1. Introduction
Undeniably, the heart of the corporate business world is accounting; however, auditing plays an indispensable role in accounting. It serves as the watchdog for all the stakeholders against any malpractices. In a nutshell, auditing serves to protect the interest of the stakeholders. However, the practice is not without some regulations and standards for quality and performance measurement and control. Auditing standards generally form the basis against which audits’ quality are not only performed but also judged. Almost all institution have adopted some forms of auditing standards and principles. A notable feature, however, is that such standards vary by territory. In the United States, several sets of auditing standards exist with the main ones being the GAAS (Generally Accepted Auditing Standards) and ISA (International Standards on Auditing). Although U.S. have witnessed constant efforts to converge to the ISA, the two sets of accounting standards are not without key areas of departure. The IAASB (International Auditing and Assurance Standards Board), a body of the IFAC (International Federation of Accountants), issues the ISA. On the other hand, the period before the enactment of the Sarbanes-Oxley Act saw the formulation of the U.S. GAAP by the ASB (Auditing Standards Board) which operated under the aegis of AICPA. For a long period, regulators have made several attempts to converge the GAAP and the ISA into a single set of auditing standards applicable universally worldwide. However substantive differences persist. The essay aims at providing a succinct analysis of the major of departure between the U.S. GAAS and ISA.
A critical analysis of the U.S. GAAP and the ISA provides five major ground which forms the basis for evaluating the key areas of departure between the two sets of standards. As such, the essay applies the five grounds in analyzing the differences.
2. Documenting the audit procedure
Documentation of the audit otherwise referred to as work/working papers refer to an auditor’s written record which forms the basis for his/her conclusion and serves to support the auditor’s representations. ISA 230 mainly deals with the responsibility of the auditor in the preparation of the audit documentation in the process of reviewing the financial statements. The provisions of ISA 230 differs significantly with U.S. Auditing Standards’ provisions on the documentations of the audit procedure. While the latter is arguably more prescriptive, the former counts on the auditor’s professional judgement.
2.1. Provisions on the engagement completion memo
Lindberg and Seifert (2011) notes that the U.S. GAAS (No. 3) requires the auditor to prepare an engagement completion memo. The Standards further prescribes the specific contents of the memo which the auditor should include such as the significant issues and findings. In an attempt to boost the understandability of the Memo, the U.S. Auditing Standards provides that the engagement completion memo is specific as necessary. The ISA, however, appears deficient of such prescriptions/provisions; only providing for the purpose of audit documentation. International Auditing Standard, however, requires proving that the auditor has performed the audit in agreement with its prescriptions and the relevant legal requirements. Such a provisions lack in the U.S. GAAS.
2.2. Retention of the auditor’s working papers
As provided by the Auditing Standards 3, A39, the auditor should retain the work papers for a minimum period of seven years. Section 103(a) (2) (A) (i) further cements the above provision. The standards further require the auditor to assemble the working papers within a reasonable time, which should not exceed forty-five (45) days, after the release of the audit report (AICPA, 2014). On the other hand, ASB requires the auditor to retain the working papers for a minimum period of five years. As such, a clear difference in retention period appears in the two regulatory standards. Unlike the PCAOB’s auditing standards, ISA 230 does not provide for a definite period within which the auditor should complete assembling the working papers. The standards only provide that the auditor should conduct such assembly on timely basis which falls in the auditor’s judgement.
2.3. Working papers retention procedure
ISA 230 vests the audit firms with the responsibility of establishing policies and procedures for the retention of the auditor’s working papers. However, PCAOB Auditing Standard No 3 lays down specific procedure outlining the documentation and retention policies and procedures of the engagement documentation.
3. Assessment and report on the internal control systems over financial reporting: Performance of an integrated audit.
The enactment of the Sarbanes-Oxley (SOX) Act by the Congress of the United States in 2002, saw the introduction of significant auditing standards (Lindberg and Seifert (2011). The Act required public companies’ management to not only assess but also report to the internal control of their companies over their financial reporting. According to the Act, the management had to state its assertion concerning the efficiency and effectiveness of the internal control put in place in the firm over the financial reporting. Such management assertions should accompany the audit report.
GAAS provides for an examination of the client’s internal control procedures and systems over their financial reporting. The auditor should integrate such examination within the audit of the firm’s financial statements. Besides the requirement to provide their opinion on the faithfulness and fairness of the financial statement, the Act required auditors in the United States also to provide their opinion of the client’s internal control effectiveness. In summary, the PCAOB auditing standards introduced an additional role for the auditors to evaluate the client’s internal control effectiveness over the financial statements (Mondher, 2012).
On the contrary, ISA provides no requirement for the auditor to form an opinion on the effectiveness of the client control system. Although, ISA requires the auditor to evaluate the effectiveness of the client's internal control system to assess the risk of material misstatement easily; it does not require the auditor to form an opinion on the area mentioned above. As such, it is clear that the audit report under the Generally Accepted Auditing Standards contains two major auditor’s opinions. First, the auditor’s opinion on the faithfulness and fairness of the client’s financial statements. Two, the auditor’s opinion on the effectiveness of the internal control systems and procedure, put in place by the client, over the financial statements. On the contrary, an audit report under ISA contains one major audit opinion. That is the auditor’s opinion on the financial statements. However, it would be misleading to conclude that ISA overlooks the client’s internal control systems. No; ISA requires the testing of the internal control to test their functioning and reliability. However, the standards do not oblige the auditor to provide his/her opinion on the client’s internal controls.
4. Auditor Outsourcing
Undeniably, group accounting and auditing often serves as the major drive on the reliance of another audit firm by an auditor. In practice, a parent company usually publishes both its separate financial statement as well as group financial statements. Consequently, an auditor expresses an opinion on the two sets of financial statements. According to the AICPA (2014), ISA 600 prohibits group auditors from wholly outsourcing for some of the audit parts to another auditor. The standards provide that the auditors should engage the partner annually in evaluating whether they should act as group auditor. Should the group engagement partner reach a conclusion that they are deficient in the relevant professional skills to form such a group audit, they should resign.
ISA 600 further requires an auditor using a third party’s work to obtain an understanding of the specialist. Moreover, the auditor should gain an understanding of business activities of the subsidiary/sub-subsidiaries. The justification of ISA’s prohibition on referring to another auditor’s/expert’s work is that such reference usually diminishes the audit opinion’s credibility and serves as a ‘loophole’ for the auditor to ‘pass the bulk’ for his role in that part of the audit which he referred.
PCAOB’s standards leave the auditor with to make a decision whether to make reference to another audit firm’s work or not. In fact, Au (section 9543) provides that an independent auditor who happens to audit a component’s financial statements in agreement with GAAS may issue an audit report which the principal auditor can use.
5. Determining the Going-concern
All entities should prepare their financial statements by the going concern concept under which the accountant views the firm as a continuing entity for the foreseeable future. However, the term “foreseeable future” remains a contentious term owing to its relativity. As such, it is no wonder that the International Auditing Standards and the Generally Accepted Auditing Standards differs in the provision on the going concern concept (Mondher, 2012). Both the U.S. GAAS and the International Standards on Auditing 570 do not provide for a specific definition of what is a “foreseeable future”. However, according to the Auditing Standards, as provided by PCAOB, the foreseeable future should be a period of 12 months after the end of the financial/fiscal year/period under audit.
On the other hand, ISA 570 provides for at least twelve months in assessing the going concern of the firm under audit. It is notable that ISA 570 does not provide for a specific time limit (owing to the term ‘at least’) but only requires that such time limit should not be below 12 months. ISA 570 further provides for three fundamental ground which should form the basis upon which the management and the auditor should evaluate whether or not an entity in question is a going concern. The three grounds are the degree of uncertainty linked to the outcome of conditions, size and complexity of the entity, and information available at the time the auditor is making a judgment (AICPA, 2014).
On the other hand, PCAOB’s auditing standards for three grounds which an auditor should employ in determining whether to consider a firm as a going concern or not. However, the three grounds provided by the two regulatory bodies differs substantially. As noted by Anandarajan and Kleinman (2014), PCAOB provides that the auditor should base his/her judgement on the results of the planning procedures, the management plans, and the adequacy of the firm’s disclosure among other things. The notable point at this point even without a further explanation of the PCAOB’s provision is the difference in the ground for an auditor’s assessment of the going concern of a firm in the two standards.
6. Risk assessment
Initially, ISA 400 which provides for risk assessments served as one of the major International Standards on Auditing. The standards provide that an auditor should strive to gain an understanding of the accounting system of the client coupled with the internal control. Such understanding forms the auditor’s basis for assessing the inherent risk as well as the control risks. Determination of such risks serves an essential purpose in the auditor’s evaluation of substantive test requirement and audit timing.
The dawn of 2004 ushered in ISA 315 in replacement of ISA 400. However, the provision of the standard on the auditor’s role in risk assessment remained. More specifically, IAS 315 requires the auditor to conduct risk assessment procedures. The assessments serve as the basis for identifying and assessing of the risk of material misstatements in the either the client’s financial statements or management assertions. The standard is, however, quick but correct to note that, by themselves, the procedures used by the auditor for risk assessment do not serve as a sufficient and reliable evidence on which the auditor can base an audit opinion. Lindberg and Seifert (2011) summarizes the procedure for risk assessment as provided by IAS 315. Such procedure includes analytical procedure, observation and inspection, and inquiries of the management. Besides, IAS 315 requires an auditor to evaluate/assess the client’s internal auditors in an attempt to supplement their understanding of the client’s ability in risk mitigation.
On the other hand, it is notable that, before the issuance of the risk assessment standards, the GAAS did not provide specific audit procedures on risk assessment. The eve of 15th December 2010 saw the PCAOB’s introduction of eight auditing standards concerning risk assessment. The new standard, though relatively similar to ISA’s provision on risk assessment is not without a significant area of departure. PCAOB’s standards appear general in that they address the assessment of risk from the initial stages of an audit throughout the audit to the issuance of an audit report (Anandarajan and Kleinman, 2014).
Another significant difference lies in the PCAOB’s integrated strategy in addressing risk assessment as opposed to the ISA’s separate approach. ASB (Auditing Standards Board) of AICPA issued a separate set of standards, SAS 99 (Statement on Auditing Standards), concerning auditor’s role in the detection of fraud and risk assessment procedures. However, PCAOB integrates its provisions on risk assessment in its general provisions. As such, it is evident that ISA gives fraud and risk assessment relatively more prominence as compared to the GAAS.
7. Other differences
7.1. GAAS’s requirements lacking in ISA
Section 210 of the GAAS provides for the communication of a newly incoming auditor with the outgoing auditor. Second, GAAS (sec 210 (13) requires the auditor to remind the client of the engagement terms and consequently document such reminders. Third, section 230 (10) provides for the inclusion of abstracts of substantial contracts in the working papers. ISA do not provide for any of the above requirements.
7.2. ISA’s requirements not in GAAs
ISA 700 (7) (b) requires the preparation of financial statements according to the compliance framework. Second, ISA 700 (35) (b) provides that an auditor may refer to either the ‘true and fair view’ concept or ‘fair presentation’ of the financial statement. GAAS do not provide on any of the above requirements
8. Conclusion
A statement that the world will/is becoming a global village sounded like a timeworn cliché several decades ago. In the current century, the world is witnessing an era of accounting standards applicable worldwide. As such, different states are increasingly converging to the International Standards on Accounting and Auditing as they seek to abandon their ‘local’ standards. However, such converge is not without a dilemma given the significant differences between the local standards and the international standards. As argued above it is evident that fundamental differences exist in GAAS’s and ISA’s provision. As such, regulators should aim at reconciling the differences to achieve uniformly accepted standards.
References
AICPA (2014). Substantive Differences between the International Standards on Auditing and
Generally Accepted Auditing Standards. Financial Reporting Centre
Anandarajan, A., and Kleinman, G. (2014). International Auditing Standards in the United
States: Comparing and Understanding Standards for ISA and PCAOB. Business Expert Press
Lindberg. D., and Seifert. D. (2011). “A Comparison of U.S. Auditing Standards with
International Standards on Auditing.” The CPA Journal (April), pp: 17 – 21
Mondher. F. (2012). “The comparability of audit reports issued in the European Union: An
Estudy based on separate and consolidated financial data.” International Journal of Accounting and Financial Reporting (2), 2: 386 – 422
