CONSULTATION ON THE ADOPTION OF INTERNATIONAL
STANDARDS ON AUDITING
The European Commission is considering the adoption of the International Standards on
Auditing (hereafter “ISAs”) of the International Auditing and Assurance Standards Board
(IAASB)1 for statutory audits required by Community law. An adoption is possible on
the basis of Article 26 of Directive 2006/43/EC on Statutory Audits2.
Comments, preferably in the form of general remarks followed by answers to the
questions listed, should be submitted by 15 September 2009 by e-mail to the following
address: markt-consultation-isa@ec.europa.eu. Respondents may alternatively send
comments by post to the European Commission, DG Internal Market and Services,
Auditing Unit-F4, SPA 2/JII – 01/112, B-1049 Brussels, Belgium.
Contributions received, together with the identity of the contributor, will be published on
the Internet, unless the contributor objects to publication of personal data on the
grounds that such publication would harm his or her legitimate interests. In this case the
contribution may be published in anonymous form. Otherwise the contribution will not
be published nor will, in principle, its content be taken into account. Please read the
specific privacy statement applying to this consultation for information on how your
personal data and contribution will be dealt with.
In the interests of transparency, organisations are invited to provide the public with
relevant information about themselves by registering in the Interest Representative
Register and subscribing to its Code of Conduct. If the organisation is not registered, the
submission is published separately from the registered organisations (Consultation
Standards, see COM (2002) 704, and Communication on ETI Follow-up, see COM
(2007) 127 of 21/03/2007).
June 2009
1 http://www.ifac.org/IAASB/
2 Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory
audits of annual accounts and consolidated accounts -
http://ec.europa.eu/internal_market/auditing/directives/index_en.htm
2
Please provide the following details together with your response:
You are:
Preparer: company subsidiary of
foreign company
organisation of
companies
User: bank/credit
provider
analyst other organisation
of stakeholders
private person investor
association
organisation
Public authority: audit/market
regulator
Ministry /
government
other
Audit profession: sole practitioner /
audit firm not
member of a
network / firm
member of a
network that is
not a member of
the IFAC Forum
of Firms
audit firm within
a network that is
a member of the
IFAC Forum of
Firms
organisation of
accountants and
auditors
Other: (please specify) ……………………………………………………
Name of your organisation / company: ………………………………………..
Country where your organisation / company is located: ……………………….….
Contact details incl. e-mail address: ………………………………………………….
Short description of the general activity of your organisation / company:
……………………………………………..
Is your organisation registered in the Interest Representative Register? Yes No
If yes, please specify the address of your organisation and the Register ID number in the
Interest Representative Register3:
………………………………………………………………………….
Publication:
Do you object to publication of the personal data on the grounds that
such publication would harm your legitimate interests?
I object
3 If your organisation is not registered, you have the opportunity to register here
(https://webgate.ec.europa.eu/transparency/regrin/welcome.do?locale=en#en) before you submit your
contribution. Responses from organisations not registered will be published separately from the
registered organisations.
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WORKING DOCUMENT OF DG INTERNAL MARKET
1. OBJECTIVE OF THE CONSULTATION
The objective of this consultation is to gather contributions from the public on a
possible introduction of the International Standards on Auditing (ISA) at European
level. Certainly, auditing standards are, in essence, addressed to auditors of
companies on how they should perform an audit required under law. DG Internal
Market and Services is, however, seeking the views of the public at large. In
particular, the opinion of users of audit reports (investors, analysts, banking and
insurance industry), companies, public authorities, regulators and academics would
be welcomed.
Further technical explanations are provided in the Appendix to this consultation
document.
2. BACKGROUND
In the European Union, the conduct of statutory audits is regulated under Directive
2006/43/EC (”Audit Directive”). The objective of the Audit Directive is to enhance
the quality of statutory audits in the European Union – a public good, the perception
of which was undermined due to corporate scandals a few years ago. The current
financial crisis again demonstrates the importance of rigorously pursuing this
policy.
The Directive empowers the Commission to adopt implementing rules at European
level. One of the most important measures could be the introduction of a common
set of auditing standards. To this end, the Commission would need to adopt a legally
binding instrument (for instance a regulation) which would require sufficient
support by the EU Member States and the European Parliament under the
comitology procedure. Article 26 of the Audit Directive sets specific conditions for
the European Commission. It may adopt auditing standards only if they:
• have been developed with proper due process, public oversight and
transparency, and are generally accepted internationally,
• contribute a high level of credibility and quality to the annual or
consolidated accounts, and
• are conducive to the European public good.
The International Assurance and Auditing Standards Board (IAASB) has recently
performed a thorough revision and clarification of the ISAs under the so-called
Clarity Project (see Appendix for further details). Directorate General Internal
Market and Services is considering the adoption of these “clarified” ISAs. The main
questions are whether the ISAs fulfil the above conditions and whether an ISA
adoption at EU level would bring sufficient benefits.
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3. GOVERNANCE AND DUE PROCESS
The first condition set by the Audit Directive relates to the governance and due
process surrounding the development of ISAs by the international standard setter –
the IAASB. The governance is supported by the Public Interest Oversight Board
(the PIOB4) which oversees the standard setting process since 2005. The members
of the PIOB are appointed by the international regulatory world which meets in the
so called Monitoring Group5. Members of this informal group include the
International Organisation of Securities Commissions (IOSCO), the Basel
Committee of Banking Supervision, the European Commission, the International
Association of Insurance Supervisors, the World Bank, and the Financial Stability
Board. The International Forum of Independent Audit Regulators currently acts as
an observer.
In overall terms, the Commission services consider that the current governance of
the IAASB has matured to a stage where it may be justifiable to adopt ISAs in the
European Union. There are four reasons for this:
• Since 2006, the European Commission regularly attends meetings of the IAASB
as an observer and meetings of the Consultative Advisory Group as a member. It
also sent nearly 30 comment letters on the exposure drafts of the Clarified
standards which it prepared after discussions with audit regulators,
representatives from the profession and companies under the umbrella of the
European Group of Auditor Oversight Bodies (EGAOB). Therefore, it had time
to test whether the due process actually works and whether the IAASB has been
responsive to comments made;
• In March 2008, the European Commission decided to appoint two out of the ten
members of the PIOB;
• In May 2009, the European Parliament and Council agreed – at political level – a
decision providing a legal base for funding the PIOB from 2010 to 20136 up to a
total of 1.2 million EUR;
• The current governance structure and the due process remains subject to regular
effectiveness reviews by the Monitoring Group so that it can constantly be
improved and adjusted to future needs. A review is scheduled for 2009 and 2010.
4 http://www.ipiob.org/
5 As to the Monitoring Group charter see: http://www.iosco.org/news/pdf/IOSCONEWS144.pdf
6 See Commission proposal here:
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/125&type=HTML&aged=0&lang
uage=EN&guiLanguage=fr
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4. INTERNATIONAL ACCEPTANCE
The second major condition set by the Audit Directive is that ISAs should be
accepted internationally. There is a lot of evidence supporting international
acceptance of the ISAs. However, a choice needs to be made whether the European
Union takes international leadership by adopting the ISAs at European level or
whether it should take a “wait and see” stance until international acceptance is even
further confirmed in other international fora or organisations. The current situation
can be summarised as follows:
Application by the audit profession
Up until recently, the members of the IFAC (professional bodies, audit networks
and firms) have played the most significant role in ensuring a widespread use of the
ISAs. As of today, in more than 100 jurisdictions, audits are based either directly on
the ISAs or on domestic standards which are derived from the ISAs7. In addition,
more than 20 of the largest networks of audit firms will in any event, as a result of
their membership of the Forum of Firms8, incorporate the clarified ISAs into their
firm’s audit methodologies and ISQC 1 into their firm’s quality control policies and
procedures from December 2009 onwards.
Recognition by public authorities and regulators
An increasing number of independent audit regulators have been set up around the
world with responsibilities to conduct inspections on the quality of the work done
by the audit firms. This is, inter alia, true for the 27 EU Member States, the US and
Japan. Many public authorities, including audit regulators have adopted ISAs or
made public their decision to converge their standards towards the ISAs including
Australia, Canada, China, the Netherlands, South Africa and the United
Kingdom/Ireland. So far convergence or adoption has been based on ISAs prior to
clarification, but an upgrade by these jurisdictions towards the clarified ISAs has
either been announced or is likely to happen. Other jurisdictions, such as Japan,
accept the use of ISAs without imposing them on domestic audits. However, the US
does not recognise the ISAs for the time being.
The Monitoring Group also supports the development of high quality auditing
standards. In particular IOSCO, one of the members of the Monitoring Group,
publicly encouraged the acceptance of audits performed in accordance with the
clarified ISAs for cross-border listings and the consideration of the clarified ISAs
when setting auditing standards for national purposes on 11 June 20099. In 2002, the
7 IAASB 2008 annual report, page 3 – http://web.ifac.org/download/2008_IAASB_Annual_Report.pdf
8 Formally established in 2002, the Forum of Firms (FOF) is an association of 21 among the largest
international networks of accounting firms that perform audits of financial statements that are or may
be used across national borders. The FOF conducts its business primarily through the Transnational
Auditors Committee (TAC), an IFAC committee whose members have been nominated by the
members of the Forum.
9 http://www.iosco.org/library/statements/pdf/statements-7.pdf
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Financial Stability Forum, which has this year become the Financial Stability
Board, already identified the ISAs as one of the 12 key sets of standards for sound
financial systems.
Recognition by investors
The viewpoint of investors is particularly important. Depending on the company
they have invested in, investors may be provided with auditor’s reports which state
that the audit was performed in compliance with national standards applicable in the
circumstances or, with international standards. Reliance on auditor’s reports could
be enhanced if the investors know that a single set of auditing standards are being
used in the European Union (and at a global level). It is worth noting that the World
Federation of Exchanges (WFE) recognises the importance of the ISAs10.
Possible future role of the European Commission
Article 26 (2) of the Audit Directive offers an option for the Commission to adopt
standards accepted at international level. It does not contain any obligation to
introduce standards set by a particular standard setter. For these reasons, the
Commission may amend the standards after initial adoption in case the standards
would not meet the expectations in terms of due process, international acceptance or
European public good. However, the Commission services currently do not foresee
the circumstances in which modifications of the contents of the clarified ISAs
would be necessary. Nevertheless, in the future, the Commission will keep the
situation under review.
Possible future role of the Member States
In the same vein, the role of the EU Member States is pivotal. Article 26 (3) of the
Audit Directive allows Member States to make additions to the ISAs only in limited
circumstances and to carve out parts of the ISAs only in exceptional circumstances11
Any national measures envisaged should in any event be communicated to the
European Commission on a timely basis to allow assessment of such proposed
measures. DG Internal Market and Services is about to examine the need for
possible “add-ons” with Member States and is currently not aware of any Member
State’s plans to “carve out”.
In any event, EU Member States need to accept the changes brought about by the
clarified ISAs (see examples of possible changes to national standards in the
Appendix). They would, for example, not be entitled to add elements to a standard
if they consider it would enhance audit quality from a purely domestic point of
view. National public oversight bodies, in isolation, would not be able to deviate
from ISAs in the frame of their inspection policies and work programmes.
10 The WFE is a trade association of 51 publicly regulated stock, futures and options exchanges. In
2006, WFE endorsed the International Federation of Accountants (IFAC) structure of public
oversight, and the processes its public bodies have established for creating high quality global
standards for audit work and assurance reviews – http://www.world-exchanges.org/
11 See Article 26(3) of Directive 2006/43/EC
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Questions:
(1) Is international acceptance of the ISAs sufficiently demonstrated?
(2) What degree of importance do you attach to the fact that the Commission may
amend the standards?
(3) To what extent are “add-ons” or “carve outs” by Member States acceptable?
5. QUALITY AND CREDIBILITY OF FINANCIAL STATEMENTS
Overall cost and benefits of using clarified ISAs
The third main condition for an adoption of ISAs in the EU is that they contribute a
high level of credibility and quality to financial statements. Against this
background, Directorate General Internal Market and Services commissioned the
University of Duisburg-Essen to conduct an external study in 2008. The results of
the study are published together with this consultation document12.
The study concludes that, on balance, an adoption of the ISAs in the EU would
result in quantitative and qualitative benefits for companies, investors and
regulators. These recurrent benefits would outweigh increases in audit costs. It
would also bring about a greater acceptance of EU based audits within and outside
of Europe. On one hand, the study concludes that the recurring costs of an audit
could increase by approximately 6% to 10% per engagement depending on the size
of the audit firm. These percentages are only indicative and may vary significantly
across Member States depending on, for example, the audit firm or the audit
engagement. On the other hand, market participants would benefit from
improvements in audit quality, a lower cost of capital and increased business
opportunities at international level. The study provides further data and evidence.
Application Material
Each ISA contains objectives and requirements which an auditor should fulfil, and
also contains application material. Application material is primarily designed to
enhance a practitioner’s understanding of the ISAs in the context of a given audit
engagement, such as for the audit of smaller entities. The IAASB emphasises in the
ISAs that the application material is an inherent part of the standards. For this
reason, the Directorate General Internal Market and Services is considering the
inclusion the Application and Other Explanatory Material as part of an EU adoption
process. However, in order to avoid confusion with authoritative parts of the ISAs
such as the requirements, the application material should be adopted as guidance
only. This may be achieved by granting special status to application material in a
legally binding adoption instrument, such as by presenting it as “best practice”.
12 Evaluation of the Possible Adoption of International Standards on Auditing (ISAs) in the EU, 12 June
2009 – http://ec.europa.eu/internal_market/auditing/isa/index_en.htm
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Internal quality controls within an audit firm
DG Internal Market and Services is considering whether to adopt the international
standard on quality control – ISQC 113 – together with the ISAs. ISQC 1 addresses
the way audit firms organise their internal quality controls. ISAs and ISQC 1 are
interrelated, especially in that ISA 220 requires the engagement partner of an audit
to assess compliance with the audit firm’s internal system of quality control. The
University of Duisburg-Essen study concludes that the introduction of ISQC 1
would increase the benefits of an ISA adoption at EU level. Some Member States,
such as the United Kingdom, have adopted ISQC 1. Some have developed their own
framework at legislative or regulatory level, such as the Netherlands. Others, such
as France, leave it to the market to decide how to organise internal quality control
systems.
The auditor’s report
The main purpose of an audit is to obtain reasonable assurance that the financial
statements are free from material misstatement. This is communicated to the users
through the auditor’s report. An introduction of the ISAs would not necessarily lead
to uniform audit reports across the EU. Auditor’s reports are in practice divided into
two main parts. Part 1 usually gives the auditor’s opinion on the audited entity’s
financial statements. Part 2 is usually a report on other legal and regulatory
requirements shaped to a large extent by company and other laws or regulations.
Article 51(a) of the 4th Company Law Directive14 provides minimum requirements
regarding the presentation and content of the auditor’s reports. Currently the
presentation tends to vary in the EU from one EU jurisdiction to another due to
local considerations. An adoption of ISA 700, the standard on the auditor’s report,
would not bring about full harmonisation, because this standard would offer
flexibility to the EU Member States. However, in case of adoption of the ISAs at
EU level, all auditors’ reports would include the statement that the audit was
conducted in compliance with the ISAs (e.g. the “ISAs as adopted in the EU”). Such
a statement would represent a major advantage for investors and other users of
audited financial statements as, to-date, there are usually references to national
standards which are often not well known and diverse. If this is not sufficient, the
European Commission may decide, as permitted by Article 28(2) of the Directive,
to go further in the harmonisation of auditors’ reports by introducing an EU standard
for the auditors’ reports on annual or consolidated accounts prepared in accordance
with IFRS.
13 International Standard on Quality Control 1 – Quality Control for Firms that Perform Audits and
Reviews of Financial Statements, and Other Assurance and Related Services Engagements.
14 Fourth Council Directive of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual
accounts of certain types of companies (78/660/EEC) -
http://ec.europa.eu/internal_market/accounting/legal_framework/annual_accounts_en.htm
9
Questions:
(4) Do you have any comments on the overall cost/benefit analysis presented in the
University of Duisburg/Essen study?
(5) Should the Application Material be part of the adoption process and
acknowledged as “best practice”?
(6) Should ISQC1 on internal quality controls be part of the adoption process?
(7) In case of adoption of the ISAs at EU level, would a common reference to “ISAs
as adopted in the EU” in all auditors’ reports in the EU be sufficient? Or, is
further harmonisation of audit reports necessary?
6. POSSIBLE ADOPTION OF THE ISAS
6.1. The principle
Directorate General Internal Market and Services is interested to know whether, as a
matter of principle, stakeholders in the EU support the adoption of the ISAs in the
European Union. Some stakeholders may want to consider in addition certain
modalities, such as the scope and timing of adoption.
6.2. Possible scope of an adoption
Article 26 of the Audit Directive empowers the Commission to make the ISAs
mandatory for all statutory audits. Yet, the ISAs could also be applicable only for
certain audits.
It could, for instance, be argued that ISAs are only suitable for capital markets. In
the EU, listed companies must prepare their consolidated financial statements in
compliance with IFRS under the IAS Regulation of 200215. ISAs could be
mandatory for audits in connection with this Regulation. The purpose of
international accounting standards is to enhance transparency and comparability of
consolidated financial statements of listed companies on global capital markets.
However, the rationale for an adoption of ISAs at European level is different to that
for the adoption of IFRS. The ISAs focus on the conduct of an audit and are
designed to be used for the audit of both consolidated and annual accounts of listed
and other relevant limited companies. International auditing standards should
provide increased confidence, for users, in auditors’ reports. Such confidence will
influence a user’s decision to invest or not and equally whether or not they should
approve the accounts prepared by management.
Another option could be to make ISAs mandatory for the audits of all limited
companies except for small companies for which the Member States are currently
free to choose if an audit should be mandatory. As a consequence, around 224,000
to 310,000 statutory audits of companies for which an audit is mandatory under EU
15 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the
application of international accounting standards -
http://ec.europa.eu/internal_market/accounting/legal_framework/ias_regulation_en.htm
10
law would follow the ISAs. If the Member States choose to mandate audits for
smaller companies, they would also be free to select which auditing standards
should be used for these audits. The definition of small companies might follow the
same definition as set under the 4th Directive. Approximately 1.4 million statutory
audits of small companies performed in the EU every year could be concerned by
each Member State’s possibility to opt out from ISAs.
Finally, it could also be supported that the ISAs should apply to all statutory audits
performed in the EU, including those of small companies. This view is taken by the
standard setter – the IAASB. The same position has publicly been taken by the
Fédération des Experts Comptables Européennes (FEE) to clarify that audits should
not follow different professional standards (”an audit is an audit”). The High Level
Group of Independent Stakeholders on Administrative Burden, on 28 May16,
underlined that the ISAs should allow for audit work and audit documentation to be
proportionate to the size of the audited entity. The Appendix provides further
background on the extent to which such proportionality is enshrined in the clarified
ISAs.
Directorate General Internal Market and Services has a preference for this last
option.
16 The group’s task is to advise the Commission with regard to the Action Programme for Reducing
Administrative Burdens in the European Union whose aim is to reduce administrative burdens on
businesses arising from EU legislation by 25% by 2012. The High Level Group explicitly welcomes
such a public consultation and holds the view that the consultation should, in particular, aim at
reaching a common understanding among all relevant stakeholders, including audit oversight
authorities, that ISAs, as principles-based standards, are universally applicable to all statutory audits
and can be tailored to the specific circumstances of the individual audit engagement without excessive
documentation. The Group asks the EU Commission to ensure that the supervision of ISAs-compliant
audits does not lead to disproportionate bureaucratic burdens for enterprises, SMEs, and their auditors.
http://ec.europa.eu/enterprise/admin-burdens-reduction/docs/hlg_opinion_environment_16042009.pdf
11
6.3. Possible timetable
The new ISAs could be applicable within a relatively short timeframe in the EU. On
the other hand, audit firms may need some time to adapt their audit methodology
and audit software, to organise training of auditors and their staff, etc.
Questions:
(8) Do you support adoption of ISAs at EU level?
(9) If yes, which of the following options do you support:
Option 1 – ISAs should be adopted for the audit of the consolidated accounts of
the listed companies (IFRS accounts);
Option 2 – ISAs should be adopted for the statutory audit of all companies except
for the audits of small companies where Member States would be free to choose
which audit standards should be applied;
Option 3 – ISAs should be adopted for the statutory audit of all companies,
including small companies for which an audit is required.
(10) Do you have comments on the timing in case of an adoption of the ISAs?
**********
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APPENDIX
Background information
This paper provides further background information on three major issues:
• What should be understood by the term “clarified ISAs”? What is the “Clarity
Project”?
• What would actually change in several EU Member States if the “clarified
ISAs” were adopted at European level?
• What would the application of the “clarified ISAs” mean for smaller audits?
The background information should not be seen as exhaustive and should also
be read together with other publications, in particular those issued by the IFAC
and the IAASB.
1. WHAT IS THE CLARITY PROJECT?
The International Auditing and Assurance and Standards Board (IAASB) commenced a
project to clarify the International Standards on Auditing (ISAs), the so-called Clarity
project, in 2004. The Clarity project was completed in February 200917.
The objective of the Clarity project was to redraft and, in some cases, revise the existing
ISAs in order to set high quality international auditing and assurance standards that are
understandable, clear and capable of consistent application. The new clarified ISAs
should also be more adapted to independent public oversight of auditors and other
regulatory purposes. Improvements arising from the Clarity project broadly comprise the
following:
• Identifying the auditor’s objectives when conducting an audit in accordance with
ISAs;
• Clarifying the obligations imposed on auditors by the requirements of the ISAs and
the language used to communicate such requirements;
• Eliminating any possible ambiguity about the requirements an auditor needs to fulfil;
• Improving the readability and understandability of the ISAs through structural and
drafting improvements; and
• Including considerations specific to smaller entities and to smaller firms in the
application and other explanatory material.
In parallel with the Clarity project, the IAASB has modernised a number of ISAs.
Compared to the extant ISAs, the following improvements will have an effect:
17 The 2009 Handbook of International Standards on Auditing and Quality Control is available at
http://www.ifac.org/Store/Details.tmpl?SID=12410328891595221&Cart=1243429284196766
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• ISA 200 (Overall Objectives and Conduct of the Audit) clarifies the auditor’s
responsibilities and objectives of obtaining reasonable assurance on the financial
statements and reporting the findings, as well as the inherent limitations of an audit. It
also clarifies and modernises the premises on which an audit can be built. It also
indicates how auditors should apply the ISAs under a principles-based approach as it
(i) stresses the use of professional judgment; (ii) mandates the application of all ISAs
relevant to the audit; (iii) requires the auditor to use the objectives stated in each ISA
to determine the need for any additional audit procedures; (iv) requires the auditor to
evaluate whether an inability to achieve one or more objectives prevents the auditor
from achieving the overall objectives; and (v) allows for departure from requirements
in exceptional circumstances;
• ISA 210 (Agreeing the Terms of the Audit Engagement) clarifies that the
“preconditions for an audit” are the use by management of an acceptable financial
reporting framework in the preparation of the financial statements and the agreement
of management to the premise on which an audit is conducted. It strives to
accommodate the terms of the engagement in varied legal and regulatory
environments, particularly with respect to management’s responsibilities;
• ISA 260 (Communicating with Those Charged with Governance) and ISA 265
(Communicating Deficiencies in Internal Control) improves communication between
auditors and management and/or those charged with governance in audited entities,
including between the auditor and audit committee where there is one, especially to
ensure an effective “two way” communication and address cases where significant
deficiencies in internal control have been identified;
• ISA 540 – (Auditing Accounting Estimates, including Fair Values Accounting
Estimates) is the result of the merger of two previous standards. This new standard
improves the audits of fair values, especially when models and/or unobservable inputs
are used through clearer guidance and requirements;
• ISA 550 – (Related Parties) has been modernised with consideration of parties with
dominant influence, a wider capture of related parties for consideration, and clearer
and expanded procedures for the auditor aiming at identifying and addressing related
party transactions;
• ISA 580 – (Written Representations) introduces an automatic disclaimer of the audit
opinion in cases where companies do not provide adequate written representation or
no representation at all;
• ISA 600 – (Group Audits) has been expanded to address the audits of consolidated
financial statements of groups in a comprehensive way;
• ISA 620 – (Using the Work of an Auditor’s Expert) clarifies the conditions for the use
of external experts by auditors in areas such as the objectivity of the expert, the
respective responsibilities of auditors and experts, the communication between the
expert and the auditor so as to facilitate the use of an expert to provide audits of a
higher quality.
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2. WHAT WOULD CHANGE IN THE EU MEMBER STATES?
At present, most EU jurisdictions apply national auditing standards which are largely
based on the current ISAs, but often with amendments to comply with national
legislation and quality aspects of the audits. The introduction of the clarified ISAs should
eliminate, to a large extent, divergences in auditing standards between jurisdictions and
reduce the divergences between national legislation/requirements and the ISAs. On the
basis of a tentative analysis, the following table shows possible examples of changes in a
selected number of Member States if the ISAs are adopted by the EU, beyond the
improvements to ISAs described in section 1 of this Appendix:
Austria
Should the ISAs be adopted at EU level, audit practice would be
affected by four new ISAs: ISA 540 (Audit of Accounting Estimates,
including Fair Values Accounting Estimates and Related Disclosures),
ISA 610 (Using the Work of Internal Auditors), ISA 620 (Using the
Work of an Auditor’s Expert), ISA 720 (Other Information in
Documents containing Audited Financial Statements).
France
Should the ISAs be adopted at EU level, ISA 220 (Quality Control for
an Audit of Financial Statements), ISA 260 (Communication with
Those Charged with Governance), ISA 402 (Audit Considerations
Relating to an Entity Using a Service Organisation) and ISA 550
(Related Parties) would represent new specific standards. Application
material, if adopted at EU level, would further complement the
existing standards. An introduction of ISQC 1 would also represent an
important new element.
Germany
No fundamental change is expected from an adoption of the ISAs at
EU level compared to current IDW standards. The auditor’s approach
to confirmation procedures from banks and lawyers would however
rely further on professional judgement.
Italy
An adoption of the ISAs at EU level would expand the use of ISAs for
statutory audits in Italy beyond audits currently performed in
compliance with the auditing standards developed by the securities
regulators: CONSOB. The auditor’s approach to confirmation
procedures from banks and lawyers would rely further on professional
judgement.. An introduction of ISQC 1 would also represent an
important new element.
Netherlands
No fundamental changes are foreseen from an adoption of the ISAs at
EU level compared to the way audits are currently conducted under
national standards. However, an introduction of ISQC 1 would entail
modifications to the current Dutch legislation in the area.
Poland
The National Chamber of Statutory Auditors’ (NCSA) Professional
Standards are generally based on the same principles as ISAs. With
regards to auditing issues not covered by NCSA’s standards, auditors
are required to use ISAs. Changes for Polish auditors are likely to be
significant across many areas of an auditor’s work especially when the
auditor is not a member of the Forum of Firms. An introduction of
ISQC 1 would also represent an important new element.
15
Spain
Three ISAs would be new in Spain: ISA 260 (Communication with
Those Charged with Governance), ISA 540 (as regards Fair Value
Estimates) and ISA 550 (Related Parties). ISA 250 (Consideration of
Laws and Regulations) would restrict options for the auditor’s report
in cases where a company does not comply with the laws and
regulations. Auditors’ reports would place less emphasis on cases
where companies face a going concern issue and correctly report the
issue (ISA 570). The auditor would also have more flexibility to use
an expert.
Sweden
No fundamental changes are foreseen from an adoption of the ISAs at
EU level.
United
Kingdom and
Ireland
No fundamental changes are foreseen from an adoption of the ISAs at
EU level compared to the way audits are currently conducted under
national standards. However, an adoption of the ISAs will reduce the
number of supplementary requirements. Differences between the
current national standards and ISAs 200 (Overall Objectives and
Conduct of the Audit), 210 (Agreeing the Terms of the Audit
Engagement), 580 (Written Representations), 600 (Group Audits) and
620 (Using the Work of an Auditor’s Expert) will disappear. Should
the European Commission adopt the ISAs, five of the ISA add-ons
relating to audit quality in ISA 450 (Evaluation of Misstatements),
ISA 510 (Opening Balances), ISA 570 (Going Concern) and ISA 720
(Other Information) may need to be addressed as well.
3. WHAT WOULD CLARIFIED ISAS MEAN FOR THE AUDITS OF SMALLER COMPANIES?
The clarified ISAs have been developed with the involvement of the IFAC’s Small and
Medium Practices Committee. In December 2007, the IFAC Small and Medium
Practices (SMP) Committee issued a Guide to Using International Standards on Auditing
in the Audits of Small and Medium sized Entities18 which provides an analysis of the
standards and their requirements in the context of SME audits. More recently in March
2009, the IFAC SMP Committee published the Guide to Quality Control for Small and
Medium sized Practices19 which provides guidance on applying the redrafted ISQC 1.
These documents contain specific provisions in relation to the documentation of smaller
audits and quality control documentation for SMP firms.
In terms of content, depending on the size and complexity of the audited entity, a number
of sections in the ISAs assist the auditor in tailoring the audit:
18 http://www.ifac.org/Members/Pubs-
Details.tmpl?PubID=1197644356547547&Category=Small%20and%20Medium%20Practices%20%2
8SMPs%29
19 http://www.ifac.org/Store/Details.tmpl?SID=1236610272184921&Cart=1243950370325413
16
• Paragraph 18 of ISA 20020 foresees a proportional application of the ISAs by stating
that “the auditor shall comply with all ISAs relevant to the audit. An ISA is relevant to
the audit when the ISA is in effect and the circumstances addressed by the ISA exist”.
Paragraph 16 of ISA 200 states that “the auditor shall exercise professional judgement
in planning and performing an audit of financial statements”. As a result, a number of
ISAs will automatically not apply to smaller, less complex audits21.
• The Application and Other Explanatory Material sections of the revised and redrafted
ISAs contain considerations specific to smaller firms22. In compliance with this
guidance, auditors are invited to consider, based on professional judgement, how to
implement the ISAs proportionally for a particular audit.
• The nature, size and lack of complexity of many smaller entities also impact on the
documentation requirements. The Application and Other Explanatory Material
sections of ISA 260 (Communicating with Those Charged with Governance) and ISA
265 (Communicating Deficiencies in Internal Control) allow the auditor of a smaller
entity to communicate orally thereby easing the documentation requirements for such
audits. Paragraphs A16 and A17 of ISA 230 (Audit Documentation) specify
provisions to ease the documentation requirements for the audits of smaller entities.
Paragraph A63 of ISA 330 (The Auditor’s Response to Assessed Risks) states that
“the form and extent of audit documentation is a matter of professional judgment, and
is influenced by the nature, size and complexity of the entity and its internal control,
availability of information from the entity and the audit methodology and technology
used in the audit”. Furthermore, with regard to the perceived documentation burden
for the audit of smaller entities, paragraph A75 of ISCQ123 allows smaller firms to use
more informal methods in the documentation of their systems of quality control such
as manual notes, checklists and forms.
*******
20 ISA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with International Standards on Auditing.”
21 Including e.g. ISA 600 (Group Audits) because smaller audits are frequently not transnational or made
up of numerous components, ISA 620 (Using the Work of an Auditor’s Expert) because smaller audits
do not often involve complex organisations/activities and ISA 402 (Service Organisations) because
smaller entities may not use the services of one or more service organisations.
22 Examples: ISCQ 1 paragraphs A1, A3, A29, A40, A50, A68, A72 andA75; ISA 200 paragraphs 18,
A64-A66; ISA 300 paragraphs A11, A15 and A19; ISA 315 paragraphs a10 and A16; ISA 320
paragraph A8 and ISA 550 paragraphs A20 and A41.
23 The 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