Following the Enron scandal, regulators and other interested parties expressed their concern that auditing standards were not rigorous enough and the process for establishing them was insufficiently transparent. In 2004 the International Auditing and Assurance Standards Board (IAASB) set up its clarity project with the objective of clarifying and improving the consistency of application of ISA. The project finished in 2009 having reviewed, clarified and updated 36 ISAs. The initial aim was just to clarify the standards but in the process many of the standards have been strengthened with new provisions to reflect the greater expectations of the auditor.

Impact on businesses

The clarified standards are effective for audits of financial periods beginning on or after 15 December 2009 – if you have just had your 31 December 2010 audit (and it was an ISA audit) it will have used the clarified standards.

Many countries have adopted ISA as a national standard in line with the international timetable. For example, of the 27 European Union members 12 have done this and a further seven have done so with a year’s delay. Eventually, ISA will become an EU requirement but the timing is unclear. Other countries are also adopting ISA as their national standards.

The USA is moving quickly to bring its standards in line with ISA and is coordinating all new work on auditing standards with the IAASB. Unfortunately, the USA also has standards produced by the PCAOB (Public Company Accounting Oversight Board) for audits of SEC (Securities and Exchange Commission) registrants which are not being coordinated.

The clarified standards are easier for auditors to use but should make no difference to the business being audited. However, some of the standards have changes of substance that may have an impact on the way your audit team interacts with you. Examples include: agreeing engagement terms, communicating with directors and owners, work on related parties, accounting estimates, and representations from management. The clarified standards also include substantial additional requirements for the audit of groups.

How different your experience will be will largely depend on what you’re used to. If you’re used to confirming the terms of the engagement every year, the new standard on agreeing engagement terms will not change this approach. If not, you will need to discuss a new approach with your auditor. More important, the new standard on the audit of accounting estimates means your auditor will ask more questions and test your assumptions more extensively where an accounting estimate has a major effect on the accounts. The precise impact will vary from audit to audit but overall the new standards will mean more interaction and structured communication between you and your audit team.

A step towards common standards

This increased interaction should lead to improved quality of service. The new standards are also more acceptable to the regulators; this should lead to wide acceptance, narrowing the gap between standards across the world. We do not yet have common standards but the new clarified international standards are a major step toward that goal.