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Staying on top of standard-setting initiatives

Vol. 11-46
December 9, 2011


Message from the Chair of the Auditing and Assurance Standards Board Regarding Auditing in Emerging Markets

Excerpted from the Chair’s Message on Auditing in Emerging Markets

Significant concerns have been expressed about the quality of financial reporting of some companies with operations in an emerging market country and the audits of these companies’ financial statements.1 An emerging market country is characterized as a country that currently has relatively lower levels of gross domestic product per capita but relatively higher levels of economic growth and volatility. Capital markets within emerging market countries may not be well developed or have a long operating history. As a result, the business environment and customs in these markets, and the risks of fraud, may be different from those with which a Canadian auditor is familiar. Auditors of public and private companies operating in an emerging market country should consider what additional or modified procedures might be necessary or advisable to help ensure that, in all cases, a high-quality audit is performed.

The Chair's message covers three important aspects of these audits and reflects guidance in the relevant Canadian Auditing Standards (CASs):

  1. Assigning competent and capable group engagement team members and component auditors;

Significant factors that may affect how the group engagement team plans and performs the audit of a company operating in an emerging market country include:

  • the ability to communicate effectively in the language used by the company in the emerging market country;

  • a working knowledge of the business environment in which the company operates in the emerging market country, for example, obtained by work experience in the relevant country; and

  • availability to travel to and within the emerging market country to conduct the audit.

While there are different ways to address these factors, ultimately the group engagement team needs to be involved in the work of the component auditors to the extent necessary to obtain sufficient appropriate audit evidence.

  1. Obtaining sufficient knowledge of the company’s business practices and environment; and

Auditing standards require the auditors to obtain knowledge of the company being audited, its business practices, the environment in which it operates and relevant local laws and regulations.

It is important to note that, in many cases, emerging market business customs and practices may differ significantly from those followed by companies in Canada.

Some companies operating in an emerging market country may have turned to the Canadian capital market for financing because they were unable to get domestic financing or they want the prestige of being a public company listed on a Canadian stock exchange. As with most public companies, there will be pressure to meet market expectations, but companies from an emerging market country may not have the same experience with Canadian standards for corporate governance, ethics and disclosure requirements. Management of some companies may be tempted to respond to the high expectations by using aggressive or even fraudulent financial reporting.

  1. Using this knowledge to plan and perform effective audit procedures.

Modified or additional procedures may be needed in auditing the emerging market operations to provide the auditors with an appropriate basis for their opinion.

Auditing standards require auditors to plan and perform an audit with professional skepticism, which is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of evidence. Recent concerns expressed by both auditing and securities regulators suggest that, for some companies operating in emerging market countries, there are numerous indicators of a high risk of misstatement due to fraud or error to which the auditors must appropriately respond. Auditors may need to modify the standard procedures they apply in an emerging market country as compared to Canada.

This Week in Review

Standard-setting Activities Digest
The Standard-setting Activities Digest (the Digest), published on a monthly basis not only represents an excellent starting point towards the original published text of the standard-setting organization but also present a single source of reference for current standards, future standards, exposure drafts and projects. You may register here to receive automatically a publication alert in your email. The following items have been released this week and will be included in the next edition of the Digest:

  Alberta Securities Commission Activities
  2011 Corporate Finance Disclosure Report
This report summarizes the ASC's observations of recurring and significant deficiencies in financial reports and provide expectations for improvement. Each year we continue to expand the report’s content and include timely, relevant content that will help reporting issuers deliver the highest quality of disclosure and financial reporting.
  United States
  FASB Activities
  Proposed Accounting Standards Update, Consolidation (Topic 810): Parent’s Accounting for the Cumulative Translation Adjustment upon the Sale or Transfer of a Group of Assets That Is a Nonprofit Activity or a Business within a Consolidated Foreign Entity (a consensus of the FASB Emerging Issues Task Force)
When a reporting entity ceases to have a controlling financial interest in a group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a consolidated foreign entity, the amendments in this proposed Update would require the reporting entity to apply the guidance in Subtopic 810-10 to release any related cumulative translation adjustment into earnings. Additionally, upon such sale or transfer, if a parent has hedged part (or all) of its net investment in the foreign entity in which the group of assets had resided, the parent shall release into earnings the related amount of accumulated gain or loss on the net investment hedge attributable to the nonprofit activity or business.
  AICPA Activities
  Technical Questions and Answers Issued on Service Organization Controls (SOC) Reports (SSAE No. 16 and New SOC 1SM and SOC 2SM Guides)
These TPAs provide guidance for service auditors reporting on controls at a service organization relevant to user entities’ internal control over financial reporting, and also to user auditors who audit the financial statements of entities that use a service organization.
  PCAOB Activities
  Staff Audit Practice Alert No. 9, Assessing and Responding to Risk in the Current Economic Environment
The alert is organized into four sections:
  1. considering the impact of economic conditions on the audit;
  2. auditing fair value measurements and estimates;
  3. the auditor's consideration of a company's ability to continue as a going concern; and,
  4. auditing financial statement disclosures.
  SEC Activities
  Non-Public Submissions from Foreign Private Issuers
Beginning today, the staff will review initial registration statements of foreign issuers that are submitted on a non-public basis only where the registrant is:
  1. a foreign government registering its debt securities;
  2. a foreign private issuer that is listed or is concurrently listing its securities on a non-U.S. securities exchange;
  3. a foreign private issuer that is being privatized by a foreign government; or
  4. a foreign private issuer that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.

Press review
(EXTERNAL WEB SITE LINKS - Some sites may require free registration)

  Date Publication Article
  2011/12/08 Financial Director Integrated reporting – friend or foe?
  2011/12/08 The Wall Street Journal SEC Lets Some Investors Keep Quiet (Subscription required)
  2011/12/08 CICA Message from the Chair of the Auditing and Assurance Standards Board Regarding Auditing in Emerging Markets
  2011/12/07 Accounting Today FASB and IASB’s Irreconcilable Differences
  2011/12/07 CFO Journal The Cost of Lease Accounting Changes: $2 Trillion
  2011/12/06 Corporate Counsel Will 2012 be the Year of the SEC Whistleblower?
  2011/12/06 PCAOB Staff Audit Practice Alert No. 9, Assessing and Responding to Risk in the Current Economic Environment
  2011/12/05 Regulators consider policy that would allow poison pills to remain unchallenged
  2011/12/05 Accounting Today SEC Postpones IFRS Decision
  2011/12/05 Journal of Accountancy SEC Won’t Decide on IFRS for At Least a Few More Months
  2011/12/05 Journal of Accountancy New Auditors’ Reporting Model Proposal Set for Release in Q2
  2011/12/05 CFO Journal SEC: ‘Knock It Off’ on Bogus Non-GAAP Measures
  2011/12/05 PCAOB What the PCAOB Expects for the Coming Year and Beyond, speech delivered today by Chairman James R. Doty
  2011/12/02 Financial Director Will EU exorcise Enron's ghost?
  2011/12/02 Corporate Counsel "Say on Pay" Compensation Reform Working Better Than Expected
  2011/12/01 Journal of Accountancy AICPA advises IASB to complete work on conceptual framework
  2011/12 CICA Improved Annual Reporting by Not-For-Profit Organizations
  2011/11 Catalyst Increasing Gender Diversity on Boards: Current Index of Formal Approaches
  2011/11 The Conference Board of Canada Canadian Directors’ Compensation and Board Practices

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