosed is the allowance for impairment losses on loans. Based on data obtained from the Indonesia Stock Exchange (IDX), the share price per share at the end of the fourth quarter of 2021 and the share price on June 30, 2022, has fluctuated. It was concluded that in the period following the issuance of the Q2 2022 financial statements with the existence of an independent auditor's report disclosing key audit matters facilitated the flow of company-specific information to the market.

Dampak Penerapan Masalah Audit Utama di Indonesia

Disclosure of the value of the main audit issues or also called Key Audit Matters (KAM) is determined from the quality of audit information, this study aims to provide an understanding of the main audit issues so as to obtain communicative value. The research was carried out with the publication of the Draft Auditing Standard Exposure (SA) regarding the adoption of ISA 701 containing on Communicating Main Audit Matters in the Independent Auditor's Report. This study examines whether ISA 701 issued by the International Auditing and Assurance Standards Board is able to influence the auditor's decision. Research also provides information related to what is the cause of the decrease in the communicative value of disclosing major audit issues. The results of the study indicate that there is support for the implementation of SA 701 which is planned in Indonesia because this is related to an increase in the communicative value of the auditor's report. The research will be useful in preparing for the implementation of SA 701 for auditors and report users in interpreting disclosures from KAM which will support the implementation of SA 701 in Indonesia.

Analisis Kesesuaian Indikator Kualitas Audit Indonesia Dengan Kerangka Kerja Kualitas Audit Dari International Auditing And Assurance Standards Board (IAASB)

Audit quality indicators play an important role in maintaining quality during the audit process, with audit quality indicators minimizing violations or fraud. Indonesia uses audit quality indicators published by the Indonesian Association of Certified Public Accountants (IAPI) in accordance with the IAASB International Auditing and Assurance Standards Board (IAASB) audit quality indicators. The method applied in this study is a qualitative descriptive method using secondary data. The results of the study show that IAPI has implemented and adopted several parts of the audit quality framework set by the IAASB. On the other hand, there are several items that are only owned by IAPI itself, such as the span of control of the engagement and the policy of compensation for services.

An Investigation of the Effect of Audit Partner’s Disclosure on Earnings Management for Egyptian Companies

International Auditing and Assurance Standards Board (IAASB), Public Company Accounting Oversight Board (PCAOB) and European Union (EU) have made significant efforts to restore the credibility, information, accuracy, and independence of the audit report by requiring disclosure of the audit partner's name and/or the audit partner's signature on the audit report. This research aims to study and examine the relationship between the audit partner's voluntary disclosure and earnings management. In precise, examine whether the audit partner's disclosure leads to lower level of earnings management. The research has also aimed for examining the impact of the audit partner quality on the aforementioned relationship, using a sample from the companies listed in the Egyptian Stock Exchange for the period starting from 2014 to 2018. The results indicated that: (1) there is a statistically significant negative effect for the audit partner disclosure on the absolute value of earnings management proxied by Miller Ratio; which in turn means that the audit partner disclosure increases the earnings quality. (2) There is no effect for the audit partner quality proxied by his industrial specialization on the relationship between audit partner disclosure and the earnings quality. The findings of this research have important consequences for regulators in determining whether the actual effects of a disclosure requirement are as expected, for investors in reducing costs of obtaining information, and for audit committees in making better decisions when hiring auditors.