International Audit Standards

Purpose of the paper

Purpose of this study is to understand the International Audit Standards in banking sector.

Introduction and Background

High quality financial reporting contributes to promoting private sector growth and reducing volatility, through: (a) strengthening countries' financial architecture and reducing the risk of financial market crises, together with their associated negative economic impacts; (b) contributing to foreign direct and portfolio investment; (c) helping to mobilize domestic savings; (d) facilitating the access of smaller-scale corporate borrowers to credit from the formal financial sector by lowering the barrier of high information(Wang, 85) and borrowing costs; allowing investors to evaluate corporate prospects and make informed investment and voting decisions, resulting in a lower cost of capital and a better allocation of resources; and facilitating integration into global financial and capital markets.

Financial reporting is also a building block of a market-based monitoring of companies, which allows shareholders and the public at large to assess management performance, thus influencing its behavior.

High quality financial reporting also contributes to strengthening the financial discipline of Government Business Enterprises (GBEs) (Taylor, 65-85). The relative lack of capital-market related pressures on GBEs means that the shareholding Ministers need to rely on administrative monitoring procedures to hold GBE boards accountable. The general adoption of International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) by GBEs enhances shareholding Ministers' and the public's ability to assess the extent to which a GBE is creating or eroding value.

High quality financial reporting may also contribute to improving the assessment and collection of taxes on corporate profits. Countries currently have fundamentally different approaches to the relationship between accounting and taxation. At one extreme (total independence), income determination for accounting purposes is completely separate from income determination for tax purposes. At the other extreme (total dependence), either financial statements are prepared in accordance with tax rules, or income determination for tax purposes is determined by the choices made in financial statements. The greater the level of dependency, the greater the importance of high-quality financial statements for the assessment and collection of taxes on corporate profits.

As an institution committed to the fight against poverty, the World Bank undertakes a number of activities to support the development and implementation of international accounting and auditing standards, as it recognizes the contribution that high-quality financial reporting can make to development(Ragsdale, 200). These activities include financial support to the relevant international standard-setting organizations; diagnostic work to benchmark countries' financial reporting standards and practices against international standards; policy advice and financial assistance to support the enhancement of these standards and practices; and participation in international discussions and initiatives aimed at strengthening the regulatory environment, both nationally and globally, in which international standards are applied.

This paper provides an overview of the main program of Bank diagnostic work in the field of private sector financial reporting: the Reports on the Observance of Standards and Codes (ROSC) accounting and auditing assessment. It summarizes some of the main findings of the 38 assessments that have been carried out to date, with specific reference ...