International Auditing and Assurance Standards Board IAASB Update Phil Cowperthwaite, Member, IAASB SMP Forum Beijing, China 28 October

Adoption and International ConvergenceAdoption and International Convergence The IAASB Clarity ProjectThe IAASB Clarity Project IAASB Current and Forward AgendaIAASB Current and Forward Agenda Agenda

Adoption and International Convergence 100+ countries adopt or use ISAs in some form Stronger transparency and accountability – –Higher quality and consistency of audits – –Reduced cost of capital and other costs arising from differing standards Facilitates efficient education and training A Perspective on Adoption & Convergence

The IAASB Clarity Project Key aimsKey aims –Understandability of ISAs, and thereby their consistent application –Facilitate convergence Completed March 2009Completed March 2009 Suite of 36 ISAs and ISQC 1Suite 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

New structure and conventionsNew 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 revisedNearly half of 36 ISAs fundamentally revised –New requirements and guidance that aim to improve practice in a variety of respects Outcome

Clarity ISAs Objectives and obligation for their useObjectives 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 gatheringRisk assessment and evidence gathering –Estimates and fair values –Related parties –Service organizations Some Highlights

Clarity ISAs Engagement acceptance and continuance (ISA 210) Fraud and error (ISA 240) Communications Planning (ISA 300) Risk assessment and response (ISAs 315 and 330) Communications (ISAs 260 and 265) Reporting (ISAs 700, 705, 800 and 805) Some Highlights for SMPs

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

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 and others Specific initiatives to support implementation How is IAASB Helping Deal with Challenges? Clarity ISAs

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

Clarity Center:

Short videos and supporting slidesShort videos and supporting slides –Main thrust of revised ISA and significant changes –First release Q4 2009, free of charge from Center ISA Modules Clarity ISAs

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

Application of ISAs designed to be proportionateApplication 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 ISAsDifferences 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 Proportionality of Application of the ISAs Clarity ISAs

Through the requirements, e.g.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 materialThrough the application material –Many considerations specific to smaller entities How do ISAs Demonstrate Proportionality? Clarity ISAs

Basic obligation in the ISAsBasic obligation in the ISAs –Comply with all ISAs relevant to the audit When can compliance with ISAs be claimed?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.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 Compliance with All ISAs? Clarity ISAs

Even if an ISA is relevant, not all its requirements may be relevantEven if an ISA is relevant, not all its requirements may be relevant –Conditional requirements need not be applied if conditions do not exist ExamplesExamples –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 Compliance with All Requirements? Clarity ISAs

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

Continued development of the ISAs Development of a full suite of reporting services Development of other assurance standards Other areas of public interest IAASB Current and Forward Agenda

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 – –Review and compilation services must be clearly distinguishable as to level of assurance, work effort and cost – –Communication to promote user understanding Reviews & Compilations IAASB Current and Forward Agenda

Monitoring experiences of implementation of the clarified ISAs by countries and firms Post-implementation review of the clarified ISAs Monitoring Implementation of the ISAs IAASB Current and Forward Agenda

Impact Analysis Analysis of impacts (costs, benefits, etc.) of proposed new or revised standards, as part of due process considerations

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 Initiatives in the Current Environment IAASB Current and Forward Agenda

Resources IAASB Strategy and Work Program, 2009 – 2011IAASB Strategy and Work Program, 2009 – 2011 Project timetablesProject timetables Meeting information and agenda materialMeeting information and agenda material Project historiesProject histories Exposure Drafts of StandardsExposure Drafts of Standards

International Auditing and Assurance Standards Board IAASB Update Phil Cowperthwaite, Member, IAASB SMP Forum Beijing, China 28 October 2009