Chapter 15

International Auditing Issues

The Accounting and Auditing

Profession
Auditing

An objective (independent), competent person

Quantifiable (and verifiable) information
Established criteria (or auditing standards)

Quality

has 3 important requirements

of auditing profession depends on

Reputation of the profession

Quality of the educational system
Certification process

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Global Audit Services

Audit/Attestation

and Assurance Services

Tax Advisory and Compliance Services
Consulting/Management Advisory Services
Standard auditing packages are difficult to
use because of international differences

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Risks in determining the scope of a

multinational audit (Hermanson,
1993)
Significant

or unusual transactions at a sub

Size of sub (revenue, net income, assets)
Large changes in a subs net income
Audit committee expectations
Competence of subs accounting personnel
Research shows that risks for domestic and
international audits are similar

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Challenges:
Local Business Practices
Predominance

Makes tracing transactions difficult

Japan use of checks may not be traceable due
to a lack of provision of cancelled checks

Inability

of cash

to confirm accounts receivable

Translation into another language

Receiving returned confirmations is difficult
Auditors may be seen as intrusive

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Challenges:
Currency, Language, and Law

Foreign Currency

Language and Culture

Auditor must determine if the choice of translation method

is correct
Translators may not give the full story
Knowledge of language is essential

Interaction of Home Country and Local Law

Home countries may have laws that extend to subs of their

domestic companies that operate abroad
Example Sarbanes-Oxley 404 compliance by 2006

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Challenges:
Distance and Organization
Distance

Operations are not audited as frequently or as

thoroughly
Communication is slow

Organization

Firms may need to expand abroad

Global firm alliances are often used

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Challenges:
Diversity, Availability, Training
Supply

of Auditors
Differences in Training 3 models

Apprenticeship approach does not require

specific university training in Accounting U.K.
University-based model U.S. and Germany
Dual track model Netherlands and France

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Reciprocity
General

Agreement on Trade in Services

Addresses problems of qualifying to practice in

other countries in two ways

Requires countries to administer their licensing rules

in a reasonable, objective, and impartial manner and
forbids countries from using licensing rules as
disguised barriers to trade
Encourages countries to recognize other countries
qualifications, either autonomously or through mutual
recognition agreements

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Reciprocity

Principles for Reciprocity

Signed between the AICPA, NASBA, and CICA

Extended to Australia (ICAA)
A short-form exam is administered

Eighth Directive (EU) auditors must

Obtain qualifications that are deemed to be equivalent to

the reviewing authorities in the host country
Demonstrate that they understand the laws and
requirements for conducting statutory audits in the host
country

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Reciprocity
Sarbanes-Oxley

and PCAOB made

reciprocity more difficult
European Commission established a
provision similar to Sarbanes-Oxley in 2004

Requirements include

Regular rotations of auditors

Independent audit committees at every company
Registration and regular inspection by the PCAOB

Proposal on establishing national watchdog

organizations is still in the works

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Structure of the Audit Industry

Statistics
Big

found in Economist, 2004

Four

Audit 97% of all public companies in the U.S. with

sales over $250 million
Audit 80% of public companies in Japan
Audit two-thirds of public companies in Canada
Audit all of U.K.s 100-biggest public companies
Hold over 70% of the European market by
revenue

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Structure of the Audit Industry

Enron

and Sarbanes-Oxley brought changes

PCAOB was established to regulate the

accounting profession and monitor firms
Sarbanes-Oxley prohibits firms from providing
many non-audit services to audit clients
(Sarbanes-Oxley Act, 2002)
Risks have increased for large international firms
Compliance with Audit Standard 2 on internal
control has been difficult and costly

Some firms have had to drop clients

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Structure of the Audit Industry

Trend

is to organize around industry

This trend results in a matrix form or
organization
Industry is the primary focus
Functional organization is a secondary focus
Firms offer tax and consulting services
Some firms have sold some non-audit
practices
Some firms are outsourcing services
International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Strategies of the Global Audit

Firm

Companies who switch to international auditors give

these reasons for the switch
The need to reflect the increasing size of overseas
business
The need to have one firm auditing all companies
within the group
Large audit firms have become multinational firms with
strong global focus and control

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Strategies of the Global Audit

Firm

Mergers allow firms to gain stronger market share in

emerging markets
Citron and Manalis (2001) findings indicate
Companies in emerging markets hire large
international audit firms to add credibility to the
financial statements
This credibility allows companies to obtain
international financing and list on foreign exchange
markets

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Standards
Vary

considerably from country to country

Standards come from

The public sector (government) U.S. now

The private sector U.K., Canada
A combination of the two Germany

Requirements

for a compliance audit

U.S. all publicly-traded companies and those

with more than 500 shareholders and assets of
more than $5 million
U.K. all limited companies must be audited

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Audit Standards

Some audits simply test whether the financial

statements reflect the books and records of the firm
Other audits test whether the books and records
accurately reflect the original transactions
Why do standards vary?

Differing capital markets

Differing accounting professions
Cultural differences Japanese confirmations are obtained
from the company as a sign of respect and trust

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

International Harmonization of
Audit Standards

IFAC is attempting to harmonize audit standards

and audit professions globally
IFAC sets standards in the following areas

Auditing, assurance engagements, and related services

Quality Control
Code of Ethics
Education
Public Sector Accounting

IFAC is also involved in issues relating to small and

medium size companies in developing countries

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

International Harmonization of
Audit Standards
International

Auditing and Assurance

Standards Board (IAASB)

Develops ISAs and International Standards on

Review Engagements
Develops International Standards on Assurance
Engagements
Develops related practice statements
(IAASB Handbook, 2005)

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Benefits of Developing and

Enforcing International Standards
Readers of financial statements have
justifiable confidence in auditors opinion
Readers of financial statements have greater
assurance that accounting standards are
adhered to
Readers are assisted in making international
financial comparisons
Further incentive to improve and extend the
set of international accounting standards

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Benefits of Developing and

Enforcing International Standards
Increased flow of investment capital
Developing countries will find it easier to
produce domestic auditing standards
The broader information gap between
investors and management of MNEs is
lessened

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Forum of Firms and IFAC

Work together to improve international accounting and auditing

standards
Forum of Firms requirements
Having policies and practices in compliance with ISAs and the
IFAC Code of Ethics
Maintenance of appropriate internal control procedures including
intra-firm practice review
Agreement to implement training on international accounting and
auditing standards including the Code of Ethics
Agreement to subject assurance work to periodic external
quality control assurance
Agreement to support the development of the professional bodies
and implementation of international standards of accounting and
auditing in developing countries

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

International Forum on
Accountancy Development
IFAD

was formed after the Asian crisis (1997)

IFAD works for conformity and consistency of
national accounting standards with IAS
IFAD needs to globally promote education on
IAS, ISA, and IFACs Code of Ethics

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,

Harmonization
European

Commission plans to adopt ISAs

for all audits effective January 2007 (Sylph,
2005)
Gaining PCAOB collaboration is key to the
success of IFACs initiatives
PCAOB may slow down harmonization in the
U.S. (Giles et al., 2004)

International Accounting & Multinational Enterprises - Chapter 15 Radebaugh,