TOPIC 1: HISTORY AND EVOLUTION OF INTERNATIONAL ACCOUNTING

INTRODUCTION

The creation of the international system of accounting was an objective process that was
influenced by global economic development and was tightly connected to development of
accounting as a science; formalization of theories of accounting and establishment of different
schools of accounting and evolution of the entire economic profession. International system of
accounting was envisioned as a solution to the problem of incompatibility of economic
information across countries, economic entities and users of such information who are tasked
with economic decision-making. Accounting, as the international language of business, should
ensure that information that is formed both on the level of individual business entities and the
economy as a whole is understandable, correct, sufficient and compatible.

The history of the system of international accounting according to the work done by Butynets
shows that the international system of accounting is not just a collection of interconnected
elements but also a system that is interconnected with an environment within which it exists
(Butynets, 2002). That’s why when analyzing origins of international accounting, most
researchers consider them within the context of the history of development of accounting. In
particular, Tkach V. I. and M. V. Tkach considered five main stages of accounting evolution:
trade stage which lasted until 1800, entrepreneurial stage which lasted up to 1900, organizational
stage which lasted till 1950, optimization stage which was between 1950 and 1975, and strategic
stage which has been present since 1975. Mizikowski Y. A. and Druzhilovska T. Y. considered
six main stages: Old Age, Medieval Age, XV–XVIII century, XIX century, first half of XX
century and second half of XX century (Myzykovskyy, 2006). Subdividing the history of
accounting into these periods is justified by developments in production, accounting thought,
accounting practice, and economic decision-making. If we consider the stages of development of
accounting (according to classification proposed by Tkach V. I. and Tkach M. V.), the
international system of accounting was a part of the organizational stage of development which
lasted until the 1950s.
Right around the end of XIX and at the beginning of XX centuries, occurred a series of
significant events which have contributed to the development of the international system of
accounting. At the end of XIX and the beginning of XX centuries, several countries passed laws
that created a legal accounting framework. At the same time, several professional accounting
associations were also created which later had a significant impact on establishment of an
international system of accounting. Such associations include Institute of Accountants in
Edinburgh and Glasgow (created in 1853), Society of Accountants in Aberdeen (1867),
Manchester Institute of Accountants (1887), Scottish Institute of Accountants (1880), American
Association of Public Accountants (1887), Canadian Institute of Chartered Accountants (1902),
London Association of Accountants (1904) etc. In 1904 the first International Congress of
Accountants took place in St. Louis, Missouri (USA). At the congress were represented not only
American accountants but also accountants from England, Scotland, Netherlands and Canada.
This congress can be considered as the first significant event in establishing an international
system of accounting. The main issues discussed at the congress were consolidation of the
accounting profession, growth of the world economy, development of auditing firms,
establishment of standards for calculating accounting services are necessary for end users and
what needs to be done to satisfy the needs of the users of accounting information. Even though at
this congress international aspects of accounting were not addressed directly, it laid the
groundwork for productive discussion in this area. This was evidenced by the next congress
which took place in 1926 in Amsterdam, where 370 attendees represented 15 countries. The goal
of the congress was to share knowledge, experiences and methodologies from different countries,
to seek universal treatment of cost accounting that would be acceptable internationally. At this
congress, materials were translated into English,

French and German. Most questions raised at the congress were closely tied to global economic
development and internationalization. At this congress there was even a proposal to create an
international prize similar to the Nobel Prize for advances in accounting (Ahmad, 1975). It was
around this time when the first transnational corporation became reality. They were primarily
focused on extraction of natural resources from colonial countries in Asia, Africa and Latin
America and processing those resources at the facilities based in the colonizer countries
(Poliakov, 2008).
The next important milestone in the development of the international system of accounting
according to Paliy V. F. (2008), was the stock market crash of 1929 which led to subsequent
global depression in developed countries. This crash exposed deficiencies in existing systems of
accounting and financial reporting. There were deep differences in principles of financial
reporting across countries and even across companies within the same country. Reporting was
not always perceived correctly by the users of accounting information. Information was not
suitable for analysis of economic entities and led to erroneous and conflicting conclusions about
business activities and financial conditions of companies (Paliy, 2008). This point of view is also
supported by O. S. Shturmina. She notes that it was the financial crisis in the USA that led to
creation of nationally recognized standards of accounting and reporting which were adopted by
corporations whose stocks were traded on exchanges (Shturmina 2010).

According to Butynets F. F., at the beginning of XX century, it became clear that traditional
accounting did not keep up with the needs of management in an increasingly competitive
environment, rapidly changing technology and growing complexity of organization of
production (Butynets, 2002). Therefore, the first stage of development of the international
system of accounting was marked by the creation of a legal framework for accounting in some
countries, establishment of professional accounting associations, and rethinking of the role of
accounting. Interest in the international system of accounting grew toward the end of the 1950s
due to the fact that following the end of World War II there was increasing global economic
integration which also led to increase in capital flows, international trade and foreign direct
investment. As noted by Butynets F. F., since the middle of the XX century, due to expansion of
international economic relationships, specialization and cooperation of production, creation of
transnational corporations, the problem of incompatibility of accounting and auditing standards
became of paramount importance (Butynets, 1999).

During this time, Europe started its movement toward unification. In 1951, European Coal and
Steel Community (ECSC) was created, in 1957 European Economic Community (EEC) and
European Atomic Energy community were established (Euratom), and in 1960 European Free
Trade Association was formed.
During the 1960s, there was a period of international mergers and acquisitions, particularly
between American and European companies. In April of 1963, Business Week carried out a
study on a new form of business organization which was named Multinational Corporation. Such
international trends strengthened the need for a meaningful comparison of financial reporting
that originated in different countries (Zeff, 2012).

The middle of XX century could be considered the second stage of development of the
international system of accounting. In 1962, under the aegis of American Institute of Certified
Public Accountants (AICPA), the 8th International Congress of accountants took place in New
York. The central issue in the discussions that took place was the impact of the global economy
on accounting. Many participants of the congress stressed the urgency to make progress toward
development of auditing and accounting practices as well as reporting standards on an
international level.

In the same year, AICPA established its own committee on international relations whose aim
was to create programs for improving international cooperation between accountants of different
countries and fostering exchange of information and ideas. In 1964 the committee published a
survey of accounting standards of 25 countries (Professional Accounting in 25 Countries) that is
considered to be the first attempt to research accounting, auditing and reporting standards on an
international level (Zeff, 2012).

An important step in development of international system of accounting took place in 1966 when
Henry Benson, a senior partner at a British accounting firm Cooper Brothers & Co. (later Cooper
and Lybrand and currently PriceWaterhouseCoopers) who served at the time as a president of
Institute of Chartered Accountants of England and Wales, visited the United States and Canada.
He and the presidents of AICPA and Canadian Institute of Chartered Accountants reached an
agreement to create Accountants International Study Group (AISG) that would study accounting
and audit in these countries. AISG took shape in 1966–1967 when representatives of professional
accounting associations from Canada, United Kingdom and United States joined forces in an
attempt to harmonize accounting and auditing practices and form a long-term strategy for
creating a set of international accounting standards. AISG functioned for ten years and published
twenty guidelines before ceasing its existence in 1977. Studies conducted by AISG further
highlighted differences in accounting practices between these three countries and, naturally, lack
of consistency in reporting standards on a global level. In 1967, the first textbook on
international accounting was published, and was written by Gerhard G. Mueller. His biographer,
Dale L. Flesher, considers Mueller to be the father of international accounting and claims that it
was Mueller who, through his academic work, spurred development of international accounting
as a research field, and his impact was felt both among theorists and practitioners. Muller was the
first professor to offer international accounting as a field in a graduate school. He prompted
development of research in international accounting in two directions: first he focused on
importance of differences among international accounting and their significance for accounting
profession and

businesses who take part in international trade; second, he emphasized the importance of
learning about differences in how accounting is taught in different educational institutions
(Flesher et al., 2010).

In 1972, at the 10th International Congress of Accountants in Sidney, representatives of AISG

met to discuss a proposal to create an International Accounting Standards Committee (IASC).
The committee was formed in London in 1973 with participants from Australia, Canada, France,
Germany, Japan, Mexico, Netherlands, Great Britain, Ireland and the United States. This entity
was an independent, non-profit, non-government organization aimed at developing unity in
accounting standards that would be used all over the world. Henry Benson was elected as the
first chairman of IASC. A unique feature of this committee was that it was created by
professional associations directly involved in accounting rather than governments of respective
countries.

Thus, an important event in the second stage of development of the international system of
accounting was the creation of two organizations: International Accounting Standards
Committee and International Federation of Accountants. These two organizations had similar yet
different goals: While IASC Was responsible for developing standards for accounting and
reporting, IFAC functioned as a global organization of the accounting profession and dealt with
problems of accounting and audit. Following creation of these two organizations, development of
international accounting was focused on development of international standards and their

gradual implementation marked by further recognition of IASC and IFAC as the primary global
institutions of account professions that were in close cooperation with other leading global
organizations. In 1980, several major multinational corporations expressed their support of
IASC. In particular, General Motors, Exxon and FMC stated that their annual reporting largely
follows International Accounting Standards (Zeff, 2012).

From 1973 to 2003, IASC issued 41 standards under the common name International Accounting
Standards as well as a Conceptual Framework. In the first years of its existence, IASC focused
its efforts on creation of international accounting standards. However, their implementation had
little success because most major developed nations continued to use their own accounting
standards, commonly known as Generally Accepted Accounting Principles. Although members
of IASC pledged to cooperate with and facilitated the development of IAS, at the end of the day
they did not treat these standards as their nationally accepted standards. The reasons for the lack
of support for IAS have been studied extensively. For example, Basoglu and Goma note that a)
international accounting standards were not sufficiently complete b) international accounting
standards were excessively flexible. The standards allowed for too many alternative calculations
and interpretations and that was unacceptable for accounting practitioners in most countries
(Basoglu and Goma, 2002).

Doupnik and Pererra pointed out the IASC activities were perceived as lacking legitimacy: There
was inadequate support for its founders; IASC was not sufficiently independent; some committee
members were believed to lack required expertise (Doupnik and Perera, 2007). After careful
consideration, in 2000 IASC changed its name to International Accounting Standards Board
(IASB) and the standards developed by this entity were also given a new name after 2001 –
International Financial Reporting Standards (IFRS). This name change came with a fundamental
change in the structure of the organization as well as its mission: Instead of striving for
harmonization of accounting standards, the goal was stated as convergence of national
accounting standards with international standards of financial reporting. Therefore, at the turn of
the XXI century, efforts to harmonize accounting systems across the world morphed into a
broader concept of international convergence. In 2002, the European Union legislated the use of
IFRS for financial reporting by publicly traded companies starting in 2005. At the same time, EU
decided to use its own «European» version of IFRS whose standards have been approved by the
European Commission. IFRS and their interpretations that were accepted by the EU were made
available in all official languages of the EU and are published in an official journal of the EU.
This decision to make IFRS the official standards influenced their further proliferation into more
countries. According to Veron Nicholas, gradual modification of national standards of
accounting and their gradual convergence with IFRS, namely in developed countries, would have
been unlikely to occur if it wasn’t for adoption of IFRS by the EU (Veron and Nicolas, 2007).

Almost simultaneously with the EU's decision, the Financial Reporting Council (FRC) of
Australia announced its acceptance of IFRS by January 1 2005. In December of 2002, Financial
Accounting Standards Board (USA) and IASB conducted a joint meeting in Norfolk,
Connecticut (USA) and pledged future cooperation in moving IFRS and GAAP toward a
common set of standards. Representatives of FASB recognized the need for high-quality
international accounting standards to be used for financial reporting by multinational
corporations (IFAC History). Taking into account the fact that the GDP of the USA is more than
20% of the world GDP, support for such standards would have a substantial impact on the
success of their implementation. Therefore, starting in 2000, the international system of
accounting receives global support and spreads into many countries all over the globe.

Literature Review

Baker and Barbu (2007) conducted a study on Evolution of research on international accounting
harmonization: a historical and institutional perspective which showed that Accounting is
acknowledged to be a complex form of socio-economic activity whose historical evolution is co-
extensive with that of human civilization. Indeed, it is argued that the rise of capitalism and the
current hegemony of global capital would not have been possible without the existence of an
institutionalized set of organized accounting practices. Trabelsi R., 2015 published a research on
International accounting normalization and harmonization processes across the world: History
and overview, which discusses the circumstances that led to the genesis of the International
Accounting Standards Committee (IASC) in 1973, by returning to the evolution of its notoriety,
and to the production of its first international accounting standards (IAS).

Maran and Leoni (2019) published a study that showed The contribution of Italian literature to
the international Accounting History literature which aimed to qualify the contribution of Italian
scholars to the AH literature. According to Carnegie and Rodrigues (2007), the present-day
dimensions of the international accounting history community focuses on examining the formal
(institutionalized) and informal (non-institutionalized) arrangements for accounting history in
various countries and regions.

Conclusion

This paper identifies three major stages of development of the international system of
accounting. First stage: From the end of XIX century/beginning of XX century until the middle
of XX century. This stage is characterized by the inception of the idea of having an
internationally accepted set of accounting standards, adoption of legislation in various countries
codifying their accounting principles, emergence of professional accounting associations,
rethinking of the role of accounting in the system of management, and internationalization of
information exchange among accounting professionals.

Second stage: From the middle of the XX century until the end of XX century, the international
system of accounting begins to take shape. During this period first international accounting
standards appear, and the process of harmonization of accounting systems across countries
begins. Two international bodies – IASC and IFA are formed, and their activity is gradually
recognized and supported by major international institutions.

Third stage: From the end of XXs century, until present day, the efforts to harmonize accounting
systems evolved into a broader concept of international convergence. International accounting
standards are officially accepted in many countries and a larger portion of the global economy
moves toward using IFRS. International system of accounting moves toward becoming a global
system of accounting.

TOPIC 2: HISTORY AND EVOLUTION OF ACCOUNTING STANDARDS

INTRODUCTION

The origin of ‘Audit‘ comes from the word ‘Audire.’ With the advent of the Industrial
Revolution, ‘auditing’ evolved as a financial accountability tool. The word “audit” has Latin
origins (audio, audire, means listening). This word has known many definitions and
classifications during this time. Generally, it is a synonym to control, check, inspect, and revise.
Auditing was primarily a method to maintain governmental accountancy, and record-keeping
was its mainstay. From the time of ancient Egyptians, Greeks, and Romans, the practice of
auditing the accounts of public institutions existed. Checking clerks were appointed in those
days to check the public accounts. The main objective of auditing of those days was to locate
frauds and to determine whether the receipts and payments were properly recorded by the
person responsible. It wasn’t until the advent of the Industrial Revolution, from 1750 to 1850,
that auditing began its evolution into a field of fraud detection and financial accountability.
Businesses expanded during this period and brought in large-scale production, steam power,
improved facilities, and better means of communication. This resulted in the origin of the joint-
stock form of organizations. Shareholders contribute to the capital of these companies but do
not have control over the day-to-day working of the organization. Management was hired to
operate businesses in the owners’ absences, but the shareholders who have invested their
money would naturally be interested in knowing the company’s financial position. So they
found an increasing need to monitor financial activities for accuracy and fraud prevention. This
originated the need for an independent person to check the accounts and report to the
shareholders on the accuracy of the accounts and the safety of their investments (Source;
https://www.iedunote.com/auditing-origin-evolution).

In the early 20th century, the reporting practice of auditors, which involved submitting reports
of their duties and findings, was standardized as the “Independent Auditor’s Report.” The
increase in demand for auditors leads to the development of the testing process. Auditors
developed a way to strategically select key cases representative of the company’s overall
performance. This was an affordable alternative to examining every case in detail, requiring less
time than the standard audit (Source; https://www.iedunote.com/auditing-origin-evolution).

THE EARLY BEGINNINGS OF FINANCIAL AUDITING —PRE-1930

to accounting historian John L. Carey, a former administrative vice president of the AICPA
(known before 1957 as the American Institute of Accountants), audits were required by law in
England as early as 1845 to protect shareholders from “improper actions by promoters and
directors.” But there was no organized profession of accountants or auditors, no uniform
auditing standards or rules, and no established training or other qualifications for auditors, and
they had no professional status. Interestingly, however, auditors were required under British
law to be stockholders in order to have a stake in the audit client entity, a common interest
with those that they were engaged to protect, but be independent in other significant respects
(The Rise of the Accounting Profession: From Technician to Professional, 1896–1936, AICPA,
New York, N.Y., 1969, pp. 17–18). So prior to the 1930s, the direction and scope of auditing was
solely determined at the discretion of the auditor; until the enactment of the federal securities
laws, it was clearly focused primarily on the detection of fraud, a subject that continues to
receive a great deal of attention.

One of the earliest and most widely used comprehensive, influential, and durable (albeit
nonauthoritative) sources of “practical” guidance for U.S. auditors was Auditing Theory and
Practice, by Robert H. Montgomery, first published in 1912 and later known simply as
Montgomery’s Auditing (the latest version, the 13th edition, was published in 2008). Prior to
1912, however, the principal source of auditor guidance in the United States was an American
edition of a work first published in 1892 by English professor Lawrence R. Dicksee, entitled
Auditing: A Practical Manual for Auditors, re-edited in 1909 by Montgomery. Unprophetically
(or not), Montgomery wrote in the preface to the 1905 American edition of Dicksee’s work: “It
cannot be expected that any hard and fast rules will ever prevail, nor is it desirable that the
personal element in an audit should be superseded by instruction prepared in advance.” So at
the dawn of the 20th century, Montgomery was campaigning against rules-based auditing
standards and checklist-driven audits―way ahead of his time!

The U.S. federal income tax on individuals had a rocky start during the Civil War (with the
Revenue Act of 1861); it was not made permanent until 1913 when the 16th Amendment to the
Constitution was ratified. A 1% tax on income of corporations went into effect in 1909. Because
of the relative insignificance of the early income tax, and despite the then primitive stage of
development of the auditing profession, Montgomery asserted in the 1912 preface to the first
edition of his auditing text that auditing was “the most important branch of accountancy.”

At first, “even though the first income tax rates were low and collections were minimal the
mere existence of an income tax affected the accounting profession almost immediately” (Ray
M. Sommerfeld and John E. Easton, “The CPA’s Tax Practice Today―and How It Got That Way,”
Journal of Accountancy, Centennial Issue, May 1987, AICPA, p. 169). Accordingly, in a new
preface to his second edition in 1916, Montgomery recognized that the “income tax is here to
stay,” and he referred to “the growing importance and complexity of the subject,” but he did
not modify his earlier statement that auditing was “the most important branch of accountancy”
(Auditing Theory and Practice, 2d ed., The Ronald Press).
Following the stock market crash of 1929 and the ensuing Great Depression, Congress passed
the two acts of federal legislation that would change the worlds of investments and auditing
forever.

Montgomery reflected back to the “formative days” of the profession when he wrote in chapter
II of his early milestone work, that the primary purposes of auditing were then the detection of
fraud and errors, but he asserted with great understanding for his time―20 years before the
first federal securities laws―that, primarily for the benefit of investors and to a much lesser
extent creditors, recent changes in user demand then required a “vastly broader and more
important class of work to ascertain the actual financial condition and earnings of an
enterprise” (2d ed., pp. 9–12). Despite Montgomery’s forward-looking vision, scanning through
the remainder of his extensive 758-page text (which he confesses in its preface is “more of
practice than of theory”), one can see that the overwhelming emphasis remained, nevertheless,
on performing procedures that are intended to detect fraud, particularly employee
misappropriations, rather than intentional misstatements in financial statements.

Although Montgomery dedicates several pages (2d ed., pp. 53–58) of his text to a somewhat
detailed discussion of the features and importance of a satisfactory system of “internal check”
(the original term for internal control), he gives little or no clue as to its effect on audit scope or
reporting except to state that that a “detailed audit”—by which he meant one that covers
results of operations rather than just the balance sheet—is warranted when “there is no
satisfactory internal check” (2d ed., p. 48).

Noted accounting historian Stephen A. Zeff wrote: “Prior to the 1930s, no laws or regulations
obliged corporations to have their financial statements audited. … By 1926, more than 90
percent of industrial companies listed on the New York [Stock] Exchange were audited, even
though the Exchange did not require audited statements by newly listed companies until 1933.
… [However, it] had informally encouraged companies to publish audited financial statements
for some years before then.” (“How the U.S. Accounting Profession Got Where It Is Today: Part
I,” Accounting Horizons, September 2003, pp. 189–205,
www.ruf.rice.edu/~sazeff/PDF/Horizons,%20Part%20I%20(print).pdf)
THE ENORMOUS IMPACT OF FEDERAL SECURITIES LAWS

Following the stock market crash of 1929 and the ensuing Great Depression, Congress passed
the two acts of federal legislation that would change the worlds of investments and auditing
forever—the Securities Act of 1933 and Securities Exchange Act of 1934. This momentous
legislation required all SEC registrants to have their financial statements audited by
independent CPAs, thus highlighting the importance of the auditing profession and substantially
increasing the demand for its services. On the negative side, it also had the effect of expanding
auditors’ exposure to liability by overriding the privity of contract defense typically enjoyed by
auditors in connection with users of audit reports when included in SEC filings.

THE INTRODUCTION AND DEVELOPMENT OF AUTHORITATIVE ACCOUNTING AND AUDITING

STANDARDS

Despite the absence of any prior professional literature that could have been characterized
collectively as “generally accepted auditing standards” (GAAS), as exist today, SAP 1 made
references to “generally accepted practice” and “recommended [but did not require] that
certain additional procedures regarding inventories and accounts receivable should be
considered as generally accepted practice … [or if they] had not been undertaken, that fact
should be disclosed in the auditors’ report or opinion [emphasis added].” It further described
such common auditing practices as consisting of “the well-established custom of making test
checks of accounting records and related data and, beyond that, reliance upon the system of
internal check and control after investigation of its adequacy and effectiveness.” It went on to
describe such common practice as “to examine a concern’s accounting records and supporting
data, in certain matters to obtain outside confirmations, and to require and consider
supplementary explanations and information from the management and employees, to the
extent necessary to enable him to form an opinion as to whether or not the financial
statements as submitted present fairly the position and the results of periodic operations.”

Despite the then absence of any authoritative body of accounting standards, SAP 1 also made
early use of the terms “present fairly” and “generally accepted accounting principles” (GAAP) as
its frame of reference, a notion that was obscure until 1959 when, for the first time, the AICPA’s
Accounting Principles Board set out to research and develop “a fairly broad set of coordinated
principles … [that] should serve as a framework for the solution of detailed problems.” The
seeds of the then undefined term GAAP, however, were first planted in 1933 when a committee
of the AICPA provided the New York Stock Exchange with a philosophy and a framework for
listed companies, proposing a set of five fundamental principles of accounting that it regarded
as “so generally accepted that they should be followed by all listed companies” (Carey, 1969, p.
177) and again in 1937/38 when the AICPA began to issue Accounting Research Bulletins whose
content was deemed to constitute “substantial authoritative support,” a similarly vague and
undefined term that was used concurrently by the SEC when it issued Accounting Series Release
(ASR) 4 stated that the SEC would accept financial statements only if based on accounting for
which there was “substantial authoritative support.” This term resurfaced again in 1964 in the
first “official” AICPA definition of GAAP, which (as vaguely as ever) stated that GAAP “are those
principles which have substantial authoritative support.” (“Was GAAP Ever ‘Generally
Accepted?’,” The CPA Journal, May 2015, pp. 12–13, https://bit.ly/32OyXPL.) According to Zeff,
the term “generally accepted accounting principles” was first used in a 1936 AICPA paper
Examination of Financial Statements by Independent Public Accountants (“The Primacy of
‘Present Fairly’ in the Auditor’s Report,” CUNY Academic Works, City University of New York,
2006, https://academicworks.cuny.edu/bb_pubs/1023).

The evolution of what was once called the “standard” audit report has been slow and cautious
over the past century.

EVOLUTION OF THE AUDIT REPORT

The evolution of what was once called the “standard” audit report has been slow and cautious
over the past century. As Montgomery discussed in chapter XII (2d ed., pp. 242–246), in the
absence of any authoritative standards, laws, or regulations, audit reports in the early 20th
century were largely free-form, with content dictated solely by the auditor’s judgment and
discretion. Montgomery does offer substantial guidance, however, and makes a distinction
between what he calls a “certificate” (limited to a description of the audit scope followed by an
opinion as to “correct” presentation with qualifications, if warranted) versus a considerably
more detailed and unstructured “report,” (i.e., roughly what appears to have influenced
subsequent development); these later evolved into a standard short-form and a long-form
report, respectively. In 1933 and 1934, the audit reports accepted in filings with the SEC were
invariably a brief, early, nonstandardized version of a short-form report merely stating that an
audit was performed and concluding with an opinion. Because of the absence of any
authoritative standards, there was ordinarily no reference in these early reports to GAAS,
GAAP, or fair presentation.

But a nonauthoritative pamphlet issued by the AICPA in 1934, “Audits of Corporate Accounts,”
recommended a standard short-form audit report that was quickly adopted widely by the
profession. This led to the recommended (but not required) use of an expanded, “standard,”
short-form report much like the one that, in 1974, finally was officially designated as the
“standard” audit report. The new report form described in some detail the nature of the
auditing procedures employed by the auditor as the basis for the audit opinion. Although it still
made no reference to GAAS, it did use the term “fairly present, in accordance with accepted
principles of accounting,” and added “consistently maintained” (Carey, The Rise of the
Accounting Profession, V.2. To Responsibility and Authority, 1937–1969, AICPA, 1970, pp. 151–
155).

In 1939, SAP 1 acknowledged the acceptability of either “a detailed report … accompanied by

statements and supporting schedules … [or one] limited to a concise statement of the scope of
the examination and the related opinion of the independent auditor concerning the
accompanying financial statements of the client”—in other words, a long-form or short-form
report (the latter it acknowledged could be called a “certificate”)—of course, still without
reference to GAAS.

With 1957’s SAP No. 27, Long-Form Reports, the importance of eliminating or reducing
opportunities for auditors to include vague and inconsistent language in their reports was
recognized. Although not prohibited, long-form reports were effectively discouraged by
cautioning auditors against certain risks deemed to be associated with them. Consequently, the
use of long-form audit reports began to diminish. In 1974, SAS 2, Reports on Audited Financial
Statements, effectively prohibited the issuance of a long-form audit report as a stand-alone
alternative for what was previously called a “short-form” report (and formally redesignated the
“standard” audit report). Its use continued to be permitted, but only as a supplement to a
standard, short-form report, and it was rarely issued except when distribution was restricted to
a select user or small group of users.

Major substantive changes made to the standard audit report were introduced in 1988 (SAS 58,
Reports on Audited Financial Statements) as part of a group of standards collectively called the
“expectation gap” standards, which attempted to better inform users of auditors’
responsibilities.

FAST FORWARD TO THE 21ST CENTURY

In addition to an explosion of technological advances in the auditing process, the 21st century
has seen some significant new developments in only 20 years. Another major auditing scandal
(Enron) was uncovered at the dawn of the current century. This led FASB to issue a new
accounting standard requiring consolidation of certain variable interest entities, and it hastened
the demise of one of the largest audit firms and the signing of another major piece of federal
legislation that rocked the auditing world―the Sarbanes-Oxley Act of 2002 (SOX). Among other
things, SOX introduced several new auditor independence rules and established the Public
Company Accounting Oversight Board (PCAOB). It also required the largest SEC issuers to
engage its auditors to audit and report on the effectiveness of their internal control over
financial reporting, thus providing the large audit firms with a significant new revenue source to
partially offset the pain of additional intense regulation.

The new report form described in some detail the nature of the auditing procedures employed
by the auditors as the basis for the audit opinion.

The PCAOB is a not-for-profit entity composed largely of nonauditors and controlled by the SEC.
It began its statutory mission almost immediately by developing what has grown to be a new,
more robust set of auditing and other professional standards and rules applicable solely to
auditors practicing before the SEC, performing audits for SEC issuers or securities broker-
dealers, as well as by monitoring and enforcing auditor compliance with its standards and rules
through periodic vigorous inspections and public reports, and by conducting investigations
often ending with disciplinary actions against auditors.

In 2011, the AICPA’s Auditing Standards Board issued its so-called “clarity standards”
(applicable only for non-SEC issuers since by then, the PCAOB controlled audit reporting for SEC
issuers), which again revised and expanded the then-standard audit report by introducing
captioned sections intended to clarify auditors’ responsibilities and distinguish them from
management’s responsibilities.

Starting 2021, for periods ending on or after December 15, 2021, with early implementation
optional, SAS 134 will require audit reports for non-SEC issuers to employ another new format
that is designed to enhance relevance and transparency for users. Among its most significant
changes are a new “Basis for Opinion” section, as well as an enhanced explanation of the
auditor’s responsibilities and more information about management’s responsibilities (when
prescribed by the financial reporting framework in use) to evaluate whether conditions or
events raise substantial doubt about an entity’s ability to continue as a going concern. SAS 134
also provides a framework for voluntary reporting of nonstandardized “key audit matters”
(similar to the PCAOB’s “critical audit matters”), which may cause audit reports for non-SEC
issuers to come full circle and resemble something like the old, “long-form” format that
dominated reporting in the first half of the 20th century. (“The Audit Report Returns to Its
Roots: An Historical Perspective on Critical Audit Matters,” The CPA Journal, February 2018, pp.
66–68, https://bit.ly/3iX0pAM.)

HISTORY OF AUDITING – NIGERIAN PERSPECTIVE

Before 1960, when Nigeria got independence, it was under British colonization and nearly all
the activities of the nation were controlled by British rulers. According to AbdulGaniyy (2013)[2]
the first set of people to be referred to as accountants in Nigeria were trained under British
rulership. According to Owolabi, Jayeoba and Ajibade (2016)[29] company ordinances enacted
prior to 1960 stipulated that companies were only statutorily required to hire auditors but the
requirements for the appointment were not specifically stated in the ordinance neither did it
reflect that the auditors should be qualified accountant. Therefore, most of the people
appointed as auditors during this period were not British trained’ accountants nor qualified
accountants. Although, with the lapses in the ordnance, Nigeria still had qualified accountants
trained by the British; few of them qualified as Chartered accountants under professional
accountancy bodies of England and Wales and that of Scotland of which Pa. Akintola Williams
was among the few. He was founder of the first and the oldest Indigenous Accounting firm in
Nigeria. The firm formerly registered as Akintola Williams & Co. (Now Akintola Williams
Deloitte) was established in 1952. Over the years, Deloitte has built up a strong representation
in several major African cities and has successfully undertaken a variety of business advisory
and consulting assignments for clients in Nigeria and elsewhere in Africa. In addition, prior 1960
audit practice was not restricted to companies but also to government. Public accounts have
been subjected to audit as far back as Colonial era. In 1866, Colonial Branch of the Exchequer &
Audit Department was established and responsible for public account audits. There was a
development in 1910 when the Colonial Audit Service, reporting to the Secretary of State of the
Colonies was founded. Also, in 1910, there was an appointments of Southern and Northern
Nigeria heads of Audit. The merger of Southern and Northern Nigeria Protectorates led to the
establishment of Nigeria as a nation in 1914; and at that time, there was a development of an
audit section as a division of the Central Secretariat located in Lagos. The first Audit Ordinance
in Nigeria was enacted in 1956, and the Ordinance (s7) stipulated that “the Directors of Audit
was responsible to the Governor, but under the supervision of the Director General of the
Overseas Audit Service”. In 1956, there was a creation of Federal Audit Department as a section
within the Ministry of Finance. Nigeria was later divided into three regions, namely, the
Western region, Northern region, and the Eastern region with each region having its own
Director of Audit. In 1960, after Nigeria became independent, the need for the Country to have
its own accountancy body became prominent and the qualified chartered accountants in
Nigeria united to establish The Association of Accountants in Nigeria (AAN). The Association
was incorporated in 1960 but obtained its legal recognition with 250 members in 1965 as the
Institute of Chartered Accountants of Nigeria (ICAN, 1965), established by an Act Parliament
(No. 15). Subsequently, other related Professional bodies were established; the Association of
National Accountants (ANAN) was established in 1979, incorporated in September 1983
although became Chartered on 25 August 1993 by Decree 76 of 1993 (IFAC, 2019). Also, The
Chartered Institute of Taxation of Nigeria (CITN) was established in 1982 and Chartered by Act
No. 76 of 1992 to regulate Tax Practice and Administration in the country. The Financial
Reporting Council (FRC) of Nigeria was established by the Financial Reporting Council of Nigeria
Act, No. 6, 2011. Until 1993, only the members of the ICAN were entitled to practice as
accountants and statutory auditors in the country but since the establishment of the FRCN in
2011, this activity has been monitored and controlled by FRCN. FRC represents the umbrella of
all the Accounting Professional bodies in Nigeria under which all the Professionals operates.
Presently, ICAN has approximately 21,850 active members as reported by the institute as
financial members as at 20th October, 2020 (ICAN, 2020) (International Journal of Management
Excellence Vol.16, Dec 2020; Historical Evolution of Audit Theory and Practice by Professor
Owolabi, S.A & Olagunju, A.O, Professor, Department of Accounting, Babcock University,
Nigeria).

CONCLUSION Auditing, dated as far back as found in Ancient history and lots of reforms have
been made to its practice since then till recent time; despite this, there are still cases of
financial scandals occurring in companies across the globe, even among firms with qualified
audit reports, audited by giants of audit (Big-4). Also, the outbreak of global pandemic has
reshaped accounting and audit professions, and a proof that existing system of audit process
need to be braced up to the level of evolutions in business. Although, nothing new in
technologies used in conducting audit in recent time but its full application is more required
now, as audit needs to pace with the realtime economy. Therefore, auditors may not have
choice than to adjust to the new system. The outbreak of COVID-19 has taken businesses from
the manual view to technology driven, likewise the audit process (Fischer, 2020)[13]. According
to Castka, Searcy and Fischer (2020) the use of Technologies has facilitated the transition in
audit practice from physical to remote auditing during the COVID-19 crisis. With the current
situation of the economy, accounting and audit practice should be fully technology-driven. It is
imperative that accountants ultimately lead the way in adoption and implementation of
technology-enhanced auditing.

Among the issues discussed and still unresolved are the following:

Should a set of minimum procedures be required to be performed in every audit; in other

words, should auditing standards be more principles-based or rules-based?

What should be the auditor’s responsibility with regard to asset devaluations or impairments
(of particular concern during the current worldwide pandemic)?

Is performing consulting and other nonaudit or nonattest services for an audit client invariably
inconsistent with independence and, therefore, incompatible with auditing?

Maybe the answers to these questions and others will become apparent one day.

TOPIC 3: DIFFERENCES AND SIMILARITIES BETWEEN IAS AND IFRS

INTRODUCTION

CONCEPT OF INTERNATIONAL ACCOUNTING STANDARDS

International Accounting Standards (IAS) are a set of rules for financial statements that were
replaced in 2001 by International Financial Reporting Standards (IFRS) and have subsequently
been adopted by most major financial markets around the world. International Accounting
Standards (IAS) were the first international accounting standards that were issued by the
International Accounting Standards Committee (IASC), formed in 1973. The goal then, as it
remains today, was to make it easier to compare businesses around the world, increase
transparency and trust in financial reporting, and foster global trade and investment.

International Accounting Standards mandated how various accounting transactions were to be

recorded and reported in an organization's financial statements. Their intent was to reduce
differences in the accounting for transactions and financial statement presentation around the
world, which in turn could improve the investment climate.
The standards were promulgated by the International Accounting Standards Committee and were
issued from 1973 to 2001. The standards were no longer released after that committee was
disbanded, resulting in a set of 41 standards covering such topics as financial statement
presentation, inventories, and agriculture. The committee's replacement is the International
Accounting Standards Board (IASB), which now issues International Financial Reporting
Standards.

The following are the International accounting standards issued by the IASC including the ones
withdrawn or superseded by other standards;

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 3 Consolidated Financial Statements

Superseded in 1989 by IAS 27 and IAS 2

IAS 4 Depreciation Accounting

Withdrawn in 1999

IAS 5 Information to Be Disclosed in Financial Statements

Superseded by IAS 1 effective 1 July 1998

IAS 6 Accounting Responses to Changing Prices

Superseded by IAS 15, which was withdrawn December 2003

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 9 Accounting for Research and Development Activities

Superseded by IAS 38 effective 1 July 1999

IAS 10 Events After the Reporting Period

IAS 11 Construction Contracts

Superseded by IFRS 15 as of 1 January 2017

IAS 12 Income Taxes

IAS 13 Presentation of Current Assets and Current Liabilities

Superseded by IAS 1 effective 1 July 1998

IAS 14 Segment Reporting

Superseded by IFRS 8 effective 1 January 2009

IAS 15 Information Reflecting the Effects of Changing Prices

Withdrawn December 2003

IAS 16 Property, Plant and Equipment

IAS 17 Leases

Superseded by IFRS 16 effective 1 January 2019

IAS 18 Revenue

Superseded by IFRS 15 effective 1 January 2017

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1983

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations

Superseded by IFRS 3 effective 31 March 2004

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Accounting for Investments

Superseded by IAS 39 and IAS 40 effective 2001

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Separate Financial Statements

IAS 27 Consolidated and Separate Financial Statements

Superseded by IFRS 10, IFRS 12 and IAS 27 effective 1 January 2013

IAS 28 Investments in Associates and Joint Ventures

IAS 28 Investments in Associates

Superseded by IAS 28 and IFRS 12 effective 1 January 2013

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial

Institutions

Superseded by IFRS 7 effective 1 January 2007

IAS 31 Interests In Joint Ventures

Superseded by IFRS 11 and IFRS 12 effective 1 January 2013

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

 Superseded by IFRS 5 effective 1 January 2005

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

Superseded by IFRS 9 where IFRS 9 is applied

IAS 40 Investment Property

IAS 41 Agriculture

CONCEPT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and easily
comparable around the world.

IFRS currently has complete profiles for 167 jurisdictions, including those in the European
Union with exception to The United States who uses a different system, the generally accepted
accounting principles (GAAP).

They were developed by the International Accounting Standards Board (IASB), which is part of
the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the standards to
“bring transparency, accountability, and efficiency to financial markets around the world." IFRS
fosters transparency and trust in the global financial markets and the companies that list their
shares on them. If such standards did not exist, investors would be more reluctant to believe the
financial statements and other information presented to them by companies. Without that trust,
we might see fewer transactions and a less robust economy.

The IFRS system is sometimes confused with International Accounting Standards (IAS), which
are the older standards that IFRS replaced in 2001.
International Financial Reporting Standards (IFRS) were created to bring consistency and
integrity to accounting standards and practices, regardless of the company or the country.

They were issued by the London-based Accounting Standards Board (IASB) to address record
keeping, account reporting, and other aspects of financial reporting.

The IFRS system replaced the International Accounting Standards (IAS) in 2001.

IFRS fosters greater corporate transparency.

IFRS specify in detail how companies must maintain their records and report their expenses and
income. They were established to create a common accounting language that could be
understood globally by investors, auditors, government regulators, and other interested parties.

The standards are designed to bring consistency to accounting language, practices, and
statements, and to help businesses and investors make educated financial analyses and decisions.
IFRS also helps investors analyze companies by making it easier to perform comparisons
between one company and another and for fundamental analysis of a company's performance.

The following are the International Financial Reporting Standards issued from 2001 till date;

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

Will be superseded by IFRS 17 as of 1 January 2023

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

IFRS 14 Regulatory Deferral Accounts

IFRS 15 Revenue from Contracts with Customers

IFRS 16 Leases

IFRS 17 Insurance Contracts

DIFFERENCES BETWEEN IAS AND IFRS

The sequel listed are some citable differences between the IAS and IFRS:

One of the significant differences is that the setting of the IAS is done by the International
Accounting Standards Committee (IASC) while that of the IFRS is done by the International
Accounting Standards Board (IASB).

The IAS were in set and used from 1973 to 2001 while that of the IFRS were set from the year
2001 till date.

Another notable difference is that the IAS is numbered up to 41 while the IFRS are 17 in
number.

Standards of the IFRS comes first if there’s logical inconsistency with those of the IAS. Then,
the IAS standards fail to hold.

SIMMILARITIES BETWEEN IAS AND IFRS

The following are the similarities between the IAS and IFRS;
They are both accounting rules

They both foster transparency and trust in the global financial markets and the companies that
list their shares on them.

They were both created to bring consistency and integrity to accounting standards and practices,
regardless of the company or the country.

They both specify in detail how companies must maintain their records and report their expenses
and income. They were established to create a common accounting language that could be
understood globally by investors, auditors, government regulators, and other interested parties.

CONCLUSION

Globally comparable accounting standards promote transparency, accountability, and efficiency

in financial markets around the world. This enables investors and other market participants to
make informed economic decisions about investment opportunities and risks and improves
capital allocation. Universal standards also significantly reduce reporting and regulatory costs,
especially for companies with international operations and subsidiaries in multiple countries.

TOPIC 4: AUDIT EXPECTATION GAP

INTRODUCTION

Accounting and auditing are critical components of any given enterprise as they play an
important role in contributing to the effectiveness and efficient functioning of business
operations, the capital markets, and the economy by adding credibility to financial statement.
The audit expectation gap has a long and persistent history. There is widespread concern with the
existence of the “expectation gap” between the auditing profession and the public. The term
“expectation gap” was first applied to auditing by Liggio (1974). Since then, cumulative
evidence has increasingly indicated the presence of an expectation gap (Godsell, 1992). The
expectation gap exists when auditors and the public hold different beliefs about the auditors’
duties and responsibilities and the messages conveyed by audit reports. Apparently, there is a gap
between what the public expects and what it actually gets.

In recent years, the auditing profession has been involuntarily placed in the spotlight, particularly
because of some spectacular and well publicize corporate collapses and the subsequent
implication of the reporting auditors .As mentioned in Godsell (1992), there is a widespread
belief that a person who has any interest in a company (shareholders, potential investors, take-
over bidders, creditors etc.) should be able to rely on its audited accounts as a guarantee of its
solvency, propriety and business viability. Hence, if it transpires, without any warning that the
company is in serious financial difficulty, it is widely felt that somebody should be made
accountable for these financial disasters, and this somebody is always perceived to be the
auditors.

Definition of Audit Expectation Gap

The definition of the audit expectation gap differs between researchers, Liggio (1975) defined
the audit expectation gap as the difference between levels of predicted performance “as
envisioned by the independent accountant and by the user of financial information”. The
commission on Auditors’ responsibilities (Cohen Commission) (1978) further expanded upon
this definition as “a gap [that] exists between the performance of auditors and the expectations of
the users of financial statements”. Monroe and Woodliff (1993) defined the expectation gap as
the difference in beliefs between auditors and the public about the duties and responsibilities
assumed by auditors and the messages conveyed by audit reports. Quite similarly, Jennings,
Kneer, and Reckers (1993) defined the concept as the difference between what the public expects
from the auditors and what the auditors actually deliver. In an empirical study of the audit
expectation-performance gap, Porter (1993) argued that Liggio and the Cohen Commission
definitions of the audit expectation gap were too narrow and that they did not consider that
auditors might not accomplish “expected performance” or what they “can and reasonably
should”. Instead, Porter (1993) defined the audit expectation gap as the gap between society’s
expectations of auditors and auditor’s performance, as perceived by society. The gap consists of
two components:

Reasonableness Gap: what society expects the auditors to achieve and what they can reasonably
be expected to accomplish.

Performance Gap: the gap between what society can reasonably expect auditors to
accomplish and what they are perceived to achieve. The performance gap can then be
further divided into:

deficient standards: the gap between the duties which can reasonably be expected of
auditors and auditors’ existing duties as defined by the law and professional
promulgations

deficient performance: the gap between the expected standard of performance of

auditors’ existing duties and auditors’ perceived performance as expected and perceived
by society.

As with the definition of expectation gap, there are also different underlying explanations offered
for the continuing presence of the expectations problem. Tricker (1982) viewed the expectation
gap as the result of a natural time lag in the auditing profession identifying and responding to
continually evolving and expanding public expectations. Other authors argued that it is the
consequence of the contradictions in a self regulated audit system operating with minimal
government intervention. In a report from 2019, the Association of Chartered Certified
Accountants (ACCA) defined the audit expectation gap as “the difference between what the
public thinks auditors do and what the public wants auditors to do”. The ACCA categorized the
audit expectation gap into three components, namely:

Knowledge Gap,

Performance Gap,

Evolution Gap.
Knowledge Gap

The knowledge gap is the difference between what the public thinks auditors do and what
auditors actually do. The knowledge gap takes into consideration that the public can
misunderstand the audit. For example, the degree to which auditors are responsible for
preventing company failure or the restrictions on auditors providing non-audit services to clients.
The knowledge gap has been used by some in the audit profession to resist change by dismissing
the gap as something arising from the public’s lack of knowledge, rather than being a legitimate
issue, ACCA does not agree with that reasoning. ACCA claims that the existence of a knowledge
gap does not discredit calls for auditors to do more, and neither does it explain or excuse the
performance gap. However, ACCA claims that a wide knowledge gap can make it difficult to
understand the evolution gap since some parts of the knowledge gap may be because of
ignorance of auditing policies and standards that are already in place.

Bailey, Bylinski and Shields (1983) conducted research on how the audit report is formulated,
what message it conveys and the knowledge of the reader. The results from the study indicated
that users with more knowledge of audit reports held the auditors less responsible for the
information in the financial statements than users with less knowledge. Likewise, Epstein and
Geiger (1994) presented evidence that investors that are educated in accounting, finance,
investment analysis and the use of the auditor’s report are less inclined to require absolute
auditor assurance (i.e. that there are no misstatements in the financial reports). Therefore, Epstein
and Geiger (1994) suggested increased awareness and education as a way to decrease the
expectation gap.

Performance Gap

The ‘performance gap’ is defined as the difference between what auditors actually do and what
auditors are supposed to do, given the requirements of auditing standards or regulations. The
performance gap occurs when auditors do not perform as auditing standards or regulations
require. This gap can occur because of an inadequate focus on audit quality; the complexity of
certain auditing standards; or variation in the interpretation of auditing standards or the
regulatory requirements between regulators and practitioners. In order for audit firms to ensure
quality in their consultation, they are required to set up specific systems and processes. Audit
firms have systems and processes that seek to ensure quality in their engagements that they
comply with the standards and regulations. Audit regulators inspect files of completed
engagements to evaluate whether quality is being achieved.

ACCA states that audit firms have an obligation to make sure that audit quality is present and
maintained by having knowledge and reacting to areas of consistent low performance. Audit
regulators should push for innovation of audit firms, to increase audit quality and to avoid
instilling a “box-ticking” mentality. Audit standard setters should be reactive to audit quality
problems by updating audit standards and providing assistance during the implementation phase
(ACCA, 2019).

Evolution Gap

The evolution gap is defined as the difference between what auditors are supposed to do if they
actually follow the requirements of auditing standards and regulation and what the public wants
auditors to do. In other words, the evolution gap indicates the areas of the audit where there may
be a need for evolution, taking into consideration the general public demand, technological
advances and how the overall audit process could be enhanced to add more value in the public
interest. It takes into consideration the public’s demand and technological advances on how the
audit process could be improved to increase the value-added.

By addressing the knowledge and performance gap it is possible to determine what needs to
evolve in the audit. Since this will help to avoid overregulation and the inappropriate
development of auditing standards when the underlying issues could be poor knowledge or
unsatisfactory performance (ACCA, 2019). By reducing the knowledge gap and performance
gap it will help the public to focus more clearly on how they want the audit to evolve. ACCA
states that there is a need for a broad discussion between stakeholders on the development of the
audit profession, so it meets the public's expectations and remains relevant. These stakeholders
could include auditing standard setters, professional accountancy bodies, audit firms, investors,
governments, and the general public (ACCA, 2019).
When the CEO of Arthur Andersen, Joseph Berardino testified before Congress, (after the
bankruptcy of their client Enron), he stated that there are needs for reforms in accounting. He
stated that there is no distinction between companies that do the bare minimum to comply with
accounting regulations and companies that are more thorough when it comes to complying with
the regulations. He pointed out that when the public looks at an audit report, they only see the
same unqualified opinion on a company’s financial statement which is essentially a binary pass
or fail grading system (Forbes, 2002).

The diagram below further explains the three components of the audit expectation gap

Nature And Structure Of The Expectation Gap

Studies on the nature and structure of the expectation gap aim to elicit the actual as well as the
perceived roles and responsibilities of auditors and attempt to uncover the factors contributing to
the expectation gap. Empirical studies have been conducted, examining the nature and the
structure of the audit expectation gap. The goal of these studies was to highlight the perceived
roles and responsibilities of the auditor and to investigate contributing components of the
expectation gap. Many of these studies determined the views of the auditors and the public on
auditor responsibilities by utilizing survey questionnaires (Baron, Johnson, Searfoss & Smith,
1977; Humphrey et al., 1993; Epstein & Geiger, 1994; Chye Koh & Woo, 1998).
Baron et al. (1977) investigated the degree of auditor detection responsibilities regarding
material irregularities and faults. The authors used a survey questionnaire to try and determine if
there are discrepancies between the perceptions of auditor’s detection and disclosure
commitments between auditors and users of financial reports. The results of the study showed
that there was a significant difference in the perceptions of auditor responsibilities between
auditors and users of financial reports. The users of financial reports e.g. bank loan officers were
found to consider the auditors more accountable for detecting and reporting irregularities and
errors than the auditors considered themselves to be.

In the UK, Humphrey et al. (1993) examined the expectation gap by ascertaining the perceptions
of individuals of audit expectations issues through the use of a questionnaire survey comprising a
series of mini-cases. The issues investigated include the following: what is and should be the role
of the auditor? What should be the prohibitions and regulations placed on audit firms? And what
decisions could auditors be expected to make? The respondents included chartered accountants
in public practice, corporate finance directors, investment analysts, bank lending officers and
financial journalists. The survey revealed a significant difference between auditors and the
respondents (representing some of the main participants in the company financial report process)
in their views on the nature of auditing. The results confirmed that an audit expectation gap
exists, specifically in areas such as the nature of the audit function and the perceived
performance of auditors. The critical components of the expectation gap were found to include:

Auditors’ fraud detection role

The extent of auditors’ responsibilities to third parties

The nature of balance sheet valuations

The strength of and continuing threats to auditors ’independence

Aspects of the conduct of audit work (e.g. auditors’ ability to cope with risk and
uncertainty).
Failures Associated With Audit Expectation Gap

Ruhnke and Schmidt (2014) argued that three types of failures can be associated with the audit
expectation gap:

Failure of the public: This failure can be caused by the public not understanding the
requirements of the audit standards and developing expectations based on personal
preferences. Furthermore, it is also probable that there is a difference between auditors’
actual performance and how the public perceives the auditors’ performance since the
audit process is unobservable by the public.

Failure of the auditor: when there is a difference between the auditors’ own views of their
responsibilities and contemporary standards. In addition, auditor failure also exists when
auditors fail to apply audit standards in a proper manner.

Failure of the standard-setter: this failure exists when the standard-setter is unable to
create standards that are consistent and clearly express the responsibilities of the auditor.

Criticism Of Auditors

That auditors are being used as scapegoats for directors is nothing new, as early as 1927, A.P.
Richardson, the editor of The Journal of Accountancy, describes the meeting of the shareholders
of Marconi’s Wireless Telegraph Co., Ltd. The company had faced serious capital losses and it
had been virtually impossible for the auditors to present an opinion on the company’s assets. The
present directors denied responsibility for investments that had not been profitable and placed the
blame on their predecessors. Despite it being clear that the auditors had not been responsible for
the current situation but had in fact done everything they could in order to bring attention to the
issues. On this occasion, the shareholders were looking for a whipping boy and the accountants
were chosen for this purpose. “Their actions seems to have been dictated by something
approaching an unreasoning desire to hit someone who would not hit back” (Richardson,1927).

Studying how the audit profession is continued to be seen as legitimate despite audit failures,
Guénin-Paracini and Gendron (2010) argue that auditors are often used as scapegoats after a
corporate failure. They argue that auditors are morally and or legally convicted in a way that
maintains or enhances the legitimacy of the financial audit function. The authors contend that
financial auditors can be seen as a ready supply of victims to be sacrificed when fraudulent
financial statements appear that threaten to disrupt the credibility and smooth operation of capital
markets. When auditors are used as scapegoats, they are first demonized. After their punishment
has brought back order, they then become revered. The auditors are then quickly de-demonized
at the expense of secondary scapegoats (often corrupted managers). In the end, the auditors are
viewed as legitimate (Guénin-Paracini & Gendron, 2010).

Hoos, Saad and Lesage studied why auditors get blamed when something goes wrong.
Conducting an experiment, the authors found that auditing firms that actively convey the
message that they are an assurance provider receive more blame from nonprofessional investors
than audit firms that do not actively convey the assurance provider message. The authors also
found significant evidence in their experiment that investors are more likely to blame big audit
firms than small firms because the big firms are perceived to have deep pockets and are able to
pay the damages resulting from accounting failures. After further analysis of their results, the
authors found that knowledgeable nonprofessional investors will only blame the audit firm under
the condition that the audit firm does not use an active assurance provider communication
strategy. Because the auditing profession communicates that investors should trust them,
nonprofessional investors will put the blame on the auditors when something goes wrong. Due to
the potential risks related to communicating the “trust us” message, Hoos et al. (2018) suggest
that auditors should place more emphasis on communicating what they actually do (i.e. applying
auditing standards and stating opinions on financial statements), instead of communicating the
utopian picture of how they would like to be seen.

Reducing The Expectation Gap

Public accounting firms have been the targets of litigation for decades. This reflects a change in
public opinion concerning the role of auditors (American Institute of Certified Public
Accountants, 1984; Dopuch and King, 1992), resulting in a wider expectation gap between the
public and the audit profession. In an attempt to narrow the gap, various approaches have been
examined and suggested by researchers and professional bodies. Such include

Expanded Audit Report

Several studies have investigated the messages communicated by audit reports and the public
expectations of auditors. These studies are based mostly in the USA, UK and Australia. In the
USA, Nair and Rittenberg (1987) concluded that users’ perceptions about the relative
responsibilities of management and auditors are changed with an expanded audit report. Kelly
and Mohrweis (1989) also found that users’ perceptions of the nature of an audit were
significantly changed by wording modifications in audit reports. Miller et al. (1990) reported that
bankers found expanded audit reports to be more useful and understandable than the short form
reports. In general, these studies provided evidence that an expanded audit report gives a fuller
understanding of the scope, nature and significance of the audit and influences the reader’s
perceptions concerning the audit and the auditor’s role. That is, an expanded audit report has
reduced the audit expectation gap in one way or another. In the UK, Holt and Moizer (1990)
found that accountants and sophisticated users differ in their perceptions of the meaning of audit
reports. In a slightly different context, changing the wording of the auditor’s report resulted in
different perceptions of the meaning of audit reports for 140 part-time MBA students. In
Hartherly et al. studies, however, the perceptions of management’s and auditors’ responsibilities
were not significantly influenced by the modified wording.

Hanks (1992) expressed concern about the level of assurance that investors may assume from the
financial reports. He suggested that the audit report should be expanded to convey more
specifically what an audit entails and implies. Also the public should be educated on the meaning
of the audit report and the scope of work required to express an opinion.
Education

Some studies have found evidence to support the belief that knowledge of the users influences
the size of the expectation gap. Hence, some researchers advocate education in narrowing the
expectation gap. Bailey et al. (1983) did a study in the USA, and found that more knowledgeable
users placed less responsibility on auditors than less knowledgeable users, implying that a larger
gap exists between auditors and less sophisticated users. Similarly, Epstein and Geiger (1994)
found that more educated investors (with respect to accounting, finance and investment analysis
knowledge) are less likely to demand higher auditor assurance. Hence, they proposed that one
way to narrow the expectation gap is through increased public awareness of the nature and
limitations of an audit. And to increase users’ knowledge and awareness it is important to
communicate the merits and limitations of an audit at every available chance (e.g. shareholder
meetings).

Structured Audit Methodologies

Increased use of auditor decision aids is one of the responses made by some audit firms to
narrow the expectation gap with the hope of eventual reduction in the legal liability of auditors.
By adopting more structured methods of operation, these firms hope that consistently high-
quality audits can be rendered. Purvis (1987) looked into the effectiveness of using structured
and semi-structured methods of data collection and concluded that the imposition of structure
can have functional and dysfunctional aspects. Likewise, Boritz et al. (1987) also concluded that
structured audit methodologies do not lead to greater intra firm consensus. Jennings et al. (1993)
empirically addressed the legal impact of the increased use of audit decision aids and structured
audit approaches in the audit environment. Findings revealed that decision aids are used as
surrogate standards of the auditors by jurists. That is, jurists do accept and use audit decision aids
as a method to increase or at least maintain auditing standards.

Expansion Of Auditor’s Responsibilities And Enhancement Of Auditor Independence

Humphrey et al. also suggested other ways to close the expectation gap. They stated that it is no
good expecting the public to abandon their hope of auditors as fraud detectives through
education, or modifying the length of the audit report, or pretending that highly publicised audit
failures are exceptions. Instead, they offered three suggestions, namely:

setting up an independent office for auditing to enhance auditor independence by

overseeing the appointment of auditors of large companies and to regulate audit fees

extending auditors’ responsibilities by statute so that they clearly include responsibilities

to shareholders, creditors and potential shareholders

clarifying that auditors have a duty to detect fraud.

However, the magnitude of the expectation gap and the costs and benefits of these suggested
solutions need to be carefully assessed before any solution is implemented. O’Malley (1993) also
agreed to imposing additional responsibilities on auditors, especially with regard to detecting
fraud. He proposed four additional responsibilities which the profession might consider:
management and auditor evaluation of internal control systems; compliance reporting; direct
reporting by auditors to regulators; and auditor association with interim financial information.
However, he stated that these proposals will increase the threat of liability unless the liability
crisis is dealt with. Any expansion of auditors’ responsibilities will not be feasible as long as the
liability system operates as a risk transfer mechanism, with auditors as the prime transferees.
Lochner (1993) also believed that it is not fair to expect auditors to resume more responsibilities
without sufficient insurance provided to them against possible litigation.

In CONCLUSION

To conclude, researchers and the accounting profession have responded, in one way or another,
to the expectation gap. However, it must be noted that the expectation gap arises from a
combination of excessive expectations and insufficient performance. The public appears ignorant
of what is expected of the auditors as enshrined in the statute books and other documents issued
by regulatory and professional bodies. This public’s lack of knowledge no doubt is responsible
for their unreasonable expectations from the auditors. Steps must be taken to lower the public’s
expectations as well as to improve the auditors’ performance. There is need to educate the public
more to enhance their understanding of the duties and responsibilities of the auditor and thereby
reduce their unreasonable expectations from the auditors. Misconceptions and differences in
expectations will persist unless effective and timely solutions are implemented. Therefore,
efforts should be made by all concerned to implement the following suggested solutions:

The public need to be educated more on the duties and responsibilities of the auditor to
improve their understanding of the work of the auditor.

The standard auditor’s report should be expanded to include disclaimer clauses clearly
showing that it is not a certificate or guarantee of the financial soundness of the auditee.

It should be clearly stated in the audit report that the auditor is not the Compliance
Officer of the auditee.

The auditors report should add that the opinion expressed by the auditor should not be
construed to mean a guarantee of accuracy of the financial statements.

But given the current situation, it is likely that the audit expectation gap will continue to be a
major concern in the accounting and auditing proffession for many more years to come.

TOPIC 5: ADOPTION AND ADAPTATION OF INTERNATIONAL ACCOUNTING AND AUDITING

STANDARDS
Introduction

The accounting profession in Nigeria received a formal reckoning in the mid-1960’s (Chibuke;
2008). During that period, Nigerian accountants, mostly trained by professional accounting
bodies in the United Kingdom came together and formed a professional accounting body that is
responsible for the training of accountants in Nigeria and fostering the development of the
profession in the country. Presently, however, two notable professional accounting bodies carry
out such functions concurrently. These bodies pay much attention to the teaching of technical
and practical aspects of accounting. The two accounting bodies in Nigeria are the Institute of
Chartered Accountants of Nigeria (ICAN) and the Association of National Accountants of Nigeria
(ANAN). They are in essence self-regulating, and both membership elect governing council
members. There is no separate statutory body for the audit profession while ICAN acts as an
examining body for awarding Chartered Accountant Certification and as the licensing authority
for members engaged in public auditing practices ANAN advances the science of Accountancy
through its unique collegiate system. Members of ICAN and ANAN are recognized as members
of the International Federation of Accountants (IFAC)

ICAN members dominate accounting and auditing services in the private sector while ANAN
members are mostly employed in the public sector.

International Financial Reporting Standards

The international financial reporting standards (IFRS) consist of standards issued by

International Accounting Standards Board from 1st April, 2001. The scope of IFRS captures the
Standards and interpretation adopted by the International Accounting Standards Board (IASB).
The International Accounting Standards Board is a successor of International Accounting
Standards Committee which was originally established in 1973. The standards promulgated by
the International Accounting Standard Committee (IASC) prior to 1st April 2001 are referred to
as International Accounting Standard (IAS). After the formation of IASB in 2001, it took over all
the interpretations given by the Standard Interpretation Committee (SIC) before the formation
of the International Financial Reporting Interpretation Committee (IFRIC). Such standards and
interpretations taken over were either amended or repelled, hence IASB currently accepted
standards including all the following: Standards Promulgated from 1st April 2001 IFRS;
International Accounting Standards (IAS) which are Standards promulgated prior to 1st April
2001 not yet amended or repelled; standards interpretation committee (SIC) Interpretations
given by Standard Interpretation Committee prior to 1st April 2001 not yet repelled and
International financial reporting committee (IFRIC) Interpretations given by the International
Financial Reporting Interpretation Committee

According to Obazee (2007), the adaptation of IFRS is the modification of IASB's standards to
suit peculiarities of local market and economy without compromising the accounting standards
and disclosure requirements of the IASB's standard and basis of conclusion.

Globally comparable accounting standards promote transparency, accountability, and efficiency

in financial markets around the world. This enables investors and other market participants to
make informed economic decisions about investment opportunities and risks and improves
capital allocation. Universal standards also significantly reduce reporting and regulatory costs,
especially for companies with international operations and subsidiaries in multiple countries.

There has been significant progress towards developing a single set of high-quality global
accounting standards since the IASC was replaced by the IASB. IFRS have been adopted by the
European Union, leaving the United States, Japan (where voluntary adoption is allowed), and
China (which says it is working towards IFRS) as the only major capital markets without an IFRS
mandate

International Standards on Auditing (ISA)

International auditing Standards are professional standards for the auditing of financial
information. These standards are issued by the International Auditing and Assurance Standards
Board (IAASB). According to Olung M (CAO - L), ISA guides the auditor to add value to the
assignment hence building confidence of investors.
The standards cover various areas of auditing, including respective responsibilities, audit
planning, Internal Control, audit evidence, using the work of other experts, audit conclusions
and audit reports, and standards for specialized areas.

In developing countries that have not adopted international accounting standards therefore the
auditing practise may differ from internationally accepted standards. Therefore the adoption of
international audit standards may require the integration of the local and international audit
practise in the adopting country. Only then would this adoption of international audit standards
help to ensure that the investors’ interests are protected and the investment performance
accurately evaluation (Latifah, 2012). Current literature (Hassan et al, 2009 and Gyasi, 2010)
also suggest that the adoption of international audit standards is beneficial for the country itself
because it improves the quality of accounting practise in the country. Many developing
countries such as China, UAE, etc. have adopted international audit standards, with the hope of
improving the quality and credibility of financial reporting, which would consequently have a
positive impact on the flow of capital and investment, ushering in economic development.

International Standards on Auditing (ISA)

ISAs are professional standards for the performance of financial audits of financial information.
These standards are issued by the IFAC through the International Auditing and Assurance
Standards Board (IAASB). The aim of the ISAs is to serve the public interest by enhancing the
quality and uniformity of audit practices throughout the world and strengthening public
confidence in the global auditing and assurance profession. The final set of clarified standards
comprises of 36 ISAs.

International auditing Standards are professional standards for the auditing of financial
information. These standards are issued by the International Auditing and Assurance Standards
Board (IAASB). According to Olung M (CAO - L), ISA guides the auditor to add value to the
assignment hence building confidence of investors.

The standards cover various areas of auditing, including respective responsibilities, audit
planning, Internal Control, audit evidence, using the work of other experts, audit conclusions
and audit reports, and standards for specialized areas.

In developing countries that have not adopted international accounting standards therefore the
auditing practise may differ from internationally accepted standards. Therefore the adoption of
international audit standards may require the integration of the local and international audit
practise in the adopting country. Only then would this adoption of international audit standards
help to ensure that the investors’ interests are protected and the investment performance
accurately evaluation (Latifah, 2012).

Current literature (Hassan et al, 2009 and Gyasi, 2010) also suggest that the adoption of
international audit standards is beneficial for the country itself because it improves the quality
of accounting practise in the country. Many developing countries such as China, UAE, etc. have
adopted international audit standards, with the hope of improving the quality and credibility of
financial reporting, which would consequently have a positive impact on the flow of capital and
investment, ushering in economic development.

Adoption of international standards on Auditing

The main attraction of international audit standards such as the IFRS is the fact that it was
developed through an international consultation process. This “due process” can be considered
to have resulted in audit standards that are “good” – fit for purpose (Zakari, 2014).
International audit standards are also attractive to foreign investors on account of their wide
adoption worldwide – the IFRS is adopted in more than 100 countries, making it the de facto
standard in more than half the world. This means that international investors would already be
familiar with these standards. The adoption of these standards locally would therefore reduce
the burden on the investors, to familiarise themselves with the local lay of the land.

In addition to its attractiveness to investors, international audit standards also have an

important role in fostering corporate governance. The standards help the auditors to ensure
that they perform their role of monitoring management’s activities effectively. In developing
countries that have not adopted international accounting standards therefore the auditing
practise may differ from internationally accepted standards. Therefore the adoption of
international audit standards may require the integration of the local and international audit
practise in the adopting country. Only then would this adoption of international audit standards
help to ensure that the investors’ interests are protected and the investment performance
accurately evaluation (Latifah, 2012). Current literature (Hassan et al, 2009 and Gyasi, 2010)
also suggest that the adoption of international audit standards is beneficial for the country itself
because it improves the quality of accounting practise in the country. Many developing
countries such as China, UAE, etc. have adopted international audit standards, with the hope of
improving the quality and credibility of financial reporting, which would consequently have a
positive impact on the flow of capital and investment, ushering in economic development. In
general it appears that current opinion has a consensus that it is imperative for developing
countries to adopt international audit standards in order to access the capital markets at the
global level (Irvine and Lucas, 2006, Obaidat, 2007, Al-Hussaini et al, 2008 and Zakari, 2014).
Indeed Quinn (2004) and Michas (2010) suggest that accounting and financial information
produced in developing countries are not trustworthy.

Financial Reporting Framework in Nigeria

Adoption of International Financial Reporting Standards from 2012

On 28 July 2010, the Nigerian Federal Executive Council approved 1 January 2012 as the
effective date for convergence of accounting standards in Nigeria with International Financial
Reporting Standards (IFRS). The Council directed the Nigerian Accounting Standards Board
(NASB), under the supervision of the Nigerian Federal Ministry of Commerce and Industry, to
take further necessary actions to give effect to Councils' approval.

On 3 September 2010, the Nigerian Accounting Standards Board (NASB) announced a staged
implementation of IFRS, as follows:

Publicly listed entities and significant public interest entities are expected to implement IFRS by
1 January 2012 Other public interest entities are expected to implement IFRS by 1 January 2013
Small and medium-sized entities are expected to implement the IFRS for SMEs by 1 January
2014.

Micro-sized entities may use either the IFRS for SMEs or the Small and Medium-sized Entities
Guidelines on Accounting (SMEGA) Level 3 issued by the United Nations Conference on Trade
and Development (UNCTAD).

In June 2011, legislative changes were enacted under which the Financial Reporting Council
(FRC) of Nigeria replaced the NASB as the entity responsible for setting financial reporting
standards in Nigeria. The FRC has published regulatory guidance (link to FRC website) which
requires Nigerian entities to make certain elections when applying IFRS 1 First-time Adoption of
International Financial Reporting Standards. This guidance also requires all entities applying
IFRS to make an explicit and unreserved statement of compliance with IFRS.
Overview of Financial Reporting Council of Nigeria (FRCN)

The Financial Reporting Council of Nigeria (FRCN) was established by the Financial
Reporting Council Act, 2011(Section 1). The Act established for the council a board which shall
have overall control of the council and further gave the composition of the board as follows
(Section 2):

A Chairman who shall be a professional accountant with considerable professional

experience in accounting practices, the Executive Secretary of the Council, two
representatives from the Association of National Accountants of Nigeria, two representatives
from the Institute of Chartered Accountants of Nigeria, and one representative from each of
the following:

Office of the Accountant General of the Federation, Office of the Auditor General for the
Federation, Central Bank of Nigeria, Chartered Institute of Stockbrokers, Chartered Institute of
Taxation of Nigeria, Corporate Affairs Commission, Federal Inland Revenue Service, Federal
Ministry of Commerce, Federal Ministry of Finance, Nigerian Accounting Association,
Nigerian Association of Chambers of Commerce, Industries, Mines and Agriculture,
Nigerian Deposit Insurance Corporation, Nigerian Institute of Estate Surveyors and Valuers,
Securities and Exchange Commission, National Insurance Commission, Nigerian Stock
Exchange, and National Pension Commission.

Section 8 of the Act stipulates the functions of the Council as follows:

Develop and publish accounting and financial reporting standards to be observed in the
preparation of financial statement of public interest entities;
Review, promote and enforce compliance with the accounting and financial reporting
standards adopted by the Council;

Receive notices of non-compliance with approved standards from preparers, users, other third
parties or auditors of financial statements;

1. Receive copies of annual reports and financial statements of public interest entities from
preparers within 60 days of the approval of the Board;

2. Advise the Federal Government on matters relating to accounting and financial reporting
standards;

3. Maintain a register of professional accountants and other professionals engaged in the

financial reporting process; Monitor compliance with the reporting requirements specified
in the adoption of code of corporate governance

IFRS versus SAS: An Overview

Preparation and presentation of financial reports under IFRS and SAS have substantial
differences. In the opinion of Ikpefan and Akande (2012), the major difference between IFRS
and SAS is that the former is a more robust and principle based set of accounting standards
with detailed disclosure requirements. While Michel, François-Éric and Jean-Yves (2011)
identified the main characteristics of IFRS to include a principle-based approach, fair-value
orientation, the concept of comprehensive income, the entity theory underlying consolidation,
and improved transparency. Other key areas of differences include: change in format,
components and nomenclature of certain items of financial statements. These differences are
further explained below:

I. The financial statement Presentation: The financial statement presentation differs under
the local accounting system when compared with the international accounting system.
According to SAS 2-Information to be disclosed in the Financial Statements, income
statement/profit and loss account, balance sheet, cash-flow statement, value added
statement, five year financial summary, accounting policies and notes constitute minimum
financial statements requirement for a public limited liability company. In the case of
international accounting system (IAS 1-Presentation of Financial Statements), statement of
comprehensive income (including income statement), statement of financial position
(balance sheet), statement of cash flow, statement of changes in equity, accounting policies,
notes and significant management estimates and judgments constitute financial statement
requirements. This also constitute a difference between international and national
accounting systems.

II. Fair Value Measurement A higher reliance on fair value accounting in IFRS represent a
substantial difference compared with SAS. It represents a departure from the traditional
historical cost principle. IFRS puts a much greater emphasis on fair value than that rendered
under SAS. It primarily responds to the needs of investors which are given deliberate
importance in IFRS compared to other users (IASB, 2001; Chua and Taylor, 2008). Since
investors need market-based values to make decisions regarding buying or selling stocks,
many items in financial statements are required or eligible for fair value accounting under
IFRS. Fair value ordinarily is no new concept under local accounting system as SAS 3(Accounting
for PPE), SAS 11 (Lease) and SAS 8 (Accounting for Employees Retirement Benefits) made
reference to its usage in some accounting treatments. According to SAS 3, fair value is the
amount for which an asset could be exchanged between a knowledgeable willing buyer and a
knowledgeable willing seller in an arm‟s length transaction. This has often been interpreted to
be market price of an asset or liability under SAS. However, IFRS 13-fair value measurement is
considered relatively unique in that it discloses valuation techniques pertaining to different
categories of inputs through a „fair value hierarchy‟ and its Estimate involves various degrees
of subjectivity depending on the availability of an active market for the assets and liabilities in
question. In general, fair value is mandatory in measuring transactions at initial recognition
under IFRS. However, items such as financial instruments held-for-trading, derivatives, assets
and liabilities are required to be re-measured at fair value.

III. Comprehensive Income Comprehensive income is seen as a major development in the

recent evolution of accounting standards and a central notion in the conceptual framework of
IFRS. It reflects all revenues, expenses, gains and losses that are to be recognized according to
accounting standards during a period, and is summarized in a separate financial statement
named the Statement of Comprehensive Income called Trading, Profit and Loss Account
under SAS. The Statement of Comprehensive Income is seen as an upgrade to the Trading,
profit and Loss Account. The Statement of Comprehensive Income has two components. The
first corresponds to the bottom line (profit or loss) of the income statement as it is
commonly measured, incorporating gains and losses on transactions with outside parties
and a number of unrealized gains and losses on items measured at fair value through profit or
loss. The second component of the statement of comprehensive income relates to unrealized
gains and losses caused primarily by fair value adjustments. This component is designed to
bypass the income statement. In order to do that, a new category of accounting adjustment has
been introduced known as other comprehensive income (OCI), which is presented directly in
shareholders‟ equity. OCI may be seen as a buffer that allows the use of fair value accounting
without its direct impact on the income statement. The profit accumulates in retained
earnings; the annual variation of the OCI accumulates directly in shareholders‟ equity, whereas
the sum of annual profit and annual variation of OCI forms the comprehensive income. It
should be noted that the separate reporting of comprehensive income was introduced in U.S.
accounting standards in 1997 (SFAS No. 130 Reporting Comprehensive Income) and in
Canadian accounting standards in 2005 (CICA Handbook: Section 1530 Comprehensive Income).
While IFRS prohibits the presentation of extraordinary items in statement of comprehensive
income or in the notes, SAS requires extraordinary items to be presented in the profit and loss
statement of the entity distinct from the ordinary income and expenses for the period. They are
considered in determining the profit and loss for the period.

IV. Consolidation The entity theory underlies the application of the consolidation technique in
IFRS. It requires that assets and liabilities of subsidiaries be measured at their full fair value on
the on the date of acquisition

V. Goodwill

Goodwill is not amortized under IAS 38 but is subject to annual impairment test under IAS 36
while SAS 9 provides that goodwill arising on amalgamation in the nature of purchase is
amortized over a period of 5 years.

XVI. Revaluation of Assets Under IFRS, if an item of property, plant and equipment is re-
valued, the entire class of assets to which that asset belongs should be re-valued. While under
SAS an entire class of assets can be re-valued, or selection of assets for revaluation can be made
on a systematic basis.

XVII. Contingent Asset Disclosure IFRS stipulates that Contingent assets should be disclosed in
the financial statements only if the inflow of economic benefit is probable. While under SAS,
Contingent assets are disclosed as part of the director‟s report and not disclosed in the
financial statement but as note (that is, off balance sheet items).

The rationale for the adoption of IFRSs

It will not be totally wrong to conclude that the adoption of IFRS and the enactment of the
Financial Reporting Council Act, 2011 were triggered by the nation‟s sense of belonging
since IFRS has already been embraced by over 122 countries. This sense of belonging and not
feeling left out can be seen as positive when the growth and development of the nation is at
stake. According to Asein (2011), it was expedient and in the best interest of the nation to raise
and benchmark the quality of its financial reporting on current global best practices by adopting
IFRS in order to achieve its goal of becoming one of the twenty largest economies of the world
by year 2020 (vision 20:2020 goals). It can be deduced from Obazee (2011), that the move
towards adopting the IFRS was majorly triggered by the nation‟s objective to realise the
full gains of cross border listing. Since the 1960s, businesses have become more global and thus
lost a significant part of their national identities. Nigeria‟s global players are reporting to global
finance market, therefore it justifies the need to have global financial reporting benchmarks.
Nigerian businesses are making more international transactions, cross border listing is now
common place, accounting firms are beginning to follow their growing corporate clients into
other countries in order to maintain services and governments are engaging in wide range
reviews that recognize the importance of reassuring the markets and the public at large that
corporate reporting and governance frameworks are sufficiently robust (Josiah et al, 2013).

This rapid growth of international trade and internationalization of firms, developments of

new communication technologies, and the emergence of international competitive forces
have disturbed the financial environment largely. Under this global business scenario, the
residents of the business community are badly in need of a common accounting language that
should be spoken by all of them across the globe. A financial reporting system of global
standard is a prerequisite for attracting foreign as well as present and prospective investors at
home alike that should be achieved through convergence of accounting standards. It has been
observed that people who invest overseas naturally want to be able to keep track of the
financial health of the securities issuers. Convergence of accounting standards is seen as the
only means to achieve this. Only by talking the same language one can understand each
other across borders. (Hati and Rakshit, 2002; Nikhil, Bhagaban, and Alok, 2009) Today, global
commerce is increasingly polarised into Multi-National Corporations (MNCs) and national
companies. Clearly, financial reporting is responding to this business dynamics by following in
this direction. However, most national companies do not have their financial statements
are mainly for tax assessment purposes and possibly to provide information to local banks in
order to secure credit facilities; whereas, MNCs play in different jurisdictions through their
subsidiaries which prepare financial reports in compliance with various local GAAPs. This
entails huge conversion costs of their financial statements during consolidation. Since these
MNCs often seek finance from various capital markets, comparability of financial reports was
a huge problem leading, in many cases, to inefficient and sub-optimal investment decisions.
(Asein, 2011) Conclusively, nations that are truly desirous of attracting more foreign direct
investment, enhancing comparability and efficient investment, enhancing communication
with stakeholders, ease of accessibility to funds, lower cost of preparing financial statements by
MNCs, uniformity in accounting language, enhancing job opportunities and overall economic
transformation are now aiming to free their countries from the limits of the present system.
This requires re-appraisal of legal and regulatory framework, institutional framework, Human
capacity building and the capacity building process. The FRC Act, 2011 ensued from the re-
appraisal of the legal and regulatory framework with regard to the financial reporting regime in
Nigeria. (Obazee, 2011; Asein, 2011)

Effects Of IFRS Adoption

IFRS and Accounting Quality

Accounting quality, according to Bhattacharjee and Islam (2009) is a function of the firm’s
overall institutional setting, including the legal and political system of the country in which the
firm resides. The adoption of IFRS in Nigeria and beyond is aimed at bringing about accounting
quality improvement through a uniform set of standards for financial reporting. Land and Lang
(2002) opined that accounting quality has improved worldwide since the beginning of the 1990s
and attributed it to factors such as globalization and anticipation of international accounting
harmonization. IFRS is contingent on at least two factors. First, improvement is based upon the
premise that change to IFRS constitutes change to a GAAP that induces higher quality financial
reporting. For example, Barth, Landsman, & Lang (2006) find that firms adopting IFRS have less
earnings management, more timely loss recognition, and more value relevance of earnings, all
of which they interpret as evidence of higher accounting quality. Second, the accounting system
is a complementary component of the country’s overall institutional system (Ball, 2001) and is
also determined by firm’s incentives for financial reporting. Various literatures document
improvements in accounting quality following voluntary IFRS adoption (Barth, et al 2006;
Gassen & Sellhorn, 2006., Hung &Subramanyam,2007) to reduce information asymmetry
between managers and shareholder and it can be evidenced by proper assets and earnings
management, lower cost of capital, and high forecasting capability by the investors about firm’s
future earnings. Barth et al. (2006) suggest that accounting quality could be improved when
alternative accounting methods used by managers to manage earnings are eliminated.

The network effects of IFRSAs quoted in Atu, Raphael and Atu (2013), Iyoha and Jafaru (2011)
state that many countries adopted IFRS believing that IFRS would create a positive “Network”
or “Sociability” effect. The Network effect is said to exist where the value of a product or service
is expected to increase exponentially when more people use the product or service. Therefore,
as more and more countries adopt IFRS, it becomes more appealing to others that are yet to
consider the adoption

Benefits of IFRS Adoption

Attracting foreign Direct Investment With more reliable and credible financial statements, the
propensity to attract foreign direct investments will increase as the nation’s risk profile would
be known and predictable. In other words, investors are attracted to environments where the
rewards are high relative to risks.

Availability of reliable information contributes to the lowering of this risk (Abel, 2011). This view
is in consonance with Okpala (2012) who found out that there is a significant relationship
between IFRS adoption by companies and FDI in Nigeria which in turn will improve the
economy.Credible financial information which makes investment decisions efficient, crucially
depend on the qualitative and quantitative characteristics of information including relevance,
reliability,comparability, understandability, full disclosure of underlying accounting policies, etc.
As companies, seek investment opportunities in other countries or within the country, their
financial statement must be accurate and comparable across industries and jurisdictions to
attract the right investment and financial support. Thus, the goal of credible financial reporting
must be pursued conscientiously such that no doubts exist about the quality of the financial
statements produced by companies in Nigeria. As Harteneck (1997) observed, in countries
where “doubts exist as to the quality, consistency or transparency of their rules, a price must be
paid for the shortcomings namely lower market values for their shares and/or higher interest
rates for their financing. Also, the cost of raising funds depends significantly on the quality of
information available to potential and existing investors as well as the basis of accounting
policies applied. Indeed, lack of knowledge of the basis of accounting implies higher risks and
higher costs of raising funds. Accordingly, the cost of raising funds will be much lower with IFRS
statements. Indeed, the use of IFRS will facilitate greater acceptability of financial reports by
regulators and this can enhance secondary listings of companies in global stock markets.
Inevitably, local stock exchange will become busier and more active as entities with IFRS-based
financial reports continue to attract FDIs.

Bridge Communication gap with StakeholdersAccounting and financial information users are
numerous so also are their needs different. Therefore, financial information must be presented
in a language that communicates effectively with the various users. IFRS, given its global appeal,
enhances this communication with greater Stakeholders. No conversion is required as the
language of preparation is internationally understood by current and potential investors.
Okpala, (2012) concluded that the adoption of IFRS will increase the level of confidence of
global investors and investment analysts in the financial statements of companies in Nigeria.
For the multinational companies, it will help them to fulfill the disclosure requirement for stock
exchanges around the world (Armstrong, et al 2007. Covrig, Defond & Hung 2007).

Uniformity in Accounting LanguageAdoption of IFRS will lead to uniformity in accounting

language across the globe which is a pre requites for the globalization of business, finance and
investment with primary objective of eliminating the unnecessary complexity that exists with
multiple reporting languages. As it is common knowledge, there exist differences in the
classifications of financial information, levels of disclosure and accounting concepts between
countries. Abel, (2011) opined that accounting terminologies can easily confuse the uninitiated
owing to differences in business language. In supporting his view gave an instance on the word
stock which, in most North American countries, refers to share ownership, whereas, in the
commonwealth countries, the word stock is typically associated with merchandise inventory.
The closest word to current in Japanese language is said to be present. While these two words
(i.e. current and present) may appear to convey the same meaning, such may not be the case if
used in terms of asset valuation in the preparation of financial statements. While current value
is about discounted cash flow measures. In this sense, unsold stock may convey under-
subscribed floatation. In commonwealth countries, this will refer to unsold inventory of finished
goods. Still on current: whereas the time frame distinguishing a current and non-current liability
is typically a year in the US and in IFAC standards, the cut-off point is commonly four years in
Germany. In fact, Choi (1998) said it succinctly when he observed in his presentation at
conference that “Accountants inhabit a kind of Tower of Babel where we not only speak
different language but also give different interpretation

Challenges of IFRS Adoption

Obazee (2007) opined that the principal factors affecting the implementation of IFRS in Europe,
America and the rest of the world are cultural issues, mental models, legal impediments,
educational needs and political influences in those countries rather than the most widely
perceived technical issues. This goes a long way to explain Siaga (2012) statistics which show
that despite 40% of African country having access to IFAC, only 28% of IFAC members in Africa
have adopted IFRS. This then shows that it’s not about the technical problem but the other
factors as opined by Obazee (2007). This is in consonance with Daske, Hail, Leuz and Verdi
(2008) and Ball (2006) Besides there are lots of uneven applications, breeding different IFRS
versions (Tsakumis, Campbell & Douphik, 2009).Nobes (2006) has indicated the motivations and
opportunities for different IFRS to continue. There must a coordinated regulatory review and
enforcement mechanism to facilitate consistent application. The complexity of certain IFRSs
and tax orientation of most nations have been identified as the two most significant
impediments to convergence (Larson & Street, 2004)

Laws and Regulations International Accounting Standards as espoused in IFRS by IASB are
principles-based which work within a set of laid down framework. On the other hand, rules-
based system regulates issues as they arise. Principles-based system operates within a
framework that provides the background of principles within which standards can be developed
and the standards so produced are not in conflict with each other. Differences in legal systems
and accounting rules among countries have serious implications for the adoption and
implementation of accounting standards. There is a multiplicity of laws and bodies for the
regulation of accounting, financial reporting and auditing requirements of companies and other
public interest entities in Nigeria, while the main legal framework for corporate accounting and
auditing practices in Nigeria is the Companies and Allied Matters Act 2004 (Akhidime, 2010)

Politics The effect of politics on the adoption and implementation of international accounting
standards is directly derivable from the effect of economic factors on accounting regulations.
Economic consideration whether on industry- level or at national level reflect on governments’
attitude towards international standards, much so as no governments wants to be seen as
acting against the interest of those in the position to vote them out of office. Stigler (1971)
explains that governments are made up of individuals who are self-interested and will
introduce regulations more likely to lead to their reelection. The powers behind standards
setting are the special interest groups and lobbyists that could be advocates for the banks, the
investors, companies, stakeholders or other political groups or subdivisions (Enofe, 2013).
When an important accounting issue is at stake those who are less favored by the outcome of
the event turn to lobbyists to seek for redress. In the past, these lobbying groups have put so
much pressure on politicians to prevent standard setters from finding adequate solution to
important technical accounting problems. While the adoption and implementation of
international accounting standards will enjoy faster pace in countries that had closer or similar
socio-political culture with the Anglo-Saxon /America countries, the same cannot be expected
of former communist and socialist USSR and European countries

Culture One key factor that adversely affects the adoption and implementation of international
accounting and auditing standards is cultural differences, which is differences in accounting
reporting culture, language, business tradition, work skill and ethics. An example of this
obstacle to harmonization is given by Perera (1989) who, in his assessment of the potential
success of transferring accounting skills from Anglo-American countries to developing
countries, notes that: The skill transferred from Anglo-American countries may not work
because they are culturally irrelevant or dysfunctional in the receiving countries’ context.
Perera further argues that international accounting standards themselves are strongly
influenced by Anglo-American accounting models and, as such, these international standards
tend to reflect the circumstances and patterns of thinking in the AngloAmerican group of
countries and that these standards are likely to encounter problems of relevance in countries
where different environments from those found in Anglo-American countries exist. Continental
Europe and indeed most EU countries which includes majority of German companies continue
to rely on ‘insider’ forms of finance, and Roman law system.

The Way ForwardEffective implementation of IFRS requires careful planning and extensive
public education, the allocation of resources, a legal and regulatory support system and
institutional support with strong management systems. Unless the various stakeholders are
integrally involved and included in development plans and how they are affected, they will be
reluctant to support the change and IFRS adoption may not succeed.The timeline for the full
adoption which this paper consider too short should be elongated as it is obviously
impracticable for Nigeria to transit from GAAP to IFRS within 4 years, what took industrialized
countries about 37 years to gestate. Implementation of certain requirements of IFRSs should be
a gradual process because adopting IFRSs is not just an accounting exercise but transition that
requires that everyone concerned has to learn a new language and new way of working. In fact,
implementation of IFRS is not a one-time process, but rather an on-going effort that requires
continued institutional support. There is the urgent need for all the relevant Nigeria educational
institutions and professional accounting bodies to integrate IFRS into their curriculum and the
membership qualifying examination syllabi respectively. This should be followed by increased
funding by way of special research grants by the government for the training of lecturers on
IFRS as a way of building human capacity in support of the transition from GAAP to IFRS. The
two Nigeria’s professional accounting bodies, ICAN and ANAN, should of necessity deepen their
Mandatory Continuing Professional Education programmes on IFRS and possibly re-accredit all
its members on the basis of IFRS compliance. Successful implementation of IFRS needs
extensive and on-going support from professional accounting bodies like Institute of Chartered
Accountants of Nigeria (ICAN).They can contribute to the effective implementation of IFRS
through requirements that hold their members responsible for observing due care in
implementing these standards

Conclusion and Recommendations

There is no doubt that conversion to IFRS in developing countries is a huge task and a big
challenge; however like we earlier said adoption and implementation of IFRS should be on the
basis of cost benefit analysis, it should not be a decision based on following the crowd. The
consideration of the following recommendations by the relevant arms of the government is
considered pertinent if Nigeria is to truly and fully transit to IFRS and conform to best global
practice in corporate financial reporting: Based on studies undertaken on IFRS adoption in
Nigeria the following recommendations are hereby advanced:(i) Strengthen professional
accounting education and training.(ii) Strengthen capacity of the regulatory bodies and review
adequacy of statutory enforcement provisions.(iii) Raise awareness of professionals, regulators
and preparers to improve the knowledge gap.

(iv) Establish an independent body to set monitor and enforce accounting and auditing
standards and codes. (v) Adequate resources should be put in place to support the sustainable
implementation of IFRS. This includes having consultative groups available to respond promptly
to concerns by users and to provide for their ongoing training.

TOPIC 6: CONCEPT OF INTERNATIONAL ACCOUNTING STANDARDS

INTRODUCTION

Accounting has been called the language of business and accounting standards the grammar of
these languages. Accounting is the system of analyzing, verifying, recording, classifying and
summarizing economic and financial transactions to enable the users of those make informed
decisions. Accounting information have been very useful over the years. Differences in
accounting principles and rules guiding the preparation of financial statements are one of the
many challenges faced by financial analysts and other financial statement users. To overcome
this, users of financial statements and financial analysts ought to familiarize themselves with the
reporting practices in different countries.

Standards are rule of best practices issued by duly authorized bodies. It is issued from time to
time by duly authorized bodies. Before standards are issued, proper procedure and process is to
be followed. This process is known as the standard setting process. Due to the variation in
accounting standards in different countries, there was a need for a globally recognized standard
setting body to help in harmonizing the accounting practices and reporting around the world.

In the history of standardization, standard setting can be traced to 1938, where a Committee on
Accounting Procedure (CAP) issued research bulletins and before 1959 they had issued 59
research bulletins. In 1959, the accounting principles board was formed and they were
responsible for issuing pronouncement on accounting principles.

In 2003, NASB Act was promulgated and from 2003 compliance with the standard became
compulsory. Thereafter in 2011, The financial reporting council of Nigeria Act was promulgated
in the preparation of the adoption of International Reporting Standards Act in 2012. In 2012,
Nigeria adopted IFRS. NASB metamorphosed into the financial reporting council of Nigeria.
Before NASB metamorphosized into FRCN they issued 33 standards.

In 1973, International Accounting Standards Committee (IASC) came into existence. It was
responsible for issuing international accounting standards. IASC issued 41 international
accounting standards (IAS) before metamorphosing into IASB in 2001.

In Nigeria, standard development can be traced to the Association of Accountants in Nigeria now
known as Institute of Chartered Accountants of Nigeria (ICAN). They were representing Nigeria
in IASC before IASB came into existence
DISCUSSION OF STUDY

Accounting standards are minimum requirements, rules, guides and principles that are expected
to be followed in the preparation of financial statements. The International Accounting Standard
Board (IASB) is responsible for standard setting (IFRSs) and follows the process outlined below
before issuing any new standard:

 Ask staff to identify and review the issues requiring the setting of standards. In doing this, the
various national accounting requirements and views of national standard setters about the issues
are brought to bear.

 Consult the Standards Advisory Council about the advisability of adding the topic to the
IASB’s agenda.

 Form an advisory group normally referred to as a working group to advise the IASB and its
staff on the project.

 Publish discussion document on the issue for public comments.

 Publish an exposure draft (ED) for public comments after approval by vote of at least nine
IASB members. The dissenting opinions held by IASB members must be included in the ED and
referred to as “alternative views”. Also, the basis for conclusions reached must be included.

 Consider all comments received within the comment period on discussion documents and
exposure drafts.

 Consider the desirability of holding a public hearing and the desirability of conducting field
tests and, if considered desirable, holding such hearings and conducting such tests.

 Approve a standard by the votes of at least nine IASB members and include in the published
standard any dissenting opinions. Also included in the standard is the basis for conclusions,
explaining, among other things, the steps in the IASB’s due process and how the IASB dealt with
public comments on the exposure draft.

Once the standards are issued, they form the basis for practice. However, it is arguable that this is
not always the case because of the following reasons:
 Weak enforcement: In jurisdictions with weak enforcement or poor regulatory environment,
standards may not be followed as prescribed. In other words, where penalties and sanctions are
minimal or non-existent, the possibility of practice being different from standards is not
unexpected.

 Voluntary disclosures: These are disclosures above what is mandatorily required by standards
and regulations. In a situation where practice is inclusive of voluntary disclosures, differences
will abound between practice and standards.

 Deviation for the sake of better representations.

International Accounting Standards

International Accounting Standards (IAS) are a set of rules for financial statements that were
replaced in 2001 by International Financial Reporting Standards (IFRS) and have subsequently
been adopted by most major financial markets around the world. Both sets of standards were
issued by the International Accounting Standards Board (IASB), an independent body based in
London. International accounting standards are issued by the International Accounting Standards
Committee (IASC). The IASC was established in 1973 as a private organisation by agreement of
accountancy bodies of the following nine countries: Australia, Canada, France, Germany, the UK
and Ireland, the US, Japan, Mexico and the Netherlands, (IASB 2008; IASC 1995). IASC aims
to formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and observance.
IASC was established to work generally for the improvement and harmonization of regulations,
accounting standards and procedures relating to the presentation of financial statements. The
goal then, as it remains today, was to make it easier to compare businesses around the world,
increase transparency and trust in financial reporting, and foster global trade and investment.

They were one of the successful bodies involved in the harmonization of accounting practices
worldwide. Bodies responsible for issuing accounting standards globally are: Financial
Accounting Standard Board (FASB) established in 1973, Accounting Standard Board (ASB),
Governmental Accounting Standard Board (GASB), International Financial Reporting Standard
(IFRS), International Public Sector Accounting Standard (IPSAS) and the International
Federation of Accountants (IFAC) which was formed in 1977, its main focus was the
enhancement and further development of the accounting profession worldwide, also, they set
international standards for auditing, ethics, education and management accounting.

More than 140 countries have adopted IFRS. Virtually all African Countries have adopted IFRS;
include prominent countries like Nigeria (2012), Namibia, Mozambique, Maritius, Southern
Africa, Cameroon, Angola, Uganda, Malawi, Tanzania, Zambia, Ghana and Kenya.

IASC issued 41 standards which are:

IAS 1 Presentation of financial statements issued in 2007

IAS 2 inventories issued in 2005

IAS 3 Consolidated financial statements issued in 1976 and was superseded in 1989 by IAS 27
and IAS 28

IAS 4 Depreciation accounting which was withdrawn in 1999

IAS 5 Information to be disclosed in financial statements, superseded by IAS 1

IAS 6 Accounting responses to changing prices superseded by IAS 15 and withdrawn in

December 2005

IAS 7 Statement of cashflows issued in 1992

IAS 8 Accounting policies, changes in accounting estimates and errors issued in 2003

IAS 9 Accounting for research and development activities which was superseded by IAS 1

IAS 10 Events after reporting date issued in 2003

IAS 11 Construction contracts superseded by IAS 15 in January 2017

IAS 12 Income taxes issued in 1996

IAS 13 presentation of current assets and Current Liabilities superseded by IAS 1 effective 1
July 1998

IAS 14 Segment Reporting superseded by IFRS 8 effective 1 January 2009

IAS 15 Information Reflecting the Effects of Changing Prices Withdrawn December 2003
IAS 16 Property, Plant and Equipment

IAS 17 Leases superseded by IFRS 16 effective 1 January 2019

IAS 18 Revenue superseded by IFRS 15 effective 1 January 2017

IAS 19 Employee Benefits (1998) superseded by IAS 19 (2011) effective 1 January 2013

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations superseded by IFRS 3 effective 31 March 2004

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Accounting for Investments Superseded by IAS 39 and IAS 40 effective 2001

IAS 26 Accounting and Reporting by Retirement Benefit Plans1987

IAS 27 Separate Financial Statements

IAS 28 Investments in Associates and Joint Ventures 2011

IAS 29 Financial Reporting in Hyperinflationary Economies 1989

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions

IAS 31 Interests in Joint Ventures superseded by IFRS 11 and IFRS 12 effective 1 January 2013

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations superseded by IFRS 5 effective 1 January

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

Reasons For Global Standards

Globally comparable accounting standards promote transparency, accountability, and efficiency

in financial markets around the world. This enables investors and other market participants to
make informed economic decisions about investment opportunities and risks and improves
capital allocation (Carson & Dowling, 2010; Asfadillah et al., 2012).

Universal standards also significantly reduce reporting and regulatory costs, especially for
companies with international operations and subsidiaries in multiple countries.

IFRS Standards strengthen accountability by reducing the information gap between the providers
of capital and the people to whom they have entrusted their money. As a source of globally
comparable information, IFRS Standards are also of vital importance to regulators around the
world. It also creates more flexibility. Using a philosophy that is based on principles, instead of
rules, this set of standards will have the goal of arriving at a reasonable valuation with various
ways to accomplish tasks. This would give businesses the freedom to adopt IFRS to their specific
situations, which will result in financial statements that are more easily read and useful.

Challenges Of Adopting International Accounting Standards

Sawan and Alsagga (2013), have found that cultural, political and business differences may also
continue to impose significant obstacles in the progress towards a single global financial
communication system because a single set of accounting standards cannot reflect the differences
in national business practices arising from differences in institutions and cultures.

Michas (2010) Alp and Ustuntage (2009) and Zhang et al. (2007) are of the view that, the
implementation of IFRSs by developing countries comes with a lot of challenges. Some of the
challenges include the complexity of the standards, fair value issues, cost, regulation, lack of
technical skills and knowledge in standards, inadequate education and training of accountants
(Schachler et al., 2012; Laga, 2012; Masoud, 2014). According to Obazee (2007), challenges are
cultural issues, mental models, legal impediments, educational needs and political influences.
Another challenge identified was that because IFRSs is principle based, it may create avenue for
earning management (Hong 2008; Jeanjean & Stolowy 2008). According to Rong- Ruey Duh
(2006), the challenges of IFRS adoption includes the ability of accountants to interpret standards,
and the knowledge level of financial statement users, preparers, auditors and regulators in
accounting information.

In summary the challenges faced with the implementation includes; the lack of relevant specific
knowledge and of practical experience, the need of training and consultancy services, difficulties
encountered in using the fair value concept, the transition costs.

Accounting and Reporting Practices in Nigeria

Nigeria is a common law country and the national standard setting body is Financial Reporting
Council of Nigeria (FRCN). The Institute of Chartered Accountants of Nigeria (ICAN) and the
government is responsible for standard development. In Nigeria, the body responsible for
formulating accounting standards was national accounting standards board (NASB) in Sept 9,
1982. They issued statement of accounting standards (SAS). NASB was later replaced by
FRCN in 2011.

Accounting and Reporting in UK US China and Japan

In U.K, the accounting standard board (ASB) is responsible for setting up accounting standard
while in the U.S., the financial accounting standard board (FASB), securities and exchange
commission (SEC) and the international accounting standard board (IASB) are the standard
setting body. The United States does not follow IFRS. Instead, the U.S. Securities & Exchange
Commission requires public companies in the U.S. to follow Generally Accepted Accounting
Standards (GAAP). China and Japan also declined to adopt IFRS.

TOPIC 7: CONCEPT OF INTERNATIONAL AUDITING STANDARDS

This International Standard on Auditing (ISA) deals with the independent auditor’s
overall responsibilities when conducting an audit of financial statements in accordance with
ISAs. Specifically, it sets out the overall objectives of the independent auditor, and explains the
nature and scope of an audit designed to enable the independent auditor to meet those
objectives. It also explains the scope, authority and structure of the ISAs, and includes
requirements establishing the general responsibilities of the independent auditor applicable in all
audits, including the obligation to comply with the ISAs. The independent auditor is referred to
as “the auditor” hereafter.
ISAs are written in the context of an audit of financial statements by an auditor. They are
to be adapted as necessary in the circumstances when applied to audits of other historical
financial information. ISAs do not address the responsibilities of the auditor that may exist in
legislation, regulation or otherwise in connection with, for example, the offering of securities to
the public. Such responsibilities may differ from those established in the ISAs. Accordingly,
while the auditor may find aspects of the ISAs helpful in such circumstances, it is the
responsibility of the auditor to ensure compliance with all relevant legal, regulatory or
professional obligations.
Audits are performed to improve the validity and reliability of information produced in
compliance with a set of accounting standards, and auditing standards provide a measure of
audit quality and articulate the objectives to be achieved in an audit. Auditing standards seek,
for example, to codify aspects such as audit planning, audit engagement procedures, the
collection and analysis of audit evidence, the review of internal control systems and the content
of audit reports (Mennicken, 2008). Whilst the auditor still has flexibility in terms of how he/she
executes the audit assignment (e.g. how much evidence is deemed to be sufficient), adherence to
ISAs (or any other generally accepted auditing standards) confers credibility to the audit
exercise and enables a third party (e.g. audit regulator, peer audit reviewer, parties in a litigation
process) to infer upon an auditor’s approach, completeness and consistency in carrying out an
audit assignment. Furthermore, an audit firm claiming to offer a service in line with
international standards can expect reputational and financial benefits in terms of high profile
clients and premium fees.
The internationalization of business and capital markets has resulted in an economic
environment in which uniform procedures for financial statement preparation and for auditing
would benefit investors, lenders, financial analysts, accountants, and auditors. The International
Accounting Standards Board (IASB) and the International Auditing and Assurance Standards
Board (IAASB) are endeavoring to develop harmonized financial accounting and auditing
standards, respectively, to meet the worldwide demands. The keys standards as issued by ISA
include:
Auditing planning

Internal control

Respective responsibilities

Audit evidence

Using work of other experts

Audit conclusion and audit report

ISA has two basic objectives:

Analyzing the comparability of national accounting and auditing standards

Assist the country in developing and implementing a country action plan for
improvement of institutional capacity

OVERVIEW OF INTERNATIONAL STANDARDS ON AUDITING (ISAS)

The increased initial attention to the state and development of ISAs has often been attributed to
concerns about the quality of financial statements and auditing standards in the wake of the
Asian economic crisis at the end of the 1990s and, more recently, to the regulatory implications
arising from the global financial crisis. For instance, various international bodies (World Bank,
International Monetary Fund) criticized large accounting firms for their apparent and uncritical
acceptance of local GAAP when preparing financial statements, and highlighted the need for
greater coordination between international and national auditing standards (Needles et al.,
2002). In effect, a greater alignment between accounting and auditing developments was
recommended to ensure that the international harmonisation agenda could deliver tangible
outcomes for users, preparers and auditors (Radebaugh & Gray, 1997). However, the paucity of
studies on the implementation and harmonisation of auditing standards (e.g. Needles et al.,
2002; Mennicken, 2008) relative to the large number of studies on accounting standards clearly
reflected the priorities of academics, practitioners and policy makers.

An Audit of Financial Statements

The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether
the financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. In the case of most general purpose frameworks, that opinion is
on whether the financial statements are presented fairly, in all material respects, or give a true
and fair view in accordance with the framework. An audit conducted in accordance with ISAs
and relevant ethical requirements enables the auditor to form that opinion.
The financial statements subject to audit are those of the entity, prepared by
management of the entity with oversight from those charged with governance. ISAs do not
impose responsibilities on management or those charged with governance and do not override
laws and regulations that govern their responsibilities. However, an audit in accordance with
ISAs is conducted on the premise that management and, where appropriate, those charged with
governance have acknowledged certain responsibilities that are fundamental to the conduct of
the audit. The audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
As the basis for the auditor’s opinion, ISAs require the auditor to obtain reasonable
assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance.
It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit
risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial
statements are materially misstated) to an acceptably low level. However, reasonable assurance
is not an absolute level of assurance, because there are inherent limitations of an audit which
result in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
 The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements. In general, misstatements, including
omissions, are considered to be material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements. Judgments about materiality are made in the light of surrounding
circumstances, and are affected by the auditor’s perception of the financial information needs of
users of the financial statements, and by the size or nature of a misstatement, or a combination
of both. The auditor’s opinion deals with the financial statements as a whole and therefore the
auditor is not responsible for the detection of misstatements that are not material to the financial
statements as a whole.
The ISAs contain objectives, requirements and application and other explanatory
material that are designed to support the auditor in obtaining reasonable assurance. The ISAs
require that the auditor exercise professional judgment and maintain professional skepticism
throughout the planning and performance of the audit and, among other things.

LIST OF INTERNATIONAL STANDARDS ON AUDITING:

Currently, International Standards on Auditing have 36 and 1 Quality Control Standard:

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 230: Audit Documentation

ISA 240: The Auditor’s 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 Auditor’s 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 500: Audit Evidence

ISA 501: Audit Evidence-Specific Considerations for Selected Items

ISA 505: External Confirmations

ISA 510: Initial Audit Engagements-Opening Balances

ISA 520: Analytical Procedures

ISA 530: Audit Sampling

ISA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures

ISA 550: Related Parties

ISA 560: Subsequent Events

 ISA 570: Going Concern

ISA 580: Written Representations

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 Auditor’s 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
Auditor’s 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 Statement

International Standard on Quality Control (ISQC)

DEFINITIONS
For purposes of the ISAs, the following terms have the meanings attributed below:
(a) Applicable financial reporting framework – The financial reporting framework adopted
by management and, where appropriate, those charged with governance in the preparation of the
financial statements that is acceptable in view of the nature of the entity and the objective of the
financial statements, or that is required by law or regulation.
(b) Audit evidence – Information used by the auditor in arriving at the conclusions on which
the auditor’s opinion is based. Audit evidence includes both information contained in the
accounting records underlying the financial statements and other information. For purposes of
the ISAs:
(i) Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity
of the audit evidence needed is affected by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit evidence.
(ii) Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which the auditor’s
opinion is based.
(c) Audit risk – The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the risks of material
misstatement and detection risk.
(d) Auditor – The person or persons conducting the audit, usually the engagement partner or
other members of the engagement team, or, as applicable, the firm. Where an ISA expressly
intends that a requirement or responsibility be fulfilled by the engagement partner, the term
“engagement partner” rather than “auditor” is used. “Engagement partner” and “firm” are to be
read as referring to their public sector equivalents where relevant.
(e) Detection risk – The risk that the procedures performed by the auditor to reduce audit risk to
an acceptably low level will not detect a misstatement that exists and that could be material,
either individually or when aggregated with other misstatements.
(f) Financial statements – A structured representation of historical financial information,
including related notes, intended to communicate an entity’s economic resources or obligations
at a point in time or the changes therein for a period of time in accordance with a financial
reporting framework. The related notes ordinarily comprise a summary of significant accounting
policies and other explanatory information. The term “financial statements” ordinarily refers to
a complete set of financial statements as determined by the requirements of the applicable
financial reporting framework, but can also refer to a single financial statement.
(g) Historical financial information – Information expressed in financial terms in relation to a
particular entity, derived primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time
in the past.
(h) Management – The person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities in some jurisdictions, management includes some or all of those
charged with governance, for example, executive members of a governance board, or an owner-
manager.
(i) Misstatement – A difference between the amounts, classification, presentation, or disclosure
of a reported financial statement item and the amount, classification, presentation, or disclosure
that is required for the item to be in accordance with the applicable financial reporting
framework. Misstatements can arise from error or fraud. Where the auditor expresses an
opinion on whether the financial statements are presented fairly, in all material respects, or give
a true and fair view, misstatements also include those adjustments of amounts, classifications,
presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial
statements to be presented fairly, in all material respects, or to give a true and fair view.
(j) Premise, relating to the responsibilities of management and, where appropriate, those
charged with governance, on which an audit is conducted – That management and, where
appropriate, those charged with governance have acknowledged and understand that they have
the following responsibilities that are fundamental to the conduct of an audit in accordance with
ISAs. That is, responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including, where relevant, their fair presentation;
(ii) For such internal control as management and, where appropriate, those charged with
governance determine is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
a. Access to all information of which management and, where appropriate, those charged with
governance are aware that is relevant to the preparation of the financial statements such as
records, documentation and other matters;
b. Additional information that the auditor may request from management and, where
appropriate, those charged with governance for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
In the case of a fair presentation framework, (i) above may be restated as “for the preparation
and fair presentation of the financial statements in accordance with the financial reporting
framework,” or “for the preparation of financial statements that give a true and fair view in
accordance with the financial reporting framework.” The “premise, relating to the
responsibilities of management and, where appropriate, those charged with governance, on
which an audit is conducted” may also be referred to as the “premise.”
(k) Professional judgment – The application of relevant training, knowledge and experience,
within the context provided by auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the circumstances of the audit
engagement.
(l) Professional skepticism – An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
(m) Reasonable assurance – In the context of an audit of financial statements, a high, but not
absolute, level of assurance.
(n) Risk of material misstatement – The risk that the financial statements are materially
misstated prior to audit. This consists of two components, described as follows at the assertion
level:
(i) Inherent risk – The susceptibility of an assertion about a class of transaction, account balance
or disclosure to a misstatement that could be material, either individually or when aggregated
with other misstatements, before consideration of any related controls.
(ii) Control risk – The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity’s internal control.
(o) Those charged with governance – The person(s) or organization(s) (for example, a
corporate trustee) with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity. This includes overseeing the financial
reporting process. For some entities in some jurisdictions, those charged with governance may
include management personnel, for example, executive members of a governance board of a
private or public sector entity, or an owner-manager.

SUMMARY AND CONCLUSIONS

Many countries have been adopting ISAs fully whilst others have been adopting the
standards on a partial basis. The basis upon which ISAs are adopted varies considerably
between countries and this has been a subject of criticism (Fraser,2010). From a functional
perspective, these differences can have important implications for national corporate governance
practices and outcomes, multinational corporations, and cross-border investment and trade
(Millaretal.,2005;Judgeetal.,2010) because ISAs are seen to be an important control mechanism
in the production of relevant, reliable and comparable financial statements. From a neo-
institutional perspective, however, differences in the level of commitment to ISA harmonisation
highlight a motivation to study empirically the relevance of national social, political and cultural
factors, as initially informed by the existing work on the level of IFRS adoption and
harmonisation (e.g. Ben Othman & Kossentini, 2015) and the implementation of corporate
governance codes worldwide. Our findings provide empirical evidence to support our theoretical
framework of neo-institutional pressures on the extent of commitment to ISA adoption and
harmonisation. We find that the coercive, mimetic and normative pressures represent significant
forces encouraging or impeding ISA harmonisation. In particular, amongst the four coercive-led
variables (lenders’/ borrowers’ rights, foreign aid, regulatory enforcement, protection of
minority interests), the first variable appears to exert a stronger influence on the extent of ISA
adoption. Insofar as mimetic isomorphism is concerned, both variables (prevalence of foreign
ownership and import penetration) appear to be good predictors of the extent of ISA adoption.
Educational attainment, as a normative isomorphism, is also a significant determinant of the
commitment to ISA harmonisation, similar to the political system. However, it is to be noted
that for countries with less civil liberties, such as autocratic countries and those with a hybrid
system, the propensity to commit to full ISA harmonisation is rather low. Moreover, the results,
whilst supporting, assessment of the drivers of ISA adoption, also show the impact of a number
of different social, political and economic factors which were yet to be validated in previous
accounting studies, notably in relation to IFRS adoption. These findings are of relevance to the
practitioners and academics currently engaged in the debate how to address cross-country
variability in the adoption and implementation of accounting and auditing standards. They are
also very important to professional educators to whom the responsibility to provide continuous
education and training on ISAs has been assigned as per the SMO Action Plan. We argue that
prescriptions spearheaded by international agencies (IFAC, IOSCO, World Bank, IMF) to
strengthen the national enforcement and regulatory structures for audit practice are often driven
by a normative ‘logic’ (e.g. an independent audit regulator ‘ought’ to work in all circumstances)
and a ‘one-size fits all’ approach. Our results show that whilst many of the hypothesised
institutional factors do matter, it does not mean that the same micro-prescriptions will
adequately somehow challenge the institutional structures in the same way and ensure all
countries move towards a similar basis of ISA adoption and implementation. For instance, the
heightened effect of lenders’ and borrowers’ right is notable as most of the mainstream
discourse about accounting standards has focused on the implications for equity holders.
However, it is arguable that debt holders, particularly in the prevailing context following the
financial crisis, have more concerns about the increased risks of relying on financial information
deemed to have been audited using the ‘best’ auditing standards. As also suggested by
Humphrey et al. (2009, p. 822), recent criticisms of audit practice in the context of a number of
failed financial institutions have raised questions as to the usefulness of the audit process.
Furthermore, the contribution of this study lies in the evidence relating to cross-country models
of commitment to harmonisation of standards, adoption and implementation. The neo-
institutional perspective has been gaining ground in the financial accounting arena, specifically
in the case of IFRS adoption (Soderstrom & Sun, 2007; Rahman, Yammeesri & Perera, 2010),
as it becomes increasingly clear that the adoption or implementation is motivated not only by
the promise of efficiency gains (e.g. lower cost of capital, higher levels of market capitalisation,
 economic growth) but also by the need to derive legitimacy, such that the organisation, industry
or the State can be seen to be worthy of support (e.g. Aguilera & Cuervo-Cazurra, 2004, 2009;
Zeghal & Mhedhbi, 2006; Zattoni & Cuomo, 2008; Judge et al., 2010). Based on the empirical
results and their relative robustness and the relatively scarce number of studies on ISA adoption,
we recommend further attention to the way ISA implementation is actually supported and
enforced by the local audit profession and regulators. In particular, many of these audit
regulators have been established in developing countries where the capacity and expertise
needed to regulate large accounting firms (e.g. branches of the Big 4 firms) may be insufficient.
In effect, even if ISA adoption levels are enhanced, we would argue that additional attention
must be paid to the work of the audit regulators and the related enforcement mechanisms.
Notwithstanding the above, the empirical nature of the study implies some limitations.
First, the data is mainly country-level data and it has been quite difficult to gauge the extent to
which particular countries are committed to greater harmonisation with ISAs. The IFAC
collected these country-level data through survey/questionnaires and, as an example, we
question whether the use of the ‘other’ category is a subtle ‘impression management’ strategy
for countries and IFAC to avoid disclosing an ‘official’ state of non-compliance. Hence,
although access to the questionnaires may be possible, the validity and reliability of the data is
unknown and only partially validated by the various country ROSC reports. Second, there is no
publicly available data on the actual use of ISAs by individual audit firms. These limitations do
provide directions for future research. To overcome the limitation(s), the adoption and use of
ISAs can be
investigated using field research, similar to the work undertaken by Mennicken (2008). Finally,
close research attention must also be paid to the work carried out by local regulators to
understand how (if at all) they ensure that audit firms and auditors actually implement ISAs.

TOPIC 8: WHO ARE THE INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS SETTERS?

TOPIC 9: PURPOSE OF INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS

Introduction
 The accounting profession is guided by common set of laid down rules, regulations and
principles that defines the basis of financial accounting policies and practices in ensuring
uniformity in the presentation of financial statements.

The International Accounting Standards (IASs) were created and issued by the Board of the
International Accounting Standards Committee (IASC) in 1973-2001. In 2001, the IASC was
replaced by IASB- International Accounting Standard Board. This board issues IFRS-
International Financial reporting Standards. These standards are put in place to regulate financial
reporting among companies; it shows how companies should report financial events in a financial
statement.

International Standards on Auditing (ISA) are standards for auditing financial

information. ISA refers to professional standards dealing with the responsibility of independent
auditors while conducting a financial statement audit. These statements are issued by International
Federation of Accountants through the International Auditing and Assurance Standard Board
(IAASB).

The goal of the IAASB is to serve the public interest by setting high-quality auditing,
assurance, quality control and related services standards and facilitating the convergence of
international and national standards, thereby enhancing the quality and uniformity of practices
throughout the world and strengthening public confidence in the global auditing and assurance
profession.

These Standards, accounting and auditing, are issued by their relevant bodies through
IFAC.

Purpose of Accounting Standards

1. Harmonization and standardization of Accounting Standards: Harmonization would facilitate the

work of accountants and auditors, thereby reducing these direct costs to multinational corporations.

2. Quality accounting
4. Improved financial reporting: Accounting standards improves the transparency of financial
reporting in all countries.

5. Similarity and Comparison: International accounting standards fosters cross border analysis of
financial statements. This enables comparison of financial statements between countries. Because
countries follow the same rules accounting standards make the financial statements credible and
allow for more economic decisions based on accurate and consistent information.

Purpose of Auditing Standards

1. Foster standardization: The IAASB's mission is to foster internationally recognized standards of

auditing. The major objective of these standards is the development of uniform auditing practices
and procedures across countries.

2. Analyzing the comparability of national accounting as well as auditing standards with

international standards, determine the degree with which applicable auditing and accounting
standards are complied, and analyze strengths and weaknesses of the institutional framework in
sustaining high-quality financial reporting.

3. Assist the country in developing and implementing a country action plan for improvement of
institutional capacity with a view of strengthening the corporate financial reporting system of the
country.

4. It enables an audit to be conducted in accordance with standards, principles and guidelines.

TOPIC 10: SUMMARY OF SOME ISA AND NSA ON SIMILAR MATTERS

Introduction.

The auditing profession is guided in standards. Whether issued by the international or

local bodies, the outcome of the standards is to have an impact on the activities and behavior
of auditors, (Robert, 2013:4). We generally presume that all of these standards improve the
quality of financial reporting. While many will take this perspective as an article of faith, it is still
worthwhile to ask: Do auditing standards matter? And even if they do, are they standardized
enough to meet all required demands? The purpose of this paper is to examine and summarize
the Nigerian Standard on Auditing (NSA) and The International Standard on Auditing (ISA) as
they relate on similar matters.

Igbinosun (2011) defined Auditing standards as a number of rules accepted by the

profession as guidelines to measure transactions, event and circumstances which affect
financial results and financial information supplied to beneficiary parties”. Every auditing
standard should be applicable and appropriate to the objectives of the audit. To this end, every
standard must satisfy 4 criteria, these are: acceptability, consistency, suitability and relevance.
Between 1980 to 1991, the Auditing Practices Committee (APC) was the standard setting body
issuing various auditing standards. Later APC was succeeded by Auditing Practices Board (APB)
and they issue the Statement of Auditing Standards.

Standards on Auditing always guide in setting the minimum standard for technical
proficiency level. Regardless of the types, Objectives (whether it’s for profit or not for profit)
and size of the organisation, all audit standards are applicable to the independent auditor
based on the audit of the financial statement of the company. At the end of the audit
engagement, the auditor will be expected to present a report to the users and shareholders of
the company in form of the audit report. In this audit report, the suitor must inform the users
that the audit has been carried out in accordance with specified auditing standards. This
standard help to provide guidance on the required minimum level of care expected from the
auditor in the audit engagement, (Gill & Cosserat, 2000).

The regulatory environment makes it mandatory that organizations such as limited liability
companies must be audited by an independent external auditor qualified under the regulations
of professional bodies internationally or nationally to ensure that the company is working in
accordance to the company law set by respective countries. An external auditor functions as an
independent body appointed by and reports to shareholders to express an opinion whether the
financial statements are prepared, in all material respects, true and fair and in accordance to
the applicable financial reporting framework (Pflugrath G., Martinov-Bennie N. and Chen L.,
2007). In reporting to the shareholders, the auditor provides reasonable assurance whereby
they do not guarantee financial statements are free from material misstatements but rather at
an acceptable level. Professional bodies worldwide carries a duty to set auditing standards to
play a role of assisting auditors in performing duties in order to provide high level of confidence
to intended users of the Financial Statements (Noreen, 1988; Siegel et al., 1995; Wotruba et al.,
2001).

An auditing standard is a form of the current best practice applicable in statutory audit
engagements by approved auditors which sets a minimum level of technical proficiency to
assure work done is of high quality auditing and at the same time providing high level of
assurance ( Jubb and Houghton, 2007; Simnett, 2007). It is a form of benchmarking the intensity
of achieving objectives of the professional bodies in being a role model in the accounting
profession as stated by Watkins et al. (2004), and also safeguarding the position of auditors
whilst auditing financial statements.

Through professional and ethical standards such as independency and integrity, Alfredson, K. et
al. (2005) states that auditors carry out detailed works to value a subject matter whether it is of
true and fair view. Once a conclusion is made, the opinion obtained would determine the level
of confidence the public would have towards the financial statements (Alfredson, K. et al.,
2005).

This adds on to reducing the risk factor faced by users of the financial statements (Martinov,
2004) as it deters directors of an entity to carry out fraudulent activities. At the same time, it
also indirectly strengthens the audit profession as the public would have an increased
confidence level leading to a better impression towards auditors in general (Simnett, 2007;
Dellaportas, Senarath Yapa and Sivanantham, 2008).

As procedures of performing a statutory audit is consistent and of principles-based, it becomes

less rigid and flexible to be implemented on the audit works carried out on financial
statements. Aside from that, as agreed by Noreen, 1988; Siegel et al., 1995; Wotruba et al.
(2001); it may be able to reduce time factor as auditors are able to plan and analyze which area
are crucial to be tested more and vice versa because they are already well-versed with the audit
procedures set by the standards.

Nevertheless, this may pose as a threat because the use of their own judgement becomes too
subjective and thus, they may tend to be too lenient during audit procedures and bypass on
important matters. Auditors could even intentionally choose not to perform so much detailed
work and just state financial statements as true and fair since knowingly for the past history, it
has been stated as so (Jones et al., 2003; Herron and Gilbertson, 2004).

The International standards on Auditing (ISA) have been developed to complement

practices of auditing among various countries and these standards are to be used when there
are no standards developed locally. In Nigeria we have the ‘Nigeria Standards on Auditing’
(NSA). It’s compulsory for all business establishment listed on the stock exchange to comply
with these standards.

The International Standards on Auditing (ISA) have come a long way since the start of
their development in the late 1970s. They started as guidelines under the harmonization
process of IFAC and its member bodies. The AICPA is one of the founding member bodies of
IFAC and has participated in its activities since inception. IFAC's main focus is the enhancement
and further development of the worldwide accountancy profession through its activities in
ethics, education, the public sector, management accountancy, technology, and auditing. The
IAPC has been charged with the responsibility to enhance and expand the worldwide use of
auditing standards. Its objective is to improve the quality and uniformity of international
practice.

Meaning of standard.
 According to Merriam Webster dictionary, a standard is something set up and
established by authority as a rule for the measure of quantity, weight, extent, value, or quality.
However, in this context we’re dealing with Auditing standards. Auditing Standards provide
minimum guidance for the auditor that helps determine the extent of audit steps and
procedures that should be applied to fulfill the audit objective. They are the criteria or
yardsticks against which the quality of the audit results are evaluated.

Reason for this paper: The objective of this paper is to summarize some International Auditing
standards and Nigerian Accounting Standards on similar matters.

SUMMARY OF SOME AUDITING STANDARDS.

NSA 1 and ISA 200

NSA - OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT
IN ACCORDANCE WITH NIGERIAN STANDARDS ON AUDITING.

ISA - OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT
IN ACCORDANCE WITH INTERNATIONAL STANDARDS ON AUDITING.

The general duties of the independent auditor when performing an audit of financial
statements in conformity with NSAs and ISAs are covered under this Nigerian Standard on
Auditing (NSA) and International Standard on Auditing (ISA). In particular, outlines the general
goals of the independent auditor and describes the nature and aims of an audit that is intended
to help the independent auditor achieve those goals. They also include rules establishing the
general responsibilities of the independent auditor applicable in all audits, including the
responsibility to comply with the standards, and it explains the jurisdiction, structure, and
scope.
 NSA 2 and ISA 210

AGREEING THE TERMS OF AUDIT ENGAGEMENTS.

These Auditing Standards deal with the auditor’s responsibilities in agreeing the terms of the
audit engagement with management and where appropriate, those charged with governance.
This includes establishing that certain preconditions for an audit, responsibility for which rests
with management and, where appropriate, those charged with governance, are present.

The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:

(a) Establishing whether the preconditions for an audit are present; and

(b) Confirming that there is a common understanding between the auditor and management
and those charged with governance of the terms of the audit engagement.

NSA 3 and ISA 220

QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS.

These standards deal with the specific responsibilities of the auditor regarding quality control
procedures for an audit of financial statements. They address, where applicable, the
responsibilities of the engagement quality control reviewer.

Within the context of the firm’s system of quality control, engagement teams have a
responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of that
part of the firm’s system of quality control relating to independence.
 NSA 4 and ISA 230

AUDIT DOCUMENTATION.

These Auditing Standards deal with the auditor’s responsibility to prepare audit documentation
for an audit of financial statements. While there are a few other standards that cover
documentation requirements and guidance. The specific documentation requirements of other
standards do not limit the application of this particular one. It is the recording of audit
procedures performed, relevant audit evidence obtained and conclusions the auditor reached
(terms such as “working papers” or “work papers” are also sometimes used to mean Audit
documentation).

NSA 5 and ISA 240

THE AUDITORS RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL

STATEMENTS.

An auditor conducting an audit in accordance with standards is responsible for obtaining

reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit,
there is an unavoidable risk that some material misstatements of the financial statements may
not be detected, even though the audit is properly planned and performed in accordance with
the standards.

NSA 6 and ISA 250

CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS.

These standards deal with the auditor’s responsibility to consider laws and regulations in an
audit of financial statements. It is important to note that they do not apply to other assurance
engagements in which the auditor is specifically engaged to test and report separately on
compliance with specific laws or regulations.

The effect on financial statements of laws and regulations varies considerably. Those laws and
regulations to which an entity is subject constitute the legal and regulatory framework. The
provisions of some laws or regulations have a direct effect on the financial statements in that
they determine the reported amounts and disclosures in an entity’s financial statements. Other
laws or regulations are to be complied with by management or set the provisions under which
the entity is allowed to conduct its business but do not have a direct effect on an entity’s
financial statements. Some entities operate in heavily regulated industries (such as banks and
other financial Institutions, Telecommunication, Oil and Gas). Non-compliance with laws and
regulations may result in fines, litigation or other consequences for the entity that may have a
material effect on the financial statements.

The requirements according to these standards are designed to assist the auditor in identifying
material misstatement of the financial statements due to non-compliance with laws and
regulations. However, the auditor is not responsible for preventing non- compliance and cannot
be expected to detect non-compliance with all laws and regulations.

NSA 7 and ISA 260

COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE.

These standards deal with the auditor’s responsibility to communicate with those charged with
governance in an audit of financial statements. Although these standards apply irrespective of
an entity’s governance structure or size, particular considerations apply where all of those
charged with governance are involved in managing an entity and for listed entities. These
standards do not establish requirements regarding the auditor’s communication with an
entity’s management or owners unless they are also charged with a governance role.

NSA 8 and ISA 265

COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED WITH

GOVERNANCE AND MANAGEMENT.

The auditor is required to obtain an understanding of internal control relevant to the audit
when identifying and assessing the risks of material misstatement. In making those risk
assessments, the auditor considers internal control in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control. The auditor may identify deficiencies in internal control not
only during this risk assessment process but also at any other stage of the audit. These
standards specify which identified deficiencies the auditor is required to communicate to those
charged with governance and management.

NSA 9 and ISA 300

PLANNING AN AUDIT OF FINANCIAL STATEMENTS.

These standards deal with the auditor’s responsibility to plan an audit of financial statements.
The standards are written in the context of recurring audits. Additional considerations in an
initial audit engagement are separately identified. Planning is not a discrete phase of an audit,
but rather a continual and iterative process that often begins shortly after (or in connection
with) the completion of the previous audit and continues until the completion of the current
audit engagement. Planning, however, includes consideration of the timing of certain activities
and audit procedures that need to be completed prior to the performance of further audit
procedures. For example, planning includes the need to consider, prior to the auditor’s
identification and assessment of the risks of material misstatement

NSA 10 and ISA 315

IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH

UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT.

The objective of these standards is to help the auditor to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion
levels, through understanding the entity and its environment, including the entity’s internal
control, thereby providing a basis for designing and implementing responses to the assessed
risks of material misstatement.

The auditor shall perform risk assessment procedures to provide a basis for the identification
and assessment of risks of material misstatement at the financial statement and assertion
levels. Risk assessment procedures by themselves, however, do not provide sufficient
appropriate audit evidence on which to base the audit opinion.

TOPIC 11: PROCESS OF SETTING INTERNATIONAL ACCOUNTING AND AUDITING STANDARDS.

THE INTERNATIONAL ACCOUNTNG STANDARD BOARD (IASB) STANDARD

SETTING PROCESS

1.0 Introduction
The issuance of standards provides direction and guidance on how business enterprises could
achieve the goal of proper record keeping, measuring, communication and interpretation of
financial accounting information. Accounting standards are issued to promote uniformity,
transparency, reliability and enhancement of the public confidence in financial reporting. The
preparation and presentation of financial statements that lack objectivity, reliability, credibility
and comparability might bring some form of inconsistencies and distortion in financial reports
which may result in fraudulent business practices which subsequently leads to business failure
and eventually devastating economic failure.

2.0 Meaning of Standards

Standard as defined in the dictionary is the level of quality that is normal or acceptable
for a particular person or an action. It is also a measure for comparison for qualitative or
quantitative value criterion. Accounting standards refers to accounting guidelines to
specific issues in financial accounting and reporting. Adedeji (2004) stated that standards
are rules of best practices issued from time to time by a duly empowered body. The
standards setting organizations function by reviewing existing accounting principles and
practices and recommend the best standards.

3.0 The Process of Setting Accounting standards by the International Accounting

Standards Board (IASB)

The process of setting international accounting standards is one that requires proper planning,
supervision and implementation. The Standard Setting Process of the International Financial
Reporting Standards (IFRSs) are developed through an international consultation process,
known as the "due process", which involves interested individuals and organizations from
around the world. It is the process which the International Accounting Standards Boards (IASB)
uses to issue new International Financial Reporting Standards (IFRS) which is developed based
on an international consultation process, the ‘due process’, that is engaging interest from
individuals and organizations globally.
 The ‘due process’ is grouped into four when processing a new standard. The six steps fall under
those four groups which are Agenda consultation, Research programme, Standard-setting
programme and Maintenance programme including Post-implementation reviews.

The Standard Setting Process of the International Financial Reporting Standards (IFRSs) are
developed through an international consultation process, known as the "due process", which
involves interested individuals and organizations from around the world. The due process
comprises six stages, with the Trustees of the IFRS Foundation having the opportunity to ensure
compliance at various points throughout. These stages are:

Agenda Consultation

Planning the project.

3. Developing and publishing the discussion paper.

4. Developing and publishing the exposure draft.

5. Developing and publishing the standard.

6. After the standard is issued.

1. Agenda Consultation: The IASB, by developing high quality financial reporting

standards, seeks to address a demand for better quality information that is of value to those
users of financial reports. When deciding whether a proposed agenda item will address users’
needs the IASB tends to consider the relevance to users of the information and the reliability of
information that could be provided, the existing guidance available, the possibility of increasing
convergence, the quality of the IFRS to be developed and resource constraints. In deciding its
future agenda, its staff are asked to identify, review and raise issues that might warrant the
IASB’s attention. New issues may also arise from a change in the IASB’s Conceptual
Framework for Financial Reporting. In addition, the IASB raises and discusses potential agenda
items in the light of comments from other standard-setters and other interested parties, the IFRS
Advisory Council and the IFRS Interpretations Committee, and staff research and other
recommendations. The IASB considers aspects associated with convergence initiatives with
accounting standard-setters, in relation to the priorities of the agenda of IASB and a simple
majority vote at an IASB meeting can approve to add items to the agenda and set the way in
which IASB will prioritize decisions. Before adding an item to an active Agenda, IASB decides
between managing the case by itself or work together with another standard-setter. Both
approaches serve as the base for the above mentioned ‘due process’. The criteria must be met
for IASB to determine whether the ‘due process’ is being included in the annual improvements
process. Those criteria are: to clarify a standard, to resolve conflicts, well defined and narrow
scope and to complete a minimum period of 3 months for comment on Annual Improvement.
After valuation is completed, the ‘due process’ will include all changes stated in the annual
improvements process, same way as other IASB projects. The main goal of the annual
improvements process is to increase the quality of IFRSs by complementing or changing existing
IFRSs.

2. Planning the project: When adding an item to its active agenda, the IASB decides whether to
conduct the project alone or jointly with another standard-setter. Similar due process is
followed under both approaches. When considering whether to add an item to its active
agenda, the IASB may determine that it meets the criteria to be included in the annual
improvements process. The IASB assesses the issue against criteria such as clarifying,
correcting, well defined and sufficiently narrow in scope that the consequences of the proposed
change have been considered, completed on a timely basis and all criteria must have been met to
qualify for inclusion in annual improvements. Once this assessment is made, the
amendments included in the annual improvements process will follow the same due process
as other IASB projects. The primary objective of the annual improvements process is to enhance
the quality of IFRSs by amending existing IFRSs to clarify guidance and wording, or
correcting for relatively minor unintended consequences, conflicts or oversights.

3. Developing and publishing the discussion paper: When targeting resolving problems
identified by the research programme, the IASB starts by reviewing the research, adds comments
on the discussion paper and proposes Standards or amendments by publishing an exposure draft
for public consultation. In order to collect supplementary evidence IFRS technical staff and
members of the Board consult with an international variety of stakeholders using the discussion
papers. The aim is to get a comprehensive overview of the issue, possible approaches to
addressing the issue, the preliminary view of its authors or the board and invitation to comment.
With the view to issue amendments or a new Standard, the Board analyses the supplementary
evidences and clarifies proposals.

4. Developing and publishing the exposure draft: Publication of an exposure draft is a

mandatory step in due process. An exposure draft is the IASB’s main vehicle for consulting the
public. Unlike a discussion paper, an exposure draft sets out a specific proposal in the form of a
proposed IFRS (or amendment to an IFRS). The development of an exposure draft begins with
the IASB considering issues on the basis of staff research and recommendations, as well as
comments received on any discussion paper, and suggestions made by the IFRS Advisory
Council, working groups and accounting standard-setters and arising from public education
sessions. After resolving issues at its meetings, the IASB instructs the staff to draft the exposure
draft. When the draft has been completed, and the IASB has balloted on it, with a minimum of
nine votes necessary to publish an exposure draft, the IASB publishes it for public comment.

An exposure draft contains an invitation to comment on a draft IFRS, or draft amendment to an

IFRS, that proposes requirements on recognition, measurement and disclosures. The draft may
also include mandatory application guidance and implementation guidance, and will be
accompanied by a basis for conclusions on the proposals and the alternative views of dissenting
IASB members (if any). The IASB normally allows a period of 120 days for comment on an
exposure draft. If the matter is exceptionally urgent, the document is short, and the IASB
believes that there is likely to be a broad consensus on the topic, the IASB may consider a
comment period of no less than 30 days, but it will set such a short period only after formally
requesting and obtaining prior approval from 75 per cent of the Trustees. The project team
collects, summarizes and analyses the comments received for the IASB’s deliberation. After the
comment period ends, the IASB reviews the comment letters received and the results of other
consultations. As a means of exploring the issues further, and soliciting further comments and
suggestions, the IASB may conduct field visits, or arrange public hearings and round-table
meetings. The IASB is required to consult the IFRS Advisory Council and maintains contact
with various groups of constituents.

5. Developing and publishing the standard: The development of an IFRS is carried out during
IASB meetings, when the IASB considers the comments received on the exposure draft. Changes
from the exposure draft are posted on the website. After resolving issues arising from the
exposure draft, the IASB considers whether it should expose its revised proposals for public
comment, for example by publishing a second exposure draft. If the IASB decides that re-
exposure is necessary, the due process to be followed is the same as for the first exposure draft.
As it moves towards completing a new IFRS or major amendment to an IFRS, the IASB prepares
a project summary and feedback statement. These give direct feedback to those who submitted
comments on the exposure draft, identify the most significant matters raised in the comment
process and explain how the IASB responded to those matters.

At the same time, the IASB prepares an analysis of the likely effects of the forthcoming IFRS or
major amendment. The analysis will therefore attempt to assess the likely effects of the new
IFRS on the financial statements of those applying the existing IFRSs, the possible compliance
costs for preparers, the costs of analysis for users (including the costs of extracting data,
Identifying how the data have been measured and adjusting data for the purposes of including
them in, for example, a valuation model, the comparability of financial information between
reporting periods for an individual entity and between different entities in a particular reporting
period, and the quality of the financial information and its usefulness in assessing the future cash
flows of an entity. When the IASB is satisfied that it has reached a conclusion on the issues
arising from the exposure draft, it instructs the staff to draft the IFRS. A pre-ballot draft is
usually subject to external review, normally by the IFRS interpretations committee. Shortly
before the IASB ballots the standard, a near-final draft is posted on its limited access website for
paying subscribers. Finally, after the due process is completed, all outstanding issues are
resolved, and the IASB members have balloted in favour of publication, the IFRS is issued,
followed by publication of any project summary and feedback statement and any effect analysis.

6. After the standard is issued: The IASB must conduct a post-implementation review of each
new standard or major amendment. After an IFRS is issued, IASB members and staff hold
regular meetings with interested parties, including other standard-setting bodies, to help
understand unanticipated issues related to the practical implementation and potential impact of
its provisions. The IFRS Foundation also fosters educational activities to ensure consistency in
the application of IFRSs. The IASB carries out a post-implementation review of each new IFRS
or major amendment. This is normally carried out two years after the new requirements have
become mandatory and been implemented. Such reviews are normally limited to important
issues identified as contentious during the development of the pronouncement and consideration
of any unexpected costs or implementation problems encountered. A review may also be
prompted by changes in the financial reporting environment and regulatory requirements,
comments made by the IFRS advisory council, the IFRS interpretations committee, standard-
setters and constituents about the quality of the IFRS.

The review may lead to items being added to the IASB’s agenda. The IASB may also continue
informal consultations throughout the implementation of the IFRS or amendment.
THE INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD
(IAASB) STANDARD SETTING PROCESS

1.0 Introduction

The International Auditing and Assurance Standards Board is an independent standards body that
isssues standards to support the international auditing of financial statements. Founded in March,
1978 as the International Auditing Practices Committee (IAPC), the IAASB current strategic
objectives are to increase the emphasis on emerging issues to ensure that the IAASB
international standards provide a foundation for high quality audit, assurance and related service
engagements, innovate the IAASB’s ways of working to strengthen and broaden its agaility,
capabilities and capacities to do the right work at the right time and maintain and deepen
relationship with stakeholders to achieve globally relevant and operable standards.

The IAASB follows a rigorous due diligence process in developing its pronouncements . Input is
obtained from a wide range of stakeholders including the IAASB’s Consultative Advisory Group
(CAG), International Federation of Accountants (IFAC) member bodies and their members,
regulatory and oversight bodies, investors, preparers and the general public.

Over 113 jurisdictions (listed on the IAASB’s website) are using or are in the process of
adopting or incorporating the clarified International Standards on Auditing (ISAs), issued by the
IAASB, into their national auditing standards or using them as a basis for preparing national
auditing standards. The European Union Audit Directive, while also noting that an assessment of
the ISAs remains to be completed by the European Commission prior to adoption, makes
specific reference to the use of clarified ISAs and other relevant IAASB standards in the
performance of statutory audits. This is another significant step towards global adoption and
implementation of high-quality international standards that facilitate transparency, consistency,
economic growth, and financial stability. While the manner in which jurisdictions are adopting,
or converging to, international standards on auditing may differ due to national circumstances,
there is strong momentum of global adoption and implementation efforts in all parts of the world.
2.0 PurposeThe mission of the International Federation of Accountants (IFAC), as set out in its
constitution, is :to serve the public interest, strengthen the accountancy profession worldwide and
contribute to the development of international economies by establishing and promoting
adherence to high-quality professional standards, furthering international convergence of such
standards, and speaking out on public interest issues where the profession’s expertise is most
relevant. In pursuing this mission, the IFAC Board has established the International Auditing and
Assurance Standards Board (IAASB) to function as an independent standard-setting body under
the auspices of IFAC and subject to the oversight of the Public Interest Oversight Board (PIOB).

3.0 Objective

The IAASB objective is to serve the public interest by setting high-quality auditing and
assurance standards and by facilitating the convergence of international and national auditing and
assurance standards, thereby enhancing the quality and consistency of practice throughout the
world and strengthening public confidence in the global auditing and assurance profession. The
IAASB develops and issues, in the public interest and under its own authority, high-quality
auditing and assurance standards and other pronouncements for use around the world. The IFAC
Board has determined that designation of the IAASB as the responsible body, under its own
authority and within its stated terms of reference, best serves the public interest in achieving this
aspect of its mission.

4.0 The IAASB Standard Setting Process - The IAASB “Due process”

In developing its Standards and Practice statements, the IAASB is required to be transparent in
its activities, and to adhere to due process as approved by the PIOB. In setting its strategy and
work program, the IAASB obtains the PIOB’s conclusion as to whether the due process used to
develop the IAASB’s strategy and work program has been followed effectively and with proper
regard for the public interest.The International Accounting and Auditing standards board “due
process” is a rigorous process followed by the IAASB and is critical to ensure that the views of
those affected by its standards are gotten and thoroughly considered. The due process is the
process applicable to the development of all IAASB standards and the issuance of its standards.
The process is as follows:
• Research and consultation: Firstly, a project task force is established by the board and it is
charged with the responsibility of developing a draft standard. The task force carries out
thorough research and analysis in order to develop the draft . It develops its positions based on
appropriate research and consultation.

• Transparent debate: A proposed standard is presented as an agenda paper for discussion and
debate at an IAASB meeting, which is open to the public. This discussion is open to the public
for proper representation and to address all issues as relating to auditing and assurance services.

• Exposure for public comment: Exposure drafts are placed on the IAASB’s website and are
widely distributed for public comment. The exposure period is 120 days to allow for sufficient
time for the public to comment on standards that need to be reviewed or needs clarification on.

• Consideration of comments received on exposure: The comments and suggestions received as a

result of exposure are considered at an IAASB meeting, which is open to the public, and the
exposure draft is revised as appropriate. If the changes made after exposure are viewed by the
IAASB to be substantive so as to require re-exposure, the revised document will be reissued for
further comment.• Affirmative approval: Approval of exposure drafts, re-exposure drafts, and
final international standards is made by the affirmative vote of at least two-thirds of the IAASB
members. These and a wide range of other publications may be downloaded at no charge from
the IAASB website.

5.0 Key Stakeholders Involved in the Process

A. The Public Interest Oversight Board (PIOB)The Public Interest Oversight Board oversees the
public interest activities of the IAASB. The objective of the PIOB is to increase confidence of
investors and others that the IAASB’s standard-setting process is properly responsive to the
public interest. PIOB members are nominated by international institutions and regulatory bodies

B. The IAASB Consultative Advisory Group (CAG)The IAASB Consultative Advisory

Group is comprised of representatives of regulators, business and international organizations,
and users and preparers of financial statements who are interested in the development and
maintenance of high-quality international standards for auditing, quality control, review, other
assurance, and related services. Through active consultation, the IAASB receives valuable public
interest input from the CAG on its agenda, project timetable, priorities and technical issues.

6.0 The IAASB MembersThe IAASB consists of a full-time chairman and 17 volunteers from
around the world. The 18 board members comprise nine practitioners with significant experience
in the field of auditing and other assurance services and nine non-practitioners (including the
chairman) who are not members or employees of an audit firm. At least three of the non-
practitioners are public members: individuals who are expected to reflect, and are seen to reflect,
the wider public interest. Members are appointed by the International Federation of Accountants
(IFAC) Board based on recommendations from the IFAC Nominating Committee and are
approved by the PIOB. All board members and their technical advisors are required to sign an
annual statement declaring that they will act in the public interest and with integrity in
discharging their responsibilities.

In addition, there is a small number of observer members who have speaking rights at IAASB
meetings but no voting rights.The IAASB is supported by a technical staff that has a wide range
of standard-setting experience. The structures and processes that support the operations of the
IAASB are facilitated by IFAC.