ACC 617 exam 3 CH 11 Auditing & Corporate Governance: An International Perspective

•History of state-owned enterprises in China affected view on valuation reserves:

-All products were seen as good for something, someday à no need for inventory obsolescence reserves -Enterprises were state-owned and state credit was always considered "good" à no need for bad debt provisions

Detection probability is affected by actual work done by auditors, including:

-Competence of auditors (eligibility & qualifications) -Conduct of the audit (quality review & monitoring) -Reporting requirements

Exercise of legal rights in a court of law in Japan

-Exercise of legal rights in a court of law is not in accordance with underlying Japanese belief in the maintenance of harmony in interpersonal and intergroup relationships and the avoidance of open confrontation

principles of corporate governance covers...

-Legal -Institutional -Regulatory

Cultural values in China are likely to have implications in the audit judgment area:

-Respect for seniors -Desire to avoid confrontation and look for agreeable compromises -Concern for "saving face"

corporate governance exercises authority and control over:

-Rules -Relationships -Systems -Processes

UK Accountancy Foundation

-The Accountancy Foundation was established in 2000, introducing a strong, independent element to the regulatory framework

purpose of the new PCAOB standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017)

-To enhance relevance and usefulness of audit report

corporate governance emphasis: United States

-capitalist/shareholder emphasis

Financial Reporting Council (FRC) took over responsibilities of the:

Accountancy Foundation in 2004

The OECD issued what to assist governments in their efforts to evaluate and improve frameworks for corporate governance

Principles of Corporate Governance (2004)

external audit

Provides assurance to financial statement users that the information contained in those statements is of high quality

regulation of auditing: Anglo Saxon

Regulate auditors within framework of self-regulation

In the U.S., PCAOB was established under:

SOX

UK FRC - functions relevant to auditing

Setting, monitoring and enforcing auditing standards, statutory oversight and regulation of auditors Operating and independent investigation and discipline scheme for public interest cases involving professional accountants Overseeing the regulatory activities of professional accountancy bodies

auditing in Germany

Supervisory Boards use external auditors to fulfill their audit and control duties (reporting responsibility to supervisory board, not shareholders)

The Financial Reporting Council (FRC) in the U.K. published this framework in 2008

The Audit Quality Framework

PCAOB adopted a new auditing standard:

The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017)

A country's corporate governance structure correlates with:

audit purpose

audit technologies..

audit technologies beneficial in one area may be ineffective or cost prohibitive in another

Reporting probability is affected by:

auditor's independence

corporate governance emphasis: Germany and Japan

banker

detection probability is affected by:

by actual work done by auditors

Different legal systems also affect auditing in different countries:

code law and common law

International Auditing and Assurance Standards Board (IAASB) requires auditors of listed entities to:

communicate "key audit matters" and the EU has a similar requirement

the Accountancy foundation handles...

complaints and disciplinary violations

which countries have the stakeholder-oriented model

continental Europe

Perception of ethical conduct influenced by:

cultural norms

OECD principles and stakeholders

deals with roles of various stakeholders

OECD principles and disclosures

deals with the importance of disclosure and transparency of information

OECD principles and the BOD

deals with the responsibility of the board

In the United Kingdom, accountant is not...

defined in statute and there is no qualification requirement to practice as an accountant

The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (2017) requires:

discussion of critical audit matters(CAM) and disclosure of the tenure of the auditor

corporate governance should facilitate...

effective monitoring

Perception of independence based on:

environmental differences

corporate governance encompasses the framework designed to:

exercise authority and control within a company

Accounting infrastructure affecting auditing issues: laws

govern production, transmission, and usage of information

audit functions

internal v external audit

the Accountancy foundation conducts....

investigations

Approaches to regulate auditing in different countries range from:

leaving the task in the hands of the profession to relying heavily on the government

legal liability suits in Japan

legal liability suits against Japanese auditors are almost nonexistent

two-tier boards: function of management board of executive directors

managerial function

auditing in China

many former state-owned enterprises, responsible for education and health care of citizens as well as employment and production; role of auditors less clear, but beginning to adopt Anglo-Saxon concepts

Accounting infrastructure affecting auditing issues: legal entities

monitor and implement laws

two-tier boards: function of supervisory board of nonexecutive directors

monitoring

Differences in audit environment affect the:

nature and demand for audit services and complexity of the audit task

Audit quality is also affected by...

nature of legal liability regime that exists

principles of corporate governance provides...

objectives and monitoring procedures

Corporate Governance in countries has evolved based on:

political, economic and cultural philosophies

Rules-Based versus Principles-Based Approach? UK

principles-based approach

audit quality

probability that an error or irregularity will be detected and reported

UK - statutory auditors must have:

professional qualification

Good corporate governance should provide:

proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders

PCAOB reaffirmed the need for:

reaffirmed the need for auditor independence, in fact and appearance

UK - statutory auditors are subject to:

requirements of recognized supervisory body

Rules-Based versus Principles-Based Approach? US

rules-based approach

Germany examinations of auditors

set by the Ministry of Economics

2 corporate governance models

shareholder-oriented model and stakeholder-oriented model

According to OECD principles, auditors should be accountable to:

shareholders, not management

IIASB v PCAOB

similar but not identical to PCAOB

shareholder-oriented model

single-tier boards and several committees within one board

corporate governance emphasis: France

socialistic/employee stakeholder

what theory is the stakeholder-oriented model

stakeholder theory

The Companies UK Act (1985 & 1989) provides:

statutory regulations for auditors

OECD: the BOD should effectively oversee...

the financial reporting function, ensuring appropriate systems of control are in place.

corporate governance

the manner in which an organization is governed or managed

stakeholder-oriented model

two-tier boards: a supervisory board of nonexecutive directors and a management board of executive directors

FRC became the U.K.'s:

unified, independent regulator for corporate reporting and governance

Audit quality is likely to:

vary across different audit environments

In short, Corporate Governance is about:

what the Board of Directors of a company does and how it sets the values of the company

the Accountancy foundation monitors...

work of accountants and auditors

UK - Financial Reporting Council (FRC) states that to be recognized as statutory auditor must be recognized by:

§Association of Chartered Corporate Accountants (ACCA) §Institute of Chartered Accountants in England and Wales (ICAEW) §Institute of Chartered Accountants in Ireland (ICAI) §Institute of Chartered Accountants in Scotland (ICAS)

audit technologies beneficial in one area may be ineffective or cost prohibitive in another:

•Accounting and securities market regulation •Economic and political systems •Patterns of business ownership •Complexity of business firms Stages of economic development

Accounting infrastructure affecting auditing issues:

•Producers of information •Final users of information •Information intermediaries Laws Legal entities

Major variations in aspects of External Auditing across different countries:

•Purpose of external auditing •Audit environment •Regulation of auditing •Audit reports

roles of BOD

•Strategy •Leadership •Supervising management •Reporting to shareholders

Duties of Supervisory Board (German Commercial Code)

•Supervise management of corporation in all branches of administration •Review cash on hand, access to books of account •Audit financial statements (can be turned over to external auditors) •Call general assembly if necessary or in interest of corporation

the UK Audit Quality Framework identifies:

•key drivers of audit quality

PCAOB expanded...

•the auditor's reporting responsibility

role of auditor in US and UK

•to report to shareholders whether financial statements give a true and fair view of financial position and results of operations

auditing in anglo saxon

1-tier board; auditor primary responsibility to shareholders

Auditors of SEC-registered companies must be members of PCAOB, which has the authority to:

1.Establish or adopt auditing standards, quality control standards and ethical rules 2.Inspect audit firms

auditing in EU

2-tier board; broader responsibility to state/society

who has ultimate responsibility for governing a company?

BOD

Concept of independent auditor in Japan

Concept of independent auditor is neither historically nor culturally appropriate in Japan

audit environment

Cultural values impact nature and quality of audit work undertaken

OECD principles and shareholders

Deal with rights and fair treatment of various groups of shareholders

uniform regulation of auditing in the UK

There is no uniform system of examination in the U.K., where four professional bodies conduct their own examinations

code law

Germany and France more reliance on stated legal objectives of auditing profession

internal audit

Monitoring risks and providing assurance regarding controls are the two main functions

important parts of corporate governance

Morality and ethics

common law

U.K. Canada more reliance on auditing profession to set general tone for profession

countries with shareholder oriented model

US and UK

what theory is the shareholder-oriented model

agency (shareholder) theory

auditing

improves the precision, quality and reliability of information made available to users of financial statements

role of auditors in Germany

in addition to statements auditors look at management reports; client includes state and society

UK: specific provision for..

independence of company auditors