The Ministry of Finance officially issued 48 CPA practice standards on February 15, 16, and the new standards have many changes compared with the old independent auditing standards in the past. This paper analyzes the content, reasons and significance of the changes starting from the system of the standards, governance and management, audit specific objectives and management's identification, aiming to further implement the new standards.
Keywords: CPA Practice Standards; Independent Auditing Standards; Management; Governance; Audit Objectives
The Ministry of Finance formally issued 48 CPA Practice Standards (the new standards) on February 15, 26, marking the formation of a system of auditing practice standards in China that meets the needs of the reality and is also in line with international convergence. The new auditing standards have improved the audit risk model. The new auditing standards improve the audit risk model, emphasize the assessment and response to the risk of material misstatement of the enterprise; improve the auditing standards system, meet the needs of the practice of certified public accountants in the new situation, highlight the protection of the public interest of the profession, and have a great impact on the prevention of audit risk and audit failure.
The new standards and the old standards compared in many of the provisions and expression of the content of the more convergence of internationalization, there have been major changes.
I. Framework System of Auditing Standards
(I) Reconstruction of the Framework
The current standards include three major parts: standards for assurance engagements, standards for related services and quality control standards. Included in the assurance practice standards are auditing standards, review standards and other assurance practice standards.
In the new standards, the system of practice standards consists of three parts: standards on assurance engagements, standards on related services and standards on quality control. In the past, they were collectively referred to as independent auditing standards. Why is the system of standards improved? The reason for the improvement is because the former system of auditing standards included some non-auditing practice standards, such as Independent Auditing Practice Bulletin No. 9 - Performing Agreed-Upon Procedures on Financial Information, Independent Auditing Practice Bulletin No. 5 - Review of Profit Forecasts, Independent Auditing Practice Bulletin No. 1 - Review of Accounting Statements, etc., which resulted in regulating other types of engagements in the name of auditing standards. Therefore, in the new system of standards for the practice of certified public accountants (CPAs), the non-auditing standards are separated from the system of independent auditing standards, and are given appropriate names according to the nature of their business, borrowing from the common international practice. For example, China CPA Review Standard No. 211 - Review of Financial Statements, China CPA Other Assurance Engagements Standard No. 3111 - Review of Predictive Financial Information, and so on.
(II) Classification of Assurance Engagements into Engagements Based on the Determination of the Responsible Party and Direct Reporting Engagements
In the new standard system, assurance engagements are classified into two categories: engagements based on the determination of the responsible party and direct reporting engagements.
In an engagement based on the identification of the responsible party, the responsible party evaluates or measures the subject matter of the engagement, and the information about the subject matter of the engagement is available to the intended users in the form identified by the responsible party. In a direct report engagement, the CPA evaluates or measures the subject matter of the engagement directly, or obtains a determination of the evaluation or measurement of the subject matter of the engagement from the responsible party, which is not available to the intended users, who can only obtain information about the subject matter of the engagement by reading the engagement report.
In the business based on the responsible party's determination, first, the responsible party evaluates and measures the subject matter of the assurance in accordance with the criteria, forming the responsible party's determination, and the CPA obtains the determination; second, the CPA evaluates and measures the subject matter of the assurance again in accordance with the appropriate criteria and compares the results with the responsible party's determination; and lastly, the CPA proposes a conclusion on the assurance with respect to the responsible party's determination, or directly to the subject of the assurance. In the direct report business, regardless of whether the responsible party determination exists, whether the CPA can obtain the determination, the CPA in the assurance report will be directly to the subject of the conclusion.
Why the assurance business is divided into these two categories, this is to guide the CPA in the implementation of the specific business of the two business focus is different. An example is shown in Table 1.
The assurance business is divided into these two types, the CPA in the implementation of specific assurance business, first analyze the business belongs to, and then for the characteristics of the business to implement specific procedures.
Second, the new standard puts forward the governance and management
In the original independent auditing standards for the audited unit are called audited unit management, the original independent auditing standards No. 24 on the CPA and audited unit management communication issues. Independent Auditing Standard No. 24, "Communication with Management," stipulated the matters to be communicated with the management of the audited entity before accepting an engagement and after accepting an engagement when signing a contract, formulating a plan, performing audit procedures, and issuing an audit report.
Since there are different levels of management in the audited organization, and there are management departments that make decisions on important matters and departments that implement the decisions, the communication with the management as stipulated in the old standard does not indicate the difference in the communication matters with the management that implements the decisions and the departments that make the decisions. Obviously, the CPA can only communicate with the department that implements the specific decisions if he/she has to deal with the details of the economic operations during the audit process. Therefore, in the new standard introduced the terms governance and management.
There are two standards that deal with these two terms in the new standard, which are CICA Auditing Standard No. 1341 - Management's Statement and CICA Auditing Standard No. 1151 - Communication with Governance. Communication. So what exactly is the difference between governance and management in the new standards?
Governance is the person or organization that has oversight responsibility for the strategic direction of the audited entity and for management's performance of its business management responsibilities, and governance's responsibilities include oversight of the financial reporting process. Management is the person or organization that has managerial responsibility for the execution of the audited entity's operations, and management is responsible for the preparation of the financial statements and is subject to the oversight of governance.
(I) Overview of Governance Structures
Agency problems arising from the separation of ownership and control are common in modern enterprises, and in some companies there may also be an agency problem between the majority shareholder in a controlling position and the small and medium-sized shareholders; therefore, in order to reasonably ensure that the realization of the enterprise's (company's) objectives, the maximization of the value of the owners, including small and medium-sized shareholders, (the shareholders), is achieved, it is necessary to introduce a series of structures and mechanisms, i.e. corporate governance. It is generally recognized that corporate governance primarily addresses the relationship between shareholders, the board of directors and managers (and sometimes between controlling shareholders and small and medium-sized shareholders). Corporate governance consists of two main aspects, namely, governance structure and governance mechanism.
Simply put, governance structure mainly refers to a series of institutions formed within the legal boundaries of the enterprise in order to realize the governance objectives and the interrelationship between these institutions. In fact, it contains two meanings: first, the governance structure is specifically embodied in the design and operation of corporate governance institutions, such as the shareholders' meeting, the board of directors, the supervisory board, the manager of the setup, and the interrelationship between them; second, the governance structure of the enterprise is within the legal boundaries of the enterprise, and the external regulatory bodies of the enterprise do not belong to the scope of the corporate governance layer. Between different countries and regions, due to differences in legal structure, economic system, social culture and other aspects, their corporate governance structure also presents different patterns and characteristics. Even within the same country and region, due to the different forms of business organization, size and even economic composition, its governance structure is not the same.
Among the institutions involved in corporate governance, the manager's main duty is to operate and manage, and thus belongs to the management level rather than the governance level. The main responsibility of the board of directors is to formulate strategies, make major decisions, appoint managers and supervise business management activities; the main responsibility of the supervisory board is to supervise the company's finances as well as the behavior of the company's directors and managers. Therefore, it is generally recognized that the board of directors and the supervisory board belong to the governance layer. However, in the board of directors, there are often varying degrees of directors also serve as senior management, that is, the guidelines referred to as "governance involved in the management" of the situation.
The general meeting of shareholders (shareholders' meeting), which generally has the statutory duties of electing directors and supervisors, making major decisions, and deliberating and approving the company's financial budget, final accounts program and profit distribution (loss recovery) program, is clearly an important governance body. However, since it is a corporate authority that exists in the form of a meeting and is not a permanent organization, it is generally not listed as a governance layer that CPAs should communicate with. However, in the case where Article 11 of the Guidelines on Communication with the Governance Level stipulates that it is necessary to communicate with the governance level as a whole, especially when the articles of incorporation stipulate that the appointment and dismissal of the CPA is to be decided by the general meeting of shareholders (the shareholders' meeting), the CPA needs to communicate with the general meeting of shareholders (the shareholders' meeting).
(ii) Governance oversight of the financial reporting process, responsibilities
In the audited entity's business, the preparation of financial reports is generally the responsibility of management, and its specific work is undertaken by the financial accounting department under the leadership of management. However, governance has oversight responsibility for the process of preparing and disclosing financial reports.
Governance oversight responsibilities for the financial reporting process include: reviewing or overseeing the enterprise's significant accounting policies, reviewing or overseeing the enterprise's financial reporting and disclosure procedures, reviewing or overseeing the enterprise's internal controls related to financial reporting, organizing and leading the enterprise's internal audit, reviewing and approving the enterprise's financial reports and related disclosures, hiring and terminating the certified public accountant in charge of the enterprise's external audit, and communicating with him/her. communicate with them, etc.
Therefore, in auditing standards, the term "financial statements prepared by management under the supervision of governance" is generally used to emphasize management's responsibility for the financial statements and governance's responsibility for overseeing the financial reporting process.
Three, management's determination and specific audit objectives
In the old auditing standards management's determination of the unified provisions of: existence and occurrence, completeness, powers and obligations, valuation and apportionment, expression and disclosure. The corresponding objectives were: overall reasonableness, truthfulness, completeness, ownership, valuation, cut-off, mechanical accuracy, classification, and disclosure. Such determinations and objectives are too general, making CPAs discern the scope of application on their own when performing their engagements, e.g., ownership is not addressed when reviewing transactions and events, and when reviewing statements, in addition to examining the data, they should also focus on checking the textual descriptions in the notes to the statements, which were not clearly given guidance in the past independent auditing standards. In the new system of standards, the determinations and specific audit objectives of the management of the audited entity are defined in detail. Management's determinations are categorized into three major groups, namely, determinations related to various types of transactions and events, determinations related to closing account balances, and determinations related to presentation. The corresponding specific audit objectives are also divided into three categories. The details are shown in Table 2.
In the current standards, for the determination and objectives for a detailed description, for the CPA in the audit process in different parts of the work of different definitions, play a good role in guiding. For example, at the stage of transactions and events, the focus is on the truth, accuracy and correctness of the entries and the appropriateness of the period of recording for each transaction reviewed. The test of account balances also emphasizes whether the recorded transactions belong to the enterprise and the accuracy of the related valuation and apportionment. To the final level of presentation not only emphasizes the content of the monetary measurements shown true, complete and accurate, but also emphasizes the transition from the books of account to the statement in the classification of the correctness of such as the statement of the amount of accounts receivable = accounts receivable ledger debit balance + accounts receivable ledger debit balance - bad debt provision credit balance, and should not be from the direct transition from the accounts receivable general ledger in the books of account. Attention to the truth, completeness and accuracy of the disclosures in the notes is also emphasized at the presentation level.
Certified public accountants practice standards system compared to the independent auditing standards, from all aspects closer to the international auditing standards. This paper analyzes the differences between the old and new standards from the above three aspects, which can reflect the new standards in the guidance of the CPA in the specific implementation of the business is more detailed and specific, more in line with the reality, to improve the quality of financial information, reduce the investor's decision-making risk and other aspects play an important role.