Country PaperⅢfor China-Indian Audit Seminar

China’s National AuditingStandards:International Reference and Innovation

Therevised of China’s National AuditingStandards was promulgated on September 1 2010. It was done by employing mainly the methodof comparative study. On the basis of reviewing the current national auditing standards and their implementation, we made comparison with and drew on the auditing standards promulgated by the International Organization of Supreme Audit Institutions (INTOSAI), the International Federation of Accountants (IFAC) and supreme audit institutions of the United States, India, etc., thus enabling China’s National Auditing standards to keep in line with international advanced experience and practice as far as possible. In the meanwhile, due attention was paid to summarizingthe experience in China’s own national audit practices in accordance with the leading system in the audit institutionsof China and the statutory duties, thus showing its Chinese characteristics.

1. Introduction to International Auditing Standards

(1) The International Standards of Supreme Audit Institutions (ISSAI). The framework of ISSAI includes documents on four levels: Firstly, the Lima Declarationwhich is serving as the basis for government audit. Itmainly standardizes the purposes of audit, pre-audit or post-audit, independence, the relationship to Parliament, government and the administration, the powers of Supreme Audit Institutions, audit methods and procedures,and reporting to Parliament and to the general public. On the second level are theMexico Declaration on SAI Independence, INTOSAI Guidelines and Good Practices Related to SAI Independence, Principles of transparency and accountability and Code of Ethics, which serve as the prerequisites for the functioning of Supreme Audit Institutions. The third level is thefundamental auditing principles. And on the fourth level isauditing guidelinesthat can be used on a daily basis for auditing tasks. As we know, when Indian Comptroller and Auditor General (CAG) revised the auditing standards in 2002, the auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI) have been suitably adapted, especially the code of ethics.

(2)The Generally Accepted Government Auditing Standards (GAGAS), commonly referred to as the "Yellow Book", are produced in the United States by the Government Accountability Office (GAO).

It contains eight chapters plus the appendixes. Chapter I is Use and Application of GAGAS, which explains thepurpose and applicability of GAGAS，Stating Compliance with GAGAS in the Auditors’Report, Relationship between GAGAS and Other Professional Standards,Types of GAGAS Audits and Attestation Engagements. Chapter II is entitled Ethical Principles in Government Auditing.The ethical principles that guide the work of auditors who conduct audits in accordance with GAGAS arethe public interest, integrity, objectivity, proper use of government information, resources, and position; andprofessional behavior. Chapter III is entitled General Standards. It definesIndependence, Professional Judgment, Competence, as well as Quality Control and Assurance. Chapter IV is entitled Field Work Standards for Financial Audits. Chapter V is entitled Reporting Standards for Financial Audits. Chapter VI is entitled General, field work and reporting standards for attestation engagements. Chapter VII is entitled Field Work Standards for Performance Audits. And the last chapter is entitled Reporting Standards for Performance Audits.

(3) Clarified International Standards on Auditing issued by International Federation of Accountants. They cover six aspects: Norms of professional ethics, standards for quality control, 32 auditing standards, 2 examination standards, 2 standards for other confirmations and 2 standards for relevant services.

2. China’s Practice in referring toInternational Experience when formulatingitsown National AuditingStandards.

When China formulated its National AuditingStandards, it referred to auditing standards and guidelines of INTOSAI, the United States, India and other countries, as well as auditing standards promulgated by the International Federation of Accountants, so as to make the basic concepts of China’s National Auditing Standards, principles and approaches compatible to the international auditing theories and practical standards. The following is a briefexplanation citingdevelopment of audit implementation plans, inspection of following-up actions, audit quality control and audit in information technology (IT)environment:

(1) Adoption of development of audit implementation plans. Lookinginto the auditing standards of INTOSAI and various countries, it is obvious that development of audit implementation plans is always looked as an important starting point for audit projects. The INTOSAI auditingstandards stipulates that the main tasks of development of audit implementation plan are as follows: Collecting relevant information of the auditees so as to assess the level of materiality; determining the auditing objective and scope; making a preliminary analysis to define procedures to be adopted and nature and degree of investigation. The Financial Audit Manual of the U.S.GAOstipulates that during the time when an audit implementation plan is being developing, the audit teamshould learn about the operation of the auditees, the important budgetary restrictions, the important clauses of relevant laws and regulations and the relevant control links of operation of auditees;determine the feasibility of effective information system control; make a preliminary assessment of risks so as to identify the fields of high risks; and work out plans for the sites and units of the entityfor field audit. By drawing on international practices, Articles 54 to 81 of China’s National Auditing Standards have laid down concrete stipulations for the stage of development ofimplementation plans. The audit teams are required to learn about through investigation the auditees and other relevant information, assess the possibility of serious problems of the auditees,formulate corresponding measures, and finally develop the implementation plans for the audit.

(2) Effective follow-up mechanisms. INTOSAI’s standard-related documents such as the Mexico Declaration on SAI Independence, INTOSAI Guidelines and Good Practices Related to SAI Independence, Principles of transparency and accountability and Code of Ethics require SAIs have their own internal follow-up system to ensure that the audited entities properly address their observations and recommendations. In its practice the National Audit Office of China attaches great importance to checking the implementation of the audit findings andthe follow-upbythe auditees and urging them to do so. Drawing on the relevant contents of the INTOSAI standards,Articles 163 to 171 of Section 5 of Chapter V entitled Audit Reports of China’s National Auditing Standards specify inspection of audit follow-up,stipulating in explicit termsthat the audit institutions should urge and check the implementation and follow-upof the auditees according to the audit findings, including setting up an audit follow-up inspection mechanism and specifying the items, the means and the procedures for the checking.

(3) Audit quality control. The international standards for quality control (ISQC1) of the International Federation of Accountants stipulatesthat quality control systems should include policies and procedures addressing each of the following points: Leadership responsibilities for quality within the firm, Ethical requirements, Acceptance and continuance of client relationships and specific engagements, Human resources, Engagement performance and Monitoring. The policies and procedures containing the above-mentioned elements should be formulated as documents, andinformation relating to such policies and procedures should be passed on in time to members of an audit institutionsization so that they are fully aware of the targets to be realized in quality control as well as the personal responsibility for quality. The key elements involved in the policies and procedures of the U.S. government auditing standards are identical with that of the International Federation of Accountants. Articles 172 to 196 of China’s National Auditing Standards have laid down stipulations for quality control. Drawing on the above-mentioned international practices, Article 173 puts forward five key elements for audit quality control, namely, responsibility for audit quality, code of ethics, audit-related human resources, implementation of audit work, and monitoring and supervision of audit quality.

(4) Auditin ITenvironment. Both theStandards, Guidelines and Procedures for Audits of Information Systempromulgated by the U.S. GAO and Association of Audit and Control of Information Systems and the Federal Information System Controls Audit Manualspecially formulated by the U.S. Government Accountability Office in addition to the auditing standards show that audit in IT environment is no longer carried out by traditional auditors for financial audit or performance audit, butinstead has formed a special branch of IT audit, in whichthe task of auditing the information systems of the auditees for financial audit or performance audit is accomplished by auditors for information systems. In light of the unique professionalism involved in information systems audit, Article 23 of China’s National Auditing Standards stipulates that the audit team should be competent in IT if the IT application of the auditees may exert a significant impact on the realization of the audit objectives; Article 20 stipulates that audit institutions may invite external experts to take part in the audit or provide technical support, professional consultation and professional appraisal; Article 62 and Article 76 stipulate respectively that an auditing team should learn about through investigation on the control system of information system of the auditeesas well as its effectiveness and safety.

3. Innovation in China’s National Auditing Standards

China’s National Auditing Standards have been formulated on the basis of summarizing the basic practices and successful experience in national audits in recent years that suit the actual situations in China and with full consideration to the characteristics of the national audit system as well as other features such as the power of administrative handling and penalizing it enjoys and focus on investigating and dealing with gross violations of laws and regulations, thus embodying thestatutory duties enjoyed by the audit institutions. By implementing the National AuditingStandards,CNAO is trying its best to let national audit to play a constructive role of supervision and give expression to the unique features of China’s National Auditing Standards.

(1) It is separately stipulated thatannual audit planis incorporated into the auditing standards and that they should serve the overall national economic and social development of the country. The audit plan mentioned in China’s National Auditing Standards refers to the project plan for annual audit worked out by audit institutions. Internationally, it is called the strategic plan for audit or options of audit projects. So far there is no separate stipulation for them in the auditing standards of INTOSAI, the U.S. GAO and other nations. Although the audit plan is not evolvedin a specific audit project, it is an important part of project management of audit institutions. That is reason why it is incorporated into auditing standards for standardization. Chapter III of China’s National Auditing Standards specifically deals with it. Article 26 in that chapter stipulates that audit institutionsshould work out annual plans for audit according to their statutory audit duties and audit jurisdiction. Formulation of annual audit plans should serve the over-all objectives of the country, center around work of the government, focus on key audit targets, and arrange audit resources in a reasonable way to avoid overlapping audits. Article 28 stipulates that the grounds for formulating audit plans include national and local financial revenues and expenditures, fiscal revenues and expenditures, relevant economic activities and the government’s focus of work; requirements for audit raisedby thegovernment administrative leaders at the same level and relevant leading authorities; tasks arranged or authorized by the audit institutions at a higher level; and relevant offenses reported and concerned about by the public. In addition, the chapter also stipulates the contents,the examination and approval and the adjustment of an audit plan.

(2) The auditing standards further embody the power of audit institutionsover inspecting, dealing with and penalizing gross violations of laws. All provisions concerning investigation and verification of fraud and law violation in the auditing standards of INTOSAI and IFA and relevant guidelines of the Association of Certified Fraud Examiners (ACFE) are summation of thinking patterns and logic reasoning of the audit personnel. In light of the system characteristics of China’s national audit and its power of administrative handling and penalizing as well as its focus on gross violations of laws and regulations, Section 4 of Chapter IV of China’s National Auditing Standards has laid down the provision for investigation of serious cases of lawviolation. Article 114 clearly stipulates that when auditors investigate serious law-violating cases, they should assess the motive, nature, consequence and composition of the offense. Articles 116 and 117 clearly showthe way to identify abnormal signs of fraudulent practices, while Article 118 contains special stipulations concerningthe audit institutions and auditors when they engage in investigation. As for the handling of grossviolationsof laws, the audit institutions as administrative organs have the authority of giving administrative penalty according to stipulations of the Audit Law of the People’s Republic of China. Article 139 of the auditing standards makes it clear that an auditing team should draft a letter of audit decision for the auditees or investigated for violation of national provisions onfinancial revenues and expenditures and fiscal revenues and expenditures if the case falls within the power of the audit institutions.

(3) The auditing standards have laid down stipulations for economic accountability audit, whichhighlights the feature of the targets forauditing supervision. The economic accountability audit is a kind of audit with Chinese characteristics. Article 25 of the Audit Law of the People’s Republic of Chinaauthorizesaudit institutions to conduct economic accountability audit, which refers to auditinga person holding special positions. Such a personenjoys certain power and undertakes certain obligations as he or she is entrusted with the duty of managing the financial funds, state-owned resources and capital, and other relevant funds as well as engaging in other economy-related activities. The purpose of the audit of economic accountability is to assess whether people holdingspecial positions have properly performed their duties and obligations, unequivocally define their responsibility in issues found in an audit, and advance corresponding audit recommendations. The outstanding feature of economic accountability audit is that the audit is targeted at people holding special positions to assess their performance of economic accountability and definetheir responsibility, while other audits generally do not aim at certain people. Article 7 of the General Principles of the auditing standards stipulates in clear-cut terms that audit institutions shall conduct economic accountability audits of principal responsible persons of the entitiesunder the audit supervision of the audit institutions according to law; Article 154 stipulates that after an audit institution completes its audit project of economic accountability, it shall submit a report on audit findings according to relevant provisions to the administrative leader of the government at the same level and the relevant department of official management and supervision.

(4) Good results have been achieved by follow-up audits and the auditing standards have laid down stipulations regarding follow-up audits. TheLima Declaration of INTOSAI divides government audit into two categories according to the time when an audit is invoked─pre-audit and post-audit. In making follow-up audits,China has changed post-audits in the past to concurrent audits, and is experimenting to conduct whole-process follow-up audits of government-invested projects and special financial funds. In recentyears, governments at various levels have constantly been expanding their investment in infrastructure construction, social security and environmental protection along with rapid economic and social development, andaudit institutionsat various levels in China have also been gradually conducting in-depth follow-up audits. In particular, after the Wenchuan earthquake in 2008, the National Audit Office of China organized audit institutionsat various levels in carrying out follow-up audits of funds for quake relief and post-quake reconstruction. Their good results were acclaimed at home and abroad. Following that the Office carried out follow-up audits of high-speed railways, important water conservancy projects and other projects. As the role of follow-up audits is becoming increasingly important, China’s National Auditing Standards have laid down stipulations concerning follow-up audits. Articles 38, 56, 58 and 124 stipulate respectively the audit plan for a follow-up audit, delivery of an audit notice, formulation of an implementation plan and audit rectification.