Strengthening

Public Confidence

in the Global

Auditing Profession

International Federation of Accountants

International

Auditing and

Assurance

Standards

Board

2002 Annual

Report

The International Federation ofAccountants (IFAC) is theworldwide organization of theaccountancy profession. Itsmission is the worldwidedevelopment and enhancement ofthe profession with harmonizedstandards able to provide servicesof consistently high quality in thepublic interest.

IFAC comprises 155 memberorganizations from every part ofthe globe, representing more than2.5 million accountants in publicpractice, education, governmentservice, industry and commerce.No other accountancy body inthe world, and few otherprofessional organizations, hasthe broad-based internationalsupport that characterizes IFAC.Membership in IFAC is open toaccountancy organizationsrecognized by law or generalconsensus within their countriesas substantial nationalorganizations in good standing.

For more information, visitIFAC’s web site at www.ifac.org.

The International Federation of Accountants

Ihe “worldwide” and “public interest” aspects of IFAC’s mission serve as

guiding principles for the organization.IFAC recognizes that a fundamental wayto protect the public interest is to require

the application of a core set of internationallyrecognized standards as a means of ensuringthe credibility of the information upon whichinvestors and other stakeholders depend. Inrecent years, IFAC has launched a major driveto promote sound global financial reportingpractices and to create a framework for auditingand assurance services to provide users of thoseservices with enhanced information and therebyfacilitate capital flows and, ultimately, enablesocial stability and economic well-being. TheInternational Auditing and Assurance StandardsBoard (IAASB) plays a key role in achievingthis objective.

This report outlines IAASB’s activities over thepast year, highlighting, in particular, the waysin which it serves both the worldwideaccountancy profession and the public interest.

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IFAC, IAASB and the Public Interest

T

4

The International Auditing and Assurance

Standards Board 5

Chair’s Report 7

Structure of the IAASB 8

Focus of the IAASB 9

Development of Standards 9

Global Acceptance 10

Partnerships Toward

International Convergence 11

Communications 13

Technical Director’s Report 14

Achievements 14

Exhibit 1: IAASB Members, Technical Advisors

and Technical Staff 18

Exhibit 2: Consultative Advisory Group

Members 19

Exhibit 3: IAASB Standards and Guidance:

2002 Achievements, Projects in

Progress and 2003 Projects 20

Table of Contents

Ihe International Auditing and Assurance Standards Board (IAASB),

formerly the International AuditingPractices Committee (IAPC), functions asan independent standard setting body

under the auspices of IFAC. The IAASBdevelops standards and guidance for financialstatement audits and other assurance or relatedservices pertaining to both financial andnonfinancial information, and establishesquality control standards covering the conductand performance of such services. The IAASBissues International Standards on Auditing(ISAs) and International Auditing PracticeStatements (IAPSs), which serve as theworldwide benchmark for high quality auditingstandards and related guidance. They establishbasic responsibilities for auditors, help themcope with increased and changing demands forcredible financial information and provideguidance in specialized areas.

IAASB ProcessesThe IAASB works closely with major nationalstandard setters to develop high qualitystandards and guidance and to promoteinternational convergence of standards. Indeveloping these standards, the IAASB seeksout the views of its stakeholders, prioritizes theissues identified and develops standards andguidance in the best interest of the public andthe profession. It also promotes debate withusers, regulators and practitioners to identifyneeds for new standards and guidance.

The IAASB follows a rigorous due process toensure that it takes into account the views ofthose affected by its standards and guidance

The International Auditing and Assurance

Standards Boards

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5

IAASB members: (back row, left to right) Gérard Trémolière, Suresh Kana, Denis Desautels, John Archambault, Roger Simnett, Ian Plaistowe, Edmund R. Noonan, John Kellas; (front row, left to right)Roberto Tizzano, Gen Ikegami, Philip Ashton, Denise Esdon, Dietz Mertin (Chair), Roger Dassen, Jan Bo Hansen, Ana Maria Elorrieta, Ian McPhee, Yang Zhiguo

6

before pronouncements are issued. Draftpronouncements are exposed for public reviewand comment and all comments received areposted on the IAASB’s web site. The dueprocess is transparent – IAASB meetings areopen to the public and related agenda materialsare available on the IAASB’s web site prior toeach meeting.

The IAASB holds four full Board meetingsannually. The IAASB ordinarily appoints taskforces to assist it in the development ofguidance on specific subject matters. These taskforces may include individuals who are notmembers of the IAASB, and information maybe sought from other organizations so as toobtain a broad spectrum of views. Task forcemeetings ordinarily are scheduled between fullBoard meetings.

IAASB CompositionThe IAASB consists of members from aroundthe world with significant experience in thefield of auditing and assurance services,comprising practitioners in public practice aswell as public members. IAASB members areappointed by the IFAC Board based onrecommendations from the IFAC Nominating

Committee. All IAASB members contributetheir time and expertise on a volunteer basis,without remuneration from IFAC. Exhibit 1contains a list of current IAASB members, theirtechnical advisors and the IAASB technicalstaff.

IAASB OperationsThe IAASB is supported financially throughthe IFAC membership dues assessed to itsmember bodies and by direct funding receivedfrom the Forum of Firms. The Forum of Firmsis a collaboration of public accounting firmsthat share the common objective to promoteconsistently high standards of financialreporting and auditing worldwide in theinterest of users of the profession’s services andthe general public. With the exception ofcertain costs of the public members of theIAASB that are funded by IFAC, some memberbodies and the Forum of Firms provide furtherfinancial support for the costs of travel,accommodations and ancillary expenses for thevolunteer IAASB members and their technicaladvisors.

IAASB Mission

The mission of the IAASB is to establish highquality auditing, assurance, quality control andrelated services standards and to improve theuniformity of practice by professionalaccountants throughout the world, therebystrengthening public confidence in the globalauditing profession and serving the publicinterest. In promulgating standards andguidance that are acceptable to a broadconstituency of international stakeholders, theIAASB works toward the continuingconvergence of national and internationalstandards and it encourages participation injoint projects with experienced standard settersfrom around the world.

To date, more than 70 countries haveindicated that they either have adoptedISAs or noted that there are no significantdifferences between their national standardsand ISAs. ISAs have been translated bymember bodies into more than 20languages, including French, German,Russian and Spanish. Moreover, theFinancial Stability Forum, a consortium ofnational authorities responsible forfinancial stability in significantinternational financial centers that seeks toimprove the functioning of markets,recently recognized ISAs as one of a set of12 core standards that must beimplemented as part of the revamping ofthe global financial architecture.

It is with great pleasure that I present theIAASB’s first annual report.Events over the last two years have seentremendous change in the marketplace –intensified regulatory and stakeholder scrutiny,

shaken investor confidence in governance andoversight practices – and presented a clearer view ofthe challenges our profession will be facing in thefuture. Global stock markets also have been severelyhit by a series of corporate scandals that havebrought into question the quality of accounting andauditing standards and the performance,independence and objectivity of those applyingthem.

Despite these tumultuous events, criticism wasgenerally not directed at auditing and assurancestandards per se, but rather at the performance ofauditors and other market participants. Regulatorsin many countries are introducing processes aimedat setting more rigorous standards for executives,audit committees and analysts. The methods ofassessing auditor performance are being consideredthroughout the world. Global convergence ofstandards for accounting and auditing, as well asenhanced quality control considerations, have risento the forefront of stakeholders’ interests.Improvement in corporate governance is beingviewed as a critical, if not fundamental, componentof necessary change.

This report highlights some of the IAASB’sachievements in global convergence of standardsand some of the fundamental changes taking placewithin the IAASB. With the formation of the new IAASB in April 2002, we have gained a clearervision of the goals that need to be achieved and “new thinking” on how they should be accomplished.

Chair’s Report

7

Dietz MertinChair

I

STRUCTURE OF THE IAASBRecognizing the need for strengthenedprocesses and broader membership of the IAPC(now the IAASB) to facilitate development ofhigh quality international standards, the IFACBoard commissioned in 2001 a Review TaskForce to undertake a comprehensive review ofthe IAPC’s membership, organization andprocesses. The final report was presented to theIFAC Board and Council at the end of 2001.The report called for wide-ranging changes to

the IAPC’s structure and processes tosignificantly upgrade and accelerate itsstandard-setting activities and to improve itstransparency.

The Task Force review was viewed as anecessary and valuable exercise. In 2002, theIFAC Board and the IAASB took the followingactions that, in combination, improve both itstransparency and effectiveness:

• Effective April 1, 2002, the IAPC’s namewas changed to the IAASB to better reflectits role, mandate and structure, and the newIAASB was created. The new IAASB is justthat – a “new” Board. The IAASB compriseseighteen members, ten of whom are putforward by member bodies of IFAC, and forthe first time, five of whom are put forwardby the Forum of Firms, and three public

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members who may be members of IFACmember bodies but may not be members inpublic practice. Ten of the 18 members arenew. The new Board continues to havebroad geographic representation – Europe,the Americas, Asia Pacific and Africa.

• Ms. Denise Esdon was appointed theIAASB’s Vice-Chair and Mr. James Sylph asits full-time Technical Director. Theseappointments were coupled with an increasein the complement of professional staffsupporting the IAASB – important steps inaccelerating the IAASB’s activities.

• A fourth full Board meeting of the IAASBhas been added to its annual agenda. Toprovide for more full Board meeting time ateach of the four annual meetings, task forcemeetings addressing individual projects nowordinarily occur between full Boardmeetings.

• The IAASB strategy and medium-termagenda were extensively updated andstreamlined, with specific focus on theglobal acceptance of ISAs.

• An ambitious agenda to develop its ownprocesses and to set and implement itsaction plan is being set. Recent IAASBdiscussions included such matters asstructure of the IFAC IAASB Handbook(including the clear separation of ISAs andstandards for other assurance engagements),the types of documents that IAASB shouldissue and the differing rules that might beassociated with their drafting, approval andpublication.

• Amendments to the Preface of the IFACIAASB Handbook, redefinition andconfirmation of the bold/gray lettering as aconvention to be used in ISAs, and theIAASB Terms of Reference on how it will bestructured and operate have recently beenexposed for public comment.

• IAASB’s meetings to discuss thedevelopment of standards and guidance weremade accessible to the public, as were theagenda material, minutes and other relevantdocuments. In addition, all final IAASB

pronouncements will now be available freeof charge in electronic form through theIFAC web site effective January 1, 2003.

FOCUS OF THE IAASB

As Chair of the IAASB, I have overseen anumber of important developments andinitiatives that have shaped the activities andfuture plans of the IAASB. To achieve itsmission, the IAASB focuses on the followingstrategic objectives:

• Development of standards – Establishinghigh quality auditing, assurance, qualitycontrol and related services standards.

• Global acceptance – Promoting theadoption and acceptance of IAASBpronouncements.

• Convergence and partnership –Supporting a strong and cohesiveinternational auditing profession bycoordinating with our Consultative AdvisoryGroup, regional organizations, memberbodies, and national standard setters.

• Communications – Improving the qualityand uniformity of auditing and assurancepractices and related services throughout theworld by encouraging debate, presentingpapers and issuing pronouncements on avariety of audit and assurance topics.

In 2003, we will be publishing an IAASBAction Plan covering the years 2003-2004during which we will focus on these and otherobjectives. We welcome public input to ouraction plan which I expect will be updated laterin 2003.

Development of StandardsThe IAASB supports changes in auditingstandards that provide shareholders and thegeneral public with greater confidence in thefinancial information circulating in the capitalmarkets. In this regard, the IAASB hasundertaken a number of fundamental steps to

complete and update its auditing and assurancestandards as well as enhance the processesunderlying their development. The IAASB’srecently issued proposed standards on assessingand responding to audit risk, for example, havebeen a significant project designed to enhancethe auditor’s implementation of the audit riskmodel and, ultimately, improve auditorperformance. On an international level, theproposed standards represent significantchanges to the body of auditing standardsgoverning audits of financial statements.

Corporate failures over the recent past havealso raised questions about other areas ofcorporate financial responsibility requiringauditor attention. Accordingly, the IAASB alsohas begun a series of individual but interrelatedprojects aimed at addressing these issues. Theseprojects include a revision to standards dealingwith the auditor’s responsibility to considerfraud and error in the audit of financialstatements, examination of current guidance onaudit materiality, accounting estimates, reviewof interim financial information, and a reviewof the wording of the auditor’s report. Theseand other priority projects are further discussedin the “Technical Director’s Report” section ofthis publication.

Any new standards or changes to currentstandards will be evolutionary and based onwide consultations that support the belief thatsuch standards will produce long-term gains.The IAASB continues to believe that highquality standards based on basic principles andessential procedures will best serve the publicinterest by eliciting thoughtful auditorassessment of the particular circumstances of

The IAASB continues to believe that highquality standards based on basic principles andessential procedures will best serve the publicinterest by eliciting thoughtful auditorassessment of the particular circumstances ofeach engagement.

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each engagement. It is recognized that relatedguidance and explanatory material needs to besufficiently comprehensive and complete todrive auditor behavior and eliminate differencesin practice. This approach to standards alsoassists with convergence of standards on aworldwide level.

Global AcceptanceOne of the IAASB’s main challenges is toconsolidate and complete the global acceptanceof its standards – a goal toward which, I ampleased to announce, significant progress hasbeen made. Endorsement and adoption of ISAsby the European Commission (EC), theInternational Organization of SecuritiesCommissions (IOSCO) and other stakeholdersare key components of this major strategicobjective and, ultimately, an important steptoward international convergence of standards.

Endorsement of ISAs by the EuropeanCommission

Ongoing communication with the EC hasbeen, and remains, intense and very positive.The EC is currently proposing that by 2005national auditing standards in the EuropeanUnion should require auditors of financialstatements to comply with ISAs in theperformance of their audits. This proposal hasbeen well received by most Member States and

bodes well for the adoption of ISAs. Althoughspecific changes to existing ISAs are notprerequisite to this adoption, it nevertheless isessential that we utilize our ConsultativeAdvisory Group to allow early and effective ECinput into the agenda and project work plan ofthe IAASB.

The IAASB updates the EC’s Committee onAuditing on the latest developments ininternational standard setting, and considersviews expressed by the EC regarding theIAASB’s agenda and exposure drafts verycarefully. We will consider and implement,whenever appropriate, the EC’srecommendations from a worldwide standpointas the IAASB develops and updates its ISAs.

The Fédération des Experts ComptablesEuropéens (FEE) and other stakeholders havebeen very active during these discussions and Iam grateful for their support andencouragement.

The IAASB will continue to work closely withthe EC and others to ensure a smooth adoptionof ISAs in Europe.

Endorsement of ISAs by the InternationalOrganization of Securities Commissions

Over the last year, much progress has beenmade through open and thoughtful discussionwith IOSCO. IOSCO has begun a phasedprogram of reviewing existing ISAs as well ascommenting on exposure drafts of newstandards. Commentary on five ISAs has beenreceived to date. The IAASB is consideringthese comments and will assess whether thesestandards should be modified. To support thisprocess, the IAASB has offered coordinationbetween itself and IOSCO to avoid anyunnecessary review of, and comment on,current standards.

By opening and maintaining activecommunication channels, the IAASB andIOSCO have established an effective workingrelationship. The IAASB intends to build upon

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this relationship with a view toward ensuringthat, on completion of IOSCO’s review andevaluation by the Board of any resultingcomments, both the IAASB and IOSCO will besatisfied that ISAs represent a high quality setof standards that can be endorsed.

Related to this process is the work of theIAASB Revisions Committee, a standingcommittee established by the IAASB to reviewall of its pronouncements periodically and toconsider whether individual ISAs need to berevised to address current thinking andexperience. The objective of the IAASBRevisions Committee is to ensure IAASBpronouncements continue to provide, in thepublic interest, a single set of high qualityglobal standards. Comments offered by IOSCOprovide useful input to the work of the IAASBRevisions Committee as it considers the needto revise individual ISAs.

Cooperation with Others — Continuing Dialogue

Our relationship with the Basel Committee onBanking Supervision continues to be close andconstructive. We continue to update the BaselCommittee through our Consultative AdvisoryGroup about current developments and ourwork program.

Exploratory meetings were recently heldbetween representatives from the IAASB andthe International Organization of SupremeAudit Institutions’ (INTOSAI) AuditingStandards Committee at a meeting initiated bythe World Bank. Following these meetings,INTOSAI, through its Auditing StandardsCommittee, has expressed an interest incontributing to the work of the IAASB in theirwork to review and develop ISAs. The goal ofINTOSAI is to develop Audit Guidelines forINTOSAI members based on ISAs. Theseguidelines would consist of certain ISAs asendorsed in their current form by INTOSAI,other ISAs supplemented by practice notesindicating how and whether they can be applied

in a public sector context, and additionalguidelines written by INTOSAI specific forpublic sector audits. While clearly an importantstep towards the globalization of auditingstandards, the approach to and implications ofsuch an endeavour requires careful deliberationby the IAASB.

The IFAC Public Sector Committee (PSC)continues to consider the output of the IAASBfrom a public sector perspective. At a futuredate, enhanced relationships with INTOSAIand the direct participation of IAASB memberswith public sector auditing experience may alterthe relationship with the PSC.

IAASB develops its standards to be applicablefor audit engagements of all sizes. The interestsof small- and medium-sized practices (SMPs)are considered during the development of allISAs. To increase input from this importantconstituency, the IAASB has sought supportfrom the IFAC Small / Medium Practices TaskForce. This group is providing input throughits network of contacts.

Partnerships Toward InternationalConvergenceThe IAASB is conscious of the need forextensive consultation and transparency as itmoves forward. The following describes someof our key initiatives and recent developmentsin working toward solid internationalpartnerships and convergence of standards.

Communication with the IAASB Consultative Advisory Group

The Consultative Advisory Group (CAG)constitutes an important forum to giverepresentatives of regulators, investors, usersand others the opportunity to influence theIAASB’s agenda and to contribute to thedevelopment of international auditing andassurance standards and guidance. The ongoingexchange of views with our stakeholders is thenecessary basis for our agenda to make sure

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that expectations of the community areconsidered and met.

The CAG is an active and valued contributorto the IAASB and is seen as an integral andimportant part of the IAASB’s work structure.The CAG meetings have attracted more andmore interest every year, with IAASB mattersmoving more into the focus of discussions.Exhibit 2 contains a list of the current CAGmembers.

In May, we initiated discussion with the CAGabout our present working relationship andhow we might improve it, operating proceduresand our future strategy. CAG members alsowere invited to assist in the development of astrategic plan for IAASB. As a result, we arejointly undertaking actions to require CAGmembers to play a greater role in assisting withconvergence and global acceptance of IAASBguidance. These include increasing the numberof meetings with the CAG to two each year,focusing the CAG meeting agenda more onIAASB’s technical agenda, soliciting commentsfrom the CAG on proposals for new projects atan earlier stage and monitoring progressthroughout their duration, and reviewing theCAG’s terms of reference to better structurethe group’s activities and to improvetransparency. In addition, steps are underway toexpand the CAG’s global representation and toreview its member nomination process.

In October, we held another very successfulmeeting with the CAG, acting on decisionsmade during our May meeting. Valuable inputwas received on several of the IAASB’s currentprojects, including Audit Risk, Quality Control,Considering the Work of Other Auditors,Audits of Group Financial Statements, andReview of Interim Financial Information, aswell as receiving constructive feedback onproposed new projects.

Cooperation with National Auditing Standard Setters

In 2001, we initiated the development of anetwork of the 10 most active national auditingstandard setters to discuss current and, moreimportant, future agendas for standard setting.The objective of this network is to achievecloser cooperation with an aim to shareresources, minimize duplication and reachconsensus and convergence of standards at anearly stage in their development.

Since its inception, the network of nationalauditing standard setters has held its first twoannual meetings. Its continuing focus is on thepossibilities of further joint projects that couldbe developed on a worldwide basis and forwhich a national standard setter or the IAASBwould be ready and able to take the lead.

At its 2002 meeting, every member of thenetwork agreed to take the lead in a project, tobe a member of a joint task force or to sendexperts, members of their own committees ortechnical staff to support IAASB activities.

We have had a very successful start tocooperation and partnership with nationalauditing standard setters. A number ofimportant collaborative efforts and jointprojects have come from this initiative,including the joint task force with the U.S.Auditing Standards Board (ASB) on the AuditRisk and Using the Work of an Expert projectsand two new projects with the U.K. AuditingPractices Board (APB): Materiality and Audit ofEstimates Involving Measurement Uncertainty.Clearly, such close cooperation will be the mostpromising way of working on worldwideconvergence of standards and acceptance of theIAASB as the leading authority for globalauditing and assurance standards.

The objective of the next meeting, scheduledfor early 2003, is to further improve theworking relationship between national standardsetters and the IAASB and to explore additionalopportunities for closer collaboration onprojects as well as options to improve

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to establish high quality auditing, assurance, qualitycontrol and related services standards and toimprove the uniformity of practice by professionalaccountants throughout the world, therebystrengthening public confidence in the globalauditing profession and serving the public interest.

Dietz MertinChair

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processes, particularly for those standard settersnot directly represented on the IAASB.

CommunicationsThe way in which IAASB activities arecommunicated and its pronouncements aredisseminated continued to be challenged andenhanced. The IAASB created a new web sitewithin the IFAC structure to contribute to thetransparency of its operations and increaseawareness of its work program. The sitefeatures expanded information on IAASBprojects, enables visitors to register online toattend IAASB meetings, and includesbackground papers and agendas for itsmeetings. Since the site was launched in March2002, it has attracted over 28,700 visitors, morethan triple the number that visited the previoussite on IFAC’s auditing activities. Additionally,close to 2,600 IAASB documents weredownloaded from the site in 2002.

Member bodies are encouraged to promoteIAASB guidance to their members and caninclude links from their web sites to theIAASB’s. All IAASB pronouncements areavailable free of charge in electronic formthrough the IFAC web site effective January 1,2003. We also, for the first time, will beoffering our 2003 IFAC IAASB Handbook in aCD-Rom format which will be available inearly 2003.

Building on Change

It has been a year of tremendous change. Iwould like to acknowledge the dedication,cooperation and support demonstrated by myfellow Board members and by their technicaladvisors, by IAASB technical staff, by memberbodies and the CAG, by national standardsetters, and by all stakeholders that have helpedthe IAASB in meeting its objectives.

Looking forward, we have adopted anambitious program to move further ahead onthese strategic initiatives – initiatives that wehope will see achievement of IAASB’s mission –

AchievementsOver the last year, the IAASB has continued torespond diligently to the wide-ranging needs ofits stakeholders. It has issued three newstandards and guidance in final form, includinga new ISA on auditing fair value measurementsand disclosures, released four new ISAs forpublic exposure, and has a number ofsignificant projects currently underway.

Exhibit 3 contains a description of IAASBstandards and guidance issued in 2002 andother 2002 and 2003 priority projects.

Three of the IAASB’s most significant projectsin progress are the recently exposed Audit Riskstandards, new Quality Control standards, andrevised standards for Assurance Engagements –projects that, respectively, will significantlydrive change in auditor behavior, enhancequality control processes and expand servicecapability. These three projects are discussedbelow.

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Ihe action plan of the IAASB for thenext two years is driven by our

principal and overall goal, which is todevelop high quality standards in ourcapacity as the global auditing and

assurance standard setting authority. Ofimmediate importance, however, is to reviewand update our set of standards with due regardtowards 2005 when ISAs will be the basis of theaudit in Europe. To this end, we are consciousthat this effort needs to be properly balancedwith other projects necessary to provide timelystandards and guidance addressing issuesrelevant to the international marketplace.

Technical Director’sReport

Our focus is on developing andissuing quality auditing andassurance standards that are

sufficiently specific, understandableand definitive to influence and guide

the judgments of auditors indesigning and carrying out their

work. They are to be comprehensivein scope and establish a worldwidebenchmark for the performance of

high quality audits.

TJames M. SylphTechnical Director

The IAASB believes the proposedISAs will:

Increase audit quality as a result of betterrisk assessments and improved design andperformance of audit procedures torespond to the assessed risks.

Improve linkage of audit procedures andassessed risks, resulting in a greaterconcentration of effort on areas wherethere is greater risk of misstatement of thefinancial statements.

Result in an overall increased work effortby the audit team, particularly for newengagements or when first implemented oncontinuing engagements.

Require new skills and competencies toimplement, and may increase the need forspecialist assistance on audits.

Audit RiskOur most ambitious and highest priorityproject today is the completion of the AuditRisk project, a comprehensive review andupdate of our core auditing standards.

Recent changes in the business environmenthave included the way entities are organizedand conduct their businesses, the effects ofglobalization and technology, and significantlyincreased pressures that may lead to fraudulentfinancial reporting. In light of these changes,the IAASB embarked on a project to addressone of the most critical issues facing theaccountancy profession today and those itserves: audit risk. In close partnership with theU.S. Auditing Standards Board (ASB), theIAASB reviewed its core auditing standards thataddress various aspects of audit risk, and as aresult, has released exposure drafts of three newISAs:

• Understanding the Entity and Its Environmentand Assessing the Risks of MaterialMisstatement;

• The Auditor’s Procedures in Response to AssessedRisks; and

• Audit Evidence.

In addition, the IAASB is proposing anAmendment to ISA 200, Objective and GeneralPrinciples Governing an Audit of FinancialStatements.

The new proposed ISAs are designed toenhance the auditor’s implementation of theaudit risk model and ultimately improve auditorperformance. They require the auditor to havea deeper understanding of an entity’s businessenvironment, to make risk assessments on allaudits and to link the nature, timing and extentof audit procedures to the assessed risks. Therequirements and guidance related to internalcontrol have been substantially increasedincluding specification of the components thatcomprise internal control, the extent of therequired understanding of each of thecomponents of internal control, and the

auditor’s procedures to obtain an understandingof internal control.

Given the extensive changes contemplatedunder the proposed standards of the Audit Riskproject, revisions to existing ISAs are underwayto ensure consistency and conformity with theconcepts and terminology of the proposed newstandards. The IAASB will continue to work onthese conforming changes during the exposureperiod.

These draft standards were exposed for publiccomment in October 2002. Because of theimportance of this project, the exposure periodhas been extended from the customary three tofive months, with the final approval of thesethree main standards planned for the end of2003.

Careful consideration of the future curriculumand training of audit staff has to follow. Aneffective date of these standards will be set toprovide the profession enough time for athorough implementation and training period.

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Quality Control This project will revise ISA 220, Quality Controlfor Audit Work, to establish standards andguidance on the quality control policies andprocedures that firms performing audit andassurance engagements should put in place.The project will develop standards in two parts:

• A quality control standard (ISQC 1) settingout the responsibilities of firm-wide qualitycontrol for engagements that fall within thescope of IAASB engagement standards,forming the first of a new series ofInternational Quality Control Standards.

• A revised ISA 220, Quality Control for AuditWork, that provides engagement-relatedstandards for audits of financial statements,with specific requirements for anindependent reviewer to perform anobjective evaluation of the compliance of arelevant engagement with applicableprofessional standards, including theappropriateness of the report, for publicentities and others where consideredappropriate.

Ultimately, the goal is to establish engagement-level standards for all engagements that fallwithin the scope of the IAASB engagementstandards.

The IFAC Board, working closely with theIAASB, is concurrently developing a newproposed document, Statement of MemberObligations No. 1, to provide guidance onquality assurance at the level of IFAC memberbodies.

The IFAC Board and the IAASB believe thatissuing the three documents simultaneously isnecessary to clarify both the overall qualitycontrol activities and responsibilities of IFACmember bodies, accounting firms andengagement teams and the manner in whichthe three documents interrelate. An exposuredraft of these documents is expected by themiddle of 2003.

Assurance EngagementsISA 100, Assurance Engagements, establishesbasic principles and essential procedures forprofessional accountants in public practice whoperform audit-level assurance engagements ona range of subject matters far broader thanfinancial statements. With the recentpublication of the findings from the IAASBcommissioned research on the determinationand communication of levels of assurance otherthan high, the IAASB has started to revise ISA100 to include basic principles and essentialprocedures for review-level assuranceengagements.

Under the current project plan, ISA 100 will besplit into two documents: a Framework forAssurance Engagements that sets out theunderlying concepts, definitions and elementsof an assurance engagement; and ISAE 2000,Assurance Engagements, which establishes thebasic principles and essential procedures for,and provides guidance to, the performance ofassurance engagements on subject mattersother than historic financial information.

This project is particularly important in today’senvironment as demand for such servicescontinues to grow. It will provide acomprehensive framework for the developmentof future assurance standards on specific subjectmatters or topics.

An exposure draft of a revised ISA 100 andISAE 2000 is expected to be released by themiddle of 2003.

Meeting Future Challenges

The combination of our current projects andnew projects approved for 2003 and those inthe “pipeline” represents a demanding workplan and timetable. Undoubtedly, there will bechallenges – challenges, however, that onlycome from such an important mandate.

During the year, we undertook a worldwidesearch to increase the depth and quality of staffresources to better serve the greater demands

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of the IAASB and the expectations of ourstakeholders around the globe. This teambrings together many years of experience inauditing and assurance standard setting fromsuch diverse environments as Australia, Canada,Hong Kong, New Zealand, South Africa, andthe United Kingdom.

I thank them for their support of the IAASBand me. I am confident that our team is wellpositioned to meet the objectives of the IAASB.Finally, my thanks to the Board membersthemselves for their support and counsel duringa year of unprecedented challenge to ourprofession.

James M. SylphTechnical Director

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Exhibit 1: IAASB Members,

Technical Advisors andTechnical Staff

As at December 31, 2002

Board Members

Dietz Mertin (Chair), GermanyDenise Esdon (Vice-Chair), CanadaPhilip Ashton, United KingdomJohn Archambault, United StatesRoger Dassen, NetherlandsAna Maria Elorrieta, BrazilJan Bo Hansen, DenmarkGen Ikegami, JapanSuresh Kana, South AfricaJohn Kellas, United KingdomEdmund R. Noonan, United StatesIan Plaistowe, United KingdomRoberto Tizzano, ItalyGérard Trémolière, FranceYang Zhiguo, China

Public Members

Denis Desautels, CanadaIan McPhee, AustraliaRoger Simnett, Australia

Technical Advisors

Wolfgang Böhm, GermanyGeorge H. Tucker, United StatesDiana Hillier, United Kingdom

Hans Verkruijsse, Netherlands

John Fogarty, United StatesYuichi Yamamoto, JapanKaren Lauf, South AfricaSylvia Smith, CanadaSusan Jones, United StatesJon Grant, United KingdomEmilio Palma, ItalyCédric Gélard, FranceXi Wu, China

Public Members

Paul Lohnes, CanadaRichard Mifsud, Australia

IAASB Technical Staff

Technical Director James M. Sylph

Senior Technical Managers James L. GunnAlta Prinsloo

Technical Managers Sylvia BarrettAshley CarpenterJan Munro Michael NugentKen SiongGill Spaul

Exhibit 2: ConsultativeAdvisory Group Members

The Consultative Advisory Group (CAG) is seen asan integral and important part of the IAASB’s workstructure. At present, CAG has the followingmembers:

Association for Investment Management and Research

Basel Committee on Banking SupervisionCouncil of the Bars and Law Societies of the

European Union European Banking FederationEuropean CommissionEuropean Federation of Accountants and Auditors

for SMEsEuropean Federation of Financial Executives’

InstitutesEuropean Federation of Investment Funds &

CompaniesEuropean Financial Reporting GroupEuropean Savings Banks GroupFédération des Experts Comptables EuropéensFederation of European Stock ExchangesInformation Systems Audit and Control AssociationInstitute of Internal AuditorsInternational Accounting Standards BoardInternational Actuarial AssociationInternational Association of Insurance SupervisorsInternational Bar Association International Monetary FundInternational Organization of Securities

CommissionsInternational Organization of Supreme Audit

InstitutionsUnited Nations Conference on Trade &

DevelopmentWorld BankWorld Federation of Exchanges

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In addition to the Audit Risk, Quality Controland Assurance Engagement projects discussedin the Technical Director’s Report, thefollowing standards and guidance were issued,are in progress of development, or underconsideration by the IAASB. Additionalinformation on these standards and guidanceand IAASB projects can be found on the IAASBweb site at www.iaasb.org.

2002 AchievementsApproved and Issued

• ISA 545, Auditing Fair ValueMeasurements and Disclosures, whichresponds to the increasing prevalence ofcomplex accounting pronouncementscontaining measurement and disclosureprovisions based on fair value. This newISA addresses audit considerations relatingto the valuation, measurement, presentationand disclosure for material assets, liabilitiesand specific components of equity presentedor disclosed at fair value in financialstatements. This ISA is effective for auditsof financial statements for periods ending onor after December 31, 2003. Recognizingthe important need for guidance in this area,the U.S. ASB has used this ISA as its basis inissuing an exposure draft on the samesubject within the U.S.

• IAPS 1013, Electronic Commerce –Effect on the Audit of FinancialStatements, which responds to theincreasing use of the Internet for business-

to-consumer, business-to-business, business-to-government and business-to-employee e-commerce and how emerging new elementsof risk need to be considered when planningand performing the audit of financialstatements. This new IAPS helps auditorsaddress e-commerce issues by focusing on,among other matters, the level of skills andknowledge required to understand the effectof e-commerce on the audit; the business,legal, regulatory and other risks faced byentities engaged in e-commerce activities;internal control considerations, such as anentity’s security infrastructure andtransaction integrity; and the effect ofelectronic records on audit evidence.

• IAASB Study 1: The Determination andCommunication of Levels of AssuranceOther Than High, which wascommissioned by the IAASB and conductedby an international network of auditingacademics, is an extensive study of thedetermination and communication of levelsof assurance other than high. The accuratedetermination and effective communicationof levels of assurance provided in assuranceengagements are critical issues for the futuredevelopment of assurance services. Theinformation contained in this study, whichconsists of an extensive literature review ofrelated initiatives within and outside theprofession, accompanied by two empiricalstudies, is important input for decisionmaking by standard setters regarding thedetermination and communication of levelsof assurance.

Approved for Public Exposure• Compliance with International Financial

Reporting Standards – With the increasinguse of International Financial ReportingStandards (IFRSs), formerly known asInternational Accounting Standards (IASs),there have been situations where reportingentities under a different financial reportingframework have stated that their financialstatements comply with IFRSs when, in fact,they do not comply with all of the

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Exhibit 3: IAASB Standardsand Guidance:

2002 Achievements,Projects in Progress and

2003 Projects

requirements of the IFRSs. This includessituations where an entity uses wording suchas “The accounting policies used meetsubstantially all the requirements ofInternational Accounting Standards” as wellas situations where an entity lists itsaccounting policies and asks its auditor toreport in terms of compliance with IFRSs.

The IAASB intends to issue an IAPS providingguidance for auditors on what to do in suchcircumstances. This draft statement is inexposure for public comment at the time ofissuance of this publication.

In ProgressThe IAASB is currently working on a numberof projects and initiatives, the majority of whichare planned to be exposed for public commentduring 2003.

• Considering the Work of Other Auditors – This project intends to establishrevised standards on considering the work ofother auditors in the context of the audit ofconsolidated financial statements presentedby a parent company. In particular, theproject will revise existing ISA 600, Using theWork of Another Auditor, and addressesconsiderations relating to ethicalrequirements, auditing and quality controlstandards to be used and communicated bythe principal and other auditor, and thenature and extent of work to be performedwhen using the work of another auditor.

• The Audit of Group FinancialStatements – Closely related to the projecton considering the work of other auditorsnoted above, a new IAPS providing guidanceon the application of existing ISAs to theaudit of group financial statements is alsobeing developed.

• Update of IAPS 1005, The SpecialConsiderations in the Audit of SmallEntities – With the number of newstandards and statements recently issued,work on revising and updating IAPS 1005 isunderway to ensure its applicability and

relevance to small- and medium-sizedpractitioners

• Review of Interim Financial Information – This project intends toestablish standards and provide guidance forauditors who review the interim financialreporting of audit clients required orallowed by legislation or regulation to issueinterim financial information toshareholders. An exposure draft of thisstandard is expected to be released by themiddle of 2003.

• The Auditor’s Report – This project aimsto revise ISA 700, The Auditor’s Report onFinancial Statements. The project will addressa number of issues regarding the guidance inthe ISAs on the form and content of theauditor’s report in an audit of financialstatements and in other types ofengagements.

• Materiality – This project intends to updatethe standards and guidance in ISA 320,Audit Materiality. The project is beingundertaken jointly with the U.K APB andwill address issues such as qualitative factorsthat affect materiality, encouraging correc-tion of identified misstatements, evaluatingmateriality of individual misstatements withrespect to qualitative and quantitativefactors, and reporting responsibilities.

• Audit of Estimates InvolvingMeasurement Uncertainty – This projectintends to revise ISA 540, Audit of AccountingEstimates. The project will provide a risk-based approach to assessing accountingestimates, including consideration of howaccounting estimates may be affected bymanagement motivation and “earningsmanagement.” This project also is beingundertaken jointly with the U.K. APB and isclosely linked to the new project onmateriality.

Looking Ahead – 2003 Projects• Using the Work of an Expert – The

IAASB has recently reviewed ISA 620, Usingthe Work of an Expert, and believes it should

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be revised now because a number of otherstandard setters are developing guidance onthe coverage of experts employed by auditfirms and treatment of employee auditorswith special skills. Initially, this project willfocus primarily on developing a revisedstandard covering only the audit of financialstatements. Considerations that will beaddressed when further developing thisproject include:

• whether experts employed by an audit firm should be covered by this standard or the standard addressing quality control, or both;

• whether employee auditors with special skills are “experts”;

• whether undertaking additional audit procedures or seeking audit evidence from another expert should be mandatory if an auditor is concerned about the competence or objectivity of an expert;

• the circumstances, if any, in which an expert can be referred to in an auditor’s report; and

• standards and guidance on using an expert in all phases of an audit.

This project will be undertaken jointly withthe U.S. ASB.

• Fraud – This project is to update ISA 240,The Auditor’s Responsibility to Consider Fraudand Error in an Audit of Financial Statements,which establishes standards and providesguidance on the auditor’s responsibility toconsider fraud and error in a financialstatement audit.

The IAASB plans to converge ISA 240 withthe principles in new SAS 99, Considerationof Fraud in a Financial Statement Audit,issued by the U.S. ASB in September 2002,subject to any differences to take intoaccount the international environment, andto conform ISA 240 to the guidance in theproposed Audit Risk standards. In addition,the proposed output of this project is an ISAthat deals only with fraud, rather than its

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current emphasis on the auditor’sresponsibility to detect fraud and error. Thiswill give greater emphasis to fraud and willpermit the standard to focus on the specificcharacteristics of fraud.

• Audit Planning and Supervision – Arevision of the existing ISA on these mattersin light of the developments in the AuditRisk project, including the expansion ofguidance on the allocation of work to, andsupervision of, those engaged in an audit.

• Documentation – A revision to current ISA230, Documentation, to strengthen thestandards and guidance pertaining to, amongothers, the nature and extent of matters tobe documented and working paper consider-ations. The project will take into accountrecently developed and revised standardsissued by other standard setters, as well asthe suggestions for improvement providedby IOSCO.

• Comfort Letters – The IAASB has chargedan IAASB member to establish a group ofinternational experts to conduct researchand to develop a “white paper” on theauditor’s involvement in and responsibilitiesfor letters provided tounderwriters/investment bankers for publicor private offerings. The envisioned “whitepaper” would be used to seek the views ofkey stakeholders on national and inter-national issues pertaining to this subject.

Projects to complete standards for assuranceengagements on sustainability reporting,prospective financial information and reportingon internal controls – topics of importance intoday’s business environment and of interest toregulators and market participants – are beingconsidered for further development.

In addition, the IAASB is monitoringdevelopments on the topic of continuousauditing with a view to consider this subject fora joint project with national standard settersand academics. IAASB involvement is to bedetermined, depending mainly on theavailability of resources.

IAASB Contact Information

IAASB ChairDietz Mertindietz.mertin@de.pwcglobal.com

IAASB Technical DirectorJames Sylphjimsylph@ifac.org

IAASB Senior ManagersJames Gunnjamesgunn@ifac.org

Alta Prinslooaltaprinsloo@ifac.org

IAASB Web Sitewww.iaasb.org

Administrative Office

535 Fifth Avenue

26th Floor

New York, NY 10017

United States

Tel: +1 (212) 286-9344

Fax: +1 (212) 286-9570

www.ifac.org