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This chapter presents an approach for teaching divergent and evolving auditing standards in an introductory auditing course. The existence of divergent and continually evolving auditing standards can be challenging for students and for auditing educators. In addition to two separate sets of standards in the United States for the audits of public companies (issuers) and nonpublic companies (nonissuers), auditors also need to be aware of the growing prominence of international standards. In addition to providing background information on standard-setting bodies and divergent auditing standards, and suggestions for simplifying the process of guiding students to an understanding of these standards, this chapter provides figures that can be used for demonstration in class, along with a series of brief internet-based research exercises. The exercises and examples provided may help auditing educators to facilitate students’ understanding and mastery of the fundamental elements of the domestic and international auditing standard-setting forces and activities that impact, directly or indirectly, auditing practice in the United States and abroad.

Financial crises in the international markets, which have global effects, have increased the importance of internal auditing especially in the banking sector in recent years. Minimizing the negative effects of crises is closely related to the establishment and functioning of an effective internal control system. International internal audit standards (IIAS) issued by the International Internal Audit Standards Boards are internationally applicable standards that contain the basic requirements for the professional implementation and evaluation of the effectiveness of internal auditing. In developing countries where the effects of crises are intensely felt, public banks are one of the most important actors of the financial system. An effective internal control structure in public banks and in compliance with international standards is necessary for a strong and fragile financial system. The purpose of this study is to examine the internal audit activities in public banks in terms of compliance with international standards. In this study conducted at one of the leading state-owned bank in Turkey, the bank’s internal control procedures and internal control activities reports were examined. In addition, the Bank’s internal audit activities were analyzed by conducting interviews with bank officials for a better understanding of the internal control system. The IIAS, which are grouped under two main headings, are related to the internal audit activities of the related bank. It is thought that the study will guide banks and auditors in terms of demonstrating the application of IIAS, which usually consist of abstract statements.

In this chapter, we study the evolution of the auditor’s report from its emergence more than 150 years ago to the present. During this period, the standard auditor’s report has evolved from a rudimentary form to its current and more sophisticated structure with a clearly defined title, addressed to specific entities, and systematically divided into sections that are meant to highlight certain aspects of the audit examination. We describe the major events that have affected the financial reporting environment in the United States and, in turn, how these events have transformed the auditor’s report over the last century. As will be demonstrated in the chapter, the progression of the presentation of the auditor’s report, from being a certification to the standard report of the present day, has been guided primarily by the kind of information that investors and creditors wanted to know in relation to their investments in public companies. However, the desire for that information was often influenced by periodic incidents of corporate scandals. These scandals made it imperative that a monitoring mechanism was established to maintain the confidence of investors and creditors in the reporting of financial information about companies and the overall functioning of the capital markets.

The typical unqualified audit report of publicly traded firms in the United States indicates the nature of the audit and an opinion that the firm’s financial statements fairly present the financial position and the results of operations of the audited company. Accordingly, some users of the financial statements, including investors, do not consider the unqualified opinion to be very useful in providing other informational value about the particular audit. In this paper, the authors examined the views of two stakeholders in the US financial reporting system, auditors in large public accounting firms and Chief Financial Officers (CFOs) in the Fortune 1000. The authors elicited their perceptions involving a Public Company Accounting Oversight Board (PCAOB) proposed auditing standard commonly referred to as “the other information standard.” This standard, if adopted, would require the auditor to evaluate information other than the audited financial statements and the related audit report for (1) a material inconsistency, (2) a material misstatement of fact, or (3) both, and if they exist, communicate them in the auditor’s report. The authors developed their research instrument based upon its perceived potential effects on the audit if adopted, some of which were referenced in the exposure draft of the proposed standard (PCAOB, 2013). They found that a majority of each groups believed, among other effects, that the proposed standard would increase audit costs, subject both the auditor and the reporting firm to increased litigation risk, and that its implementation costs by affected firms would exceed any benefits to financial statement users created by the standard.

In crafting Auditing Standard No.3 (AS3), a primary objective of the PCAOB was to reduce auditors' exposure to litigation by raising the standard of care for audit documentation. We examine whether the increased documentation requirements of AS3 affect legal professionals' perceptions of audit quality and auditor responsibility in the event of an audit failure. Our experiment consists of a 3 × 2 between-participants design with law students serving as proxies for legal professionals. The results of our experiment indicate that when an audit procedure, namely the investigation of inconsistent evidence, is not required to be documented, legal professionals perceive the performance of the work itself but not its documentation to significantly increase audit quality and reduce the auditor's responsibility for an audit failure. When documentation of the procedure is required, as per AS3, legal professionals perceive enhanced audit quality and reduced auditor responsibility only if the performance of the work is documented.

This chapter examines China’s corporate governance and accounting environment that shapes the adoption of internationally acceptable principles and standards. Specifically, it examines international influences, including supranational organizations; foreign investors and international accounting firms; domestic institutional influences, including the political system, economic system, legal system, and cultural system; and accounting infrastructure. China’s convergence is driven by desired efficiency of the corporate sector and legitimacy of participating in the global market. Influenced heavily by international forces in the context of globalization, corporate governance and accounting practices are increasingly becoming in line with internationally acceptable standards and codes. While convergence assists China in obtaining legitimacy, improving efficiency is likely to be adversely affected given that corporate governance and accounting in China operate in an environment that differs considerably from those of Anglo-American countries. An examination of the corporate governance and accounting environment in China suggests heavy government involvement within underdeveloped institutions. While the Chinese government has made impressive progress in developing the corporate governance and accounting environment for the market economy, China’s unique institutional setting is likely to affect how the imported concepts are interpreted and implemented.

This case examines critical ethical accounting practice issues surrounding a request for proposal for audit services at Aviary Corporation based on a real Securities and Exchange Commission enforcement action. Audit and tax partners at Western Accounting Firm, a large international public accounting firm, used confidential information obtained from the company’s Chief Audit Officer to modify their proposal for audit services. In response to their actions, the Securities and Exchange Commission fined the auditing firm, the partners, and the Chief Audit Executive. The authors used publicly available information and adopted fictitious names to develop a teaching case that instructors can implement in a variety of accounting and ethics classes to increase students’ understanding of professional codes of conduct and independence guidance.