Auditing - ISAs and GAAS

In order to assure accurate and fair portrayal of transaction records as promised, the financial accounts of an organization are evaluated and examined objectively. This procedure is known as auditing. Investors' trust in both financial and non-financial information is supported by the establishment of strong standards for auditing, financial reporting, and ethics. Therefore, auditing significantly contributes to a nation's financial stability and economic prosperity (Ramanna & Sletten, 2009). There has been a renewed focus on the need to create worldwide standards for auditing due to the markets' rapid growth (ISAs). The world is gradually expanding, and investment levels are rising. For these reasons, using common set of international standards can offer benefits to regulators, investors and audit firms. These international standards are developed by an international body which heeds a rigorous due process with significant public interest input. The body in charge is known as the International Auditing and Assurance Standards Board (IAASB) of IFAC (International Federation of Accountants).
The IAASB facilitates the convergence of national and international standards. It also issues high quality international standards on quality control, auditing and assurance and related services (Ares et al., 2012). During the rigorous due process, the IAASB identifies new projects through reviewing international and national developments and the suggestions of subjects interested in the international pronouncement of the standards. Occasionally, IAASB may hold a public forum if a particular topic demands a broad range of views. Notably, the due process of establishing international standards goes through the stages of research and consultation, transparent debate, exposure for public comment, consideration of any comments received and affirmative approval. Once approved, the IAASB makes a priority to outreach its stakeholders on a continuous basis to ensure they meet their needs as well as the expectations of the public (IFAC, 2004).
Countries such as the US have established their auditing standards to govern the processes of financial reporting and auditing. These standards are referred to as the US Generally Accepted Auditing Standards (GAAS). The US also has bodies in charge of issuing the rules that become GAAS. They include the Public Company Accounting Oversight Board (PCAOB) and the Auditing Standards Board. The ASB auditing standards are for the publicly traded companies and the Clarity Project. The project aims at making GAAS easier to understand and apply. Moreover, it aims at making the US auditing standards coordinated and comparable to ISAs (Ares et al., 2004).
The key differences between ISA and US GAAS can be observed in five principal areas. Firstly, the documentation of the audit procedures is different with the US standards being more descriptive than ISA. Moreover, PCAOB demands all the auditors to receive engagement letters before beginning any audit work unlike IAASB. Under the documentation retention policy, PCAOB needs the audit work to be retained for seven years while ISA retains for at least five years.
The going-concern considerations are another primary difference whereby the PCAOB defines the period of going-concern as one year from the date a fiscal year begins being audited. On the other hand, the ISA's period is a year but it is not limited to solely one year. The international control over financial reporting also differs. The passing of the SOX (Sarbanes Oxley Act) of 2002 led to the company management developing internal controls to ensure correct financial reporting (Ares et al., 2012). The management also needs to provide their assertion of the existence of internal controls over financial reporting and accompany them with the audit report. In contrast, ISA lacks the explicit expression of these requirements in their standards. It, therefore, needs to test the internal controls to ensure they are functional and sufficient.
Notably, the process of risk assessment in critical audit procedures is different. ISA highlights the need to obtain an understanding of the entities business risks including the strategic and operating risks. The auditors under ISA are then required to assess how companies respond to risks. On the contrary, the ASB auditors are needed to assess material misstatement based on its organizations and operating environments (Ares et al., 2012). Finally, the use of a different auditor to specifically audit foreign subsidiary and complex investments are another issue where ASB, PCAOB and ISA differ. The PCAOB and ASB gives the auditor an option not to mention other auditors or clearly state the division of responsibilities. In contrast, ISA does not permit an auditor to mention other auditors used in an audit, instead the auditor takes full responsibilities.
Advantages and disadvantages of ISAs
Advantages
The use of ISAs provides various benefits to countries particularly the investors, audit firms as well as regulators. ISAs have led to greater comparability among businesses. Investors often seek to monitor the performance of a global portfolio and evaluate the available investment opportunities. Therefore, having financial information that has been prepared according to the ISAs can be imperative in making decisions on areas of investment (Ramanna & Sletten, 2009). Most importantly, they develop more confidence and a better understanding of the companies they have invested in since their financial information has been prepared and reviewed based on the international standards. The new and small investors also benefit since they are presented with an equal opportunity as the professional investors hence reduced risks. For these reasons, an increase in international investment and capital inflow results which will lead to a decrease in interest rates hence economic growth.
The ISAs have created more flexibility as they are a philosophy based on principles is utilized. The established standards are crucial to international regulators since they can accept the fact that foreign users meet the necessary standards since the standards are utilized for both international and domestic purposes (Ares et al., 2012). ISAs make it easy for the regulators to persuade foreign regulators to rely on the work of the home regulator. Furthermore, ISAs bring about efficiency among international audit firms since they apply a common audit approach that complies with relevant standards.
Disadvantages
The adoption of ISAs by a country may lead to increased costs among the small-, medium sized and large firms. Nonetheless, the costs may be much more among the small firms. The firms need to change the entire internal system to be compatible with the new reporting standards (Ramanna & Sletten, 2009. Most small firms lack the necessary and sufficient resources to implement the changes as well as train their staff. They may, therefore, be compelled to bring on board professional auditors to help make the changeover hence bearing a greater fiscal burden compared to the larger companies (Ares et al., 2012). However, an engagement in early preparation can control costs and promote effective management of the challenging scope of implementation. A transition to international financial reporting standards (IFRS) may lead to additional audit fees particularly for the public accounting firms. Despite the large initial cost of shifting to IFRS, the firm benefits, creates more opportunities and becomes cost effective in the long run.
Additionally, the flexibility offered by the use of ISAs contains downsides since firms can use the methods they wish presenting only the desired results. Such choices lead to profit or revenue manipulation and can be used in hiding the firm's financial problems and encourage fraud. For example, while the IFSR demands for the justification of the application method used to obtain a financial statement, it is possible for firms to give reasons for the changes made (Ares et al., 2012). Therefore, stricter rules would ensure equal valuing of statements by all companies. Moreover, countries such as the US have not accepted the ISAs as much as there is the Clarity Project working towards the convergence of GAAS and ISA. Foreign companies operating in such countries face challenges since they have to carry out their auditing and financial reporting using the country's GAAS as well as the ISA. Additionally, environmental factors such as culture, legal system and language may affect the manner in which ISA is applied. Differences may arise in auditing and financial reporting among countries following the differences in the economic system and objectives and the national laws (Ares et al., 2012). As a result, interpretative differences may arise following the differing historical practices and backgrounds making comparability between two countries difficult. It has, therefore, been highlighted as paramount for an investor to understand the culture of a country when evaluating investment opportunities.
Ethical standards
Ethical standards not only concern themselves with the professional qualities of an auditor but also judgment exercised in the auditor's report and performance of examination. The US has ten GAAS that form the foundation of auditing. They are classified into general standards, standards of fieldwork and standards of reporting (Becker Educational Development Corporation, 2012). The general standards include training, independence and professional care. The auditor must possess adequate proficiency and technical training to perform the audit. He or she also needs to maintain mental attitude in all audit-related matters. The independence needs to be observed in fact and appearance such that they should not indulge in relationships or activities that depict a possible lack of independence. The auditor needs to also exercise due professional care particularly professional scepticism in audit planning and performance and the preparation of the report. The standards of fieldwork entail planning, supervision, internal control, entity, environment and evidence. An auditor is required to adequately plan work and efficiently supervise the assistants. The auditor should sufficiently understand the entity and its environment as well as its internal control (Becker Educational Development Corporation, 2012). It will propel the designing of the extent, nature and timing of audit procedures and the assessment of risk of misstatement of material of the financial statements.
Furthermore, the auditor needs to obtain adequate audit evidence by carrying out audit procedures to obtain a reasonable basis for an opinion concerning the audited financial statement. Lastly, the standards of reporting include accounting, consistency, disclosure and express opinion. The auditor must acknowledge the presentation of financial statements according to the GAAP (generally accepted accounting principles). He or she also needs to identify instances in the audit report in which the principles have been consistently employed in the current period in comparison with the preceding year (Becker Educational Development Corporation, 2012). The auditor must also determine if the informative disclosures are inadequate and reflect the inadequacy in the report. Finally, the auditor needs to express his or her opinion concerning the financial statements or state that an opinion cannot be expressed in the audit report and give reasons.
Despite establishing auditing standards at a national level to bring forth growth to the economy of a country, adopting strong global standards can even lead to a higher resilience of the economic system. Global standards encourage easy comparison and transparency in transactions crossing jurisdictions and borders. Moreover, most of the reconciliation and translation costs are eliminated as well as opportunities for arbitrage. Companies can also attract capital from a larger pool of investors reducing the cost of capital. Such benefits help both the regulators and businesses. The mergers and acquisitions and strategic investment across borders are facilitated while the national regulators can work collaboratively to develop closely aligned supervisory practices.
The ISA contains various ethical guidelines with the fundamental ones including integrity and objectivity. Integrity does not merely refer to honesty but truthfulness and fair dealing (Ares et al., 2012). The objectivity principle imposes the obligation of all auditors intellectually honest, fair and free of conflicts of interest. The second principle is the resolution to the conflict of interest. Whenever faced with significant ethical issues, auditors are required to follow the developed policies to resolve the conflict. The professional competence and due care principle stipulates that auditors need to uphold professional knowledge and skill to ensure clients and employers receive competent services. They are also required to act diligently according to the applicable professional and technical standards during the provision of professional services (IFAC, 2004). The principle encompasses the attainment and maintenance of professional competence. An auditor requires a high standard of education that is followed by special education and training in the relevant subjects. There should also be a period of professional development. The maintenance of professional competence needs to also be upheld through the continuous awareness of development in auditing. The auditor should also adopt a designed program to ensure quality control in the conduction of professional services consistent with international pronouncements.
Moreover, confidentiality is a vital principle that demands auditors to respect the confidential information of the staff under their control and persons to whom advice is given (IFAC, 2004). The principle does not only cut across the disclosure of personal information but also needs an auditor not to use information obtained during the professional services to personal advantage or to a third party. Confidentiality needs to be observed unless specific authority has been issued to disclose or in cases with professional or legal duty to disclose. Finally, the principle of professional behaviour emphasizes on the need for auditors to comply with the laws and regulations and avoid actions that may bring discredit to the profession. Such actions include having an informed and reasonable third party possessing knowledge of the relevant information. The auditors are not also allowed to bring their profession into disrepute in promoting and marketing their profession and work (IFAC, 2004). They also need to be truthful and honest by not making exaggerated claims for the services they offer, the experience gained nor qualifications possessed. Ultimately, they should not make unsubstantiated comparisons or disparaging references to the work of other professionals.













References
Ares, A. A., Elder, R. J. & Beasley, M. S. (2012). Auditing and Assurance Services. An Integrated Approach, 14th edition. Prentice Hall.
Becker Educational Development Corporation. (2012). Top 10 GAAS Standards and the Old Auditor's Reporting Model.
International Federation of Accountants. (2004). Handbook of International Auditing, Assurance and Ethic Pronouncements.
Ramanna, K. & Sletten, E. (2009). Why Do Countries Adopt International Financial Reporting Standards?