THEORETICAL BACKGROUND ON AUDITING
Overview of common-law and code-law systems
1.1.1 Characteristics of common-law system
Common law refers to a system of unwritten laws derived from judicial precedents set by courts, playing a crucial role in guiding decisions in atypical cases where existing statutes are insufficient Originating from British legal traditions, the U.S common-law system developed during the colonial era of the 17th and 18th centuries and is also utilized in countries like Australia, Canada, Hong Kong, India, New Zealand, and the United Kingdom.
Stare decisis is a legal principle that refers to the history of judicial decisions, serving as a foundation for evaluating future cases Common law, or case law, depends on comprehensive records of similar situations and statutes, as there is often no official legal code applicable to the specific case being considered.
The presiding judge in a case identifies applicable precedents, with higher court rulings binding on lower courts to ensure stability and consistency in the U.S legal system While lower courts may modify or deviate from outdated precedents when cases differ significantly, overturning precedents is a rare occurrence.
Countries following a standard law system are typically former British colonies or protectorates, including the United States
Features of a common-law system include:
- There is not always a written constitution or codified laws;
- Judicial decisions are binding – decisions of the highest court can generally only be overturned by that same court or through legislation;
- Extensive freedom of contract - few provisions are implied into the contract by law (although provisions seeking to protect private consumers may be implied);
- Generally, everything is permitted that is not expressly prohibited by law
A standard law system is generally less prescriptive than a civil law system, prompting governments to consider specific legislation to protect citizens in infrastructure programs This may include prohibiting service providers from disconnecting water or electricity for non-payment and mandating the disclosure of transaction-related documents under freedom of information laws Additionally, legal requirements may necessitate the inclusion of equal bargaining provisions in contracts, especially when one party holds significantly more power than the other For further details, refer to Legislation and Regulation.
1.1.2 Characteristics of code-law system
Code law or civil law is a comprehensive system of rules and principles usually arranged in codes and easily accessible to citizens and jurists (LSU law)
Civil law governs the legal relationships among individuals and entities, focusing on persons, property, and their interactions, while excluding criminal, commercial, and labor law The codification of civil law is prominent in many countries, with the French Civil Code and the German BGB serving as the most significant and influential examples.
Civil-law systems, also known as continental or Romano-Germanic legal systems, are prevalent worldwide, encompassing approximately 60% of the globe Rooted in Roman law and influenced by canon law, these systems are often enriched by local customs and cultural practices While they have evolved to become more secular over the centuries, the civil law tradition emphasizes individual freedom and fosters cooperation among individuals.
Countries that adhere to a civil law system are often former colonies or protectorates of France, the Netherlands, Germany, Spain, or Portugal, prominently found in Central and South America Additionally, many Central and Eastern European and East Asian nations also utilize this legal framework Originating from Roman law, the civil law system is characterized by its codified nature, which serves as a defining feature of its structure.
A written constitution typically outlines fundamental rights and responsibilities through various codes, including civil, corporate, administrative, tax, and constitutional law However, administrative law is often less codified, leading administrative court judges to operate similarly to common law judges.
Legislative enactments are the sole binding authority for all individuals, leaving minimal room for judge-made law in civil, criminal, and commercial courts However, judges often adhere to prior judicial decisions in practice In contrast, constitutional and administrative courts possess the power to invalidate laws and regulations, and their rulings in these matters carry binding authority for everyone.
- In some civil law systems, e.g., Germany, writings of legal scholars have a significant influence on the courts;
In many legal systems, there are specialized courts established to address specific codes, including separate constitutional, administrative, and civil courts These courts are responsible for assessing the consistency of legislation and administrative actions with their respective codes, as well as interpreting the provisions outlined within those codes.
In civil law systems, there is less freedom of contract as many provisions are legally implied, restricting the ability of parties to negotiate specific terms These systems tend to be more prescriptive compared to common law systems To facilitate successful infrastructure projects, governments may need to enact specific legislation to limit certain restrictions or address sector-specific requirements (The World Bank, 2021).
Overview of International Standards on Auditing
1.2.1 Introduction to International Auditing and Assurance Standards Board
The International Auditing and Assurance Standards Board (IAASB) is an independent body dedicated to establishing high-quality international standards for auditing, quality management, and assurance services By promoting the implementation of these standards, the IAASB enhances the consistency and quality of auditing practices globally, thereby bolstering public trust in the auditing profession worldwide.
1.2.2 Introduction to International Standards on Auditing
International Standards on Auditing (ISA) are essential professional guidelines for auditing financial information, issued by the International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB) These standards assist auditors in enhancing the value of their work, ultimately fostering greater confidence among investors.
The auditing standards encompass a range of critical areas, including auditor responsibilities, audit planning, internal control assessments, gathering audit evidence, leveraging the expertise of other professionals, drawing audit conclusions, and preparing audit reports, along with specific standards for specialized fields.
The groundwork for an international set of standards for auditing began in
In 1969, the Accountants International Study Group published several reports on international auditing, highlighting comparisons among Canada, the U.K., and the U.S This initiative laid the groundwork for increased interest in global auditing standards Following this, the formation of the International Accounting Standards Committee in 1973 sparked demands for a comparable organization dedicated to auditing practices.
In his 1978 book 'International Auditing Standards,' Maurice Moritz, Director of Accounting Research at AICPA, presented a compelling argument for the establishment of a unified set of auditing standards and recommended the formation of the International Auditing Standards Committee (IASC) Moonitz's work serves as a valuable resource for understanding the global landscape prior to the adoption of international standards and highlights the various calls for such standards during that period.
In the late 1970s, the International Federation of Accountants (IFAC) established the International Auditing Practices Committee (IAPC) as a standing committee of the IFAC Council, which was later renamed the IFAC Board in May 2000.
From 1980 to 1991, the International Auditing Practices Committee (IAPC) released a series of International Auditing Guidelines (IAG) and their addendums The inaugural International Standard on Auditing (ISA) was introduced in 1991, establishing a framework that continues to be in effect today.
The IAPC was renamed the International Auditing and Assurance Standards Board (IAASB) Membership of the organization was widened to include non- auditors
On January 1, 2003, the International Auditing and Assurance Standards Board (IAASB) released the complete text of its International Standards on Auditing for free on its website, committing to publish all future final pronouncements online at no cost Users can access IAASB publications by registering on the IFAC website.
May 21, 2003, the European Commission issued the communication, reinforcing the statutory Audit in the European Union (COM/2003/286) on May 21,
2003, which identified the requirement to use ISAs for all E.U statutory audits from
2005 onwards as a short term priority The communication was issued with the press release Audit of company accounts: Commission sets out ten priorities to improve quality and protect investors
On May 6, 2004, the Auditing Practices Board in the U.K announced plans to adopt the International Standards of Auditing (ISAs) established by the International Auditing and Assurance Standards Board (IAASB), a decision that marked a significant shift in auditing practices This board was later replaced by the Audit and Assurance Council in July 2012.
December 22, 2004, the APB issued International Standards on Auditing (ISAs) (U.K and Ireland)
The International Auditing and Assurance Standards Board (IAASB) completed a project (known as the 'Clarity Project') to update and reformat the
The International Standards on Auditing (ISAs) aim to enhance their understandability and align with regulatory frameworks, such as the European Commission's Statutory Audit Directive The Clarified ISAs, along with related documentation and FAQs, can be accessed through the IAASB Clarity Center.
March 2, 2009, the APB issued a press release announcing its intention to update U.K and Irish Auditing Standards for the New International Standards on Auditing for 2010
On October 13, 2009, the APB announced the release of new International Standards on Auditing (ISAs) for the U.K and Ireland, which will replace the current ISAs and ISQC 1 in these regions.
The 2009 standards for financial statement audits will be effective for periods ending on or after December 15, 2010 To aid in understanding these changes, the APB has released a staff paper summarizing the main updates in the new ISAs for the U.K and Ireland.
New auditing standards issued in 2016 are effective for audits of financial statements for periods commencing on or after June 17, 2016, in the U.K (ICAEW)
The ISA objectives are two-fold:
This article examines the alignment of national accounting and auditing standards with international standards, assessing the extent of compliance with these standards It also evaluates the strengths and weaknesses of the institutional framework that supports high-quality financial reporting.
- Assist the country in developing and implementing a country action plan for improvement of institutional capacity to strengthen the country's corporate financial reporting system (Financial Stability Board, 2015)
Every ISA is structured in individual sections as:
The introductory section of the ISA outlines its purpose, scope, and subject matter, highlighting the responsibilities of auditors and other relevant parties within the established framework of the ISA.
Every ISA consists of a clear statement about the auditor's objective in the audit area addressed by that ISA
For a higher understanding of the ISAs, pertinent terms are delineated in each ISA
Clearly stated requirements shore up every objective Requirements are always expressed by the phrase "the auditor shall."
- Application and other explanatory material
The application and accompanying materials clarify the definition of a requirement, outlining its intended scope and providing examples of suitable procedures for specific situations.
The International Standards on Auditing consists of:
ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing
ISA 210, Agreeing the Terms of Audit Engagements
ISA 220, Quality Control for an Audit of Financial Statements
ISA 240, The Auditors' Responsibilities Relating to Fraud in an Audit of Financial Statements
ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements
ISA 260, Communication with Those Charged with Governance
ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
ISA 300, Planning an Audit of Financial Statements
ISA 315, Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment
ISA 320, Materiality in Planning and Performing an Audit
ISA 330, The Auditors' Responses to Assessed Risks
ISA 402, Audit Considerations Relating to an Entity Using a Service Organization
ISA 450, Evaluation of Misstatements Identified during the Audit
ISA 501, Audit Evidence-Specific Considerations for Selected Items
ISA 510, Initial Audit Engagements-Opening Balances
ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
ISA 600, Special Considerations-Audits of Group Financial Statements (Including the Work of Component Auditors)
ISA 610, Using the Work of Internal Auditors
ISA 620, Using the Work of an Auditors' Expert
ISA 700, Forming an Opinion and Reporting on Financial Statements
ISA 705, Modifications to the Opinion in the Independent Auditor's Report
ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors' Report
ISA 710, Comparative Information-Corresponding Figures and Comparative Financial Statements
ISA 720, The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements
ISA 800, Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
ISA 805, Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
ISA 810, Engagements to Report on Summary Financial Statements
International Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements
International Auditing Practice Notes (IAPN) 1000, Special Considerations in Auditing Financial Instruments
(Source: IAASB, Handbook of International Quality Control, Auditing,
Review, Other Assurance, and Related Service Announcements) 1.2.3 Auditing Standards on Audit Disclosure
Theoretical background of the audit report
An auditor's report is a formal document that expresses the auditor's opinion on the adherence of a company's financial statements to generally accepted accounting principles (GAAP) It assesses whether these statements are free from material misstatements, ensuring transparency and reliability in financial reporting.
An independent auditor conducts a thorough examination and provides an opinion on an enterprise's financial statements, fulfilling their appointment and adhering to legal or statutory requirements.
An audit report helps the shareholder as the shareholder can believe that the company is reliable and there is no problem
- The auditor's report is critical because banks and creditors require an audit of a company's financial statements before lending to them
- Assure financial statements A professional auditor issues it
- The report helps the users of the financial statement to assure that financial information is correct or not
- As the auditor is independent, it is proof that the company is true to their shareholders
- The most important thing is that the government wants the business to follow the rules and regulations, so the audit report states that they follow the rules and regulations
- The report converts in accessible language to understand as many shareholders want to know about the audit report (Will Kenton, 2021)
1.3.2 Contents of an audit report
According to the International Standards on Auditing – ISA 700, the content of the audit report consists of the following parts:
- Title: The title should be an Independent Auditor's Report
- Addressee: It should be mentioned to whom the auditor's report is given For example, in the case of a company auditor's report is addressed to the company's members
- Management Responsibility: After Addressee, the management responsibility towards the financial statement is to be written, which includes the responsibility of management towards the preparation and presentation of financial statements
- Auditor's Responsibility: After management responsibility, the auditor's responsibility is to be written, which includes their responsibility to issue an unbiased opinion on the financial statements
In addition to the previously outlined responsibilities, it is essential to address any other reporting obligations, including the requirement to report on additional legal and regulatory standards.
- Opinion: Then, the auditor is required to write his own audit report opinion on the truth and fairness of the financial statements specifying the basis of such opinion
- Signature: The signature is to be done by the engagement partner of the audit firm Below the name of the engagement partner and the audit firm
- Place and Date: Then, the place of signature and the date of signing are to be mentioned (IAASB, ISA 700, 2015)
The auditor's letter follows a standard format, as established by generally accepted auditing standards (GAAS) A report usually consists of three paragraphs
- The first paragraph states the responsibilities of the auditor and directors
- The second paragraph contains the scope, stating that a set of standard accounting practices was the guide
- The third paragraph contains the auditor's opinion (Will Kenton, 2021)
An additional section may update the investor on the findings of a separate audit related to another aspect of the entity The investor will focus on the third section, which presents the stated opinion.
There are two types of reports issued for companies
A clean report means that the company's financial records are free from material misstatement and conform to GAAP guidelines A majority of audits end in unqualified or clean opinions
A qualified opinion is issued in two scenarios: when financial statements have material misstatements that are not widespread, or when the auditor cannot gather enough appropriate evidence to form an opinion, yet the potential impact of any misstatements is limited For instance, there could be an error in calculating operating expenses or profit Auditors usually specify the reasons and areas affected by these issues.
An adverse opinion from an auditor indicates that significant and widespread misstatements have been identified in a company's financial statements, representing the most serious outcome for the organization This type of opinion can lead to severe consequences, including rejection of the financial statements by regulators and investors, as well as potential criminal charges for corporate officers if illegal activities are involved.
A disclaimer of opinion occurs when an auditor cannot gather enough evidence to form a reliable opinion on financial statements, potentially leading to significant and widespread misstatements This situation may arise if the auditor lacks impartiality or is denied access to essential financial data.
1.3.4 Stakeholders approach to the audit report
An audit report serves as a crucial communication tool between auditors and users of financial statements, including management, the board of directors, shareholders, investors, and regulatory bodies Typically issued annually, this report provides stakeholders with essential insights into the financial health and integrity of the entity's financial statements.
- The investors use this to assess the financial performance of the entity on the basis that only they will decide whether to invest in that company or not
- This report is used by the Government agency to assess the accuracy and completeness of tax declaration and to check that there is no tax evasion
- It is used by Shareholders and the board of directors for assessing the transparency of the financial statement and the integrity of management (Corporate
1.3.5 How is an audit report considered to be quality?
The audit process involves a series of procedures conducted by auditors to assess the financial health, fairness, and transparency of an enterprise's financial statements based on collected evidence The Audit Report serves as a critical outcome of this evaluation, providing essential insights for users who rely on these audited financial statements for decision-making However, if auditors fail to identify errors or fraud due to inadequate assessment of inherent risks or improper adjustments to the audit program, or if they neglect to gather sufficient evidence regarding significant estimates, the integrity of the financial information may be compromised.
The issuance of International Standards on Auditing by the IAASB establishes a unified framework for measuring audit quality In 2019, Hendrik Elisa Sutejo Samosir from Universitas HKBP Nommensen conducted research titled “Audit Quality Report: A Conceptual Review of Perceived.”
A longer audit residency may negatively affect auditor independence and compromise the quality of audited reports However, extended audit tenures can significantly reduce audit report lag, thereby enhancing the timeliness and overall quality of the reports This study by Hendrik Elisa Sutejo Samosir (2019) suggests further empirical investigation into the relationship between prolonged audit tenure and the quality of audit reports, focusing on the dual aspects of quality degradation and timeliness.
According to the “Audit Quality Reporting” resource of the Center for Audit
A quality audit report is influenced by several key factors, primarily the leadership of the audit firm The administration's commitment to emphasizing audit quality is crucial, as it demonstrates accountability for the firm's quality control framework and public interest This includes allocating appropriate resources for the development and communication of quality control practices Additionally, the report should highlight the importance of ethics and sound judgment in every decision made by personnel, particularly at the engagement level, as well as their responsibilities in creating and maintaining the firm's quality control system.
The next component is “Independence, Objectivity and Skepticism.”
Audit quality is crucial for audit firms as it involves implementing strategies to identify and evaluate potential threats to independence and objectivity Firms must take appropriate actions to eliminate or mitigate these threats, ensuring compliance with ethical standards, independence, and confidentiality requirements set by professional associations Additionally, it is essential for firms to encourage their professionals to maintain an objective and skeptical mindset throughout the audit process.
Chapter 1 offers essential background information on the convention and outlines the features of two law-based systems It introduces the International Standards on Auditing, detailing its objectives and the publisher responsible for its dissemination Additionally, the chapter covers the foundational knowledge of an auditor's report, which serves as a critical basis for decision-making in business.
A COMPARATIVE ANALYSIS OF THE IMPACT OF THE
Financial statements audit process
Auditing firms play a crucial role in providing assurance on the financial information presented in enterprises' financial statements Qualified auditors meticulously examine accounting records to identify material misstatements and weaknesses in clients' internal control systems, ultimately benefiting users of financial statements such as business owners, lenders, banks, and investors Despite its importance, the audit process can be unclear to many, including the companies being audited This article outlines the five main stages of the audit process to enhance understanding.
Understanding the client is a critical initial step for an audit firm upon accepting an engagement This involves assessing the client's conditions, nature, legal framework, and industry, which significantly influence the auditors' judgments After gaining this insight, auditors must form a team to conduct fieldwork, develop a structured timeline, and create an effective audit program This phase is essential as it directly affects the overall quality of the audit process and the final audit report.
Risk appraisal involves auditors researching and assessing the business environment, industry, and operations to identify potential risks and fraud that could lead to material misstatements in financial statements This process requires auditors to possess extensive knowledge and experience, particularly with large and complex contracts Key procedures at this stage include evaluating the business's internal controls, conducting general analyses of collected data, and staying informed about relevant regulators, customers, suppliers, and competitors, often drawing from years of prior audits and personal expertise.
An effective audit strategy and plan are developed based on risk assessment to identify key accounts for concentrated examination, thereby minimizing potential risks The audit firm creates a comprehensive audit plan that includes a detailed approach to testing various financial items, assessing the reliability of the company's internal controls, and establishing a thorough schedule while assigning tasks to team members This audit framework is continuously reviewed and adjusted in response to new information from the business and its environment, ensuring a robust evaluation of material misstatements in the financial statements.
Auditors gather evidence by testing a company's internal controls, verifying financial statement amounts and disclosures against supporting books and records, and collecting external third-party documents for evaluation.
Exercising skepticism and judgment is crucial for auditors, as it involves critically evaluating management's statements and testing the assumptions behind financial statements Independent verification may be necessary for significant balances, like cash, and auditors can conduct random sampling of reported items, such as inventory prices and quantities Additionally, auditors can reach out to third parties, including suppliers or customers, to confirm specific transactions or account balances, enhancing the reliability of the financial information.
Auditors implement testing controls to reduce the risk of material misstatements, adjusting the nature, timing, and scope of the audit as necessary They assess the effectiveness of these controls to ensure accurate financial reporting.
Effective controls that are consistently tested throughout the year can lead auditors to reduce the amount of substantive audit evidence needed for their opinions However, regardless of the reliability of these controls, auditors still gather varying degrees of substantive audit evidence.
After the testing control, the auditor must conduct substantive tests to gather significant audit evidence from key processes that present potential risks These additional procedures are essential for ensuring a thorough evaluation of the audit's integrity.
+ Study of records to confirm balances and transactions;
+ Getting the support of third parties with whom the company does business (such as its suppliers, customers, and in particular, the banks that use it);
+ Examining the components of financial statements by comparing them with external related information and examining any discrepancies
+ And recalculation of various accounts
In the finalization stage of the audit process, auditors utilize their professional judgment to form an overall opinion based on the tests conducted and the audit evidence gathered This conclusion is critical as it serves as the foundation for the auditor's report Throughout the audit, auditors engage with the company at various levels, including discussions with both operational and senior management, as well as those responsible for governance Employing professional skepticism, auditors critically evaluate management's assertions regarding the financial statements' numbers and disclosures.
Impacts of common-law and code-law system to accounting and
The first chapter highlights the two predominant legal systems—common law and code law—which significantly contribute to the diversity observed in accounting and auditing practices.
Common law, or judge-made law, significantly influences accounting by providing flexibility in financial reporting and justifying various accounting treatments This principle-based system, prevalent in English-speaking countries, allows for adaptability and innovation, as it evolves on a case-by-case basis rather than relying on exhaustive statutes The regulation of accounting is primarily managed by non-governmental professional associations, enabling quicker adjustments to rules and ensuring that professionals maintain an up-to-date knowledge base.
In countries with a code-law system, accounting regulations are primarily established by the government, resulting in a uniform approach to evaluation, reporting, and disclosure This system contrasts with the flexibility found in common-law nations, where accounting practices can vary In civil-law countries, such as Vietnam, the Ministry of Finance dictates accounting standards and procedures, which can complicate the adoption of International Financial Reporting Standards (IFRS) The rigid adherence to legal form in these jurisdictions, influenced by historical colonial practices, limits the ability of accounting practitioners to shape generally accepted principles As a result, while IFRS offers businesses greater autonomy and accountability in representing financial transactions, the existing Vietnamese Accounting Standards (VAS) are more prescriptive and predetermined.
In common-law countries like Canada, New Zealand, and South Africa, standard setting is managed by professional accounting bodies such as the Canadian Institute of Chartered Accountants, the New Zealand Institute of Chartered Accountants, and the South African Institute of Chartered Accountants Conversely, in Roman-law countries, such as France, standard setting is typically overseen by the government, with the primary authority being the Conseil national de la comptabilité, established in 1946 as part of the Ministry of Finance Currently, its standards must be adopted by the Comité de réglementation comptable, chaired by the Finance Minister, and there are also various accounting rules embedded within tax statutes.
Legal precedents significantly shape common law systems prevalent in Anglo-Saxon countries like the United States, Australia, and Canada, whereas civil law, or code law, relies on formalized legal codes that are regularly updated Common law, rooted in English law, is based on judicial decisions, and it extends to the United Kingdom and its dependencies Legal frameworks can influence financial reporting, thereby affecting investor security for both investors and creditors Research indicates that common-law jurisdictions offer superior investor rights and corporate accountability compared to code-law nations Countries that uphold robust shareholder rights and maintain an impartial justice system are crucial for enabling swift identification of financial losses Furthermore, firms with strong shareholder protections and high-quality political institutions tend to disclose adverse news more promptly than those operating under weaker investor safeguards and lower-quality legal frameworks in advanced economies.
English law, or common law, is characterized by strong investor and shareholder rights, rigorous compliance with regulations, high transparency, and consistent financial reporting In contrast, civil law systems, such as those in France, Germany, and Scandinavia, tend to offer lower levels of investor protection, less effective law enforcement, and weaker consistency in financial standards.
In auditing, the study of “Global Audit Characteristics Across Cultures and
Environments: An Empirical Examination” by Wood, R A (1996) illuminated that
The legal framework of a country can significantly influence the behavior of auditors and their roles within the profession In a codified Roman law system, the rigidity of legal standards may lead to a greater reliance on established legal objectives in auditing practices Conversely, a common law system, which adopts a more flexible, case-by-case approach, may foster the evolution of auditing characteristics and allow the profession to establish its own standards and norms more freely.
The quality of audit report in common - law countries
The International Standards on Auditing (U.K.) (ISAs (U.K.)) and the International Standard on Quality Control (U.K.) (ISQC (U.K.)) are derived from the global standards set by the International Standards on Auditing (ISAs) and the International Standard on Quality Control (ISQC) These duplicate titles were published by the International Auditing and Assurance Standards Board (IAASB) and distributed by the International Federation of Accountants (IFAC) in 2009, with their usage authorized by IFAC.
Great Britain has adopted International Standards on Auditing as its National Standards and utilized in the country with no independent local auditing standards
As a result, the form of an audit report, sections, and quality control are followed by the ISAs
The audited financial statements of Burberry Group PLC, as illustrated in the PwC audit report, adhere to ISA 700 guidelines, detailing the auditor's opinion on the Group's financials for the specified period Key sections include the independent auditor's report, the basis for the opinion supported by gathered evidence, and a statement of independence confirming ethical compliance with FRC's Ethical Standard The audit approach outlines the planning, outcomes, strategies, and focus areas, while key audit matters highlight how critical issues were addressed Additionally, the materiality section discusses qualitative considerations for evaluating misstatements, alongside assessments of going concern, reporting on other information, and other necessary disclosures, culminating in the auditor's signature.
The report effectively safeguards the rights of investors and shareholders while providing detailed insights into the audit process, making it accessible even to those outside the financial sector This transparency enhances user trust in the auditor's services and allows stakeholders to comprehend the step-by-step evaluation of materiality, determining whether any misstatements in the financial statements pose significant concerns that could influence the auditor's conclusions.
Figure 2.1: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2 2: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.3: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.4: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.5: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.6: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.7: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.8: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
Figure 2.9: Burberry Group PLC - Audit report
Source: Burberryplc.com, Annual report 2019-2020
2.3.2 The United States of America
In the United States, the Auditing Standards Board issues the Generally Accepted Auditing Standards (GAAS) to ensure quality and evaluate auditor performance Key differences exist between U.S GAAS, PCAOB standards, and International Standards on Auditing (ISAs), particularly in areas such as audit evidence verification, going-concern assessments, internal control reporting over financial statements, risk evaluation and responses to identified risks, and the integration of other audit work into the overall audit process.
In accordance with Generally Accepted Auditing Standards, Standards of Reporting are:
- "The auditor must state in the auditor's report whether the financial statements are presented under generally accepted accounting principles
- The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period concerning the preceding period
- When the auditor determines that informative disclosures are not reasonably adequate, the auditor must state in the auditor's report
An auditor is required to provide an opinion on the financial statements as a whole or indicate when an opinion cannot be expressed in their report If an overall opinion cannot be provided, the auditor must clearly state the reasons for this in the report Additionally, whenever an auditor's name is linked to financial statements, they must specify the nature of their work and the level of responsibility they assume in the report.
Accepted Auditing Standards) (AICPA, GAAS, A.U Section 150)
The International Standards on Auditing (ISA) provide less detail than the Standards on Reporting The Public Company Accounting Oversight Board (PCAOB) opted not to clarify specialized terms like "reasonable assurance" in the new audit reporting framework.
“The Importance of Clarification of Auditors’ Responsibilities under the New Audit Reporting Standards” of ANN G BACKOF (University of Virginia), KENDALL
BOWLIN from the University of Mississippi and BRIAN M GOODSON from Clemson University highlight the contrast between the international audit reporting model, which emphasizes that reasonable assurance does not guarantee the detection of all material misstatements (IAASB, 2015) They argue that including audit-specific data in reports helps address the need for tailored information However, some caution that requiring auditors to disclose critical audit matters (CAMs) may raise questions about how firms can issue clean conclusions despite recognizing these risky areas The authors clarify that the purpose of CAM disclosures is to inform financial statement users about the audit aspects that required significant judgment or posed challenges to auditors (PCAOB, 2016), indicating that these disclosures reflect areas deemed to have a higher risk of material misstatement.
In the publication of IAASB in July, 2017 of “Summary Comparison
Between the IAASB and the US PCAOB Standards”, the Auditor Reporting
The Implementation Working Group highlighted the distinctions between the IAASB's new and amended reporting standards and the PCAOB Standard AS 3101, which pertains to the auditor's report on financial statements when an unqualified opinion is expressed These differences were outlined in the PCAOB's June 2017 release, PCAOB Release No 2017-001.
Table 2.1: Key differences between ISAs and the United State Auditing
Communication of KAM/CAM when there is a modified opinion
In circumstances when there is a disclaimer of opinion, the auditor’s report does not include KAM
In circumstances when there is a disclaimer of opinion or an adverse opinion, the requirements in relation to the communication of CAM do not apply
ISA 7012 mandates that auditors communicate Key Audit Matters (KAM) when expressing an adverse opinion, in contrast to PCAOB standards, which do not require the communication of Critical Audit Matters (CAM) under similar circumstances.
Relevant ethical requirements and independence
In the Basis for Opinion section, there is identification of the relevant ethical requirements and a statement indicating that the auditor is independent and has fulfilled the auditor’s other
In the Basis for Opinion section, it is essential to state that the auditor is a registered public accounting firm with the PCAOB (Public Company Accounting Oversight Board) in the United States, emphasizing the necessity for the auditor to maintain independence concerning the company in accordance with regulatory standards.
The IAASB mandates that auditors provide a clear affirmation of their independence and adherence to all relevant ethical obligations.
U.S federal securities laws and the applicable rules and regulations of the US Securities and
Exchange Commission (SEC) and the PCAOB
Responsibilities of the auditor, and of management and those charged with governance
The auditor's report includes detailed sections outlining the responsibilities of management and governance, along with the auditor's own responsibilities and the essential features of the audit process.
Recent updates to standardized language now include the phrase “whether due to fraud or error,” clarifying auditors' responsibilities under PCAOB standards These enhancements emphasize the need for auditors to obtain reasonable assurance that financial statements are free from material misstatement.
Under PCAOB Standards, the responsibilities of auditors, management, and those charged with governance are less detailed and integrated within the Basis for Opinion section, rather than being outlined in distinct sections.
Name of the engagement partner
Disclosure of the name of the engagement partner is required to be
Disclosure of the name of the engagement partner and other accounting firms participating in
The IAASB does not mandate the disclosure of information regarding other accounting firms involved in the auditor's report for audits of financial statements of listed entities However, the audit must be summarized for all entities audited and reported by the audit firm on PCAOB Form AP, which pertains to the auditor's reporting of certain audit details.
The quality of audit report in some code - law countries
In contrast to common – law nations, French, German, and Scandinavian legislations or civil law result in lower investor security, law enforcement, and financial standards consistency
France adheres to the bookkeeping, auditing, and financial reporting requirements established by European Union (E.U.) Regulations and Directives, which are incorporated into its national laws and regulations.
In France, all statutory audits must adhere to a mandatory quality affirmation (Q.A.) review framework as stipulated by the Audit Directive and E.U Regulation The High Council for Statutory Audits (H3C) is responsible for ensuring the quality of all statutory audit firms, with standards primarily based on the International Standards on Auditing (ISA) However, the specific version of the ISA referenced remains unclear Additionally, the Compagnie nationale des commissaires aux comptes (CNCC) indicates that the adoption of ISA for statutory audits will depend on their coordinated approval at the European level by the European Commission Notably, the 2018 Handbook has been translated into French.
The France Standards on Auditing are partially adopted from International Standards on Auditing, apart from International Standard on Quality Control 1
The International Standard on Quality Control (ISQC) 1 and ISA 220 have not yet been adopted in France As a result, audit reports in the country fully disclose all aspects as outlined in the International Standards on Auditing, including critical audit matters and detailed explanations from the auditor.
The audit report format in France aligns with that of the U.K and Singapore, as it adopts the International Standards on Auditing as its national guidelines, potentially with adjustments to comply with local legislation.
Figure 2.14: Sartorius Stedim Biotech S.A - Audit report
Source: SARTORIUS STEDIM BIOTECH S.A., Annual Report and Notes, Year ended 31 December 2018.
Figure 2.15: Sartorius Stedim Biotech S.A - Audit report
Source: SARTORIUS STEDIM BIOTECH S.A., Annual Report and Notes, Year ended 31 December 2018.
Figure 2.16: Sartorius Stedim Biotech S.A - Audit report
Source: SARTORIUS STEDIM BIOTECH S.A., Annual Report and Notes, Year ended 31 December 2018.
Financial reporting prerequisites for commercial substances and financial education in Denmark are stipulated in European Union
(E.U.) Directives and Regulations, which are at that point transposed into Danish law Article 16 of the Danish Act on Affirmed Auditors and Audit Firms
(the Audit Act) No 468 of June 17, 2008, and Executive Order No 487 (2013) on
Quality Assurance Reviews stipulate that audits must be conducted in agreement with "generally accepted auditing practices." Since 2010,
Danish auditing standards align with the International Standards on Auditing (ISAs) established by the IAASB and interpreted by the FSR As recognized by the FSR, these ISAs are regarded as the accepted auditing standards in Denmark.
DBA has not issued such guidelines
Denmark has fully adopted International Standards on Auditing as their
National Standards, which contains these information:
- Identification of the recipient NGO, project/appropriation and accounting period
- Confirmation that the accounts have been audited
- Statement of the nature and scope of the audit
- Assessment of and information about any misrepresentations in the recipient’s internal control procedures, bookkeeping and accounting practice
- Conclusion and statement concerning the audit (General Guidelines for
Accounting and Auditing of Grants Channeled through National NGOs)
As a result, the detailed audit report is served by the auditor in Denmark, containing sufficient information for intended users to make decisions
Source: Sergel A/S, Annual Report for 2018
Source: Sergel A/S, Annual Report for 2018
Source: Sergel A/S, Annual Report for 2018
The Accounting Law (2015) and the Law on Independent Audit (2011) frame the constitutional system of bookkeeping, auditing, and business’s financial reporting in
The Law on Independent Audit in Vietnam establishes the standards, conditions, scope, and procedures for conducting autonomous audits It outlines the rights and responsibilities of practicing auditors, auditing firms, and foreign auditing branches operating in Vietnam, as well as the entities subject to examination Compliance with these regulations is mandatory for all parties involved in the auditing process.
Vietnamese Standards on Auditing by all open intrigued substances
(public companies, banks, and credit educate, insurance businesses, insurance brokerage businesses, and securely exchanging and endorsing businesses), as well as endeavoring with foreign-owned capital, and fund organizations The
Government Decree No 17 of 2012 empowers VACPA to create VSA in alignment with International Standards on Auditing (ISA) VACPA confirms that the current version of VSA is based on the 2009 ISA framework, with necessary modifications.
Under Decree No 87 of 2017, the Ministry of Finance (MOF) is focused on regulating the audit profession, while the Law on Independent Audit establishes the standards, quality, scope, and framework for audit operations.
The Ministry of Finance (MOF) is responsible for establishing competency requirements, overseeing examinations, and issuing licenses for auditors Additionally, the MOF sets auditing standards, establishes ethical guidelines, and manages quality assurance (Q.A.) as well as investigative and disciplinary (I&D) frameworks.
Thirty-seven VSA ultimately adopted of ISA have been issued on auditing and related administrations, which are:
- Thirty-three relate to audits and reviews of chronicled financial information,
- Two benchmarks relate to an audit engagement,
- One standard relates to related administrations
- One standard in specialized ranges
The benchmarks for Audit Reports in VSAs include VSA 700, which outlines the process of forming an opinion and reporting on financial statements, VSA 705, which details how to modify the opinion in the independent auditor's report, and VSA 706, which addresses the inclusion of emphasis of matter paragraphs and other matter paragraphs in the independent auditor's report.
Table 2.2: Form of the audit report under standards
5 Auditor’s responsibilities for the audit of the Financial Statements
6 Auditor’s Opinion Key Audit Matters
7 Other Reporting responsibilities Responsibilities for the Financial
8 Signature of the Auditor Auditor’s responsibilities for the audit of the Financial Statements
9 Date of the Auditor’s Report Other Reporting responsibilities
10 Name and Address of the Audit company
Name of the Engagement Partner
12 Date of the Auditor’s Report
The structure of the audit report differs significantly between VSA 700 and ISA 700 In VSA 700, the opening paragraph is positioned third, while ISA 700 prioritizes the audit opinion, placing it at the top of the report Additionally, ISA 700 highlights the audit opinion section, followed by the basis for the audit opinion, contrasting with VSA 700 where this section appears near the end.
Table 2.4 reveals that VSA 700 and ISA 700 share similar content, but ISA 700 includes two significant additions: a more detailed presentation of the Going-Concern Assumption and a requirement for audit reports of listed companies to specify the name of the director responsible for the audit along with key audit matters.
Key Audit Matters (KAM) are essential for compliance with ISA 701 as mandated by ISA 700 Auditors must identify significant issues discussed with the Board of Directors that require focused attention during the audit process Consequently, the audit report for listed companies must include a dedicated paragraph addressing these matters.
In the auditor's report, it is essential to highlight any "Key Audit Matters" and provide references to the corresponding notes in the financial statements This section should explain the significance of these matters in the audit process, detailing why they were considered the most critical issues and describing the assessment methods used during the audit.
The Ministry of Finance has recognized International Standards on Auditing as the official benchmarks for Vietnam, although the current standards in the country remain outdated Notably, on January 14, 2015, the International Auditing and Assurance Standards Board (IAASB) introduced new auditing standards, specifically ISA 701, which focuses on the communication of key audit matters.
Conclusion on the impact of the International Standards on Auditing
As can be seen that there is a significant difference in detail of information in the audit report among countries
An analysis of audit reports from the U.K, U.S, Singapore, France, Denmark, and Vietnam reveals that the legal origins of common-law and civil-law systems do not significantly influence the content of these reports Despite sharing a common legal origin, the U.K, U.S, and Singapore exhibit variations in their audit report formats, with differences in Generally Accepted Auditing Standards (GAAS) compared to International Standards on Auditing (ISA) This inconsistency stems from the varying degrees of adoption of ISA among these nations Key Audit Matters are clearly articulated in reports from countries that endorse international benchmarks, enhancing user understanding of the audit process The opinion section is crucial, indicating whether financial reports are free from material misstatements or modified due to insufficient evidence or fraud However, the quality of audits cannot solely be judged by the responsibilities of management and auditors or the opinion sections For instance, Burberry’s audit report is structured to help users understand the auditing process, standards applied, and factors affecting financial reporting This leads to essential questions about materiality, its impact on financial statements, and how auditors determine it, all of which are thoroughly explained in the Burberry Group's disclosures.
This thesis explores the relationship between legal systems—specifically common law and code law—and their impact on accounting and auditing practices, particularly audit reports Previous studies indicate that the legal framework contributes to diversity in accounting and auditing practices; however, it does not necessarily result in differences in audit quality across countries The variation in audit quality is primarily linked to the adoption of International Standards on Auditing, which varies based on each country's specific implementation roadmap and regulatory adjustments.
Chapter 2 of the Thesis outlines the stages of conducting an audit, which include understanding the client, risk appraisal, developing an audit strategy and plan, gathering evidence, exercising expert skepticism and judgment, and finalization It also addresses the influence of the legal system on international accounting and auditing, highlighting discrepancies such as flexibility versus uniformity, the roles of regulatory bodies, investor rights, financial report transparency, and the impact of legal frameworks on auditing practices Additionally, the chapter examines factors affecting the quality of audit reports and emphasizes the importance of adhering to international reporting benchmarks, including audit report timeliness, the leadership capabilities of accounting firms, and the independence, objectivity, and skepticism of audit professionals Finally, it compares typical audit report samples from common-law and code-law countries to analyze variations in these dependent aspects.
RECOMMENDATIONS FOR IMPROVING THE QUALITY
The adoption of the International Financial Reporting Standards
Vietnam is transitioning to IFRS to enhance the quality and transparency of financial reporting, aiming to attract foreign capital investment Early adopters of these standards will undoubtedly reap significant benefits Therefore, businesses must adequately prepare by strengthening their knowledge, human resources, and experience in this area.
From 2022 to 2025, large-scale businesses and newly founded companies in Vietnam are encouraged to voluntarily adopt Vietnamese Financial Reporting Standards (VFRS) with the support of knowledgeable accountants and human resources This initial phase serves as a trial for both the Ministry of Finance and enterprises to assess the benefits and areas for improvement in the application of VFRS While modifications may be necessary to align with Vietnam's specific circumstances, a thorough evaluation process will be essential for determining appropriate adjustments.
In Vietnam, the education system primarily focuses on VAS, leaving a gap in knowledge for accountants regarding IFRS To effectively implement IFRS, accountants must acquire additional insights beyond theoretical understanding, including real-world case studies from countries that have successfully adopted IFRS and developed consolidated financial statements This knowledge is crucial for comprehending the impact of these standards on financial statistics.
To adapt to the new implementation, businesses must shift away from traditional methods and practices Companies are no longer bound by previous regulations; instead, they should take a proactive approach in updating information and enhancing collaboration among departments within their operations.
Figure 3.1: Roadmap of IFRS adoption in Vietnam
Improving the Vietnamese Standards on Auditing
A 2016 World Bank report on Vietnam highlights that many public interest entities are audited by domestic firms that lack the capacity and resources of international auditing firms Local auditors face significant challenges in establishing internal quality control systems and receive limited professional support from their international counterparts These issues are critical for ensuring compliance with International Standards on Auditing (ISA) and International Standards for Quality Control, particularly when auditing complex public interest entities.
The adoption of International Standards on Auditing (ISA) has surged globally, with Vietnam primarily following the Vietnamese Standards on Auditing (VSA) established by the Ministry of Finance in 2012 While Vietnam's auditing standards align with ISA, recent changes in domestic economic structures and the ISA framework have highlighted shortcomings in the VSA, particularly concerning revisions made by the International Auditing and Assurance Standards Board (IAASB) such as ISA 700 (Revised) and ISA 701 in 2015 To attract foreign investment and ensure transparency, Vietnamese enterprises must provide complete and reliable International Financial Reporting Standards (IFRS) financial statements, accompanied by clear audit reports that convey essential information As Vietnam's economy integrates further into the global market, enhancing the business environment, promoting sustainable development, supporting the stock market, and safeguarding investors are critical objectives.
The Vietnamese auditing standards (VSA), while based on International Standards on Auditing (ISA), require a regular updating mechanism to address discrepancies in audit reports To align with international standards, the audit opinion should be positioned at the beginning of the report, and the framework should incorporate going-concern content and significant audit issues In light of the Covid-19 pandemic, which has led to numerous business suspensions and dissolutions in Vietnam, auditors must carefully evaluate the appropriateness of financial statements prepared on a going-concern basis and disclose any uncertainties The Ministry of Finance should provide guidance on these matters, taking into account the resources from the Vietnam Association of Certified Public Accountants (VACPA) and the International Federation of Accountants (IFAC) Establishing a regular mechanism to update VSA in accordance with the latest ISA requirements and ensuring adherence to quality control and professional ethics standards is essential for maintaining audit quality in Vietnam.
Annual evaluation of audit service quality is essential, with results published in a public report for businesses and users of audited financial statements This evaluation aims to assess the strength of quality control and the overall audit process, enabling auditing firms to identify areas for improvement each year For users of audit reports, this evaluation helps prevent poor investment decisions stemming from material misstatements and misleading financial presentations.
Vietnam is set to adopt International Financial Reporting Standards (IFRS) by 2025, necessitating that both accountants and auditors enhance their knowledge and skills This transition requires auditors to develop a fundamental understanding of these global benchmarks to ensure accurate and reliable examinations of financial statements.
In Vietnam, enterprises are required to establish a Control Board instead of an Audit Committee, which results in inadequate quality control of audit reports prior to their disclosure This practice undermines effective corporate governance by failing to ensure the independence and expertise necessary for informed decision-making.
Auditor independence is a critical concern in today's auditing landscape, as it is essential for maintaining high-quality audit services The Law on Independent Audit emphasizes that independence is a fundamental principle governing audit operations Additionally, this legislation prohibits audit firms from conducting audits if they have engaged in activities such as bookkeeping, financial statement preparation, or internal auditing for the same entity in the previous year.
According to Point a, Clause 1, Article 30 of the Law on Independent Audit, limited resources and capacity often lead some entities to depend on auditors for preparing and presenting certain items in their financial statements This reliance can jeopardize the fundamental principle of independent auditing, as it may compromise the auditor's independence when expressing an opinion on a report they helped create (World Bank, 2016).
This chapter offers recommendations to address the disparities identified in the audit report between Vietnam and international standards Despite the approval of the roadmap for adopting International Financial Reporting Standards (IFRS) in Vietnam, several critical factors must be addressed Enterprises need to prepare comprehensively for this significant transition, focusing on skilled human resources and structural reorganization Additionally, Vietnamese authorities must stay updated with the evolving requirements of International Standards on Auditing to enhance audit quality and ensure alignment with global benchmarks.
The audit report is crucial for various users and purposes, with differences in accounting and auditing largely influenced by legal systems This Thesis highlights that the adoption of International Standards on Auditing leads to distinct audit reports in different countries It emphasizes that common-law systems exhibit greater flexibility and investor rights, while code-law systems prioritize uniformity and legal compliance Additionally, the study reviews quality audit reports, identifying key components such as timely reporting, quality control in auditing firms, and ethical practices of report issuers By analyzing six audit report samples, the Thesis demonstrates how the implementation of International Standards varies between common-law and code-law systems Ultimately, it proposes improvements to Vietnam's accounting and auditing standards, aiming to enhance foreign investment opportunities.
While acknowledging the limitations of the current research, the author aims to analyze the shortcomings of existing reporting frameworks and offer several long-term recommendations to enhance the subject of the study.
This Thesis aims to examine the impact of common-law and code-law systems on accounting and auditing practices, highlighting their relationship with the adoption of International Standards on Auditing and the quality of audit reports The study focuses on comparing the effects of these legal systems and analyzing the current state of auditors' reports across nations Ultimately, the findings provide recommendations to enhance accounting and auditing frameworks in Vietnam, fostering significant opportunities for integration.
In the course of this thesis, the author has endeavored to incorporate a variety of measurements from books, reports, media, and previous studies; however, certain deficiencies and limitations are acknowledged The author welcomes feedback from educators and others with shared interests to enhance the subject further.
Many online publications offer varying levels of access to their content, with some available for free while others require payment or membership Access restrictions are often influenced by geographical limitations, as certain websites may block users from specific regions or countries Additionally, some publications necessitate verified documentation for membership, further complicating access to their articles.
The thesis primarily relies on research from previous studies due to a lack of practical experience in the field Achieving better results would be possible if the researcher gained sufficient insights, knowledge, and relevant experience in auditing.
1 Ajit Dayanandan Han Donker Mike Ivanof Gửkhan Karahan, (2016),"IFRS and Accounting Quality: Legal Origin, Regional, and Disclosure Impacts", International International Journal of Accounting & Information Management, Vol 24 No 3, pp 296-316