Introduction to auditing standards
4 minute read
| Name | Introduction to auditing standards |
|---|---|
| Publication date | 19 March 2025 |
| Type | Information sheet |
| Format | PDF, 1.7 MB |
What are International Standards on Auditing (ISAs)?
The ISAs are a set of globally recognised, principles-based, performance standards used when auditing the financial statements of all types of entities, including businesses and public sector organisations. More than 130 countries either base their auditing standards on the ISAs, or use the international standard directly, allowing for consistent, comparable and quality audit engagements across the world, supporting the movement of global capital. The objective of an audit in accordance with the ISAs is to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether they have been prepared in accordance with applicable law and regulation, including whatever the required reporting framework is. Reasonable assurance is a high but not absolute level of assurance, and it is a matter of professional judgement of individual auditors as to when sufficient appropriate audit evidence has been obtained to support a reasonable assurance opinion. Indeed, the ISAs require the auditor to exercise professional judgement throughout an audit, as the requirements they contain are principles-based.
Who sets the ISAs?
The ISAs are set by the International Audit and Assurance Standards Board (IAASB). This is a global, multi-stakeholder board comprising 16 members. It is intended that a maximum of 5 members are audit practitioners. Other members work in business, regulation, standard setting, or for universities. Board members represent themselves, not their employers or nominating organisations, and are expected to act in the public interest. In the UK, the FRC is the competent authority for audit and sets the ISAs (UK), which are based substantially on the ISAs. The FRC may supplement the ISAs with requirements and application material to reflect the UK business context and UK legal and regulatory requirements, but does not disapply any of the requirements in the ISAs. Therefore, an audit that meets the requirements of the ISAs (UK) will meet those of the ISAs too. This is important as many UK firms are bound by agreements at the global network level to design their methodologies to meet ISA requirements.
How are ISAs developed?
1. Decision to revise or issue a standard
The IAASB may choose to revise or issue a standard for many reasons. These include the presence of emerging trends and developments, such as the increasing prevalence of technology, and feedback from stakeholders that identifies issues with an extant version of a standard. The IAASB is supported in the identification of topics that may merit standard setting activity by the Stakeholder Advisory Council, a multi-stakeholder group of around 30 experts that offer a diverse range of views. The IAASB consults publicly on its strategy and work program every 4 years, which allows all stakeholders to have their say on what issues the IAASB should prioritise.
2. Development
When a project to revise or issue a standard is commenced, a project team comprising IAASB staff is set up to develop an exposure draft. Some projects may have one or two Board members assigned to advise the IAASB staff team. The project team will carry out research and engage with stakeholders, bringing project updates to Board meetings periodically. These Board discussions and attached documents are public.
3. Consultation and engagement
The IAASB consults publicly on all revisions to the ISAs. It will often hold roundtables and webinars and will publish explanatory memorandums alongside consultations to enhance the feedback received.
4. Issuance
Following the consultation process, amendments to the exposure draft will be made after which the IAASB Board will vote on whether to issue a new or revised standard. If approved, the standard will go to the Public Interest Oversight Board, which certifies the final standard to confirm that due process has been followed and that the standard is responsive to the public interest. The Public Interest Oversight Board is overseen by a Monitoring Group of Public Financial Authorities comprising the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, the World Bank, the European Commission, the Financial Stability Board and the International Forum of Independent Audit Regulators. The IAASB publishes a basis for conclusions along with the final standard.
Who uses ISAs?
The ISAs (UK) apply for audits including:
- Statutory audits of companies in accordance with the Companies Act;
- Audits of financial statements of entities in accordance with other UK legislation e.g. building societies, charities and pension funds;
- Public sector financial statement audits in the UK.
Further, audit firm networks that operate internationally and are members of the Forum of Firms are obligated to base their methodologies on the ISAs. Professional Accountancy Bodies that are members of the International Federation of Accountants also commit to using standards that do not fall below the requirements of the international standards.
What purpose do ISAs (UK) play in well-functioning UK capital markets?
Consistent, comparable and quality audits, performed in accordance with globally recognised standards, enhance market confidence in financial statement information. This greater trust reduces the risk premium both domestic and international investors may charge, lowering the cost of capital for UK companies and supporting their ability to grow, creating jobs and wealth across the UK.
How are ISAs proportionate to the complexity of the entity audited?
The requirements in the ISAs are principles based and the auditing model they articulate is risk based. These two factors create significant opportunities for scalability and proportionality, though professional judgement is often required to unlock them. For example, the ISAs require the auditor to obtain sufficient appropriate audit evidence to reduce the risk that they have not found a material misstatement that exists to an acceptably low level. If the risk of a material misstatement is lower, as may be the case in a less complex entity, then less persuasive evidence is required to get the auditor to the same acceptably low level of remaining risk. Many audit firm networks, and indeed many audit engagements, are global. The consistency of standards across jurisdictions also provides a coherent framework for group audits, reducing costs for business and raising quality.
FRC campaign to support UK SMEs to grow and scale
- Market study examining issues affecting SMEs including audit and reporting requirements
- Guidance to support the proportionate audit of SMEs
- Support materials for SMEs