ACCA Advanced Audit and Assurance (AAA) Course: 1. The Need for Regulatory Frameworks for Audit

Advanced Audit Assurance, lesson one,

international regulatory

frameworks. And we should cover three

elements. Firstly, the need for regulatory

frameworks for audit and assurance.

Secondly, what sort of public oversight

exists of the audit profession. And

thirdly, the role of corporate governance

both for the entity itself, but also for

the audit profession.

So, let's think about what

sort of regulatory framework exists for

audit and assurance and why we need them.

Now it's important for a recap here and for

you to recall what previous studies

taught you about an assurance engagement.

And let's have a look at the paragraph

from the IAASB glossary. So an assurance

engagement is one in which a

practitioner expresses a conclusion

designed to enhance the degree of

confidence of the intended users other

than the responsible party. So there are

three parties to this arrangement.

Firstly, the practitioner.

Secondly, the intended user.

And third, the responsible party. The

responsible party is responsible for the

subject matter. The practitioner is there

to verify and provide assurance about

that subject matter in order to provide

a degree of confidence that that

information does have validity for the

intended user.

Now what sort of need is this for?

Well ultimately, the intended user needs

to make an informed investment decision

based upon the information that is being

presented. And therefore, if there's a

knowledge that that information has been

reviewed by a third party,

then that enhances confidence, it

enhances trust, it enhances reliance on

the information in order to make those

informed investment decisions. And

hopefully it has minimized or at least

reduced any potential bias in that

information because it's being looked at

by a third independent party.

So it's all about enhancing confidence,

allowing the user of the

information to have the confidence to

use that information to make an informed

investment decision. So that's the

objective of an assurance engagement, okay?

It is there to enhance confidence.

Now we need to think about

what's happened to the audit profession

recently in the headlines.

And unfortunately there have been a number

of corporate failures that have existed

over the last few years.

Now notice I'm talking about

corporate failures.

Sometimes individuals often talk about

audit failures, but this is not

appropriate, it's a corporate failure. So

Wirecard in Germany, Carillion, and Patisserie

Valerie in the United Kingdom.

These are organizations that have failed.

And from these failures have come

criticism of the external

auditors. The criticism being that the

work that they have done was of poor

quality.

That they hadn't done enough nor had

they raised this alarm

when going through this

information and realizing that there was

some sort of financial difficulty.

Now a reaction to these

corporate failures has therefore

resulted in this increase regulation and

certainly an increase in public

oversight of what auditors actually do.

It's all about, remember, the enhancement

of confidence of the user in order to

make an informed investment decision.

Now why do we need regulation?

Well we need to ensure that

the standard of work

being performed by an auditor is

being monitored. Okay so where does this

come from? Well it comes from the audit

industry itself, the actual firm itself

who requires quality procedures, but also

independent regulators. So regulators who

have oversight of the audit firms themselves.

We need to ensure there is

constant high-quality work. We need to

ensure there's sufficient work being

done in terms of enhancing the

confidence of the user in terms of the

information being presented. And

ultimately we are there to protect the

reputation of this quality profession.

Now where does this audit regulation

derive from? Well it comes from three

main areas. Firstly, actual auditing

standards, but also standards in relation

to assurance engagements. Now this is a

sort of form of self-regulation. So the

profession itself produces these

standards, but of course we perform this

work within the wrapper of a law and

therefore there will be UK,

there'll be International, there'll be

laws, regulations to actually govern what

sort of information is being used in

order to be able to enhance that confidence

The auditors have a duty of

care for the wider or to the wider

public and therefore there will also be

potential independent regulators outside

of the firms to ensure that the audit is

being done correctly, the quality level

is very, very high, and that these

auditing standards which are hopefully

fit for purpose are actually being implemented.

So in relation to the standards,

well we have this term, the

IAASB, so the International Auditing and

Assurance Standards Board. And we have

the IESBA, the International Ethics

Standards Board. And these organizations

produce codes but also the actual

standards which have got to be adopted

internationally when going through an

audit and also an assurance engagement.

Now we have this

International Federation of Accountants

and it is the

IFAC.

Federation in which the

IAASB and also the IESBA, so the standards

board and the ethics board, exist.

The IAASB,

they produce these ISAs, the

International Standards on

Auditing which is the framework

against which an audit must be conducted.

And the International Ethics

Standards Board, the IESBA, produces a

code. A code of ethics for professional

accountants, a code which must exist when

doing an audit but also in the actual

daily life of an external auditor and a

professional accountant.

Now these are

international and every country will

differ slightly. And therefore it's

absolutely vital that these standards

are not followed blindly but are

potentially adapted to ensure that it is

relevant for the area, for the

the country in which this audit is

being produced. And hence, as I've said

there, across the globe, across the world

we have more than a 100 countries which

have taken the auditing standards and

they have adopted them and

they either used them or they've

slightly amended them so that they have

their own national standards. But

ultimately, the auditing standards, the

ethical standards are against which

you must work.

Now in the UK we have ISAs but

notice it's ISAs (UK) because they've been

slightly adapted in order to be

consistent with the UK Market.

In relation to the code of ethics,

well we have the ACCA's Code of Ethics

which is based upon the Ethics Standards

Board code and in which you must work.

Now the AA, I apologize, the IAASB

also produces other standards. So

they include standards on what sort of

quality control must exist within an

audit but also an audit firm.

They produce ISAEs

which are standards on assurance

engagements which of course include

audit.

We also have ISREs

which provide standards on a

review engagement which differs

from an audit, different level of assurance.

And we have ISRSs, Standards

on Related Services.

So the ISAs apply to audits, but

also all of these individual standards,

they also provide or they also

relate to audits and assurance

engagements as well. And we will use

these going forward.