Auditing Standards Board Research Articles

Auditor Perceptions Of SAS 99: Do Two Expectation Gaps Still Exist?

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-style: normal; font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">In 1988, the Auditing Standards Board released nine standards intended to narrow the previously identified “expectation gap”—a gap between the expectations of financial statement users and certified public accountants (“Expectation Gap I”).<span style="mso-spacerun: yes;">  </span>A 1992 study of auditor perceptions of two of those standards dealing with errors, irregularities, and illegal acts of clients, revealed that there existed a second expectation gap, one between the standard setters and practicing CPAs (“Expectation Gap II”). Since then, the ASB has released two successor statements intended to address the issue of auditors’ responsibility to consider fraud in a financial statement audit.<span style="mso-spacerun: yes;">  </span>This study examines auditor perceptions of the more recent pronouncement and reveals general skepticism among respondents regarding its effectiveness in promoting Congressional and public confidence in the auditing profession; i.e., little confidence that it will serve to reduce Expectation Gap I.<span style="mso-spacerun: yes;">  </span>It also reveals the continued existence of Expectation Gap II.<span style="mso-spacerun: yes;">   </span></span></span></p>

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the Proposed International Standards on Auditing Revisions to ISA 315 and ISA 610

The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on the Proposed International Standards on Auditing Revisions to ISA 315 and ISA 610, exposure draft (International Auditing and Assurance Standards Board [IAASB] 2010). We very much appreciate the opportunity to provide input. The views expressed in this letter are those of the members of the Auditing Standards Committee and do not reflect an official position of the American Accounting Association. In addition, the comments reflect the overall consensus view of the Committee, not necessarily the views of every individual member. We hope that our comments and suggestions are helpful and will assist in finalizing the proposed guidance. If the Board has any questions about our input, please feel free to contact our committee chair for additional follow-up.

Governance benefits of new assurance reports

The use of external assurance is one of many ways to add credibility to information. This article firstly discusses the concept of external assurance as defined by the International Auditing and Assurance Standards Board (IAASB) and its limited application to date outside the statutory financial statement audit. The article then discusses the experience of the Institute of Chartered Accountants in England and Wales (ICAEW) in applying the IAASB framework for external assurance in practice. The benefit of external assurance is primarily to enhance confidence in information for the benefit of users of information who have little control over its production. However, the benefit of external assurance potentially can extend beyond enhancing the credibility of information. Through a case study of developing an assurance reporting framework on internal control in the United Kingdom in 2006, the article firstly demonstrates the benefit of stakeholder engagement in the process. By taking part in collective decision-making over the scope of reporting and related responsibilities, stakeholders obtain a better understanding of the role of assurance reporting and thus are able to align their expectations. Collectively agreeing the basic elements of an assurance reporting framework also means that parties need not negotiate them along with other individual engagement terms, thereby saving time and cost. Secondly, where stakeholders decide to opt for an ‘assertion-based’ assurance reporting framework, management reports on its internal control procedures and their effectiveness and professional accountants opine on management assertions. This assurance process can facilitate better governance as management explicitly owns primary responsibility over the information rather than attributing it to external accountants. The article finally considers the use of external assurance reporting in a wider context. Assurance services, conducted on a voluntary basis and outside the scope of a statutory financial statements audit, can enhance the credibility of specific information that is relevant to certain stakeholders without adding unnecessary burdens to others that have little to gain from this assurance process. This may be particularly relevant to financial institutions subject to increased scrutiny because of the recent crisis in the banking sector.

Are Greenhouse Gas Assurance Engagements a Natural Domain of the Auditing Profession?

Informed by stakeholder responses to the International Auditing and Assurance Standards Board’s (IAASB) Consultation Paper on their draft international standard for assurance on greenhouse gas (GHG) statements, this paper explores the question of whether GHG assurance engagements are a natural domain of the auditing and assurance profession. It is argued that there will be scope in the GHG assurance market for services led by different professionals depending on the nature of the engagement and clients’ cost-benefit analyses. Potential responses to the issues raised in the Consultation Process with regards the engagement partner, engagement teams and the use of the IAASB’s standards by parties other than professional accountants are also canvassed.

Developing an International Assurance Standard on Greenhouse Gas Statements

SYNOPSIS: Worldwide public concern over climate change and the need to limit greenhouse gas (hereafter, GHG) emissions has increasingly motivated public officials to consider more stringent environmental regulation and standards. The authors argue that the development of a new international assurance standard on GHG disclosures is an appropriate response by the auditing and assurance profession to meet these challenges. At its December 2007 meeting, the International Auditing and Assurance Standards Board (hereafter, IAASB) approved a project to consider the development of such a standard aimed at promoting trust and confidence in disclosures of GHG emissions, including disclosures required under emissions trading schemes. The authors assess the types of disclosures that can be assured, and outline the issues involved in developing an international assurance standard on GHG emissions disclosures. The discussion synthesizes the insights gained from four international roundtables on the proposed IAASB assurance standard held in Asia-Pacific, North America, and Europe during 2008, and an IAASB meeting addressing this topic in December 2008.

Auditing Standards Committee Comment Letter Auditing Standards Board Proposed Statement on Auditing Standards—Initial Audit Engagements, Including Reaudits—Opening Balances (to Supersede Statement on Auditing Standards No. 84, Communications Between Predecessor and Successor Auditors, as Amended, Paragraphs .01–.02, .04, .11–.13, and .15–.23)

INTRODUCTION The Auditing Standards Committee of the Auditing Section of the American Accounting Association is pleased to provide comments on the Proposed Statement on Auditing Standards: Initial Audit Engagements, Including Reaudits—Opening Balances. We appreciate the opportunity to provide comments on the proposed standard. The views expressed in this letter are those of the members of the Auditing Standards Committee and do not reflect an official position of the American Accounting Association. In addition, the comments reflect the overall consensus view of the Committee, not necessarily the views of every individual member. We hope that our comments and suggestions are helpful and will assist in finalizing the proposed standard. The Committee commends the Auditing Standards Board ASB for applying clarity drafting conventions and converging with International Standards on Auditing ISAs in developing the proposed standard. The following comments address the specific questions in the guidance for respondents.

A Summary of Research and Enforcement Release Evidence on Confirmation Use and Effectiveness

SUMMARY: Confirmations are extensively used and are often perceived by practitioners to be one of the most persuasive forms of audit evidence. Yet academic research has found limitations that restrict confirmation effectiveness for many management assertions. In addition, a number of problems with false and forged confirmations are identified in Accounting and Auditing Enforcement Releases (AAERs). The Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have put confirmation evidence on their respective agendas. Academic research indicates that receivable confirmations can be effective evidence for the existence assertion. Low response rates, as well as respondent errors and directional bias in detecting errors, are key barriers to confirmation effectiveness. Our review of AAERs identified failure to authenticate responses, collusion between auditee management and customers, and concealed side agreements and special terms as specific problem areas. We also identify a number of research questions for future research.

Developing an International Assurance Standard on Carbon Emissions Disclosures

Governments, organizations and individuals around the world are paying increasing attention to climate change and carbon emissions. This paper argues that a new international assurance standard on carbon emissions disclosures is an appropriate response by the auditing and assurance profession to these challenges. At its December 2007 meeting the International Auditing and Assurance Standards Board (IAASB) approved a project to consider the development of an international standard or guidance for such a service. Such a development is aimed at promoting trust and confidence in disclosures of carbon emissions, including those required under emissions trading schemes. This paper assesses the types of disclosures that can be assured, and outlines the issues involved in developing an international assurance standard on these disclosures. The discussion reflects and expands upon the insights gained from four international roundtables on the proposed IAASB assurance standard held in the Asia-Pacific, North America and Europe during 2008, and an IAASB meeting addressing this topic in December 2008.

Internationalising auditing standards: stakeholder views on Australia's strategic directions

PurposeThe purpose of this paper is to examine and evaluate the internationalisation of Australian auditing standards by analysing the submissions to the Auditing and Assurance Standards Board's (AUASB) strategic directions paper (SDP) and comparing the proposed and approved strategic directions frameworks of the AUASB.Design/methodology/approachA content analysis of the submissions to the SDP is conducted to identify the extent of support, and arguments for and against the proposed strategic directions. This study attempts to find a link, if any, between the proposed strategic directions, the views expressed by the stakeholders, and the final set of strategic directions issued by Australia's Financial Reporting Council.FindingsOverall, the final set of strategic directions released in April 2005 are consistent with the views expressed in the submissions, which support minimal divergence from International Standards on Auditing (ISAs) and using the ISAs as the base for developing Australian auditing standards. Major changes from the SDP include a requirement for the AUASB to undertake research and monitor auditing standards issued by national standard setters. However, the AUASB is no longer obliged to contribute to the international standard arena and need only have regard to any program initiated by the International Auditing and Assurance Standards Board.Research limitations/implicationsThe findings of this study provide an insight into the future of Australia's role in the international arena and increase awareness of stakeholders' views on the international harmonisation of auditing standards.Originality/valueWhile there have been several studies examining the international harmonisation of accounting standards, there is comparatively little research on the international harmonisation of auditing standards. This paper attempts to address this void, in part, and contribute to the literature on the convergence of auditing standards with ISAs.

Due Process and Standard-setting: An Analysis of Due Process in Three Canadian Accounting and Auditing Standard-setting Bodies

Due process is the means by which ethical constraints are placed on administrative decision-making. I have developed a model of variation in due process and use this model to explore the implementation of “due process” norms by three standard-setting bodies that are created, funded, and overseen by the Canadian Institute of Chartered Accountants – the Accounting Standards Board, the Auditing and Assurance Standards Board, and the Public Sector Accounting Standards Board. I conducted two analyses: a comparative analysis of the implementation of due process norms based on differences among the three cases; and, a critique of the due process norms followed by these boards based on their internal logic and a set of best practices identified in other contexts for due process by standard setters. I have presented evidence that due process norms are more fully developed, where standards are enforced by the state and the heterogeneity of users is greatest.

The Australian Auditing and Assurance Standards Board after the Implementation of CLERP 9

This paper traces the establishment of the reconstituted Auditing and Assurance Standards Board (AUASB) as a result of the CLERP (Audit Reform and Corporate Disclosure) Act 2004, and its progress in developing auditing standards that are “in the public interest”. The paper canvasses the composition of the AUASB, its transparency and due process, its relationship with the International Auditing and Assurance Standards Board and the Financial Reporting Council, and its resourcing and attitude to researching issues of importance in auditing. The paper discusses methods that might be used to provide evidence of the efficacy of the reforms to auditing standard‐setting.

A Critique of the International Auditing and Assurance Standards Board

Knowledge of initiatives and developments at the international level are important to the Australian auditing profession, which has adopted a policy of convergence with the International Auditing and Assurance Standards Board (IAASB). To aid this knowledge, this paper provides a critical review of developments at the IAASB and their impact on Australia, drawing on insights gained by the author as a member of the IAASB from 2002 to 2005.

The Consideration Of Fraud In A Financial Statement Audit: Some Study Questions

In October 2002, the Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit in response to recommendations from the Fraud Task Force. SAS No. 99 is intended to improve auditor performance during audits and to increase the likelihood that the auditors will detect fraudulent financial reporting if any is present. Since fraud awareness is such a major part of any audit, accounting students should be well versed on the content of SAS No. 99. However, not all accounting students read SASs in detail. Then how do accounting educators get this important content to these students?

Global Standards for Domestic Financial Regulations: Concourse, Competition and Mutual Reinforcement between Different Types of Global Administration

Over the last decades, the number of international standards for financial regulation has increased remarkably. Transgovernmental networks for banking, securities and insurance regulation, such as the Basel Committee, IOSCO and IAIS, all constitute standards setting bodies. Similarly, also international organizations like the IMF and the World Bank produce international financial standards. Furthermore, the Financial Stability Forum – FSF brings together not only the transgovernmental regulatory networks mentioned above, but also intergovernmental international organizations (the IMF and World Bank, in particular) and private bodies with regulatory functions, such as the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board (IAASB), one of the International Federation of Accountants' (IFAC) technical committees. This article aims to analyse the mutual interaction between global financial standards established by organisms corresponding to different models of global administration. What kind of connection links rules which have been developed by different types of global regulators? Is there competition between global financial standards originating from different bodies or are these standards mutually reinforcing? How are conflicts between global rules solved? The analysis will seek to answer such questions by examining three possible ways of interaction between global financial standards. In the first place, I will look at the trend towards a codification of global financial standards, the most obvious product of which is the development of the FSF's "Compendium of Standards". Secondly, the incorporation of standards established by private bodies within regulatory regimes referring to public bodies will be taken into account. Thirdly, I will examine if, and to what extent, the emergence of new mechanisms for the assessment on countries' compliance with global financial standards may result in the prevalence of some global rules over others.

The Different Types of Assurance Services and Levels of Assurance Provided

In 2001 the international auditing practices committee (iapc, now the international auditing and assurance standards board (iaasb)) commissioned research on the determination and communication of moderate assurance. This research was published in ifac research monograph no. 1 (2002). Part of this research involved surveying the types of assurance services undertaken by 56 assurance firms from 11 different countries, the levels of assurance at which these assurance services were generally provided, and for those services provided as moderate assurance services, the reasons why. This paper re-analyses this data and extends the ifac research report (2002) by examining the differences between the types of assurance services (other than historical financial statement assurance) and levels at which these assurance services are provided by the former big 5 audit firms compared with the non-big 5 audit firms. Information was also collected on 166 moderate assurance engagements provided by these participating assurance firms. The determinants of the level of assurance for these assurance service engagements were identified and differences between the big 5 and the non-big 5 audit firms are reported.

A Review and Integration of Empirical Research on Materiality: Two Decades Later

There has been a renewed interest in the concept of materiality motivated by concerns at the Securities and Exchange Commission, the Sarbanes-Oxley Act, and the Auditing Standards Board and International Auditing and Assurance Standards Board issuance of proposed standards on materiality. This paper: (1) reviews and integrates the empirical research on materiality since 1982, and (2) suggests some implications of this research for audit practice and research. The review indicates that while many issues related to materiality have been addressed by prior research, a number of new and important areas are in need of further examination.

Corporate Governance Factors and Auditor Going Concern Assessments

When making going concern assessments, Statement on Auditing Standards No. 59 (Auditing Standards Board 1988) directs auditors to consider the nature of management's plans and ability to mitigate periods of financial distress successfully. Corporate governance factors reflect attributes of control, oversight, and/or support of management's plans and actions intended to overcome financial distress. Correspondingly, this study investigates the impact of certain corporate governance factors on the likelihood of a going concern modification. Using survival analysis techniques, we examine a sample of 161 financially distressed firms for the time period 1988–1996. We find that auditors are twice as likely to issue a going concern modification when the CEO is replaced. We also find that going concern modifications are inversely associated with blockholder ownership. We also confirm Carcello and Neal's (2000) findings with respect to the association between an independent audit committee and an increased likelihood of modification. In a repeated events setting, we find that insider ownership and board independence are inversely associated with repeated going concern modifications. Our study concludes by proposing implications for the current financial reporting environment (including the Sarbanes‐Oxley Act of 2002) and future research avenues.

After Enron and Worldcom: The Government, AICPA, and FASB Responses

This paper examines the responses of the government, the AICPA, and the FASB after the Enron and WorldCom accounting scandals. The major failures of these companies center on their creative accounting and bad corporate governance. The Congress responded to these issues with the Sarbanes-Oxley Act of 2002. The SEC responded with a variety of measures to restore confidence in the accounting profession; expand the role of management; improve disclosures and financial reporting; improve the performance of audit committees; and enhance enforcement tools. The Auditing Standards Board of the AICPA responded by issuing SAS No. 99, which provides auditors with additional guidance for detecting material fraud. The FASB has been slower to respond due to its lengthier due process rules. The paper discusses whether those responses would have been enough to prevent the Enron and WorldCom financial disasters, and whether they are ample now to prevent corporate failures in the future.

Can financial ratios detect fraudulent financial reporting?

Fraudulent financial reporting is a matter of grave social and economic concern. The Treadway Commission recommended that the Auditing Standards Board require the use of analytical procedures to improve the detection of fraudulent financial reporting. This is an exploratory study to determine if financial ratios of fraudulent companies differ from those of nonfraudulent companies. Fraudulent firms were identified by examining the SEC's Accounting and Auditing Enforcement Releases issued between 1982 and 1999. The fraudulent firms (n=79) were then matched with nonfraudulent firms on the basis of firm size, time period, and industry. Using this matched‐pairs design, ratio analysis for a seven‐year period (i.e. the fraud year −/+ 3 years) was conducted on 21 ratios. Overall, 16 ratios were found to be significant. Of these, only three ratios were significant for three time periods. Of the 16 statistically significant ratios, only five were significant during the period prior to the fraud year. Using discriminant analysis, misclassifications for fraud firms ranged from 58 percent to 98 percent. These results provide empirical evidence of the limited ability of financial ratios to detect and/or predict fraudulent financial reporting.

Could $51 Million Be Immaterial When Enron Reports Income of $105 Million?

The collapse of Enron raises a number of questions about the adequacy of financial statement audits. A primary factor generating these questions was Enron's need to correct its books going back to 1997, thereby reducing its audited profits by $591 million. The correction included a $51 million adjustment that would have cut Enron's 1997 income by almost 50 percent, from $105 million to $54 million, if it was booked in 1997 (Hilzenrath 2001). The note to the financial statements states simply: Audit Adjustments. The restatements include prior-period proposed audit adjustments and reclassifications, which were determined to be immaterial in the periods originally proposed. (Enron 2001) Some have questioned how such adjustments, representing almost half of 1997's reported income, could be deemed to be immaterial (Hilzenrath 2001). This commentary considers whether there is a reasonable basis for considering this amount as quantitatively immaterial using guidance available at the time of the audit. In the following section of this commentary we review professional standards related to materiality, emphasizing that which was available at the time of the Enron audit early in 1998. We then review available literature and the issue of assessing materiality for Enron. Finally we present our approach, results, and conclusions. PROFESSIONAL STANDARDS AVAILABLE AT THE TIME OF THE 1997 ENRON AUDIT The Auditing Standards Board addressed materiality in 1983 when it issued Statement on Auditing Standards (SAS) No. 47 (AU 312), Audit Risk and Materiality in Conducting the Audit. To serve as a frame of reference for the materiality judgment, SAS No. 47 cites FASB Statement of Financial Accounting Concepts No. 2, para. 132, which defines materiality as follows: The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the items. SAS No. 47's provisions relating to materiality require auditors to make a preliminary judgment about materiality levels in planning the audit. Subsequently, when misstatements are identified, an auditor must consider both quantitative and qualitative considerations in determining whether the financial statements are materially misstated. That is, the amount used to evaluate a misstatement may or may not differ from that used in planning the audit. When does one expect the auditor's materiality level for evaluation purposes to equal that used in planning? SAS No. 47 addresses this in para. 22 when it states that assuming, theoretically, that the auditor's judgment about materiality at the planning stage was based on the same information available at the evaluation stage, materiality for planning and evaluation purposes would be the same. However, SAS No. 47 goes on to suggest that the planning and evaluation amounts of materiality may differ due to the findings of the audit. The example it includes at the time of the audit simply illustrates how a qualitative factor such as an illegal payment of an otherwise immaterial amount could be material if it led to a material contingent liability or a material loss of revenue. It was not until December 2000 that an interpretation to SAS No. 47 included additional examples of qualitative factors (AICPA 2002). (1) SAS No. 39 (AU 350), Audit Sampling, also provides some general guidance on qualitative factors. In para. 27 it suggests that in addition to considering the frequency and amounts of misstatements, the auditor should consider qualitative aspects of misstatements that include: (a) the nature and cause of misstatements, such as whether there are differences in principle or in application, are errors or are caused by fraud, or are due to misunderstanding of instructions or to carelessness, and (b) the possible relationship of the misstatements to other phases of the audit. …