Standards
The Clarity Project
En route to reducing uncertainty in auditing standards.
FROM: JUL-AUG 2006 ISSUE | BY STEPHEN SPECTOR
In January of 2006, the Auditing and Assurance Standards Board (AASB) issued an exposure draft with the lofty title of Improving the Clarity of Canadian Auditing Standards — Phase I. The ostensible goal of the exposure draft was to conform Handbook sections 5135, 5141, 5143 and 5150 to comparable International Standards on Auditing (ISAs). This is consistent with the fact that the AASB is on record as stating that it intends to abandon "made in Canada" standards in favour of those of the International Auditing and Assurance Standards Board (IAASB) of IFAC.
However, there was a second underlying objective to the draft, namely to enhance the linkages between Canadian and international standards. The draft represents the first step in that process and it introduces a number of formative (as opposed to substantive) changes to Canadian standards.
The first change is stylistic. Standards will now contain four main sections — Introduction, Objectives, Requirements, and Application Material. The separation of Requirements from Application Material is a significant structural change from existing standards. No significant changes to content are expected.
A second change is also stylistic, and it pertains to specific word usage. Current Canadian standards use the word "should" as a directive — the auditor should do this or that. This usage draws from the British heritage of the language, where "should" is used in a directive sense; however, it is possible to construe "should" as meaning, "it's a good idea, but it's up to you to decide if you want to do it." To avoid this possibility, the word "shall" will replace "should" in all recommendations.
Another change relates to the tenses used in standards. The Handbook tends to use the present tense to specify actions expected of an auditor. For instance, the draft quotes paragraph 5141.054: "Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented." The inference is that in order to gain an understanding of internal control, an auditor must evaluate the design of a particular control and then determine whether that control has been implemented.
If adopted, the Clarity Project would take such recommendations and reword them to clarify what actions are required: "In obtaining an understanding of internal control, the auditor shall evaluate the design of relevant controls and determine whether they have been implemented." As noted before, this is not a change in substance; rather, it is an attempt to reduce ambiguity.
A fourth change relates to the text itself. These are alterations that focus on clarifying objectives within the standards. For example, Section 5150, which was issued last year, was based on ISA 300 as it existed in 2004. At the time of its release, section 5150 reflected the wording of ISA 300. Subsequently, the IAASB amended ISA 300 — which now means that section 5150 be amended. This "game of catch up" is an on-going problem for the AASB. More critically, this raises the notion of how much guidance is needed? For example, paragraph 8 of ISA 300 used to say: "The auditor should establish the overall audit strategy for the audit." The specifics were left to the auditor, presumably based on the experience and professional judgment of the auditor.
ISA 300 has been amended to "clarify" what was meant by the earlier directive. Specifically, paragraph 8 of ISA 300 states, "The auditor shall establish the overall audit strategy for the audit that sets the scope, timing and direction of the audit, and that guides the development of the audit plan." Clearly, clarification is useful, but at some point, one has to rely on the expertise of the auditor; otherwise, the auditor is reduced to following the "yellow brick road."
The exposure draft concludes with a segment on significant differences between ISAs and Canadian standards. This segment deals with text that arises due in part to:
- requirements of Canadian legislation or regulation;
- the use of more specific wording where the ISA contains more generic wording appropriate in an international context; and
- circumstances when an existing recommendation can be construed as stronger than the ISA being adopted.
Some of the differences are semantic. For example, paragraph 5135.93 requires the auditor to communicate with management regarding identified fraud or information indicating that a fraud may exist "on a timely basis," whereas the ISA requires communication "as soon as practicable." Are these really different?
On the other hand, there are parts of Canadian standards that are not contained in ISAs. Should those be retained? For instance, paragraph 5135.95(a) contains a requirement for the auditor to communicate questions regarding the honesty and integrity of management to the audit committee. There is no corresponding requirement in the equivalent ISA.
Overall, the Clarity Project is a positive exercise. Its goal of expanding requirements by stating the obvious intent can only help by ensuring that there is no ambiguity associated with the standard's requirements. Is it overkill? Perhaps but given the litigious environment in which auditors operate, a move to clearly outline the obligations of auditor is not unreasonable. All that is being done in most instances is specifying explicitly what was meant implicitly. If it reduces uncertainty, then the project is worthwhile.
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Stephen Spector, MA, FCGA, owns Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC’s board of governors. E-mail shspector@shaw.ca.