Audit regulation - Purpose and scope of ISAs

Learning Outcomes

After reading this article, you will be able to explain why International Standards on Auditing (ISAs) exist, describe their main objectives and structure, and outline the areas they govern. You will also know how ISAs support consistent audit quality, when and how they are applied, and why their requirements are relevant for the ACCA FAU exam and practical audit work.

ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand how audit regulation shapes the conduct of an external audit and the importance of following professional standards. Focus your revision on:

• The purpose and global role of International Standards on Auditing (ISAs)
• Areas covered by ISAs and their mandatory nature in statutory audits
• The fundamental structure and key components of an ISA
• Interaction between ISAs and local laws or regulations
• Application of ISAs in the audit of historical financial information
• How ISAs contribute to audit quality and user confidence

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the primary objective of International Standards on Auditing (ISAs)?
   1. To specify tax reporting procedures
   2. To harmonise auditing practices and improve audit quality
   3. To set out company law requirements
   4. To provide rules for preparing internal management accounts

2. True or False? Compliance with ISAs is optional if local legal requirements already exist for audits.

3. Briefly explain how ISAs achieve global consistency in audit procedures.

4. What are the key sections found within an ISA, and what is the function of the 'Requirements' section?

Introduction

Audit quality and comparability depend on clear, shared professional standards. International Standards on Auditing (ISAs) establish a universal benchmark for conducting and reporting external audits of historical financial information. Regardless of where an audit takes place, ISAs aim to ensure that users—whether shareholders, regulators, or lenders—can rely on the scope, methodology, and integrity of the audit process. For the ACCA FAU exam and your career, understanding the purpose and structure of ISAs is critical for sound knowledge of current audit practice.

Key Term: International Standards on Auditing (ISAs)
Authoritative pronouncements that set out basic principles and essential audit procedures, together with explanatory guidance, for conducting audits of historical financial statements worldwide.

THE PURPOSE OF ISAs

The main reasons for ISAs are twofold:

• They harmonise audit approaches so that audits, regardless of country, are broadly equivalent in quality and scope.
• They drive a focus on audit quality, responding to regulators' and users’ expectations for reliable, consistent audit evidence and reporting.

Without ISAs, audits might differ widely between countries, reducing the credibility and comparability of financial statements. ISAs are developed and maintained by the International Auditing and Assurance Standards Board (IAASB) and adopted or referenced by audit regulators worldwide.

Worked Example 1.1

A non-listed company in one country prepares its first financial statements after beginning international sales. Its external auditors are required by law to use ISAs. Why is this important for overseas creditors reviewing the accounts?

Answer:

• The use of ISAs assures overseas creditors that the company's auditor applied the same high standards as auditors in other jurisdictions.
• This increases confidence in the financial statements, as the audit was carried out following recognised procedures, helping creditors compare risks across companies in different countries.

SCOPE AND APPLICATION OF ISAs

ISAs apply to audits of historical financial information undertaken by independent auditors. Their principles guide every stage of an audit, from planning to reporting. While ISAs are not legally binding themselves, many countries require compliance through local regulation, and most professional auditors are required by their membership or licensing bodies to follow them.

Key Term: Historical financial information
Financial data relating to past periods, such as statements of financial position and comprehensive income, subject to external audit.

STRUCTURE OF AN ISA

Each ISA follows a consistent format, helping auditors and stakeholders quickly find and apply the needed requirements:

• Introduction: Explains purpose, scope, and context.
• Objective(s): States what the auditor must achieve in the audit area covered.
• Definitions: Clarifies any key audit terms used in the standard.
• Requirements: Lists the specific professional actions auditors must perform, using the phrase “the auditor shall...”.
• Application and Other Explanatory Material: Offers guidance on interpreting and applying the requirements, with examples and best practice scenarios.

Key Term: Requirements (in ISAs)
Provisions within an ISA using the phrase "the auditor shall," setting out actions professional auditors are obligated to carry out in all relevant audits.

Worked Example 1.2

ISA 500 requires auditors to obtain "sufficient appropriate audit evidence." Where in the ISA would you find examples of audit procedures to meet this need, and are these examples mandatory?

Answer:

• Illustrative procedures are found in the 'Application and Other Explanatory Material' section of ISA 500.
• These examples are not themselves mandatory; they provide guidance in applying the standard's requirements, which are always required.

ISAs VS LOCAL LEGISLATION

ISAs are designed for international use. If local laws or regulatory frameworks set higher or different requirements, the audit must comply with both ISAs and those local rules. If local regulations conflict with an ISA in a specific area, the auditor should not claim full compliance with ISAs unless all relevant standards are fulfilled.

Key Term: Harmonisation
The process of aligning auditing methods and standards internationally, so that audit outcomes are consistent and comparable across jurisdictions.

Key Term: Reasonable assurance
A high but not absolute level of confidence, obtained by the auditor through adequate evidence, that the financial statements are free from material misstatement.

HOW ISAs IMPROVE AUDIT QUALITY

ISAs provide a framework for:

• Consistent planning, performance, and review of audit work
• Documenting evidence and judgements to an internationally accepted level
• Uniform format and terminology of audit reports
• Identifying standard procedures for risk assessments, controls testing, substantive work, and communication with management

This reduces the risk of poor or incomplete audits and supports auditor independence and public trust.

Exam Warning

Students often incorrectly assume that ISAs guarantee all audits are identical or that compliance with ISAs alone is always enough for legal audit compliance. Always check for any stricter local legal or regulatory audit requirements.

Summary

ISAs are a set of international rules and guidelines for performing external audits of historical financial information. They aim to harmonise audit quality worldwide and ensure that users of audited accounts can rely on the supporting process and opinion. ISAs are structured for consistent use and are mandatory wherever required by law or professional bodies, but local regulations may impose additional requirements. Application of ISAs is central to ACCA FAU exam preparation and to audit work in practice.

Key Point Checklist

This article has covered the following key knowledge points:

• Purpose of ISAs: harmonisation of audit procedures and audit quality
• Scope: audits of historical financial information by independent auditors
• Structure: Introduction, Objective(s), Definitions, Requirements, and Application/Explanatory Material
• Meaning of the "Requirements" section in each ISA
• Interaction of ISAs with national law and regulation
• How ISAs improve audit consistency and user confidence

Key Terms and Concepts

• International Standards on Auditing (ISAs)
• Historical financial information
• Requirements (in ISAs)
• Harmonisation
• Reasonable assurance