Intent Declared Summary

A joint statement by the chairmen of Chinese Auditing Standards Board (CAuSB) and the International Auditing and Assurance Standards Board (IAASB) issued in December 2005 asserts that the main reason for drafting new auditing standards in China is to improve the Chinese auditing standards system and to accelerate its convergence with the IAASB's International Standards on Auditing (ISAs). A 2009 report by the World Bank assessing the Chinese accounting and auditing framework notes that China has made significant progress with respect to convergence and that the Chinese Standards on Auditing (CSAs) are “largely comparable” to ISAs issued by the IAASB. An October 2009 International Federation of Accountants update on ISA adoption, reiterates these findings and notes that the process of harmonization of auditing standards is at an advanced stage, with the final new set of Chinese standards (incorporating the clarified ISAs) likely to be approved by the Ministry of Finance (MoF) by the end of 2010. Overall, the World Bank recommends that application of CSAs should be limited to public interest entities that include listed companies, banks, insurance companies, investment funds, pension funds, and other large entities, including state-owned enterprises that meet certain size criteria. The World Bank also finds weaknesses in the auditing regime and points out that MoF-issued implementation guidance on CSAs seems inadequate in comparison to the guidance available on ISAs. Also, The assessment finds that auditors lack adequate expertise and the regulators face capacity-constraints with regards to ensuring compliance with applicable standards.

General Overview

As fallout to the 1997 Asian financial crisis, 12 modules were developed by the World Bank and International Monetary Fund in order to evaluate the strengths and weaknesses of a country’s financial architecture. The Report on the Observance of Standards and Codes Accounting and Auditing (ROSC A&A) is one of the 12 modules which assesses national accounting and auditing practices/standards against International Financial Reporting Standards (IFRSs) (formerly known as International Accounting Standards, or IASs) and International Standards on Auditing (ISAs). Under this module, an assessment of Chinese accounting and auditing practices was conducted by the World Bank in October 2009. In this report, the World Bank notes the Chinese Standards on Auditing (CSAs) are issued by the Ministry of Finance (MoF) which has thus far issued 48 auditing standards developed by the China Auditing Standards Board (CAUSB) (which is part of the Chinese Institute of Certified Public Accountants or CICPA). In line with international practice, the auditing standard-setting process, as detailed in the World Bank report, involves (1) developing a proposal for setting of a new standard; (2) drafting an exposure draft; (3) seeking public comments by publishing the ED and; (4) preparation of the final draft. The World Bank notes that the CSAs are “largely comparable” to ISAs issued by the International Auditing and Assurance Standards Board (IAASB). The MoF also issues implementation guidance on CSAs, however, the World Bank finds this inadequate in comparison to the guidance available on ISAs. The World Bank also recommends that Chinese authorities “require legal entity and/or consolidated financial statements to be audited only when there is a public interest for such an audit irrespective of entity’s legal form” (p, 23). As defined by the World Bank, public interest should include listed companies, banks, insurance companies, investment funds, pension funds, and other large entities, including state-owned enterprises that meet certain size criteria.

With regards to convergence, the World Bank points out that the process of harmonization of auditing standards started in 2005 with the signing of a memorandum of understanding between the CAUSB and the IAASB. In a joint statement issued in December 2005, the CAUSB chairman states that "the fundamental principle of drafting Chinese auditing standards is to improve the Chinese auditing standards system and to accelerate its convergence with the IAASB's International Standards on Auditing (ISAs)" (p. 1). The World Bank in its 2009 ROSC points out that China has already made significant progress with respect to convergence and the CICPA plans to update the CSAs so as to achieve full convergence by 2010. An October 2009 International Federation of Accountants (IFAC) update reiterates these findings and notes that the process of harmonization of auditing standards is at an advanced stage, with the final new set of Chinese standards (incorporating the clarified ISAs) likely to be approved by the MoF by the end of 2010.

Overall, the World Bank finds many weaknesses in the Chinese auditing regime. For instance, the report notes that “audit risk and audit materiality are not determined in accordance with the standard and not adequately considered when conducting the audit” (p. 21). Documentation practices and analytical procedures were also found to be insufficient. Further, auditors face numerous practical constraints in implementation of accounting standards due to lack of adequate expertise or industry specific knowledge. The World Bank adds that the quality of audits varies remarkably from large accounting companies, which have higher standards to medium and small companies that account for poor quality of audits.

With regards to listed entities, the Securities Law requires that companies prepare audited annual financial statements. The audit requirement is waived for interim financial statements except in the following cases: (1) “a company plans to distribute profit, capitalize, or make up loss from general reserves in the second half of the financial year; (2) a company plans to issue new shares or convertible bonds for refinancing in second half of the financial year and; (3) a company meets any other special requirement set by the CSRC [China Securities Regulatory Commission]” (p. 4). The audited financial statements of the listed companies, listed banks and other financial institutions are required to be published in an annual report, on the internet and approved newspapers by the respective regulators and non-compliance can result in sanctions. According to the 2009 ROSC, the Chinese MoF and the securities market regulator, the CSRC are responsible for registration and supervision of the accounting firms that are qualified to provide audit services to listed companies. Auditors and accounting firms must meet strict pre-conditions set by the MoF and CSRC in order to qualify as auditors of listed companies. Some of the conditions listed include “no penalty or violation record imposed during the last 3 years [on the auditor of listed company] (p. 6),” the World Bank notes. These pre-conditions have been established to improve the quality of audits, the report explains. However, the World Bank points out that there is a need to strengthen oversight of financial reporting and auditing of non-listed public interest entities. As explained in the report, “many of the non-listed entities in both financial and non-financial sectors in China, including state-owned enterprises and credit cooperatives, have significant public interest. However, their accounting and auditing activities are not subject to strong monitoring and enforcement, as in the case of listed companies” (p. 17).

Banks and financial institutions are regulated by the China Banking Regulatory Commission (CBRC) and a MoF/CSRC approved auditor must perform the audit of listed banks while non-listed bank audits can be performed by any statutory auditor. Banks are required to submit monthly, quarterly, and audited annual financial statements to the CBRC. The CBRC also conducts on-site and off-site supervision to ensure that reporting requirements are met. However, the World Bank finds weaknesses in the supervisory regime and points out that “the CBRC needs to have a mechanism to regularly review the general purpose financial statements of banks and other financial institutions to ensure compliance” (p. 17). The World Bank notes that auditors must make independent assessment of the internal control system and risk management of banks and also report any non compliance with required standards and regulations. With regards to supervision of insurance companies, the China Insurance Regulatory Commission (CIRC) ensures that that these entities submit audited financial statements along with additional reports as prescribed monthly, quarterly, and annually by the CIRC for prudential purposes. Similar to listed banks, listed insurance companies are required to be audited by MoF or CSRC approved auditors. Although the CIRC ensures that the financial statements of insurance companies are verified by external auditors specifically with respect to “reinsurance activities, capital provisioning, liquidity, commissions, revenues, costs, profits, and profits distribution” (p. 8), the World Bank expresses a need to strengthen mechanisms to ensure complete compliance with reporting requirements. Furthermore, the 2009 World Bank report notes that the “CBRC and CIRC should develop a core group, imparting them additional training to identify accounting and auditing infractions in the financial statements of banks and insurance companies” (p. 24).

As mentioned earlier, the MoF issues the auditing standards setter and also supervises the audit profession. According to the ROSC, the MoF is responsible for, “developing principles, issuing regulations, setting standards, ensuring compliance with financial reporting requirements, providing directions and setting requirements for the accounting and audit profession, and carrying out regular inspection and special investigations on the audit services provided by the statutory auditors” (p. 3). The Law of the PRC on Certified Public Accountants (CPA Law) regulates the audit profession in China and empowers the CICPA, the main professional body with oversight responsibility for accountants in China. The CICPA also ensures adherence to professional ethics and standards. As part of its overall strategy to improve the audit profession, Chinese authorities are working towards developing ten big accounting firms with the capability to provide a complete range of accounting and auditing related services. The CICPA performs auditor practice review and based on the results takes “punitive measures” against auditors for noncompliance. Furthermore, the World Bank notes that “in line with International Federation of Accountants (IFAC) requirements concerning conflict of interest, the auditors are not allowed to provide various non-audit services to the audit clients” (p. 7). With regard to the Code of Ethics, the 2008 (part III) CICPA self-assessment notes that in the first half of 2009, the new CICPA Code of Ethics, which was issued for public comments for the second time in September 2008, is expected to be approved by the MoF. The new code will bring the CICPA code in line with the IFAC Code of Ethics. The CICPA is listed as a member on the IFAC website.

The Principles

IIISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1101: Objective and General Principles Governing an Audit of Financial Statements is based on ISA 200 (effective December 15, 2004). However, ISA 200 was subsequently revised there is no information publicly available as to whether these amendments have been incorporated into the Chinese standard.

IIISA 210 Agreeing the Terms of Audit Engagements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1111 Audit engagement letters is based on ISA 210 (effective December 15, 2004). However, ISA 210 was subsequently revised and there is no information publicly available as to whether these amendments have been incorporated into the Chinese standard.

IIISA 220 Quality Control for an Audit of Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1121 Quality control for audits of historical financial information is based on ISA 220R (effective June 15, 2005). However, there is insufficient publicly available information as to the extent of compliance of Chinese requirements with ISA 220R.

IIISA 230 Audit Documentation (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1311 - Audit working papers is based on ISA 230R (effective June 15, 2006). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 230R.

IIISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1141 - Consideration of fraud in an audit of financial statements is based on ISA 240 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 240.

IIISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1142 - Consideration of laws and regulations in an audit of financial statements is based on ISA 250 (effective as of December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 250.

IIISA 260 Communications of Audit Matters with Those Charged With Governance (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1151 - Communications with those charged with governance is based on ISA 260 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 260.

IIISA 300 Planning an Audit of Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1201 - Planning an audit is based on ISA 300 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 300.

IIISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1211 - Understanding the entity and its environment and assessing the risks of material misstatement is based on ISA 315 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 315.

IIISA 320 Materiality in Planning and Performing an Audit (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1221 - Materiality is based on ISA 320 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 320.

IIISA 330 The Auditor’s Procedures in Response to Assessed Risks (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1231 - Procedures in response to assessed risks of material misstatement is based on ISA 330 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 330.

IIISA 402 Audit Considerations Relating to an Entity Using a Service Organization (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1212 - Consideration relating to entities using service organizations is based on ISA 402 (effective as of December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 402.

IIISA 500 Audit Evidence (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1301 - Audit evidence is based on ISA 500 (effective as of December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 500.

IIISA 501 Audit Evidence—Specific Considerations for Selected Items (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1311-Supervision of physical inventory count is based on ISA 501Part A (effective as of December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 501.

IIISA 505 External Confirmations (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1312 - Confirmations is based on ISA 505 (effective as of December 15, 2004). However, there is no information publicly available as to the extent of compliance of Chinese requirements with ISA 505.

IIISA 510 Initial Audit Engagements—Opening Balances (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1331 - Audit of opening balances on initial engagements is based on ISA 510 Initial Engagements - Opening Balances effective as of December 15, 2004. However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 510.

IIISA 520 Analytical Procedures (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1313 - Analytical procedures is based on ISA 520 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 520.

IIISA 530 Audit Sampling (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1314 - Audit sampling and other means of testing is based on ISA 530 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 530.

IIISA 540 Audit of Accounting Estimates (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1321 - Audit of accounting estimates is based on ISA 540 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 540.

IIISA 545 Auditing Fair Value Measurements and Disclosures (effective 2004, superseded by ISA 540 in December 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1322 Auditing fair values measurements and disclosures is based on ISA 545 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 545.

IIISA 550 Related Parties (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1323 - Related parties is based on ISA 550 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 550.

IIISA 560 Subsequent Events (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1332 - Subsequent events is based on ISA 560 (effective December 15, 2004). However, ISA 560 was subsequently revised and there is no information publicly available as to whether these amendments have been incorporated into the Chinese standard.

IIISA 570 Going Concern (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1324 - Going concern is based on ISA 570 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 570.

IIISA 580 Written Representations (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1341 - Management representations is based on ISA 580 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 580.

IIISA 600 Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1401 – Using the work of other CPAs is based on ISA 600. However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 600.

IIISA 610 Using the Work of Internal Auditors (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1411 - Considering the work of internal auditing is based on ISA 610 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 610.

IIISA 620 Using the Work of an Auditor’s Expert (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1421 - Using the work of an expert is based on ISA 620 (effective as of December 15, 2004). However, ISA 620 was subsequently revised and there is insufficient information publicly available as to whether these amendments have been incorporated into the Chinese standard.

IIISA 700 Forming an Opinion and Reporting on Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1501 - Auditors' report is based on ISA 700 (effective as of December 31, 2006). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 700.

IIISA 705 Modifications to the Opinion in the Independent Auditor’s Report (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1502 - Modified auditors' report is based on ISA 701 (effective as of December 31, 2006). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 701.

IIISA 710 Comparative Information—Corresponding Figures and Comparative Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1511 - Comparatives is based on ISA 710 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 710.

IIISA 720 The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1521 - Other information in documents containing audited financial statements is based on ISA 720 (effective December 15, 2004). However, there is insufficient information publicly available as to the extent of compliance of Chinese requirements with ISA 720.

IIISA 800 Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (effective 2009)

According to an April 2006 Deloitte report, Chinese Auditing Standard No. 1601 - Auditors' report on special purpose audit engagements is based on ISA 800 (effective December 15, 2004). However, ISA 800 was subsequently revised and there is no information publicly available as to whether these amendments have been incorporated into the Chinese standard.