ISL458U-AUDITING
Chapter 2: Auditing Standards
Introduction
Inadequate quality studies and management activities lie at the basis of financial crises and business scandals after 2000s. Accounting and auditing scandals and global economic crises have diminished confidence both in financial reports published by the enterprises and in the auditor’s reports in which they expressed their views. In order to increase the reliability of independent audit activities and to regain the lost trust, international improvement studies have been carried out. To achieve this purpose, standards and principles are published and developed by the regulatory bodies. The purpose of the standards and principles are to increase the quality of audit work, to interpret the rules and the principles about the characteristics, responsibilities and work that the auditor should have in general and to guide the principles and rules.
Professional Organizations in Turkey and in the World
“Generally Accepted Auditing Standards” developed by AICPA and “International Auditing Standards” prepared by IFAC are the leading standards for auditing activities to guide the auditor.
If we examine the institutions that are authorized in the development and publication of auditing standards, quality control standards and code of ethics in Turkey and in the World; IFAC (International Federation of Accountants) is authorized in the world, KGK (Public Oversight, Accounting and Auditing Standards Authority) is authorized in Turkey.
International Federation of the Accountants
IFAC is the global organization for the accountancy profession, comprising more than 175 member and associate organizations in 130 countries and jurisdictions, representing nearly 3 million professional accountants. It was founded in 1977.
IFAC’s purpose and public interest focus are achieved through three strategic objectives.
• Contributing to and promoting the development, adoption, and implementation of high-quality international standards, specifically for audit and assurance, ethics, education and international public sector accounting standards. • Preparing a future-ready profession by equipping professional accountants and professional accountancy organizations for the future. • Speaking out as the voice for the global profession in a trusted and influential way.
International Standard Setting Board
The work of the international, independent standard- setting boards supports the global economy and financial markets by producing high-quality, global standards for audit and assurance, professional ethics, public sector
financial reporting, and professional skills and competencies. These boards are: The International Auditing and Assurance Standards Board (IAASB), International Standards on Auditing (ISA), International Standards on Review Engagement (ISRE), International Standards on Related Services (ISR), Standards on Assurance Engagement (ISAE), The International Accounting Education Standards Board (IAESB), The International Ethics Standards Board for Accountants (IESBA), and The International Public Sector Accounting Standards Board (IPSASB).
Public Oversight, Accounting and Auditing Standards Authority of Turkey (KGK)
In order to ensure more effective auditing and public oversight system, the KGK was established in accordance with “Public Oversight, Accounting and Auditing Standards Authority’s Organization and Responsibilities Decree Law” numbered 660, issued on November 2, 2011. The KGK is responsible for achieving an effective public oversight in Turkey. The KGK is also responsible for setting standards that ensure the preparation and auditing of financial statements in compliance with international standards. International standards are issued under the name of Turkey standards.
In order to establish a high quality and reliable financial reporting and auditing environment, the KGK has four main functions which are:
• setting accounting standards • setting auditing standards • authorising and registering auditors and audit firms • overseeing, inspecting and applying legal enforcement to auditors and audit firms.
Generally Accepted Auditing Standards (GAAS)
Generally accepted auditing standards have been approved and adopted by the membership of the AICPA (American Institute of Certified Public Accountants) in 1947. AICPA, which consists of representatives from CPA firms and the academic community, issues pronouncement on auditing matters that serve as interpretations of these standards. Generally accepted auditing standards (GAAS) are a set of systematic guidelines used by auditors when conducting audits on companies’ financial records. GAAS helps to ensure the accuracy, consistency, and verifiability of auditors’ actions and reports. An independent auditor plans, conducts, and reports the results of an audit in accordance with generally accepted auditing standards. Standards consists of the three steps or phases, each of which requires a distinct set auditing standards:
1. Taking steps to assure the quality of the audit. 2. Planning and performing the audit procedures. 3. Reporting the audit results.
Generally Accepted auditing standards are classified in three categories and also includes ten standards.
1. General Standards (Assuring the quality of the audit) 2. The Standards of Fieldwork (Planning and performing the audit procedures) 3. The Standards of Reporting (Reporting the audit results) The standards for each class are summarized in Figure 2.2.
General Standards (Assuring the Quality of the Audit)
General standards address the important qualifications of the auditor should possess. There are three general standards.
Adequate Technical Training and Proficiency: Standard interpreted that the audit should be performed by the auditor having adequate practical experience for the work and have formal education in accounting and auditing. Auditor to have continuing professional education. Having technical experience in some industries in which the auditors’ clients are engaged is very important. In some countries there are laws requiring that persons possess the CPA certificate before being independent auditors. And also some laws for continuing education so that the auditor’s authorization can continue.
Independence in Mental Attitude: The auditor must maintain independence in mental attitude in all matters relating to the audit. Independence is the most important standard of all. And also is the most basic feature that the auditor should have. Auditors are expected to be independent of the reporting entity.
Two types of independence can be mentioned:
• Independence of mind The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, • Independence of appearance The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or assurance team member’s integrity, objectivity or professional skepticism has been compromised.
Due Professional Care: The auditor must exercise due professional care in the performance of the audit and the preparation of the report. The standard is interpreted that the auditor’s work should be done according to standards. The auditor should act diligently, meticulously and in accordance with the reputation of the profession during her /his work.
Standards of Field Work
There are three field work standards:
• Adequate Planning and Supervision • Understand the Client’s Internal Control • Sufficient Competent Evidence
The Standards of Reporting (Reporting the Audit Results)
Reporting standards are the rules and the principles that the auditor must follow when preparing the auditor’s report and expressing his / her opinion in the report. There are four reporting standards:
• Whether Statements were Prepared in Accordance With GAAP • Circumstances When GAAP not Consistently Followed • Adequacy of Informative Disclosures • Expression of Opinion on Financial Statements
The auditor’s responsibility is to form an opinion on the financial statements. Auditor’s report indicates the degree of the responsibilities. The auditor’s report shall be in writing. The auditor’s opinion varies according to the importance of the violation in the reporting standards and its impact on the financial statement. There are four types of reports; unmodified opinion, qualified opinion, disclaimer opinion and adverse opinion.
International Code of Ethics for Professional Accountants
The International Code of Ethics for Professional Accountants sets out fundamental principles of ethics for professional accountants, reflecting the profession’s recognition of its public interest responsibility. These principles establish the standard of behavior expected of a professional accountant. The fundamental principles are: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.
Threats and Safeguards
In the auditing process, the circumstances in which professional accountants operate might create threats to compliance with the fundamental principles. Professional accountants must identify threats to compliance with the fundamental principles; then evaluate the threats identified; and address the threats by eliminating or reducing them to an acceptable level. Safeguards are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.
International Standard on Quality Control
International Standard on Quality Control (ISQC) deals with a firm’s responsibilities for its system of quality control for audits and reviews of financial statements, and other assurance and related services engagements.
The independent audit firm has to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and (b) Reports issued by the firm or engagement partners are appropriate in the circumstances.
It is stated in the standard that firms should establish and maintain a system of quality control that includes their policies and procedures regarding the below mentioned items:
a. Leadership responsibilities for quality within the firm b. Relevant ethical requirements c. Acceptance and continuance of client relationships and specific engagements d. Human resources e. Engagement performance f. Monitoring