Preface

There has been a great deal written on the topic of the globalization of business operations and finances over the last 30 years. Increasingly, corporations in one nation set up offshore operations in another nation. Further, corporations in one state invest in, or extend credit to, corporations in another state. In addition, capital markets that individual and institutional investors invest in are global in that capital can be disinvested from one firm in State A and almost immediately invested in another firm in State B within moments. The importance of accounting information in facilitating these initial investment decisions and in providing the information investors/creditors need to monitor the outcome of these decisions cannot be understated. The problems encountered by investors in making these initial decisions and in monitoring the results of these decisions mirror those that initially gave rise in the United States to the U.S. requirements that first financial statements in proxy statements be audited (i.e., as codified in the Securities Act of 1933) and then that financial statements of all publicly listed firms in the United States be audited by independent auditors (as codified in the Securities Exchange Act of 1934). While figures may not lie, liars do figure. These acts were passed due to President Franklin Delano Roosevelt’s recognition that, as part of the need to restore public confidence in the security markets in the United States during the Great Depression, investors and creditors needed to have confidence in the information that they were provided by firms seeking funds or else they would not invest. That confidence, of course, was provided by requiring independent auditors to audit the numbers provided by firm management on their financial statements using audit methodologies. At that time, of course, the amount of international investment was small compared to today. The size of domestic, let alone international, financial markets and cross-market investing was small as well.

Since World War II, the size of the domestic U.S. financial market has grown much larger, as have the financial markets of the European Union, China, Japan, and the emerging economies elsewhere. Given this, and the growing level of cross-national investment, investors and creditors need to be concerned with the “fairness of presentation” of domestic U.S. financial statements as well as whether those of overseas firms reflect a true and fair view of the underlying economic reality that the financial statements claim to represent. They also need to have some understanding of what the auditor’s report, which will accompany the U.S. or non-U.S. financial statements, means, and, given that it is very important, how the auditor came to his or her conclusion. In order to help with this, we discuss the background of auditing and the different sets of laws that are relevant to the practice of auditing. We also compare the auditing standards used domestically for publicly listed corporations in the United States with those used internationally. Our goal in doing so is to provide students, managers, and researchers with a clear, concise guide to the major differences between these standards. Given the global environment within which we live, we believe that understanding these differences will promote additional study of the standards and greater understanding of the relevant (to this book) differences between financial statements audited within as opposed to outside the United States.

Auditing standards themselves are standards or guidelines that auditors follow when conducting a financial audit of a company’s financial statements. As such, they cover such areas of concern to students of auditing as ethically correct behavior, the legal environment of auditing, and what ethical behavior is supposed to be, given the auditing standards in force. Accordingly, it becomes clearer for the auditors which practical actions are to be undertaken to provide an accurate audit report on the financial statements and stay within the ethical rules and laws within which the auditor works. Standards, though, are the key focus of this book. International Standards on Auditing (ISA) are the standards to be followed in those jurisdictions that have adopted ISA or some version of ISA. ISA covers much ground. Each jurisdiction designates specific responsibilities of an auditor, including how to plan an audit, how to evaluate and conclude on the adequacies of internal controls, how to evaluate audit evidence and draw conclusions from it, and how to write an audit report. The ISA also puts out ethical standards and quality control standards for auditors and audit firms to follow. It is not enough to set forth standards, the auditor also has to feel internally obligated (i.e., being ethical) to live up to the standards, and the audit firm has to monitor the quality of its members’ compliance with the standards.

The United States, on the other hand, has its own auditing standards: the so-called Generally Accepted Auditing Standards (GAAS) set forth by the American Institute of Certified Public Accountants (AICPA), for use in private company audits, and the Public Company Accounting Oversight Board (PCAOB) standards, which apply to the audits of publicly owned corporations. The problem for both the practitioners and students is that the auditing principles of the ISA and the AICPA are not identical, even though they are now converged. This problem is compounded because of the significant differences between the standards of the ISA and PCAOB, sets of standards that are not moving toward convergence. ISA standards generally cover audits of clients that are both publicly owned and privately owned. In the United States, the AIPCA’s auditing standards for privately owned clients cover audits of firms that are typically, but not always, small. There are many larger private organizations, governments, and universities that are subject to audits using AICPA auditing standards. Auditing standards for publicly owned firms in the United States are set by the PCAOB. These are typically much larger firms. In this book, we focus on the differences between PCAOB auditing standards and the ISA. In doing so, we maximize the usefulness of this book to its users as the typical reader is very unlikely to read the financial statements, let alone see the audit report, for a small—or even a larger—privately owned client firm.

Accordingly, while books have been written on both the PCAOB standards and the ISA, here we plan to focus on the differences between the PCAOB standards and the ISA. We will cover the important differences and similarities in a clear and concise way. This should be of importance to students of auditing, researchers, and managers in the United States and internationally.

A Brief Note on the Use of this Text

We seek to present in this book a tool that students, faculty, and practitioners can use to better understand the relationship between U.S. PCAOB auditing standards and IFAC IAASB auditing standards. With time, the designations of U.S. PCAOB standards were reorganized from the initial publication of this book. Accordingly, we have added to this edition an Appendix, Appendix 1, which presents the correlation of the old designation of PCAOB auditing standards, before reorganization, and the new designations for these standards. We also have added a second Appendix, Appendix 2, which presents the PCAOB standards, the related AICPA standards, and the IFAC IAASB standards.

We suggest bookmarking the Appendices and referring back to them as you use the text.