🏏International Accounting Unit 7 – International Auditing Practices

Key Concepts in International Auditing

• International auditing involves examining financial statements of entities operating across national borders to ensure compliance with applicable accounting standards and regulations
• Aims to provide assurance that financial statements are free from material misstatement, whether due to fraud or error, and are prepared in accordance with the applicable financial reporting framework
• Requires understanding of the unique risks and challenges associated with auditing multinational companies, such as differences in legal and regulatory environments, cultural norms, and business practices
• Emphasizes the importance of professional skepticism, which is an attitude that includes a questioning mind and a critical assessment of audit evidence
• Involves the application of a risk-based approach, focusing audit efforts on areas with the highest risk of material misstatement
  • Includes assessing the inherent risk (susceptibility of an assertion to misstatement) and control risk (risk that a misstatement will not be prevented, detected, or corrected by the entity's internal control)
• Requires effective communication and coordination among audit team members, particularly when dealing with cross-border engagements and multi-location audits
• Necessitates the use of technology and data analytics to efficiently and effectively analyze large volumes of financial data across multiple jurisdictions

Regulatory Bodies and Standards

• International Federation of Accountants (IFAC) is the global organization for the accountancy profession, with over 175 member and associate organizations in more than 130 countries
  • IFAC's mission is to serve the public interest by strengthening the accountancy profession and contributing to the development of strong international economies
• International Auditing and Assurance Standards Board (IAASB) is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, quality control, review, other assurance, and related services
  • IAASB operates under the auspices of IFAC and is responsible for developing and issuing International Standards on Auditing (ISAs)
• International Ethics Standards Board for Accountants (IESBA) is an independent standard-setting body that develops and issues high-quality ethical standards and other pronouncements for professional accountants worldwide
  • IESBA's Code of Ethics for Professional Accountants sets out fundamental principles of ethics and provides a conceptual framework for applying those principles
• National regulatory bodies, such as the Public Company Accounting Oversight Board (PCAOB) in the United States and the Financial Reporting Council (FRC) in the United Kingdom, oversee the auditing profession and establish auditing standards within their respective jurisdictions
• Convergence efforts between national and international auditing standards aim to promote consistency and comparability in auditing practices across jurisdictions

International Standards on Auditing (ISAs)

• ISAs are professional standards that deal with the independent auditor's responsibilities when conducting an audit of financial statements
• Issued by the International Auditing and Assurance Standards Board (IAASB) to promote consistency and quality in auditing practices worldwide
• Cover various aspects of the audit process, including planning, risk assessment, evidence gathering, and reporting
• Key ISAs include:
  • ISA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with ISAs
  • ISA 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment
  • ISA 330: The Auditor's Responses to Assessed Risks
  • ISA 500: Audit Evidence
  • ISA 700: Forming an Opinion and Reporting on Financial Statements
• Require auditors to exercise professional judgment and maintain professional skepticism throughout the audit process
• Emphasize the importance of obtaining sufficient appropriate audit evidence to support the auditor's opinion on the financial statements
• Provide guidance on communicating key audit matters in the auditor's report to enhance transparency and informational value for users of financial statements

Differences Between National and International Auditing

• National auditing standards are developed by individual countries' regulatory bodies and may differ from International Standards on Auditing (ISAs) in terms of scope, requirements, and application
• Differences in legal and regulatory environments across jurisdictions can impact the nature and extent of audit procedures required to comply with national auditing standards
  • For example, some countries may have more stringent requirements for auditor independence or mandatory audit firm rotation compared to ISAs
• Cultural differences and business practices can influence the way audits are conducted and the expectations of stakeholders in different countries
  • In some cultures, there may be a greater emphasis on personal relationships and trust, while others may prioritize strict adherence to rules and regulations
• Language barriers and translation issues can pose challenges when applying ISAs in countries where English is not the primary language
  • Misinterpretation or misapplication of auditing standards due to language differences can impact audit quality and consistency
• Differences in the adoption and implementation of ISAs across jurisdictions can lead to variations in audit practices and reporting
  • Some countries may adopt ISAs as issued by the IAASB, while others may modify or supplement them with additional national requirements
• Convergence efforts between national and international auditing standards aim to reduce differences and promote greater harmonization of auditing practices globally
  • However, complete convergence may not be achievable due to the unique characteristics and needs of individual jurisdictions

Risk Assessment and Materiality in Global Contexts

• Risk assessment is the process of identifying and evaluating the risks of material misstatement in the financial statements, whether due to fraud or error
• In international auditing, risk assessment involves considering the unique risks associated with operating in multiple jurisdictions, such as:
  • Differences in legal and regulatory environments
  • Variations in accounting standards and financial reporting frameworks
  • Cultural differences and business practices
  • Foreign currency transactions and translation
• Auditors must obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement
  • This includes understanding the entity's global operations, organizational structure, and key business processes
• Materiality is a concept that refers to the significance of an item or information in the context of the financial statements as a whole
  • Misstatements, including omissions, are considered material if they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
• In international auditing, determining materiality involves considering factors such as:
  • The size and nature of the entity's global operations
  • The expectations and information needs of users of the financial statements across different jurisdictions
  • The impact of foreign currency translation on the materiality threshold
• Auditors apply the concept of materiality in planning and performing the audit, as well as in evaluating the effect of identified misstatements on the financial statements and forming an opinion

Audit Planning and Procedures Across Borders

• Audit planning in international engagements involves developing an overall audit strategy and a detailed audit plan that address the unique challenges of auditing across borders
• Key considerations in international audit planning include:
  • Understanding the legal and regulatory requirements in each jurisdiction where the entity operates
  • Identifying and assessing the risks of material misstatement, taking into account the entity's global operations and cross-border transactions
  • Determining the materiality threshold and performance materiality for the group audit and individual components
  • Establishing effective communication and coordination protocols among audit team members, component auditors, and management across different locations
• Audit procedures in international engagements may involve:
  • Testing the operating effectiveness of internal controls over financial reporting across the entity's global operations
  • Performing substantive procedures to obtain sufficient appropriate audit evidence for significant account balances, classes of transactions, and disclosures
  • Using the work of component auditors in other jurisdictions to audit the financial information of significant components
  • Applying audit sampling techniques to select and test transactions and balances across multiple locations
• Auditors may face challenges in obtaining audit evidence across borders due to differences in language, cultural norms, and business practices
  • For example, access to certain records or personnel may be restricted in some jurisdictions due to data privacy regulations or cultural sensitivities
• The use of technology and data analytics can facilitate the efficient and effective execution of audit procedures across multiple locations
  • Auditors may leverage tools such as remote access, secure data sharing platforms, and data visualization to analyze and communicate audit findings

Challenges in Multinational Audits

• Multinational audits involve unique challenges that can impact the planning, execution, and reporting of the audit engagement
• Differences in legal and regulatory environments across jurisdictions can create compliance complexities and risks
  • Auditors must navigate varying requirements for auditor independence, audit documentation, and reporting obligations in each country
• Variations in accounting standards and financial reporting frameworks can lead to inconsistencies in the preparation and presentation of financial statements
  • Auditors must ensure that the financial statements are prepared in accordance with the applicable financial reporting framework and that any differences are properly reconciled and disclosed
• Cultural differences and language barriers can hinder effective communication and understanding among audit team members, component auditors, and client personnel
  • Misunderstandings or misinterpretations due to cultural or language differences can impact the quality and efficiency of the audit process
• Coordinating and supervising the work of component auditors in different locations can be challenging, particularly when dealing with time zone differences, varying levels of audit quality, and local business practices
  • Establishing clear communication protocols, setting expectations for audit quality, and monitoring the work of component auditors are critical to ensuring a consistent and effective group audit
• Accessing and verifying audit evidence across borders can be difficult due to data privacy regulations, confidentiality concerns, or logistical constraints
  • Auditors may need to develop alternative procedures or rely on the work of component auditors to obtain sufficient appropriate audit evidence
• Geopolitical risks, such as political instability, economic sanctions, or trade disputes, can impact the entity's operations and financial performance
  • Auditors must consider the potential impact of these risks on the audit engagement and adapt their procedures accordingly

Ethical Considerations in International Auditing

• International auditing requires adherence to high ethical standards to maintain the integrity and credibility of the profession
• The International Ethics Standards Board for Accountants (IESBA) sets out fundamental principles of ethics for professional accountants, including:
  • Integrity: Being straightforward and honest in all professional and business relationships
  • Objectivity: Not allowing bias, conflict of interest, or undue influence of others to override professional or business judgments
  • Professional Competence and Due Care: Maintaining professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service
  • Confidentiality: Respecting the confidentiality of information acquired as a result of professional and business relationships
  • Professional Behavior: Complying with relevant laws and regulations and avoiding any conduct that discredits the profession
• Auditors must be independent in both fact and appearance to maintain objectivity and credibility
  • Independence may be threatened by various factors, such as financial interests, personal relationships, or the provision of non-audit services to audit clients
• Ethical dilemmas may arise in international auditing due to differences in cultural norms, business practices, or legal requirements across jurisdictions
  • For example, gift-giving or hospitality may be considered a normal business practice in some cultures but could be perceived as a threat to auditor independence in others
• Auditors must exercise professional judgment and apply the conceptual framework for identifying, evaluating, and addressing threats to compliance with the fundamental principles of ethics
  • This involves identifying threats, evaluating the significance of the threats, and applying safeguards to eliminate or reduce the threats to an acceptable level
• Effective communication and consultation with those charged with governance, regulators, and professional bodies can help auditors navigate ethical challenges and maintain compliance with relevant ethical standards
• Ongoing training and education on ethical issues, as well as a strong tone at the top emphasizing the importance of ethical behavior, are essential for promoting a culture of integrity and professionalism in international auditing