International Standards on Auditing (ISAs): conflicting influences on implementation

Abstract

In contrast to the very significant body of research into the adoption of International Financial Reporting Standards (IFRS), there has been less interest in auditing practices and standards, conceptualised primarily in terms of (i) processes, routines and procedures by which an external auditor forms an opinion of the financial statements as a fair representation, and (ii) settings and conditions within which an external auditor or external audit firm is ‘licensed’ to operate and where relevant, how the auditor or audit firm is evaluated in compliance with applicable laws, regulations and/or professional ethics/standards. Auditing standards typically seek to codify aspects from these two perspectives and purport to offer some ‘legitimacy’ of the external auditing process and a degree of reassurance to outside parties as to the basis by which an audit opinion has been expressed (Simunic et al., 2016; Boolaky and Soobaroyen, 2017). In the light of high-profile corporate failures and the finding that audit firms have not always applied the expected diligence and oversight, the issue of audit quality has been the subject of extensive work primarily in the context of developed countries (Gendron and Bedard, 2001; DeFond and Zhang, 2014) but with a heavy reliance on quantitative approaches and potentially limitative proxies of audit quality (e.g. Ahmed and Goyal, 2005). Such approaches have been criticised for being less concerned about audit practices and processes in the field (Humphrey, 2008; Hazgui and Gendron, 2015; Power and Gendron, 2015). Financial statements could thus be prepared in accordance with international accounting standards but concerns may remain as to the reliability of an auditor’s assurances if there are questions about the basis (and potentially varying standards) adopted by external auditor in providing such an assurance. It is in this regard that research into the implementation of International Standards on Auditing (ISAs) and the contribution (if any) played in the local arena has begun to take some prominence in developed as well as developing countries, albeit that empirical evidence is substantially lacking in both contexts (Needles et al., 2002; Fraser, 2010; Simunic et al., 2016). The International Auditing and Assurance Standards Board (IAASB) reports that, as of December 2017, 128 jurisdictions were using the clarified ISAs or were committed to using them in the near future, albeit on different bases of adoption (clarified ISAs are explained later in this chapter). Of this total, over 80 jurisdictions are classified as emerging economies by the IMF .

This chapter sets the scene for further research and empirical forays on the adoption and use of auditing standards generally, and ISAs specifically, by providing (i) a review of the (limited) academic literature on ISAs, (ii) a broad picture of ISA ‘implementation’ (or the apparent variations or lack of implementation) in developing and emerging economies and (iii) a specific illustration of how ISAs have permeated a developing economy (Egypt).We first contribute to the extant knowledge on the consequences of policies and strategies instigated by transnational institutions (e.g. IFAC, World Bank; global audit firms) as outlined in Humphrey et al. (2009) and Humphrey and Loft (2013), in developing and emerging economies. Second, we extend an understanding of ISA implementation at the national level and by outlining the relevant contextual factors and dominant actors in the case of developing and emerging economies.

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ORCID for Oliver Marnet: orcid.org/0000-0001-9450-2332

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