Internal auditing

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					                 701455 Ch 11

International Auditing

International Diversity in External
     Globalization is leading to increased importance of
      auditing internationally.
     Significant international diversity exists in various
      aspects of auditing.
     The purpose of external audits varies between
     The environment in which auditing takes place
     Regulation of the audit function varies.
     The content of audit reports also varies.

International Diversity in
External Auditing
 Purpose of auditing
    In the U.S. and U.K., the purpose of the external
     audit is to provide assurance that the financial
     statements are fairly presented.
    In the U.S., Sarbanes-Oxley also requires audits of
     internal controls.
    Such a report provides assurance about the process
     of financial statement preparation.
    In Germany, auditors are also responsible for
     evaluating the report of management.
International Diversity in External

  Purpose of auditing
     International variation in the purpose of audits
      seems to be related to differences in corporate
      governance structure.
     The supervisory board in Germany has essentially
      equivalent responsibilities to a U.S. board of
     German law includes specific regulations about the
      composition of the supervisory board.
     German supervisory boards are more broadly
      representative than their U.S. equivalent.
International Diversity in
External Auditing
Environment of auditing – Culture and
   Cultures that value saving face and societal
    harmony are less accepting of the questioning
    inherent in auditing.
   Collectivist cultures often distrust outside auditors.
   Recent Chinese history of state-owned enterprises
    is related to explicit limits regarding application of
    lower-of-cost-or-market and allowance for bad
   All of these factors can surprise auditors from a
    western perspective.
            International Diversity in
            External Auditing
            Environment of auditing
               Countries with less developed financial infrastructure would
                need less sophisticated auditing.
               When banks or families are the primary source of financing,
                there is less demand for auditing.
               Common law countries tend to have a more influential
                auditing profession relative to code law countries.
               Audit quality and independence are likely to be influenced by
                level of rigor to join the profession and by the extent of legal
                liability assigned to auditors.

Learning Objective 3
            International Diversity in
            External Auditing
            Audit regulation
               Auditing in Anglo-Saxon countries has historically
                been self-regulated.
               However, recent scandals have led to increased
                government oversight.
               In many other countries (e.g., Germany, China)
                government exercises much more control.
               Auditor qualifications vary significantly from country
                to country.

Learning Objective 3
International Diversity in
External Auditing
Audit reports
   The content of audit reports varies significantly
    between countries, and sometimes between
    companies in the same country.
   For example, audit reports sometimes refer to local
    audit standards, non-local audit standards, multiple
    sets of audit standards, or are addressed to
    different audiences.
   The Sarbanes-Oxley Act in the U.S. includes a
    requirement to provide assurance on the internal
International Harmonization of
Auditing Standards
     International auditing has historically received less
      attention than international accounting.
     Recently, globalization has increased the
      importance of cross-national understanding of audit
     Harmonization of international auditing standards
      will help increase consistency of auditing
     The increased level of assurance on financial
      statements should result in more efficient global
      capital markets.
     The International Federation of Accountants (IFAC)
      develops international auditing standards.
Auditor Liability and Independence

 Auditor liability -- Background
    Auditors are subject to civil liability, criminal
     liability, and professional sanctions.
    Civil liability can result from breach of contract or
     civil duty (e.g., negligence).
    Criminal liability can result from criminal conduct
     (e.g., fraud).
    Professional sanctions can result from violation of
     the rules of a professional body.
    The potential for legal liability varies internationally
     and is highly significant in some countries (e.g., the
     U.S.).                                                   10
Auditor Liability and Independence

 Auditor liability – Recent events
    Andersen, a big five firm, was effectively put out of
     business by a criminal conviction, later overturned,
     in connection with its Enron audit.
    One remaining big four firm,
     PricewaterhouseCoopers, suggested to U.K.
     authorities that auditors are in a legally untenable
    A 1998 German court decision resulted in auditors
     being liable to third parties for the first time in that
Auditor Liability and Independence
 Auditor liability – Possible reforms
    Several solutions to limiting auditor liability exist in
     order to limit potential damage to firms.
    Change of ownership structure to limit or eliminate
     joint and several liability
    Proportionate liability that limits auditor liability to
     the proportion for which they are deemed
    Statutory caps to limit damages
    Disclaimer of liability to avoid unintended liability.
     Some U.K. auditors use these, but the U.S. SEC
     rejects them as invalid.                                 12
Auditor Liability and Independence

 Auditor Independence -- Background
    Independence is a fundamental principle of
    Auditors in the U.S. are required to adhere to a
     detailed set of independence rules.
    The SEC has additional rules for auditors of public
    An SEC report in 2000 cited numerous violations by
     big five auditors.
    Auditor independence is a subject of intense debate
     internationally as well as in the U.S.

Audit Committees

 Audit committees – United States
    The audit committee is a committee of the board of
     directors responsible for financial reporting
    Beginning in the 1990s, increased attention has
     been paid to this topic.
    In the U.S., the Blue Ribbon Committee made a
     series of recommendations to enhance the role of
     the audit committee.
    Sarbanes-Oxley includes specific provisions related
     to audit committees.
Audit Committees

 Audit committees – Internationally
    Audit committees are increasingly being seen as an
     important component of corporate governance.
    There is wide acceptance globally that the auditor
     works for the audit committee.
    Australia, for example, requires listed companies to
     have audit committees composed completely of
     outside directors.
    Audit committees are also now required for listed
     companies in Malaysia and Singapore.

Internal Auditing

  Internal auditing -- Background
     Internal auditing is “an independent, objective
      assurance and consulting activity designed to add
      value and improve an organization’s operations.”
     The SEC requires an internal audit function of
      public companies.
     Internal audit can enhance the effectiveness of
      internal controls over financial reporting.

Internal Auditing
  Internal auditing -- Background
     The clearest difference between external and
      internal auditing is the consulting function of the
      latter, particularly in risk management.
     Given their complexity, multinational corporations
      (MNCs) are increasingly demanding risk
      management consulting.
     Internal auditors also commonly perform
      compliance audits, and effectiveness and efficiency
     This standard applies a principles-based approach
      and eliminates unnecessary procedures from the
Sarbanes-Oxley and the Future of
    Sarbanes-Oxley is the most significant legislation
     pertaining to financial reporting and auditing since
     the establishment of the SEC in the 1930s.
    The act has had an observable impact on business,
     one example of which is the increase in financial
     expertise on audit committees.
    Companies have spent significant resources
     enhancing internal controls.
    On a more negative note, many financial executives
     are experiencing increased stress due to Sarbanes-
Sarbanes-Oxley and the Future of
  Other international audit issues
     There is increased demand for internet-based
      financial reporting and the related assurance.
     Continuous assurance on real-time information
     Increased competition in the audit market
     Increased exposure of international audit firms
     The risk that increases in litigation will lead to more
      of a checklist approach to auditing
     The enhanced partnership between external
      auditors, internal auditors, and audit committees

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