1. Accounting 4570/5570 Chapter 15 International Auditing Issues

2. Global Audit Global businesses Accounting and Auditing Profession –Differences in the way to become an auditor –Differences in form and content of financial statements –Differences in auditing standards –Differences in quality of audit profession –Differences in educational systems –Differences in licensing processes (public versus private sectors)

3. Global Audit Services Services provided: –Audit/Attestation and Assurance Services –Tax Advisory and Compliance Services –Consulting/Management Advisory Services –Exhibit 15.1, page 423 Most Influential Risks in determining audit scope: –Significant or unusual transactions at a subsidiary –Size of subsidiary –Large changes in a subsidiary’s net income –Audit committee expectations –Competence of subsidiaries’ accounting personnel

4. Challenges to Auditing the Multinational Enterprise Local accounting practices –Predominance of cash –Inability to confirm accounts receivable Foreign currency –Restrictions –Transfer requirements –Corporate procedures for translation

5. Challenges to Auditing the Multinational Enterprise Language and culture –Ignorance of the local language means relying on a translator Local laws –Local laws that subsidiaries must follow conflict with domestic laws Human rights issues Social disclosures Bribes

6. Foreign Corrupt Practices Act (FCPA) 1977 Purposes –Eliminate bribery –Establish better internal controls Impact of FCPA on U.S. Firms Accounting implications –Must keep books and records of ALL transactions –Internal control systems required

7. Challenges to Auditing the Multinational Enterprise Customs and Distance –Travel from home office (traveling auditor) –Use local auditors Availability of Suitable Personnel –Problems with expatriate staff being transferred in –Lack of local staff

8. Challenges to Auditing the Multinational Enterprise Supply of Auditors –Exhibit 15.2, page 428 (Accountants per capita) –Number varies based on barriers to entry to the profession, such as strict educational and testing requirements Variety of training models –Apprenticeship approach – British model –University education and certification – U.S. and Germany –Dual track – either approach – Netherlands and France

9. Challenges to Auditing the Multinational Enterprise Reciprocity –General Agreement on Trade in Services (GATS) Requires countries to administer their licensing rules in a reasonable, objective, and impartial manner, and forbids using them as disguised barriers to trade Requires countries to establish procedures for verifying the competence and credentials of professionals from other countries

10. Challenges to Auditing the Multinational Enterprise Reciprocity (continued) –GATS (continued) It encourages countries to recognize other countries’ qualification, either autonomously or through mutual recognition agreements –U.S./Canada/Australia – shorter exam on local taxes and legal frameworks –European Union – Eighth Directive addresses auditing qualifications of statutory auditors. The qualifications must be similar and auditor must demonstrate knowledge of local laws and procedures for conducting statutory audits –French have been leaders in reciprocity, unlike Germany, Britain, and the U.S.

11. Strategies of Global Accounting Firms Small and medium firms –More likely to use local CPA firms in foreign countries Large international firms –Audit most of the international companies in the world

12. International CPA Firms (In order of highest 2003 sales) Deloitte and Touche Price Waterhouse/Coopers Ernst and Young KPMG BDO International RSM International Grant Thornton International

13. Audit Standards Auditing standards and practices vary from country to country due to cultural, legal-political, and economic variables Sources of Audit Guidelines and Audit Requirements differ (public/private) Who is required to be audited differs –Large companies versus small companies Differences in Audit Standards Differences in “independence”

14. Audit Standards Differences in Audit Opinions (true and fair view predominant among European and Australian companies) Exhibit 15.4 (Comparison of the Audit Function, Ethical Standards and Enforcement, and Audit Reports)

15. International Harmonization of Audit Standards International Federation of Accountants (IFAC) - established 1977 –Main purpose is harmonizing audit standards and audit professions globally –163 member bodies from 113 countries –Encompasses over 2.5 million practicing accountants

16. IFAC (continued) Sets standards in the following areas: –Auditing, Assurance, and Related services –Quality Control –Codes of Ethics –Education Standards –Public Sector Accounting Standards

17. IFAC (continued) IFAC’s International Auditing and Assurance Standards Board (IAASB) –Develops International Standards on Auditing (ISAs) –ISAs adopted by the E.U. effective January 2007 IFAC’s Forum of Firms –Open to any multinational auditing firm that complies with rigorous independence quality assurance reviews

18. International Forum on Accountancy Development (IFAD) Alliance of accountancy groups and firms across the world Promotes improvement in the quality of accounting and auditing worldwide