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Auditing Best Practice

The Complex World of International Auditing Regulation

by Christopher Humphrey and Anne Loft

Executive Summary

The contemporary development of international audit regulation is connected to the growing significance of international investors who demand financial reports that are prepared and audited in accordance with globally accepted international standards. International Standards on Auditing (ISAs) are set by the International Auditing and Assurance Standards Board (IAASB), an independent standard-setting board working within the International Federation of Accountants (IFAC) and subject to public oversight by international regulators. ISAs have been adopted in more than 100 countries, but their practical impact depends centrally on how they are implemented and enforced. In recent years, there has been a greater emphasis on such issues.

Introduction

The development of international audit regulation is closely linked to the development of international accounting regulation. Both have been significantly associated with the globalization of capital markets and growth in importance of international investors. Such investors expect the financial reports of the companies they are investing in to be fair and reliable, with auditors playing a critical role—famously categorized by Paul Volcker in 2002—as the “guardians of truth in markets”.

Audit regulation is centrally concerned with the issue of ensuring that auditors are competent and independent. These attributes ensure that auditors are capable of both detecting significant errors and omissions in financial status (competent), and faithfully reporting these to investors/stakeholders in the enterprise (independent).

Broadly defined, audit regulation has the same four basic elements of any regulatory system—namely a concern and involvement with the setting, adoption, and implementation of standards and, through monitoring and enforcement processes, ensuring that such standards are applied in practice.

Following this introductory section, the chapter reviews the setting of international auditing standards (ISAs). This includes the role of international regulatory bodies in supporting this process, and the demands they have made of the standard-setting body and the international accounting profession more generally. In the third section, issues of compliance and oversight are discussed, including recent developments in international coordination through the International Forum for Independent Audit Regulators (IFIAR). The fourth section examines the role of the big audit firms in international audit regulation, and the final section presents conclusions and some thoughts for the future.

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