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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

Chapter 15

International Auditing Issues

the accounting and auditing profession
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

global audit services
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

risks in determining the scope of a multinational audit hermanson 1993
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

audit challenges local business practices
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

audit challenges currency language and law
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

audit challenges distance and organization
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

audit challenges diversity availability training
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

reciprocity
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

reciprocity10
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

reciprocity11
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

structure of the audit industry
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

structure of the audit industry13
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

structure of the audit industry14
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

strategies of the global audit firm
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

strategies of the global audit firm16
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

audit standards
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

audit standards18
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

international harmonization of audit standards
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

international harmonization of audit standards20
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

benefits of developing and enforcing international standards
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

benefits of developing and enforcing international standards22
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

forum of firms and ifac
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

international forum on accountancy development
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

harmonization
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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