Chapter 14 – Comparative International Auditing and Corporate Governance
Answers to Questions
1. Auditing issues should be of concern to any firm that seeks funds from the capital market,
because auditing improves the quality and reliability of the financial information made
2. The revised version of the OECD Principles of Corporate Governance issued in 2004 is
designed to strengthen corporate governance practices in companies around the world. The
3. The Sarbanes Oxley Act provides a tight definition of “independent” audit committee
4. The primary role of external auditing in a particular country is determined mainly by the
corporate governance structure of that country. For example, in the Anglo-Saxon countries,
which have one board of directors, the auditor’s primary role is to report to the shareholders
5. Audit quality is the probability that an error or irregularity is detected and reported. The audit
quality in a given country is determined mainly by three factors: the level of competence of
the auditor, the level of independence of the auditor, and the nature of the liability regime.
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Chapter 14 – Comparative International Auditing and Corporate Governance
6. The Public Company Accounting Oversight Board (PCAOB) was established in 2002 as an
important part of the efforts aimed at restoring investor confidence in the aftermath of the
financial scandals involving major companies and accounting firms in the U.S. The PCAOB
has been given extensive powers to tighten the regulation of many aspects of accounting
7. The Eighth Directive was given effect in the U.K. through the Companies Act 1989, which
included specific provisions concerning audit regulation. These include:
8. Variations in the audit reports of companies in different countries are mainly due to the
particular auditing standards used in preparing those reports. For example, some
companies use local auditing standards, whereas others use International Standards of
Auditing (ISAs), or U.S. auditing standards. Some audit reports are prepared on the basis of
more than one set of audit standards. Different companies in the same country can use
different auditing standards. For example, the audit reports of some Japanese companies,
such as Toshiba, are prepared on the basis of the U.S. auditing standards, whereas those of
other companies, such as Sumitomo Metal Industries Ltd., are prepared on the basis of
Japanese audit standards.
9. International harmonization of auditing standards is expected to:
Enhance the credibility of the information provided through corporate financial reports.
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Chapter 14 – Comparative International Auditing and Corporate Governance
10. International Auditing Practice Statement (IAPS) 1014, Reporting by Auditors on
Compliance with International Financial Reporting Standards, issued in June 2003 by the
International Auditing and Assurance Standards Board (IAASB) of IFAC, specifies that
11. In the U.K., changing the ownership structure of an auditing firm from partnership to a
limited liability company is used as a strategy for limiting the auditor’s liability. Further, U.K.
12. One factor that complicates the issue of auditor independence is the auditor appointment
process. In order to ensure independence from management, the auditor is expected to be
appointed by the shareholders of the company. However, in reality, it is the management of
13. The oversight role of an audit committee involves ensuring that quality accounting
policies, internal controls, and independent and objective outside auditors are in place to
deter fraud, anticipate financial risks, and promote accurate, high quality and timely
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Chapter 14 – Comparative International Auditing and Corporate Governance
14. A major difference between internal and external auditing is that they have different
functions. The primary function of internal auditing is to examine, evaluate, and monitor the
adequacy and effectiveness of the accounting and internal control system, whereas the
Solutions to Exercises and Problems
1. The audit report of Unilever N.V. and Unilever PLC reflect several features that are unique to
MNCs.
2. Circumstances under which the auditor should express a qualified opinion, disclaimer of
opinion, and adverse opinion as per International Standard of Auditing (ISA) 700 are as
follows:
3. Additional guidelines provided in International Auditing Practice Statement (IAPS) 1014 in
expressing an opinion when management claims that financial statements have been
prepared:
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Chapter 14 – Comparative International Auditing and Corporate Governance
In accordance with IFRS: To issue an unqualified opinion, compliance with all the
In accordance with IFRS and a national financial reporting framework: To issue an
In accordance with a national financial reporting framework with disclosure of the
extent of compliance with IFRS: Entities that prepare their financial statements in
4. The previous version of paragraph 8.151 of the Code of Ethics for Professional Accountants
reads as follows:
“Using the same lead engagement partner on an audit over a prolonged period of time may
create a familiarity threat. This threat is particularly relevant in the context of the audit of
listed entities and safeguards should be applied in such circumstances to reduce such threat
5. Providing proper incentives for the board and management to pursue objectives that are in
the interests of the company and shareholders, and facilitating effective monitoring are two
important objectives of good corporate governance (OECD, 1999). This has implications for
6. It has been argued that a two-tiered corporate structure, with a management board and a
supervisory board, prevalent in many Continental European countries such as Germany,
may be better suited for addressing corporate governance issues including the issue of
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Chapter 14 – Comparative International Auditing and Corporate Governance
7. The ownership structure of some business entities in China, particularly former state
enterprises redefined to create new economic enterprises can be described as unique,
because it does not conform to the concept of an entity as the term is commonly understood
8. In this exercise, the students are expected to explain the concept of accounting
9. The Public Company Accounting Oversight Board (PCAOB) was established in 2000 to,
among other things, strengthen the auditing function in the U.S. For example, the PCAOB
has the power to establish or adopt auditing quality control standards and ethical rules in
relation to the conduct of audits of public companies, and it may also impose a broad range
10. a. In the U.S., audit regulation is within the framework of professional self-regulation. For
example, the PCAOB is an independent body, which has the authority to take the
necessary steps as the main oversight body. In Germany, audit regulation is through
legal means, rather than within the framework of professional self-regulation. For
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Chapter 14 – Comparative International Auditing and Corporate Governance
b. As two countries that follow the Anglo-Saxon traditions, the U.K. and U.S: have many
similarities in the mechanisms put in place to regulate auditing. However, there are also
11. As a condition of membership with the IFAC, professional accounting bodies are obliged to
support the work of the IFAC and endeavor to implement its pronouncements in their
countries. However, the main problem facing the IFAC in its efforts to discharge it
12. For this exercise, students should structure their discussion in such a way that it
13. a. The UK corporate governance code which became effective in June 2010 takes a flexible
approach based on ‘comply or explain’. The main features of this approach are:
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Chapter 14 – Comparative International Auditing and Corporate Governance
b. The UK ‘comply or explain’ approach has been imitated internationally because it
Case 14-1 HONDA MOTOR COMPANY
Case 14-2 DAIMLER AG
In providing a solution, identify the main features of the Supervisory Board report of Daimler
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