International Auditing and Assurance Standards Board IAASB Update

International Auditing and Assurance Standards Board IAASB Update Prof. Arnold Schilder, Chairman James Gunn, Technical Director CICPA Beijing, China 18 September 2009

Agenda • Adoption and International Convergence • The IAASB Clarity Project • IAASB Current and Forward Agenda

Adoption and International Convergence Global Acceptance of ISAs • 100+ countries adopt or use ISAs in some form • 23/25 world’s capital markets foreign issuers • IOSCO endorsement • Support from World Bank, Basel Committee, World Federation of Exchanges, Financial Stability Board, public sector (INTOSAI), etc. • Top 22 global networks’ methodologies aligned

Adoption and International Convergence A Perspective on Adoption & Convergence • Stronger transparency and accountability – Higher quality and consistency of audits – Reduced cost of capital and other costs arising from differing standards • Enhanced uniformity and effectiveness of regulatory systems; platform for harmonization • Facilitates efficient education and training • IFAC Recommendations to G 20 – Adopt ISAs and support implementation of global standards

The IAASB Clarity Project • Key aims – Understandability of ISAs, and thereby their consistent application – Facilitate convergence • Completed March 2009 • Suite of 36 ISAs and ISQC 1 – Effective for audits of financial statements for periods beginning on or after Dec. 15, 2009

The IAASB Clarity Project Outcome • New structure and conventions – Objective, definitions, requirements and guidance provided in separate sections, to improve readability – Requirements and guidance revisited to eliminate any ambiguity about what is required of auditors • Nearly half of 36 ISAs fundamentally revised – New requirements and guidance that aim to improve practice in a variety of respects

Clarity ISAs Some Highlights • Objectives and obligation for their use – Use to evaluate whether more needs to be done; Standards cannot anticipate all possibilities – Strengthen the ‘thinking audit’ • Risk assessment and evidence gathering – Estimates and fair values – Related parties – Service organizations

Clarity ISAs Some Highlights • Basis for reliance and quality of audit evidence – Audits of group financial statements – Auditor’s experts – External confirmations – Written representations • Materiality • Communications and reporting • Professional judgment

Clarity ISAs Implications • Successful implementation essential to realizing full benefits of Clarity ISAs • Impacts on – National standards/legislation and guidance – Audit methodologies, programs and manuals – Translation and training programs – Education curriculums

Clarity ISAs How is IAASB Helping Deal with Challenges? • Broad membership of IAASB (incl. Mr. Jianhua Tang) • Working in partnership with national auditing standard setters – CICPA is a key participant • Continual dialogue with stakeholders – IAASB Consultative Advisory Group, IFIAR and others • Specific initiatives to support implementation

Clarity ISAs IAASB Support • Moratorium on new ISAs for next two years • Translation support, through IFAC resources • IAASB Clarity Center – Background and information on Clarity Project – Individual ISAs and Basis of Conclusions – Staff Updates, Alerts, FAQs, Q&A, etc. – ISA Modules

Clarity Center: www. ifac. org/clarity-center/index

Clarity Center: www. ifac. org/clarity-center/index

Clarity ISAs ISA Modules • Short videos and supporting slides – Main thrust of revised ISA and significant changes – First release Q 4 2009, free of charge from Center

Clarity ISAs Proportionality of Application of the ISAs • Concern in some quarters about: – Applicability of ISAs to smaller audits – Audit documentation burden – Undue inspection requirements • IAASB Staff Q&A issued August 2009 – Explains proportionality of ISAs in SME context – Emphasizes importance of professional judgment

Clarity ISAs Proportionality of Application of the ISAs • Application of ISAs designed to be proportionate – Proportionate to size, level of complexity, nature of entity – Proportionality ≠ modification of requirements • Differences between SMEs and larger entities recognized by ISAs – Not every audit needs to be performed the same way – Audit approach will vary with circumstances (simpler/more complex) – Work effort affected by entity’s activities/accounting

Clarity ISAs How do ISAs Demonstrate Proportionality? • Through the requirements, e. g. – ISA 260, where management = TCWG – ISA 315, absence of formal risk assessment process – ISA 540, choice of responses to assessed risks • Through the application material – Many considerations specific to smaller entities

Clarity ISAs Compliance with All ISAs? • Basic obligation in the ISAs – Comply with all ISAs relevant to the audit • When can compliance with ISAs be claimed? – Only when all relevant ISAs have been complied with • However, not all ISAs may be relevant in an SME audit, e. g. – ISA 402, if SME does not use a service organization – ISA 600, if SME audit is not a group audit – ISA 610, if SME has no internal audit function

Clarity ISAs Compliance with All Requirements? • Even if an ISA is relevant, not all its requirements may be relevant – Conditional requirements need not be applied if conditions do not exist • Examples – Engagement team discussion – Performing substantive and other follow-up procedures in context of unidentified related parties – Determining whether material uncertainty exists in context of going concern

Clarity ISAs Documentation Requirements • Appropriate documentation need not be burdensome • Documentation of significant professional judgments helps to reinforce their quality • Application designed to be proportionate, efficient and effective – Experienced auditor test – Requires professional judgment, not checklist approach – Helpful illustrations of how to apply requirements

IAASB Current and Forward Agenda • Continued development of the ISAs • Development of alternatives to the audit • Development of other assurance standards • Other areas of public interest

IAASB Current and Forward Agenda Continued Development of the ISAs • Guidance on auditing complex financial instruments – Briefing paper and revision of IAPS 1012 • Use of internal audit (revision of ISA 610) • Auditor’s report: – Academic research on user perceptions; consideration of implications for ISA 700 • Other information in documents containing audited financial information (revision of ISA 720)

IAASB Current and Forward Agenda Alternatives to Audit: Reviews & Compilations • ISRE 2400 and ISRS 4410 are increasingly relevant in meeting needs of those entities exempt from statutory audit requirements • Project approved March 2009; IAASB progressing discussion of issues • Project considerations – Alternative services must be clearly distinguishable as to level of assurance, work effort and cost – Communication to promote user understanding

IAASB Current and Forward Agenda International Standards on Assurance Engagements (ISAEs) • New ISAE 3402: Assurance Reports on Controls at a Third-Party Service Organization – Concurrent initiative in the US to revise SAS 70 – Approval expected September 2009 • New ISAE: Assurance on Greenhouse Gas Statements – First IAASB project in the area of sustainability assurance – Consultation plan under development

IAASB Current and Forward Agenda International Standards on Assurance Engagements (ISAEs) (cont’d) • New ISAE: Pro-forma Financial Information included in Prospective Financial Information – Exposure draft expected December 2009 • Revision ISAE 3000: Assurance Engagements Other Than Audits and Reviews of Financial Standards

IAASB Current and Forward Agenda XBRL Addressing performance and reporting expectations of the auditor in connection with audited financial statements accompanied by XBRL data Rapid Response Development of a mechanism for responses to urgent issues Impact Analysis of impacts (costs, benefits, etc. ) of proposed new or revised standards, as part of due process considerations

IAASB Current and Forward Agenda Initiatives in the Current Environment • Staff Audit Practice Alerts – Auditing Fair Value Accounting Estimates (October 2008) – Going Concern (January 2009) – External Confirmations (forthcoming Fall 2009) • Liaison activity with others – – – International Accounting Standards Board International Valuation Standards Committee IFIAR

Resources www. iaasb. org • IAASB Strategy and Work Program, 2009 – 2011 • Project timetables • Meeting information and agenda material • Project histories • Exposure Drafts of Standards