1- Introduction

2- Background

3- Terminology and methodology

4- Previous theoretical and empirical literature

5- Citation analysis

6- Conclusions

References

Abstract

Research on International Standards on Auditing (ISAs) would greatly benefit from a research framework that categorizes the research streams related to ISAs and suggests areas for future research. This paper reviews the current research related to ISAs and develops a framework for analysis going forward. We identify seven main research streams: the development and history of ISAs; adoption of ISAs; association between national auditing standards and ISAs; financial reporting quality; audit reports; audit efficiency; and International Financial Reporting Standards (IFRS) compliance. For each research stream, the main results are summarized. At the conclusion of our literature reviews for each research stream, we suggest areas requiring further examination.

Introduction

Researchers are increasingly focusing on International Standards on Auditing (ISAs), and prior research suggests that ISAs are as essential as International Financial Reporting Standards (IFRS) in ensuring that a country’s financial system is sound and stable (Boolaky & Omoteso, 2016; Boolaky & Soobaroyen, 2017; Fraser, 2010). However, no comprehensive review of ISA research currently exists. This paper develops such a review to analyze the knowledge from ISA research, revealing, for example, that the results for many drivers of adoption of ISAs are consistent across studies. This synthesis also suggests that ISAs are positively affecting financial reporting quality, and audit efficiency is more observable when the audit is conducted using ISAs. ISAs promote auditor behavior that contributes to effective audits (e.g., Burns & Fogarty, 2010). For instance, ISAs have wider implications for increasing auditor skepticism. When examining IFRS compliance, prior studies indicated that there is an association between IFRS compliance and the use of ISAs. In addition, previous studies revealed that even when ISAs are adopted, several countries’ audit reports are not perfectly conforming to the content and structure of reports standardized by the International Federation of Accountants (IFAC) (e.g., Fakhfakh & Fakhfakh, 2010). This can be due to the inconsistent implementation of ISAs. This literature synthesis has three primary objectives. The first is to provide a comprehensive overview of current academic knowledge about ISAs. The second is to identify key topics and issues that appeared in the previous literature. Finally, the third objective is to suggest fruitful future research opportunities. The remainder of the paper is organized as follows. Section 2 presents relevant background information on the topic. Section 3 presents the definition of ISAs and explains the method used to conceptualize this synthesis.

Over the past 15 years, efforts to stem the wave of financial scandals in large companies have resulted in substantial changes in the regulatory landscape and the way in which financial statement audits are conducted (Humphrey, Kausar, Loft, & Woods, 2011; Knechel, 2013). In many jurisdictions, the development of auditing regulation has moved from a national level to an international level. In addition, there has been a shift in the regulation of auditors from self-regulation by the accountancy profession to substantial oversight by government authorized bodies, coordinated through international networks (Humphrey & Loft, 2013). A fundamental change in audit regulation between 1996 and 2010 was the introduction of risk-based ISAs that required greater documentation of the client’s business risks (Curtis & Turley, 2005; van Buuren, Koch, van Nieuw Amerongen, & Wright, 2014). At the same time, auditing standards became more detailed and prescriptive, and greater emphasis was placed on assessing clients’ risk in terms of operations, internal controls and management fraud. However, the question of whether audits have become more risk-oriented depends on how willing the auditor is to follow the new risk-based standards and how strongly they are enforced. The purpose of this study is to investigate the extent that the new risk standards are reflected in the auditing process. The study is set in Finland which joined the European Union (EU) in 1995. At that time, guidance for auditors and quality checks in Finland were based on voluntary peer review and recommendations provided by professional associations of auditors. However, in 2005, the European Group of Auditors’ Oversight Bodies (EGAOB) was set up by the European Commission to co-ordinate a new public oversight system of statutory auditors and audit firms in EU Member States, which is enforced through a network of national oversight bodies. This was followed in 2006 by the Directive on the Statutory Audits of Annual Accounts and Consolidated Accounts (2006/43/EC).1 This meant that future guidance for auditors would come from International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB), the independent standard-setting body of the International Federation of Accountants (IFAC). In addition, the quality checks previously provided by the Finnish accountancy profession were replaced by systematic inspections by a national oversight body, the Auditing Board of the Central Chamber of Commerce (AB3C).

Abstract

We examine the relation between nonaudit fees and SOX 404 opinions on the effectiveness of a client’s internal control over financial reporting. We find a negative association between nonaudit fees and the auditor’s propensity to issue an adverse SOX 404 opinion during 2004–2006 (when AS2 was the applicable standard), but not in 2007 or 2008 (when AS5 was the applicable standard). Our results hold when we control for office size and time trend and examine tax and nontax nonaudit fees separately. These findings suggest that AS5 reduced ambiguity relative to AS2 and improved auditor independence. Our paper contributes to two literature streams: (1) the sparse literature on the adverse effects associated with ambiguity (lack of precision) in an auditing standard (Willekens and Simunic, 2007, Ye and Simunic, 2013), and (2) the AS5 literature by documenting that AS5 contributed to a more effective audit via greater auditor independence.

Introduction

We investigate the effect of ambiguity (i.e., verbal probability expressions that are subject to between-auditor variations in interpretation) in the PCAOB’s Auditing Standard No. 2 (AS2) on auditor decision making. Specifically, we examine the impact of the ambiguity in AS2 on auditor independence by testing the relation between nonaudit fees and the 2002 Sarbanes Oxley Act (SOX) 404 control audit opinion on the client’s internal control over financial reporting (ICFR). 1 Basically, SOX Section 404 requires the auditor to issue an audit opinion on the effectiveness of the client’s ICFR in addition to the traditional financial statement audit opinion.

Over the past decade, following the trend that a growing number of jurisdictions (e.g. Australia, China, the European Union, Japan, and Taiwan) mandate the signature or identification of the engagement partner in the audit report or other documents (Carcello and Li 2013), archival auditing research has begun to study the impact of partner-level characteristics on audit quality. Such characteristics include tenure (Chen, Lin, and Lin 2008), gender (Ittonen, Vähämaa, and Vähämaa 2013), educational background, Big 41 audit firm experience, rank in the audit firm, political affiliation (Gul, Wu, and Yang 2013), and aggressiveness (Knechel, Vanstraelen, and Zerni 2015). As Francis (2011, 134) pointed out, ‘These archival studies of partner characteristics illustrate the importance of knowing more about the people who do audits and the effect it may have on audit quality.’ Based on a unique setting, we extend this stream of research by investigating whether engagement partners who participate in the auditing standard setting (hereafter, ‘Auditing Standards Committee (ASC) member auditors’ or ‘standard setting auditors’) provide a different level of audit quality, and more importantly, the underlying cause if they do. Given that there is no ready-made theory that exists at present to explain the potentially distinct audit quality delivered by standard setting auditors; therefore, the arguments and empirical results in this study may help us to further explore some drivers that affect audit quality. Specifically, we present three arguments to explain why the ASC member auditors may provide better audit quality2 : (1) inherent expertise for appointment as an ASC member, i.e. the appointment as an ASC member is just the result of superior audit expertise, not the cause why an ASC member auditor can provide better audit quality; (2) knowledge accumulated through standard setting experience; and (3) concerns about impairments to the auditor’s increased reputational capital. We use a sample of listed companies audited by Big 4 audit firms in Taiwan for three reasons. First, an audit report in Taiwan must be signed by two audit partners, and this requirement makes studies based on the characteristics of individual auditors feasible. Second, the national auditing standard setter in Taiwan, the Auditing Standards Committee (ASC), allows its member to be a practicing auditor.3 Third, the legal environment in Taiwan minimizes the auditors’ litigation risks (Liao, Chi, and Chen 2013; Lin and Lin 2013). To sum up, this setting provides us with unique data to explore our research questions.