Generally Accepted Auditing Standards: Internal Control – 1976

In February 1975, the CICA’s Auditing Standards Committee (AuSC) proposed, subject to comments received following exposure, to publish the contents of an Exposure Draft as CICA Handbook: Section 5100 - Generally Accepted Auditing Standards.

The following year, in July 1976, the AuSC issued a 32-page Exposure Draft on “Internal Control.” This material (for inter-related Sections 5200 to 5230) was intended to provide an explanation, in general terms, of what the auditor should do in order to comply with field work standard (ii) within Generally Accepted Auditing Standards (GAAS). Field work standard (ii) states: “There should be an appropriately organized study and evaluation of those internal controls on which the auditor subsequently relies in determining the nature, extent and timing of auditing procedures."

The Exposure Draft addressed the following matters: Management’s objectives; Basic components of internal control systems; Auditor's objective regarding internal control; Auditor's approach – overview; Auditor's study and evaluation; and, Relationship to substantive auditing procedures. A decision tree was provided in Appendix A on page 32 (refer to the graphic above). It is noteworthy that the Exposure Draft also mentioned that the AuSC was working on a project to provide a similar explanation with respect to field work standard (iii) - Audit Evidence.

Andersen, Auditing and Atonement

Ten years ago, Arthur Andersen was forced to surrender its licences in the United States after the Enron scandal, precipitating its global collapse. December 2011 marked 10 years since Enron, the Texas energy company, filed for bankruptcy after perpetrating one of the world's biggest business frauds. More significantly for the accounting profession, May 2012 marks a decade since the Enron indictment in the United States, and the beginning of the end for the well-respected Arthur Andersen, one of what was then the Big Five accounting firms.

The firm was convicted of obstructing justice by destroying thousands of documents related to its work for Enron. While the ruling was overturned in 2005 on technical grounds, it came too late to resuscitate the brand. For the profession, the scandal drew wide scrutiny on the supposed compromised position of large firms that audit the books of clients to whom they also provide consultancy services.

For a look back on the past decade of reactions, reforms and soul-searching in the accounting profession, read the article “ANDERSEN, AUDITING AND ATONEMENT: The accounting profession 10 years after Enron” by George W. Russell at GAA Accounting online.

CICA - Good Audit Working Papers: An Audit Technique Study (1970)

According to the Foreword in a 1970 CICA Audit Technique Study, Gertrude Mulcahy, FCA, Director of Research, states: “The preparation of audit working papers is an essential part of audit work. However, because they are part of the normal routine followed in all audit engagements, there is a very real danger that the basic purposes of preparing such papers may be overlooked, with the result that the papers may fail to achieve these purposes.”

In this 35-page study, called Good Audit Working Papers, the Study Group provides a statement of the purposes of working papers and develops what they believe to be a systematic approach to the content, organization, review and retention of good audit working papers as a basis for practitioners to evaluate their own procedures. During the formulation of this approach, the Study Group also examined questions relating to the ownership of working papers and the preparation of working papers for non-audit engagements.

Basic principles to assist in the resolution of these questions are also set out. In addition, several suggestions on the preparation of good audit working papers are included in the Appendices. Gerald Trites, FCA is acknowledged for his work on various drafts of this landmark Study published more than 40 years ago.