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Topic:
Emerging issues in audits and Global Regulatory
Framework















AL-FALAH I NSTI TUTE OF BANKI NG AND
FI NANCE
BAHAUDDI N ZAKARI YA UNI VERSI TY
MULTAN

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Submitted To:

Sir Mustabsar Awais


Submitted By:
Aneeka Niaz
MBK-M-12-04


Programe:
MBA (banking and finance)
4th semester (Morning)





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Table of Contents
Executive Summary 04
Historical Perspectives of Auditing 05
Emerging issues in audit and global regulatory frame work .06
1. Issues for audit committees .06
2. The current and emerging issues relating to financial reportings .. 10
a) Issues related to the Earning Management 10
b) Issues in reporting of audit work .. 12
3. Economic Consequences and the Political Nature of Accounting Standard Settings 13
4. Impact of convergence of U.S GAAPs with IFRS.. 16
5. Challenges in auditing fair value accounting estimates in the current market environment 18
6. Legal Issues related with HR Audits.. 19
7. Emerging IT audit issues. 20
Conclusion . 20
Reference . 21




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Executive summary:
The history of the auditing and the accounting is old the as the business itself. From the past to up
till now many changings are happened in the profession as the changings occur in the business
environment. The current auditing and accounting practices prevailing in the business world are
the birth of many misshapes that have occurred in the capital markets around the globe in the past
decades. The few of them are the Enron, the World com. And the Lehman Brothers. The
subsequent fallout of these frauds was a lack of confidence in the way companies were run and
audited and the loss of public confidence in the capital markets. In the USA, this resulted in the
Sarbanes-Oxley Act 2002 which has completely changed the regulation of the accounting
profession in the USA and influenced such issues worldwide
There are a number of regulatory bodies who are working on national and international level to
make the auditing profession transparent and to enhance the confidence and trust of the public on
the auditor and the audit firms. For this purpose so many standards are established to make this
profession common for all. To enhance auditor independence, objectivity, audit quality and
evidence, accounting and auditing standards, and other reporting and auditor services has been
made. Despite all of these efforts since there are so many issues are under question relating to the
accounting treatment of transections, auditing of financial statements and financial reporting. As
we know that different set of standards are prevailing in the current business, accounting and
auditing world that is also a major issue for corporations to what to follow or what to not. Than
the establishment of new standards or changings or alteration in existing standards have also many
economic consequences that cause for continues unrest among the business world. The divergence
of U.S GAAPs and the U.K IFRS is also a cause of great panic not only for the corporations but
for the regulators themselves.
The emergence of new technology in the business make the activities of the business more
complex. Transection are done through the use of IT this is a horrible situation for the business
and also for the auditor to conduct the audit of IT system of the organization. It is good in one
aspect as it is required less human efforts because to manage a huge work force is also a great deal.
As the work force increases in the organization it will be difficult for the auditor to audit the
activities and processes of the Human resource.
So it is required a great attention of all the standards setters and regulatory bodies to take measures
and set the standards that are equally beneficial for all to resolve these issue and to make the
auditing profession transparent and independent, to enhance the quality of assurance engagement
and to assure the reliability of the audit opinion. So that the auditing profession is able to attain the
trust of public and the corporate world as well. Furthermore about the issues is discussed on the
following pages.



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Historical Perspectives of Auditing:
The history of the profession, the various public policy choices made along the way, and the
tensions that ascended during the many business cycles and crises have framed the current
governance and accountability model that supports capital markets at present
Now a days Accounting and auditing standards and practices that are exist in the world wide capital
markets are the result of a series of actions taken by the Congress, the Securities and Exchange
Commission (SEC), the regulatory authorities, the standard setter bodies and the accounting
profession over many years, founded with the stock market crash in 1929 and the Great Depression
that followed. Than as a result of this stock market bubble of the late 1990s and speculation over
the future of dotcom companies, many countries experienced huge corporate financial scandals
and frauds. The bubble burst in 2000 and was followed by the disclosure that senior management
at Enron, a US Electronic and Energy Company, had been deceiving investors by fraudulently
overstating profitability. Its auditor, Arthur Andersen, was shown to have lacked objectivity and
independence in evaluating its accounting methods. This led to the demise of Arthur Andersen in
2002. Other companies that were also involved in corporate frauds included WorldCom, Parmalat,
Cable & Wireless and Xerox, to name but a few.
The subsequent fallout of these frauds was a lack of confidence in the way companies were run
and audited and the loss of public confidence in the capital markets. In the USA, this resulted in
the Sarbanes-Oxley Act 2002 which has completely changed the regulation of the accounting
profession in the USA and influenced such issues worldwide
The central questions dealt with whether and how companies should provide investors with
detailed financial statements, and what type of assurance could be provided to the public that those
financial statements were reliable.
Over the intervening decades, there have been numerous studies, investigations, Congressional
hearings and debates about reforms to the accounting profession. Major recommendations in the
areas of auditor independence, objectivity, audit quality and evidence, accounting and auditing
standards, and other reporting and auditor services has been made. There are some areas where
additional progress is needed, including auditor independence, reporting on internal controls, and
responsibility for detecting fraud and standard settings.
In setting the standards and providing guidelines on the areas of issue the following regulatory and
standard setter bodies play a vital role.
The Public Company Accounting Oversight Board (PCOAB), established under Sarbanes-
Oxley Act 2002
The Financial Accounting Standard Board (FASB). Provide guidelines to the companies
working under the territory of U.S.
The International Accounting Standard Board (IASB). Provide guidelines to the companies
operating outside of the U.S.



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Emerging issues in audit and global regulatory frame work
Following are the issues that currently the auditing profession is facing.
1. Issues for audit committees.
2. The current and emerging issues relating to financial reportings.
3. Economic Consequences and the Political Nature of Accounting Standard Settings.
4. Impact of convergence of U.S GAAPs with IFRS.
5. Challenges in auditing fair value accounting estimates in the current market environment.
6. Legal Issues related with HR Audits.
7. Emerging IT audit issues.
1. Issues for audit committees:
Along with the primary responsibility of the audit committees to oversee managements activities,
including financial reporting and compliance, remains fundamental to corporate governance, the
demand for audit committees is expanding overtime. It is challenging day by day for audit
committees to focus on their traditional core duties along with staying up to date on emerging
issues such as:
Updated COSO framework
Cyber security,
Proposed auditors reporting model
PCAOB Auditing Standard No. 16, (Communications with Audit Committees)
Foreign Corrupt Practices Act
Risk oversight
Updated COSO framework
The Committee of Sponsoring Organizations of the Tread way Commission (COSO) recently
released an updated version of its Internal Control Integrated Framework. The 2013 update will
soon replace the original framework, issued in 1992, which has become one of the most widely
adopted approaches to internal control. While the ground rules of the new framework are similar
to the original.
The updates are:
Outlines a formal structure for designing and evaluating the effectiveness of internal
control
Offers an expanded discussion of each component and principle, including detailed points
of focus
Explicitly calls for considering fraud risk when assessing risks to achieving organizational
objectives.
COSO has provided some conversions specifics and is encouraging users to change their
applications and related documentation as soon as possible. COSO will make its original
framework available until the end of the transition period. While the framework is relevant for
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operations, regulatory compliance, and reporting, it is most widely used by companies to evaluate
their internal control over financial reporting.
Questions for audit committees to consider:
Is the company using the framework for internal control over financial reporting only, or
for operations and regulatory compliance as well?
Have company controls been mapped to the new framework?
Has the new framework revealed any gaps in current processes, control activities, or
documentation, and if so, how are these being addressed?
Is the company educating leadership, risk management, and control owners regarding the
content in the updated COSO framework?
What policies are in place and who is responsible for communicating internal control
considerations to external parties (e.g., third-party service providers)?
Does the company use information technology and data analytics to help continuously
monitor internal control systems?
Cyber security
In an increasingly digital world, it is highly challenging for companies to effectively defend their
information technology systems, and the occurrence of cyber-attacks continues to rise rapidly.
Cyber security is often at the top of programs for audit committees and management at companies
of all sizes and industries, since the extensiveness of cyber issues connects them to financial
concerns and internal controls. The changing technological environment can lead to sophisticated
attacks that are difficult to anticipate and defend against if suitable safeguards and response plans
are not in place.
There are numerous categories of cyber-attacks i.e.
Spiteful software such as Trojans, worms, viruses, and spyware;
password hacking; and
Rejection of-service attacks to crash websites.
A number of corresponding motivations are included behind these attacks. These are
financial fraud,
information theft or misuse,
activist causes, and
Efforts to disrupt the critical infrastructure of government and its vital services.
Questions for audit committees to consider:
What are the organizations critical assets to be secured, and how are susceptibilities
identified? How are risks disclosed?
How are critical infrastructure and regulatory requirements met?
What is the overall strategy and plan for protecting assets from cyber-attacks?
How robust are the organizations incident response and communications plans?
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Proposed auditors reporting model
The Public Company Accounting Oversight Board (PCAOB) in recent times proposed auditing
standards on the auditors reporting model and the auditors responsibility for other information in
annual SEC filings. These proposed standards could significantly change the external auditors
report and necessitate expanded audit procedures.
The proposed auditing standards are intended to increase the value, usefulness, and relevance of
the auditors report; expand the auditors responsibilities for information outside the financial
statements; and include specific reporting in the auditors report.
The significant proposed changes include
A new section in the auditors report on critical audit matters specific to the audit.
Enhanced language in the auditors report on auditor responsibilities
New statements in the auditors report providing more information on areas such as auditor
independence and tenure.
Increased auditor responsibility for other information in the companys annual report and
disclosure about this responsibility in the auditors report.
PCAOB Auditing Standard No. 16, (Communications with Audit Committees)
PCAOB Auditing Standard No. 16 (AS 16), Communications with Audit Committees, is effective
for audits and quarterly reviews of fiscal years beginning on or after December 15, 2012.
PCAOBs principal objectives in issuing AS 16 are to
Enhance communications between auditors and audit committees. And
Improve audits by developing constructive negotiation between the auditor and the audit
committee
Auditors responsibilities while communicating with audit committee:
There are certain auditors responsibilities that should be communicated to the audit committee
include the following.
1. Communicate significant changes to planned audit strategy or the significant risks
identified and the reasons for such changes.
2. Communicate information about audit results, including:
Significant and critical accounting policies and practices
Critical accounting estimates
Significant unusual transactions
3- Communicate the following:
Qualitative aspects of significant accounting policies and practices
Assessment of critical accounting policies and practices
Conclusions regarding critical accounting estimates
Understanding of business rationale for significant unusual transactions
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Evaluation of financial statement presentation
Alternative accounting treatments discussed with management.
Foreign Corrupt Practices Act
With the passage of time Foreign Corrupt Practices Act (FCPA) enforcement actions are
increasing, and are considered as the hot issues in 2014. Corruption-related issues can arise from
and potentially involve all parts of an organization, from employees to associates to suppliers and
other third-party intermediaries. Organizations and individuals who violated the FCPA may have
to bear a number of consequences, including
Significant fines,
Reputational damage,
Weakened stock price,
Loss of business, and
Costly lawsuits.
The Companies who have strong anti-corruption related programs will likely to have better ability
to prevent and detect potential violations, and to reduce or even avoid criminal and civil liability
should a violation occur. Management should develop and is maintain an effective compliance
program to address corruption risk and Audit committees are often directly involved in assessing
whether management fulfill these requirements or not. Each board member should understand the
components of an effective anti-corruption compliance program in order to assess its competence.
An effectively designed, implemented, and managed compliance program tailored to a companys
specific risks is supreme. The audit committee should concentrate on assessing the following
important components such as:
The overall compliance structure
The thoroughness of the anti-corruption risk assessment
Policies and procedures covering riskier activities
Training protocols
Protocols for third-party and distributor due diligence
The substance and frequency of senior management and regional compliance officer anti-
corruption communications
The whistleblower reporting systems for employees and third parties
Monitoring and audit processes
Questions for audit committees to consider:
i. Are they conducting periodic anti-corruption risk assessments to continuously evaluate and
manage our corruption risk profile?
ii. How does management communicate its continued commitment to compliance (for
example the tone at the top)?
iii. Can the audit committee provide evidence that their compliance program is well designed,
effectively overseen, and tailored to their size, structure, and risk profile?
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iv. Do the audit committee provide country-by-country FCPA reinforcement training tailored
to business-specific risks?
v. Are the audit committee doing enough anti-corruption due diligence during pre-acquisition
and post-acquisition integration?
Risk oversight
Now a days Risk oversight has taken on increased importance for boards and audit committees.
Many boards are evaluating their risk governance structure and practices and which committees
have the skills and knowledge to oversee particular risks. According to the SEC consideration risk
oversight is a key responsibility of the board and requires the board role to be disclosed to improve
investors understanding of board activities.
It is the responsibility of the audit committees to oversee the process for identifying and addressing
financial risks. The New York Stock Exchange (NYSE) listing standards require the audit
committee to discuss the companys risk assessment and risk management policies with
management. Although the major responsibility to assess and manage the companys risks is lies
with senior management, the audit committee should also focus on areas of major financial risk
and discuss the guidelines and policies for addressing them.
Financial risks frequently arise from other sources of risk, for example strategy, operations, and
compliance with environmental, health, safety, legal, and regulatory requirements. Therefore, it is
necessary for audit committees to consider widening the lanes and adopting more pre-emptive
approach to avoid reactive situations.
2. The current and emerging issues relating to financial reportings:
This is a fundamental requirement for effective management to address current and emerging
issues because these issues have a direct or indirect effect on a company's control environment,
financial reporting, and the audit process. The understanding that how the company responds to
the current business world challenges is necessary to an audit committee in discharging its
responsibilities. An audit committee must take into consideration all the activities that is happening
within a company at the present and, at the same time, what will be happen in the coming future.
In today's global economy and challenging business environment, being prepared to face all the
difficulties and issues is a major component for success.
a) Issues related to the Earning Management:
At present a number of high-profile irregularities reported in the press. These are attributed to
various earnings management practices. These include inappropriate deferral of expenses;
questionable revenue recognition; and recognition, reversal, or use of reserves without events or
circumstances to justify such actions. These practices come under the attention of securities
regulators and others in companies' accounting policies and procedures, and have led to questions
about the quality of reported earnings.
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Information is the essence of the capital markets. If a company fails to provide significant
disclosure to investors about where it has been, where it is and where it is going, a damaging
configuration arises.
Earnings management is a problem that is more extensive than we might think. Everyone, in
whatever field, who has information to instruct wishes to manage the way in which the information
is communicated and the particular message is to be provided. The problem is that exploitations
such as earnings management can occur when people exploit this flexibility. This is why the
highest standards of objectivity, integrity and judgment must be the rule, not the exception.
Deficiencies in reporting of earnings:
There are some specific areas of accounting standards that may make the financial instability
ambiguous and harmfully affect the quality of reported earnings. The common areas included are
Revenue recognition
Changing estimates
Abuse of the materiality concept
Capitalization and deferral of expenses
Non-GAAP measures
Revenue recognition:
There is a concept of accrual accounting that has been assumed great importance in recent years.
On the basis of this principle of accounting the turnover is recognized before a sale is complete, or
at a time when the customer still has options to terminate, void or delay the sale.
This concept is particularly adopted by so for new economy companies where the focus is often
on current revenue rather than long term profit or benefit.
Changing estimates:
There is another method that is mostly used to manage the earnings this method is known as
changing estimates to make the numbers. These kind of methods are mostly acceptable when these
are supported by the facts of the real economy. Otherwise these can be changed or altered when
these estimates are not supported by the business economy or require any disclosure to investors.
As the investors may change the estimates to make investment decisions if they find that these are
not transparent, comparable and consistent.
Abuse of the materiality concept:
The major issue in the earning management is that some time the auditor do not bother to record
the errors intentionally and sometime do not correct them that are present in the financial
statements and have material impact on the financial reporting of the company. Because he think
that its impact is not so significant or sometime ignore it due to the cost associated with its
disclosure. However it depends on the reaction of the capital market toward these changes that
what is significant and what is not.
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Capitalization and deferral of expenses:
There are some costs that are known as the capitalizing and deferring costs these costs should be
accounted for as a cost of the period through unreasonable amortization periods, or through the
capitalization of costs for which future economic benefits are not reasonably guaranteed. These
capitalizing and deferring costs concept is used for property, plant and equipment and intangible
assets.
Non-GAAP measures:
This is a technique that is adopted by some companies that they use to publicize an idealized
version of their financial performance that eliminates any number of costs and expenses that are
under question i.e. yet still required more reliability and comparability. Frequently unjustified
importance is placed on results before exceptional items, or startup operations, or earnings before
interest, tax depreciation and amortization (EBITDA), and even on the marketing expenses as if
some costs were in some way proficient of being ignored. This may be perfectly appropriate, and
consistent with what is done in the industry, but the impression given can be of a lack of balance.
Now a days Regulatory authorities are becoming more alarmed about such practices and try to
control it.
b) Issues in reporting of audit work:
There are a number of deficiencies and issues which are faced by the auditor while reporting the
audit work at the end of the audit engagement. These issues are of very importance and faced by
many companies around the world where the auditor failed to find out sufficient appropriate audit
evidence to support their opinion about the financial statements and opinion about the internal
control effectiveness over financial reporting. Common areas of deficiency are
Fair Value of Financial Instruments
Revenue Recognition
Related Party Transactions
Equity Financing Instruments
Fraud Risk
Testing and Evaluating Internal Controls
Fair Value of Financial Instruments.
There is observed a number of situations in which the auditor failed to evaluate sufficiently and
accurately the appropriateness of the valuation methods used by the management for the treatment
of accounting transections i.e. the valuation method of inventory and the valuation of depreciation.
Sometimes the auditor also unable to understand the reasonableness of managements significant
assumptions used in valuations.
Revenue Recognition.
Recognizing the revenue is the major issues in the companies. There is a number of instances
where the auditor or the audit firms failed to test, or sufficiently test, sales transactions to determine
the appropriateness of the revenue recognition, as well as testing that credible evidence or an
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arrangement exists, documented evidence of delivery that has been occurred or services have been
rendered, the certainty of price i.e. the sellers price to the buyer is fixed or determinable, and
collectability is reasonably assured.
Related Party Transactions.
In the companies the management involved in a number of related party transections. These type
of transactions are not disclosed by management to anyone. There have been observed so many
instances where the auditor and the audit firm failed to test for undisclosed related parties or
transactions with undisclosed related parties. Some firms failed to identify and address the lack of
disclosure of related party transactions.
Equity Financing Instruments.
An area that is commonly problematic for smaller auditor firms is the audit work related to the
issuers use of equity financing instruments to pay compensation to employees, dealers, and others.
Many of these agreements and instruments contain composite terms and conditions that impact the
manner in which the instruments should be recorded and accounted for by the issuer. There is a
number of instances where audit firm fail to perform procedures to obtain an understanding of the
terms of the agreements in order to determine the appropriate accounting and sufficiently test
estimates of fair value, including inputs, assumptions, and methodologies used in determining fair
value.
Fraud Risk.
Sometimes the audit firm or the auditor identified fraud risks and then didnt sufficiently respond
to those risks with appropriate audit procedures due to the lack of audit evidence. Deficiencies in
reporting the audit work occur when the auditor fails to test, or test sufficiently, journal entries and
other adjustments, fails to consider the risk of material misstatement due to fraud relating to
revenue recognition or to indicate why revenue recognition would not be considered a fraud risk.
In addition, other deficiencies are founded where the auditors failed to make the required inquiries
of the audit committee, management, and other related parties like employees as to know their
views about the risk of fraud.
Testing and Evaluating Internal Controls.
These include deficiencies in auditing internal controls, including failures to test controls that
address the risk of material misstatement, controls during the audit period, and controls that depend
upon system-generated data and reports. In addition, failures to test sufficiently the design and
operating effectiveness of management review controls or perform procedures regarding the use
of the work of others, such as internal auditors is also identified
3. Economic Consequences and the Political Nature of Accounting
Standard Settings:
It is said frequently by politicians, SEC and other regulators, journalists and special interests that
the accounting standard setting process should and must be protected from politics. For decades it
is said that the accounting standards have economic consequences in the country i.e. the special
interest parties the politicians and large business men has influence on the standard setters. This is
one of the important issues for auditing now a days that require special consideration.
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Recently it is remarked by the chairmen of the Securities and Exchange Commission (SEC) that
the accounting standard setting process should and must be protected from the politicization of
special interest groups and the interfering of government institutions.
The concern of interested parties is understandable, because it has become known that various
accounting sanctioned standards for example fair value rules, changing lease rules have economic
consequences that produce contrary effects for certain identifiable corporate interests, and these
parties dont like it. These affected parties only have three opportunities to protect their positions
and interest
i) In hoping to get the rule they want they can influence the FASB or IASB during the
due process stage of establishing standards before accounting standards are adopted.
ii) If the new and changed rules are implemented they can unduly influence their auditors
for favorable treatment when they consider how to account for transactions.
iii) If these two above mentioned tactics are failed to produce favorable results, the affected
corporations have one final alternative. They continue to complain and seek the
assistance of politicians to get the accounting rule changed.
Of course, the FASB and the IASB wish to maintain their rule making franchise, and so they try
to protect their rules and their responsibilities.
The SEC, FASB and the IASB, to save their position and to separate accounting standard setting
from politics, should take the following measures that are based on a number of premises, such as.
accounting standards are designed to benefit all users and interests,
There is a best accounting rule for every occasion,
Accounting standards are economically neutral, and
Selecting accounting standards because of their economic impact is the devils work.
The fact is that Accounting standards do not equally benefit all affected parties. As the economic
and business conditions are not same all over the world. These are changing over time and also
different for developed and developing countries. That is why while setting the standards the
standard setter bodies must take into consideration all the interested parties who will be effected
by these standards. Thus we can say that Accounting standards all have economic consequences.
As a caution, it is the responsibility of a countrys government to serve as an appeal court of last
resort and adjudicate between economic interests in the selection of accounting standards.
There is no such thing as universal accounting truth:
The rules and principles that guide todays capital markets are recent inventions. The most
appreciated accounting proverb assets is equal to liabilities plus owners equity has been
around less than six hundred years. Before that there was simply no need for it, therefore it was
not yet invented. Accounting rules do not come anywhere close to the perpetuity and universality
of natural laws.
Moreover, when new accounting standards are considered there are always alternatives. Ultimately
one alternative is selected by majority vote of the board members of the standard setting
organization, because it seems reasonable for them to do so. The best that a proposed accounting
rule can hope for is that it looks better than the alternatives, and this desirability will be durable.
Here are some accounting standard setting alternatives that at one time have been the law of the
land.
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Research and development expenditures were once capitalized, but now must be expensed
as incurred.
Lease obligations can be treated as operating leases or capital leases or both at the same
time as per IFRS. A contemporary proposal calls for all to be treated as capital leases. Some
economic interests would desire operating lease treatment.
Measurement for the income statement was once the main priority, now it is the balance
sheet.
Accrual of a contingent liability must be probable or likely to happen or more likely not.
In accounting standard policy discussions and establishments, participants frequently deteriorate
to a default position of searching for the one best accounting standard. They just dont understand
that it is impossible for one to exist.
Accounting standards do not equally benefit all affected parties:
Accounting rules that govern the formation of corporate financial statements all have economic
consequences. It has always been this way. Every rule puts some interest group at an advantage
over another. From the start, investors have demanded for more disclosure than the executives
running corporations have wanted to supply. This tension is natural. Investors want an open
window into the corporation, corporate executives want a closed door. It is up to standard setters
to draw the line in such a place so as to serve as an effective compromise between them.
As the SEC prioritized the needs of investors over those of companies, the ultimate solution was
to charge the newly formed FASB with the task of reducing alternatives and choices in accounting
standards. As alternatives were eliminated, rules became one size fits all.
One troubling situation is that when accounting standards are designed to advantage reporting
companies, then investors will naturally benefit.
All accounting standards have economic consequences:
If an accounting standard has no economic consequences, then the standard is not needed. There
are several ways to justify this statement about economic consequences, and there are many
examples in support.
Financial statements are intended to provide information to investors for making
investment decisions. The decisions that result from using financial statements are
themselves economic consequences.
All human communication is influential. There is no such thing as an unbiased fact. There
is no such thing as neutrality and objectivity in either accounting measurements or
accounting standards.
There are many instances where corporate executives have failed to comply with
accounting standards because they did not desire to report bad financial results that fail to
reach a target. These executives certainly believed that numbers disclosed in accounting
statements have economic consequences, and they were willing to go to great lengths to
reach their targets. And, they still believe this way. Sometimes executives manage their
earnings using accounting tricks. Because there are negative consequences to being
perceived with managing earnings.
Sometimes executives attempt to influence the configuration of accounting standards. By
using the system to change the accounting rules, they can set the stage for reporting good
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numbers The actions that corporate executives take are themselves economic consequences
of accounting standards. The current fair value issue is a good and current example of this.
4. Impact of convergence of U.S GAAPs with IFRS:
Financial reporting standards are different for different economies, which creates inconsistencies
in financial reporting. This is a problematic situation for investors trying to identify accounting
reporting differences when they are considering providing funding to companies that required their
fundings that follow the accounting standards and financial reporting of the country in which they
are doing business. The International Accounting Standards Board (IASB) seeks a workable
solution to improve the existing complexity, conflict and confusion created by inconsistency and
the lack of efficient accounting standards in financial reporting. The main difference between the
GAAP and the IFRS is the approach each takes to the standards. The GAAP is rules-based while
the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines
attempting to establish rules and criteria for any contingency, while the IFRS begins with the
objectives of good reporting and then provides guidance on how the specific objective relates to a
given situation.
Accounting Globalization, the Sarbanes-Oxley Act, the SEC adoption of international standards,
and the economic and financial collapse in recent years have been exerting pressure on a number,
of countries, including the United States, to eliminate the gap between the International Financial
Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP).
Positive Consequences:
The convergence and subsequent change of accounting and reporting standards at the international
level impact a number of components, including corporate management, investors, credit
agencies, stock markets, accounting professionals and accounting standards setters and agencies.
Impact on Corporate Management
Corporate management will benefit from moderate standards, rules and practices that apply to all
countries and are followed worldwide. The change will afford corporate management the
opportunity to raise capital via lower interest rates while lowering risk and the cost of doing
business.
Impact on Investors
Investors will have to re-educate themselves in reading and understanding accounting reports and
financial statements following the new internationally accepted standards. At the same time, the
process will provide for more credible information and will be simplified without the need for
conversion to the standards of the country. Further, the new standards will increase the
international flow of capital.
Impact on Accounting Standards Setters
The development of standards involves a number of boards and entities that make the process
longer, more time consuming and frustrating for all parties involved. Once standards have
converged, the actual process of developing and implementing new international standards will be
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simpler and will eliminate the reliance on agencies to develop and ratify a decision on any specific
standard.
Impact on Accounting Professionals
The shift and convergence of the current standards to internationally accepted ones will force
accounting professionals to learn the new standard, and will lead to consistency in accounting
practices.
Impact on Stock Markets
Stock markets will see a reduction in the costs that attend entering foreign exchanges, and all
markets adhering to the same rules and standards will further allow markets to compete
internationally for global investment opportunities
Arguments against accounting standards convergence:
There is some opposition to the convergence from all stakeholders involved, including accounting
professionals (CPAs, auditors etc.) and corporations' top management (CFOs, CEOs). There are
various reasons for such resistance to change, some are relevant to the accounting profession, some
to corporate management and some are shared by both. These are
i. The unwillingness of the different nations involved in the process to collaborate based on
different cultures, ethics, standards, and beliefs, types of economies, political systems, and
preconceived notions for specific countries, systems and religions.
ii. The time it will take to implement a new system of accounting rules and standards across
the board.
iii. Lack of good understanding of the international principles.
iv. Change in business dynamics, cultures, business ethics and accounting systems across the
countries.
v. Changing business environment across the developed and developing countries.
Arguments of CFOs:
CFOs are not embracing this change because of the costs involved. There are specifically two areas
that are directly impacted
a company's financial reporting and
internal control system
Another cost involved in the evolution and change to the IFRS is the public's perception of
the integrity of the new converged set of standards.
Despite the convergence efforts made on financial performance reporting, it appears that the main
issues lie with the difference in the approach of the U.S. GAAP and IFRS. The IFRS is more
dynamic and is continuously being revised in response to an ever-changing financial environment.
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5. Challenges in auditing fair value accounting estimates in the current
market environment:
Measurement and disclosure of fair values are of great importance in many financial reporting
frameworks. Auditors are expected to be aware of the need to understand the accounting principles
and rules relating to accounting on the basis of fair value, including disclosures, and to give
appropriate consideration to their application.
Recent market experience has highlighted the difficulties that arise in valuing financial instruments
when market information is either not available or sufficient information is difficult to obtain.
Challenges of Fair Value Accounting:
Fair value is defined in the ISAs as the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arms length transaction.
Here are some matters that are particularly important for preparing fair value estimates and that
must be taken into consideration by the auditor.
The measurement objective, as fair value accounting estimates are expressed in terms of
the value of a current transaction or financial statement item based on conditions prevalent
at the measurement date;
The need to incorporate judgments concerning significant assumptions that may be made
by others such as experts employed or engaged by the entity or the auditor;
The availability (or lack thereof) of information or evidence and its reliability;
The breadth of assets and liabilities to which fair value accounting may be, or is required
to be, applied;
The choice and superiority of acceptable valuation techniques and models; and
The need for appropriate disclosure in the financial statements about measurement methods
and uncertainty, especially when relevant markets are not easily liquid able.
Reliable information relevant to fair values:
In the current environment obtaining reliable information relevant to fair values has been one of
the greatest challenges faced by the auditors.
The nature and reliability of information available to management to support the making of a fair
value accounting estimate vary widely, and thereby affect the degree of estimation uncertainty
associated with that fair value. If markets become inactive, market price information becomes
unavailable and estimates need to be made on the basis of other information, often using models,
some of which incorporate inputs that are unobservable.7 The degree of estimation uncertainty
therefore increases and affects, in turn, the risks of material misstatement.
Experience to date has suggested that, while estimation of fair values has proved to be extremely
difficult in light of market uncertainty, it has not proved impossible to obtain sufficient information
to record these fair values in financial statements.
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While fair values are commonly thought to relate primarily to financial assets and financial
liabilities, the use of fair value is more widespread. Depending on the financial reporting
framework, the impact of fair value accounting may be seen with regard to managements
determination of pension liabilities, the value of goodwill and intangibles acquired in a business
combination, real estate, share-based payments, endowment funds, non-monetary exchanges and
other classes of assets and liabilities.
Requirements and Guidance in the ISAs Relevant to Auditing Fair Value Accounting
Estimates:
ISA establishes standards and provides guidance on auditing fair value measurements and
disclosures contained in financial statements. Fair value measurements of assets, liabilities and
components of equity may arise from both the initial recording of transactions and later changes
in value.
6. Legal Issues related with HR Audits:
There are certain legal issues related with the human resource audit of an entity. An HR audit may
require teamwork at a larger level to ensure an extensive examination of HR practices. Human
resources auditing is a widespread process that is periodically adopted and conduct by many
companies to determine whether the company's HR practices are up-to-date and whether they meet
legal guidelines related to the HR standards. Therefore, an HR audit give the notion about legal
issues related to federal and state laws that the company must address to conform and to bring into
line HR best practices. The prime purpose of HR audit is to evaluate whether the company's
policies and procedures are in accordance with federal labor and employment related laws
regulations. I.e. the laws related with the industrial labor relations.
Here are some issues related to the Human Resource Management the auditor must address and
take into consideration while conducting the audit of the HR of the organization.
Employment Applications
It is the responsibility of the auditor while conducting HR audit to disclose legal issues concerning
with the company's recruitment and selection process and procedures. Specifically related to the
type of employment application used by the companys recruitment conducting committee.
Employment applications must not contain non-job related questions that include the applicant's
age, sex, national origin or other characteristics that are not required by the job. Many applications
also contain an employment at-will refusal that protects the company's interests in case of
dismissed employees' filing legal action for unlawful discharge.
Affirmative Action Compliance:
There are some employers who have affirmative action obligations. These obligations are required
by the firms who provide goods or services to the federal government. This law make sure the
assembling of data be appropriate to the company's affirmative action plan. The auditor during the
HR audit engagement looks at compliance with affirmative action requirements such as gathering
information for the company's applicant flow log. An auditor may also examine whether the
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company has fair reimbursement practices, such as paying equal wages to employees, regardless
of race, sex, religion and other factors which are not related with the job as mention above.
Required Postings
While HR Auditing a relatively simple aspect of an HR audit is that whether the company posts
required notices or not. There can be chances of occurrence of Legal issues when the employer
doesn't post notices such as the notices related with the minimum wage poster required by the Fair
Labor Standards Act. In addition, employers must post legal notices concerning employees'
municipal rights, equal employment practices and workplace safety notices, commanded by
agencies such as the U.S. Equal Employment Opportunity Commission and the U.S. Department
of Labor.
Workplace Issues
Employers can reduces their risk of liability for workplace issues related with the discrimination
and harassment. An HR audit of employee relations practices doesn't always disclose outstanding
legal matters. Instead, through the HR audit the auditor only determines whether the company is
taking the necessary precautions and proactive measures to protect its interests, should legal
matters arise from HR departmental practices. For example, an audit examines how the company
receives employees' grievances, the process for investigating complaints and at what point
employee complaints are referred to in-house counsel or the company's outside prosecutor.
Privacy
In any organization employee confidentiality is a principal element of HR practices that must be
taken into consideration by the Human Resource Management of the organization. Employers
maintain confidential information concerning employees' personal data, compensation and
performance. More importantly, employers must preserve information about employees' medical
information discretely from standard employment actions. For example, information about an
employee's medical leaves of absence, health benefits and workers compensation matters must be
set apart from information in the employment file. The superior HR manager for an organization
typically designates a privacy officer who has sole access to employees' medical-related
information. Confidentiality measures are required under the Health Insurance Portability and
Accountability Act and the Americans with Disabilities Act.
7. Emerging IT audit issues:
There is a complete list of issues related to IT. These issues vary from country to country and
company to company on the basis of the changing business environments, processes, technology
and the industry. These issues are equally important we cannot prioritize one on the other. These
issues include the following.
Cyber security reporting:
As a part of the management discussion and analysis, now it is required by the SEC to disclose
risk of cyber incidents. Now a days this issue is among the most important factors that make the
investment of the investors in the company more risky. Following risks are included in it.
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Failure to comply with SEC reporting requirement.
There is a risk of exposure to prospective investor proceedings if requirements are not met.
Exposure to audit committee.
So it is necessary for the organizations to know exactly what to report. That is why organizations
must have proper procedure to identify exposure, evaluating impact and at the end the proper
reporting and disclosing. This process must be assessed by the IT audit to determine its
comprehensiveness if it exist.
Software asset management:
Now a days there are complex software lifecycles and complicated software licensing contracts.
There are economic downturn in the economy due to this reason software vendors aggressively
pursue licensing audits. So it involve the following risks.
Loss of potential savings.
Perspective significant financial liabilities in case of an audit
So it is necessary to perform a software asset management audit. Auditor must try to use the
standards presented by the International Standard Organization. And there should be continuous
evaluation of these processes.
Hyper-hybrid cloud:
The use of heterogeneous cloud solutions my cause for a number of significant issues with the
management and the integration of the processes and the data this situation arises the need for the
development of the additional management solutions. Following risks are associated with it.
Hybrid solution impact the business processes.
There is require an increase need of effective service life cycle management.
Master data productivity and management is required.
So the more understanding of current and planned cloud services and specific business control
points. There is an increased need of security development strategy and placement of new
technologies.
Data lifecycle management (DLM)
In the present ere the business world face the change in regulations and legislations relating to the
record management and the data retention methods. Regulators try to increase the security of the
data lifecycle space day by day. I.e. there are strict rules that must be followed by the companies
for data lifecycle management.
In such case following risks are associated with it.
Huge amount of financial penalties in case of non-compliance with the rules
Impact on brand
Impact on customer and suppliers.
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So it is necessary to gain understanding about the operationalization of the DLM throughout the
organization. And creating awareness about the DLM procedures, it is necessary to identify the
gaps relating to the DLM procedures, governance, structure and policies.
IT Governance:
IT governance plays an important role in aligning the use of technology in the organization with
the objectives of the organization. It is the responsibility of the auditor to assess that the
information technology governance of the organization support and sustain the objectives and the
strategies of the organization. It cause for the occurrence of the following risks
Non-compliance with standards
Mismatching of IT resources with the strategy of the organization.
So it is necessary to assess the IT governance capabilities of the organization, risk management,
performance management, value delivery and resource management. It is also necessary to
understand the current practices of the IT governance.
Digital identity:
Utilization of emerging technologies and unification of internal and external system create
significant identity extension. That is why IT access audit and analysis are becoming more reliant
and review based controls. It has included the following risks.
Risk of un-authorized access to data and transactions
Regulatory fines and litigations in case of non-compliance with standards.
Impact of brand
So it is necessary to understand the impact corporate security perspective on identity management.
Inventory system, technologies and devices currently planned must be properly understand by the
organizations. So it is required by the auditor to properly conduct the detailed audit of critical
technologies and controls.
Conclusion:
All the above discussed issues have serious consequences on the auditing profession. These are
required the attention of standard setter and regulatory bodies to resolve these issues. These issues
can be resolved if the standards are made transparent and independent. For this purpose following
steps must be taken into consideration by the standard setting bodies.
Firstly, the process of making standards should be transparent. Secondly, the standard setter bodies
take into consideration the interest of all the related parties. Thirdly, they should not be influenced
by any special interest, fourthly they must have adequate resources, expertise, skill and knowledge
while establishing the standards. They should take steps to make sure the implementation of set
standards. If the new standards are made they should provide guidelines for its implementations.
The language of standard books must be easy so that it is understandable by the all. And finally
the conflicts between U.S GAAPs and the U.K IFRS must be resolved to provide a clear line to all
business corporates.
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References:
Top ten emerging IT audit issues By Michael juergens and Deloitte & touche LLP.
Audit Committee Brief Top issues for audit committees in 2014 by Dolitte.
Current and Emerging Issues by Audit committee 1nstitute Sponsored by KPMG.
The Impact of Combining The U.S. GAAP And IFRS by By Nicolas Pologeorgis.
Audits around the world are riddled with problems-survey Wikipedia
TOP AUDITING ISSUES FOR 2013 CPE COURSE by Perry M. Henderson, CPA, MPA
Legal Issues related with HR Audits Wikipedia.
Economic Consequences and the Political Nature of Accounting Standard Setting by David
Albrecht