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Chapter 15

Chapter 15. International Auditing Issues. The Accounting and Auditing Profession. Auditing has 3 important requirements An objective (independent), competent person Quantifiable (and verifiable) information Established criteria (or auditing standards)

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Chapter 15

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  1. Chapter 15 International Auditing Issues

  2. The Accounting and Auditing Profession • Auditing has 3 important requirements • An objective (independent), competent person • Quantifiable (and verifiable) information • Established criteria (or auditing standards) • Quality of auditing profession depends on • Reputation of the profession • Quality of the educational system • Certification process International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  3. Global Audit Services • Audit/Attestation and Assurance Services • Tax Advisory and Compliance Services • Consulting/Management Advisory Services • Standard auditing packages are difficult to use because of international differences International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  4. Risks in determining the scope of a multinational audit (Hermanson, 1993) • Significant or unusual transactions at a sub • Size of sub (revenue, net income, assets) • Large changes in a sub’s net income • Audit committee expectations • Competence of sub’s accounting personnel • Research shows that risks for domestic and international audits are similar International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  5. Audit Challenges:Local Business Practices • Predominance of cash • Makes tracing transactions difficult • Japan – use of checks may not be traceable due to a lack of provision of cancelled checks • Inability to confirm accounts receivable • Translation into another language • Receiving returned confirmations is difficult • Auditors may be seen as intrusive International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  6. Audit Challenges: Currency, Language, and Law • Foreign Currency • Auditor must determine if the choice of translation method is correct • Language and Culture • Translators may not give the full story • Knowledge of language is essential • Interaction of Home Country and Local Law • Home countries may have laws that extend to subs of their domestic companies that operate abroad • Example – Sarbanes-Oxley 404 compliance by 2006 International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  7. Audit Challenges: Distance and Organization • Distance • Operations are not audited as frequently or as thoroughly • Communication is slow • Organization • Firms may need to expand abroad • Global firm alliances are often used International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  8. Audit Challenges:Diversity, Availability, Training • Supply of Auditors • Differences in Training – 3 models • Apprenticeship approach – does not require specific university training in Accounting – U.K. • University-based model – U.S. and Germany • Dual track model – Netherlands and France International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  9. Reciprocity • General Agreement on Trade in Services • Addresses problems of qualifying to practice in other countries in two ways • Requires countries to administer their licensing rules in a reasonable, objective, and impartial manner and forbids countries from using licensing rules as disguised barriers to trade • Encourages countries to recognize other countries’ qualifications, either autonomously or through mutual recognition agreements International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  10. Reciprocity • Principles for Reciprocity • Signed between the AICPA, NASBA, and CICA • Extended to Australia (ICAA) • A short-form exam is administered • Eighth Directive (EU) – auditors must • Obtain qualifications that are deemed to be equivalent to the reviewing authorities in the host country • Demonstrate that they understand the laws and requirements for conducting statutory audits in the host country International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  11. Reciprocity • Sarbanes-Oxley and PCAOB made reciprocity more difficult • European Commission established a provision similar to Sarbanes-Oxley in 2004 • Requirements include • Regular rotations of auditors • Independent audit committees at every company • Registration and regular inspection by the PCAOB • Proposal on establishing national watchdog organizations is still in the works International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  12. Structure of the Audit Industry • Statistics found in Economist, 2004 • Big Four • Audit 97% of all public companies in the U.S. with sales over $250 million • Audit 80% of public companies in Japan • Audit two-thirds of public companies in Canada • Audit all of U.K.’s 100-biggest public companies • Hold over 70% of the European market by revenue International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  13. Structure of the Audit Industry • Enron and Sarbanes-Oxley brought changes • PCAOB was established to regulate the accounting profession and monitor firms • Sarbanes-Oxley prohibits firms from providing many non-audit services to audit clients (Sarbanes-Oxley Act, 2002) • Risks have increased for large international firms • Compliance with Audit Standard 2 on internal control has been difficult and costly • Some firms have had to drop clients International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  14. Structure of the Audit Industry • Trend is to organize around industry • This trend results in a matrix form or organization • Industry is the primary focus • Functional organization is a secondary focus • Firms offer tax and consulting services • Some firms have sold some non-audit practices • Some firms are outsourcing services International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  15. Strategies of the Global Audit Firm • Companies who switch to international auditors give these reasons for the switch • The need to reflect the increasing size of overseas business • The need to have one firm auditing all companies within the group • Large audit firms have become multinational firms with strong global focus and control International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  16. Strategies of the Global Audit Firm • Mergers allow firms to gain stronger market share in emerging markets • Citron and Manalis (2001) findings indicate • Companies in emerging markets hire large international audit firms to add credibility to the financial statements • This credibility allows companies to obtain international financing and list on foreign exchange markets International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  17. Audit Standards • Vary considerably from country to country • Standards come from • The public sector (government) – U.S. now • The private sector – U.K., Canada • A combination of the two – Germany • Requirements for a compliance audit • U.S. – all publicly-traded companies and those with more than 500 shareholders and assets of more than $5 million • U.K. – all limited companies must be audited International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  18. Audit Standards • Some audits simply test whether the financial statements reflect the books and records of the firm • Other audits test whether the books and records accurately reflect the original transactions • Why do standards vary? • Differing capital markets • Differing accounting professions • Cultural differences – Japanese confirmations are obtained from the company as a sign of respect and trust International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  19. International Harmonization of Audit Standards • IFAC is attempting to harmonize audit standards and audit professions globally • IFAC sets standards in the following areas • Auditing, assurance engagements, and related services • Quality Control • Code of Ethics • Education • Public Sector Accounting • IFAC is also involved in issues relating to small and medium size companies in developing countries International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  20. International Harmonization of Audit Standards • International Auditing and Assurance Standards Board (IAASB) • Develops ISAs and International Standards on Review Engagements • Develops International Standards on Assurance Engagements • Develops related practice statements (IAASB Handbook, 2005) International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  21. Benefits of Developing and Enforcing International Standards • Readers of financial statements have justifiable confidence in auditor’s opinion • Readers of financial statements have greater assurance that accounting standards are adhered to • Readers are assisted in making international financial comparisons • Further incentive to improve and extend the set of international accounting standards International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  22. Benefits of Developing and Enforcing International Standards • Increased flow of investment capital • Developing countries will find it easier to produce domestic auditing standards • The broader information gap between investors and management of MNEs is lessened International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  23. Forum of Firms and IFAC • Work together to improve international accounting and auditing standards • Forum of Firms requirements • Having policies and practices in compliance with ISAs and the IFAC Code of Ethics • Maintenance of appropriate internal control procedures including intra-firm practice review • Agreement to implement training on international accounting and auditing standards including the Code of Ethics • Agreement to subject assurance work to periodic external quality control assurance • Agreement to support the development of the professional bodies and implementation of international standards of accounting and auditing in developing countries International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  24. International Forum on Accountancy Development • IFAD was formed after the Asian crisis (1997) • IFAD works for conformity and consistency of national accounting standards with IAS • IFAD needs to globally promote education on IAS, ISA, and IFAC’s Code of Ethics International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

  25. Harmonization • European Commission plans to adopt ISAs for all audits effective January 2007 (Sylph, 2005) • Gaining PCAOB collaboration is key to the success of IFAC’s initiatives • PCAOB may slow down harmonization in the U.S. (Giles et al., 2004) International Accounting & Multinational Enterprises - Chapter 15 – Radebaugh, Gray, Black

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