New Guidance Directs Auditors - auditing standards - Brief Article

Internal Auditor, June, 2001 by C. Brune

THE INTERNATIONAL Federation of Accountants (IFAC) recently released three new documents on fraud and error, auditing derivatives, and independence.

The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements is an International Standard on Auditing that expands on previously released guidance. Applicable to audits of financial periods on or after June 30, 2002, the standard advises auditors to consider the risk of financial statement inaccuracies resulting from fraud and error. It also distinguishes between management and employee fraud and discusses fraudulent financial reporting, the inherent limitations of an audit's ability to detect fraud, and the need to obtain management's assessment of risk and fraud.

Auditing Derivative Financial Instruments, a new International Auditing Practice Statement, aims to help auditors plan and perform audit procedures for assertions about derivative financial instruments. The guidance explains when specific substantive procedures should be used, addresses key financial risks, and examines management's responsibilities. Additionally, the statement explores the role of internal auditing in risk assessment and control.

To address the critical issue of auditor independence, IFAC also released a revised exposure draft on independence that clarifies specific aspects of its initial June 2000 draft. The original version included a proposed "conceptual framework approach" that required auditors to identify, evaluate, and reduce factors that threaten their independence. Favorable responses to the initial draft prompted IFAC officials to include more details in the subsequent revision.

The new re-exposure draft, Independence -- Proposed Changes to the Code of Ethics for Professional Accountants, provides further guidance on relationships and situations that threaten independence. The draft specifically identifies non-family members, such as partners and other professional staff, who could endanger independence. It also recommends safeguards to reduce these threats.

All three documents can be downloaded from IFAC's Web site at www.ifac.org.