UNIVERSITI TEKNOLOGI MARA KAMPUS SABAH

FACULTY OF ACCOUNTANTCY (AC110)

AUDITING(AUD339)

TRANSNATIONAL AUDIT

PREPARED BY:

NAME STUDENT ID

JAVIER JOEL JAURIN 2021606228

MOHAMAD DANIEL BIN SAIDI 2021497586

EKMAL ASYRAF BIN ABU BAKAR 2021464178

SEAN DARRIEN SIPAL 2021212204

PREPARED FOR:
DR. YVONNE JOSEPH ASON

DATE OF SUBMISSION:
25 MAY 2024
1.0 Introduction

The increase of productivity from the Multi-National Companies (MNCs) has shown a significant
development in terms of economy, social, technology, etc. However, due to this positivity it also
created a challenge from an audit perspective in providing quality audit. For instance, in a
competitive business operation, audit firms have to adapt to the competitiveness operation due
to globalization(OECD, 2009). Thus, transnational audits provide an examination of financial
statements and accounting practices to the Multi-National Companies (MNCs) in ensuring
compliance standards into globalization.

The variations in audit environment, economic conditions, culture, legal frameworks, and
conceptual framework impose difficulties in the application of auditing standards which
compromise audit quality. For instance, the environments would vary from each country where
the financial statements are being audited with different government policy. According to Briston
(1978), the existing work in international accounting shows that the quality of accounting is
mainly shaped by key environmental factors, including economic conditions, societal influences,
the legal framework, cultural context, and the political environment. Given these factors, it is
important for an auditor to adapt with different conditions accordingly in providing quality audit.

In conclusion, (Yusoff et al., 2023) Transnational Audit: The Differences of National

Environments Have Challenged the Auditors in Providing Quality Auditing which highlighted the
common challenges that were given to the auditors. The research paper aims to provide
comprehensive issues of transnational audit with the effects of audit environment, economic
conditions, culture, legal frameworks, and conceptual framework in order to improve consistency
in audit.
2.0 ISSUE

2.1 Audit Environment

One issue that is constantly faced by auditors is the struggle to maintain a hugh standard of
work all while navigating through the rapidly changing nature of the audit environment.

Different aspects of the audit environment can have an impact on the quality of audited financial
accounts, and these aspects often pose a challenge for the auditor. The degree of corporate
ethics,the responsiveness and transparency of governments,the sophistication of capital
markets, as well as the quantity and rights of foreign investors are a few examples of these
national differences.

The corporate environment influences the incentive of the people who prepare information,such
as the management. Businesses within a larger organization may conclude that various
disconnected external reporting requirements do not offer value to the organization,which leads
to less motivation for preparers to submit information. Furthermore, if the notions of
accountability and transparency are not established strongly in national institutions, the financial
report as well as the audit will suffer. Similarly,unclear legal duties or enforcement methods for
information preparers can hinder motivation. Stefan Bode (2007) claims that political barriers
hinder national pride in a country’s sovereignty and political system. As people are proud of their
national qualities,they refuse to give up said characteristics. Governments as well are hesitant
to give up their power in order to define ethical norms. ISA 600 may also face opposition from
current national standard-setters or business executives,making it challenging to gain a
majority in national parliaments.

The economic issues faced are the varying user attitudes of financial statements and stages of
technological advancement. The auditing procedures cater to the diverse interest of different
investors as shareholders often select auditors.With the rise of e-commerce and ebusiness,
auditors in wealthy countries are held to a greater standard than those in underdeveloped
nations.
2.2 Cultural

Cultural differences are the most important-and most challenging- obstacle to overcome as they
affect people’s behaviors, faiths, attitudes, beliefs and languages. Respected authors such as
Geert Hofstede and Fons Trompenaars have previously examined and classified many cultural
practices. They stress that people’s behaviors and perspectives differ merely due to unique
cultural backgrounds. When examining ISA 220 in this context, which needs safeguards to
ensure auditor independence, it appears difficult to specify the necessary level of independence.
For example,in places such as Latin America,Asia,and Southern Europe, personal relationships
are of the utmost significance,and gift-giving is commonly used in corporate life.

Furthermore,according to Parker(1998),there are almost 6000 different languages that are

spoken globally.Attempting to translate the actual meaning of the English ISA in all languages is
a major challenge since words in different languages are not equivalent to the English ones.
Translators may also face frequent problems such as exact expert terms no having any
equivalents,nevermind the varying interpretations of standards and key phrases within the
translation process remain one of the main reasons of inconsistency between countries. There
is also the matter of different dialects within a single language, an example being some words in
American English having other meanings in British English such as the term property which
consists only of land and buildings, whereas the term has a wider meaning in the USA.

To further complicate manners, some countries may bear some hostility to international
standards as the ISA are not a product of direct experiences and do not mirror the needed
relevance of each nation. Countries such as Africa and South America still regard the IFAC as a
Trojan horse concealing the Anglo-Saxon auditing principles behind a more reputable
international framework,when in truth the IFCA cannot acquit itself of the accusation of being
strongly biased by the EU and the USA, as their principles would hold no value if they are not
accepted by the two most powerful economies. Regardless, IAASB has tried to be as
multinational as possible,since the ten board members come from eight diverse nations.
Additionally, during the process of developing international standards, small and medium sized
entities are often neglected as big audit firms amount to 13 of the 18 IAASB members, with the
remaining ones filled by public sector auditors and academics. As a consequence, second-tier
audit firms may be reluctant to implement the ISA(Jopson,2006). Even the IFAC(2006) confirms
the “challenges that are faced by small and medium practices(SMPs) in applying ISAs to the
audits of small and medium enterprises(SMEs)...”

A culmination of the analysis is that achieving truly harmonized standards will be challenging
due to significant national variations. As such it is more vital to attain a fundamental set of
international auditing standards because unitary standards have many benefits. Some of these
benefits include improved cooperation among regulators, higher audit quality and acceptance,
and fewer financial scandals.
2.3 Legal Framework

Laws are important in the business sector because they protect investors and creditors and set
rules for how companies must conduct themselves. A country's legal system can provide
standards or rules for doing business and impose duties on entrepreneurs. Apart from
addressing issues such as property rights, a strong legal framework can also facilitate the
settlement of conflicts

Administrative and constitutional laws may place significant restrictions on a country's capacity
to give domestic legal effect to international norms established by non-governmental
international organisations. Particular issues may arise for countries that have traditionally relied
on laws and regulations since new legislation may be needed to update or accept a standard.
This has an effect on the activities related to compliance, monitoring, and enforcement because
it can be costly and time-consuming. If external quality assurance methods (managed by
governments, regulators, or professional accountancy organizations) are not implemented, it will
also have an impact on the quality of audits.

On the other hand, differences in national laws and the legal system are mostly to blame for
legal impediments. It is now possible to distinguish between the codified law, which is employed
in many European continental states, and the common law, which is predominant in
Anglo-Saxon nations. The ways in which these two legal systems approach the law and render
court decisions are very dissimilar. In addition, disparities in the efficacy of national rules and
regulations, including those that control accounting standards and auditor liability, adversely
impact the harmonization process.

Rules in weak, nonexistent, or inconsistent countries may affect the quality of audited financial
statements and the implementation of international accounting and auditing standards. On
occasion, both individuals and businesses may need to rely on alternative ways; in this case,
the audit may need to take these methods into consideration.

Individuals ought to possess the ability to uphold their rights, regardless of their legality, and
litigation provides a means of doing so. But this can turn out to be ineffectual. Complete
transparency is extremely difficult to attain, and audit quality may suffer in an environment
where everything is subject to legal action and legal liability is a major source of risk. Increased
litigation, for example, can result in defensive audits and a tendency to apply standards
haphazardly rather than as guides. Furthermore, more lawsuits could prevent or impede the
development of new standards and procedures.
2.4 Conceptual Framework

The conceptual framework that was shown above is to illustrate clearly the relationship on how
the differences in national environments present a barrier in achieving auditing quality. The
factor of national environments gives a challenge to auditors, that might result in negative
impact if the auditor is unfamiliar and lacks expertise in the related issue.

First of all, the key factors impacting the national environments on quality transnational audits
are the political, economic, and business environments that shape the national environment
which impact auditing quality. Political factors, including government stability and regulatory
policies, influence the regulations of audit. Economic conditions, such as market stability,
inflation rates, and economic growth, affect financial statements and the relevance of audit
procedures. The business environment, characterized by industry practices, competition levels,
and market structures, requires auditors to adapt their strategies to local conditions. Together,
these factors create a complex landscape that auditors must navigate to maintain high-quality
audits across different national contexts.

Secondly, the difference in the legal framework that includes the regulations from various
countries can create significant challenges for auditors. The compliance with local laws and
international standards requires auditors to be familiar with the legal environment in each
country where the audit is conducted.
Lastly, cultural differences can impact the interpretation and application of auditing standards.
Auditors must be aware of cultural differences and how they affect business operation.For
instance, understanding local attitudes towards compliance, risk, and transparency.

To avoid the negative impact that will occur regards audit quality the International Standard on
Auditing (ISA) 315 (Revised) had to obtain understandability of the industry, regulatory, and
external influences impacting the audited organization which was required by the auditors.
Which means that in achieving consistency in auditing quality, auditors have to be aware and
familiar of the potential audit risk that may arise due to the difference of national environment,
and reflect on how these variations are currently handled in international standards. Therefore, it
is expected that consistent quality of audit will be provided by the auditor to the user of the
financial statement(“Conceptual Framework for Financial Reporting,” 2010).
3.0 Recommendation

Global audit firms need to adapt to country-specific contexts. The national accounting bodies,
regulators, standard setters, governments, and international institutions have a role in enabling
the audit firms to adopt knowledge sharing. The understanding of differences at the national
level enables the auditors to better address the concerns in specific national contexts and
therefore enhance the audit. In most countries, there are local networking groups that pool
together audit firms of all sizes and that address the concerns for those specific audit firms.
Such networks include collaboration that aids in sharing insights and best practices, finally
resulting in better audit outcomes. (Yusoff et al., 2023).

National professional accounting bodies have a big role in making these discussions possible.
They can help with the creation of platforms for members with diverse international experiences
to exchange ideas and opinions and improve communication strategies. This will not only help
the auditors conduct high-quality audits in a global context, but also ensure that the audit
practices retain their relevance and effectiveness in divergent national contexts. By learning
from professionals in other countries, auditors develop a more profound understanding of both
the global challenges of auditing and the solutions. Communication techniques to be improved
in the course of time is a never-ending process and can be achieved only through dedication
and innovation from all stakeholders involved. (ICAEW, 2010).

Once effective platforms for the sharing of experience are made, auditors and standard setters
must address audit issues that present issues resulting from the differences between countries.
A review on how these differences are captured in international standards and areas for
improvement should be done. International standards should place an emphasis on how
country-specific factors affect the risk of the audit. For instance, reviewing the application and
explanatory sections in International Standards on Auditing—ISA 315 to capture broader
cultural and behavioral factors will be helpful. This revision would help the auditor cope much
better with specific situations, enhancing the quality of the audit. (ICAEW, 2010).

With the change in the global business environment over the years, the requirement for
improvements in audit standards is also on a constant rise. Making international standards more
solid, practical, and adaptable by incorporating insights from diverse national settings is,
therefore, very important. It requires a regular process of feedback from practitioners who
encounter challenges firsthand. The aspects to be addressed include country-specific cultural
norms and business practices, which the current standards may have failed to cover adequately.
Such action will leave auditors better placed to cope with the complexities of international
audits, raising the quality of audits and increasing confidence in financial reporting across
countries. (ICAEW, 2010).
4.0 Conclusion

This study illustrates how transnational audits may help the business find and handle important
changes. They give assurance and help in realizing important organizational
changes—reorganization, mergers, acquisitions, and installation of new systems. They help in
understanding how such changes impact the financial statement, internal control, and general
health.

One of the key challenges in this study is maintaining the audit quality in complex and
constantly changing environments. Factors that may influence the quality of audited financial
reports include national differences in business ethics, responsiveness, and transparency of the
government, the level of capital market sophistication, and the norms in governance.
Additionally, incentives for the preparers of the information and national institution accountability
and openness are important. The auditing process is also complicated by economic challenges,
different attitudes of financial statement users, and different technological development stages.

The presence of different legal regimes may also result in cross-border auditing complications.
For multinational group audits, the group auditor may be responsible for the group audit report,
even when outside auditors are included. There may be hidden costs related to language
barriers and different disagreements regarding accounting treatments. Other difficulties are
limited access to the work papers and cross-border communication problems due to linguistic,
cultural, methodological, and time zone differences.

Transnational audits are, therefore, crucial in ascertaining the reliability, accountability, and
transparency during organizational changes. They provide crucial information on the costs of
transition, risks, and potential challenges and make the stakeholders understand and make
appropriate decisions to address emerging issues. Such challenges mentioned above need to
be addressed to ensure that multinational audits are effective and complete.
5.0 Reference

1. Yusoff, Y. H., Khoiri, A. A., Suhaimi, I. Z., Noor, N. a. M., Anuar, S. A., & Sulaiman, S.
(2023). Transnational audit: The differences of national environments have challenged
the auditors in providing quality auditing. International Journal of Academic Research in
Business & Social Sciences,
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ferences_of_National_Environments_Have_Challenged_the_Auditors_in_Providing_Qu
ality_Auditing
2. Institute of Chartered Accountants in England and Wales. (2010). Audit Quality
International Consistency.
3. OECD, S. G. (2009). Competition and Regulation in Competition abd Regulation in
Auditing
Related Professions. Roundtable on Competition and Regulation in Auditing and
Related Professions Report, (June).
4. Conceptual Framework for Financial Reporting. (2010). International Financial Reporting
Standard. Retrieved July 13, 2023, from
https://www.ifrs.org/content/dam/ifrs/publications/pdf-
standards/english/2021/issued/part-a/conceptual-framework-for-financial-reporting.pdf