The international standard of financial reporting and the risk of non-detection of the first part of the audit

The international standard of financial reporting and the risk of non-detection of audit part one:

The risk of not being discovered in the first part of the audit, we want to discuss in several parts

In 2006, the Society of Chartered Accountants of New Zealand, like other countries (UK and Australia), has published guidance on the audit results of the adoption of International Financial Reporting Standards.

This guideline predicts that the transition to the mentioned standards will lead to a significant increase in audit risk.

In other words, the problems related to the transition to this issue and the lack of sufficient knowledge of the employer and the auditor regarding these standards can lead to an increase in audit risk during the transition (Redmayne and Lasud, 2013).

In a research, Marden and Berkeny (2009) believe that the increase in audit risk after the adoption of international financial reporting standards is due to the high flexibility of these standards (increasing the possibility of judgment by the company’s management and measurement requirements based on fair values).

Based on the existing theoretical texts and empirical evidence related to the effects of international financial reporting standards on audit risk and in order to fully and simply explain these effects, the present research has designed a theoretical framework.
The aforementioned theoretical framework (figure no 1) shows that international financial reporting standards due to the nature of these standards that: 1) are based on principles, 2) the basis of their measurement and valuation is based on fair values and 3) they are very complex.

They lead to increased discretion by the employer’s management. Increasing the discretion of the management of the employer can increase the risk of material misstatement of the financial statements by the employer.

Finally, the increase in the risk of distortion with the importance of financial statements by the employer in the absence of double audit efforts can lead to an increase in the risk of non-discovery of the audit.

But another thing that can simultaneously lead to an increase in the risk of distortion with the importance of financial statements by the employer and an increase in this issue of audit.

Lack of necessary knowledge and awareness of accountants and auditors about these standards.

This problem is not caused by the nature of international financial reporting standards.

And it can be solved by training and over time by increasing the knowledge and experience of accountants and auditors.

1- Principles-based accounting standards

Schiffer (2003) believes that the rules in the generally accepted accounting principles of the United States are derived from the principles.

Therefore, the difference between international financial reporting standards and generally accepted accounting principles is not in the accepted principles.

Rather, it is in rules with guidelines that do not exist in international financial reporting standards.

In this regard, many researchers, such as Chand and Patel (2008) and Hill et al. (2010), have criticized international financial reporting standards, in such a way that principles-based standards with general guidelines have resulted in a high degree of judgment.

This can increase the possibility of manipulation of figures and financial information by the management.

In other words, the main concern about international financial reporting standards is this.

that principles-based standards allow more judgment to management.

to decide how to conform to said standards.

For example, in rule-based standards, if the investing company owns more than 50% of the shares of the subsidiary.

It must prepare consolidated financial statements. However, in principles-based standards, if the investing company has not acquired ownership of more than half of the voting shares of another entity.

If there is one of the conditions listed in the standard (such as the ability to manage the financial and operational policies of another unit through law or agreement), it is considered as a learning unit.

and must prepare consolidated financial statements. This shows that in the principles-based standards, the space for the judgment of the employer’s management is very open.

The widespread use of international financial reporting standards may cause disagreements between auditors and business managers about this issue.

Whether the unit under review has used correct judgments or not.

And this problem is caused by the view that international financial reporting standards have more flexibility and lead to more judgments in decision making by managers.

Although compliance with international financial reporting standards is simple and convenient for managers due to the high flexibility of these standards.

We will probably make the audit process more complicated.

As a result, compared to assessing compliance with the rules established by generally accepted accounting principles, auditors have a difficult task to assess managers’ judgment in compliance with international financial reporting standards and the “spirit of the law”.

Allowing such flexibility may lead to “my judgment versus your judgment” between managers and auditors.

If the auditors unknowingly fail to adjust their opinion regarding the financial statements with major distortions, this issue can increase the audit risk.

The increase in audit risk is due to the fact that auditors are involved in accepting a more flexible and seemingly unfamiliar set of standards (Marden and Breckney, 2009).