According to a 2004 World Bank assessment of Ecuadorian accounting and auditing practices, the Ecuadorian Auditing Standards (NEAs) are based on the International Standards on Auditing (ISAs) promulgated by the International Auditing and Assurance Standards Board (IAASB) as they existed in 1999, when Ecuador adopted ISAs. Since 1999, however, the IAASB revised many of the standards and also issued new ISAs, and these changes have not been adopted in Ecuador due to the lack of established due process for updating the national standards. The World Bank, therefore, recommended full adoption of ISAs for public interest entities in Ecuador. Given the fact that auditors of financial institutions and insurance companies are already required to apply ISAs in statutory audits, the World Bank specifically called for the adoption of the international standards for audits of listed companies and entities regulated by the Superintendency of Companies. The World Bank found that the enforcement of existing financial reporting requirements was inadequate and noted that the most important factors hindering effectiveness of the audit process are the lack of implementation guidance, quality control, and audit committees.

General Overview

According to the description of the legal framework for financial reporting in Ecuador provided in the 2004 World Bank review of Ecuadorian accounting and auditing practices, accounting and auditing requirements for corporate entities in Ecuador are governed by the Companies Law of 1999. Listed companies and all Ecuadorian corporate entities with assets of more than US$1 million are required to be audited in accordance with Ecuadorian Auditing Standards (NEAs). NEAs were adopted in 1999 as a result of the collective efforts of a group of seven audit firms. At the time of adoption, NEAs were based on ISAs effective at that time. The World Bank commended the authorities for adopting the international standards, noting that NEAs represented "a significant step forward for the country in improving the quality of its standards" (p. 14). Nevertheless, the World Bank pointed out, since 1999 the International Auditing and Assurance Standards Board (IAASB) promulgated new ISAs and revised the existing ones, bringing about changes that have not been incorporated into national standards due to the lack of an established due process for updating the national standards. As a result, there are no equivalent national standards in many areas covered by the international standards. Moreover, it was noted that in Ecuador "the standards were developed on the basis of respectively IAS and ISA through the translation into Spanish of the original text in English" (p. 9). Ecuador's translations were done without any international cooperation, and the World Bank found differences between the text of the Ecuadorian standards and other existing translations of ISAs into Spanish.

In addition to the requirements of the Companies Law, all entities must submit a tax-compliance report to the Internal Revenue Service. Listed companies must additionally comply with financial reporting requirements laid out in the Securities Market Law (LMV) which, according to the World Bank, "regulates auditing activities, including independence, incompatibilities, confidentiality, communication of findings, etc., and mandates the change of an audit firm's signing partner after five years" (p. 3). Although the National Securities Council (CNV) is the official regulator of the securities market, enforcement of the LMV and the CNV resolutions is delegated to the Superintendency of Companies (SCE). Therefore, all listed companies are required to provide their audited annual financial statements to the SCE, which has the authority to conduct inspections and impose sanctions on auditors found in violation of the requirements. The SCE also sets additional requirements regarding the form and content of financial statements, the auditors report, and appointment of the auditor. Given the fact that financial institutions and insurance companies are already required to apply ISAs, the World Bank recommended the adoption of ISAs for audits of listed companies and entities regulated by the SCE.

Banks and insurance companies adhere to separate financial reporting regulations. Governed by the General Law of the Financial System Institutions of 2001, banks, investment funds, savings, and loans institutions must prepare their financial statements in line with the requirements issued by the Superintendency of Banks and Insurance (SBS). The SBS mandates the use of ISAs for the audits of financial institutions and insurance companies. Also, SBS-regulated annual financial statements must be accompanied by an opinion from an independent auditor. In addition, the SBS lays down detailed requirements for the appointment of auditors. Similarly, insurance companies follow financial reporting requirements set out by the SBS under the General Law on Insurance.

The World Bank assessment noted that there is no legal obligation to publish statutory audited financial statements in Ecuador. Overall, the assessment noted that there was lack of coordination between regulators, particularly in area of licensing and monitoring of auditors. The report also found enforcement of accounting and auditing standards by regulatory bodies inadequate, specifically in the case of the SCE. Overall, it was concluded that the Ecuadorian environment is not conducive for compliance with auditing standards because of lack of implementation guidelines, quality control, effective sanctions to ensure compliance, and absence of governance structure.

The Law on Accountants passed by the Congress in 1966 lays down rules for the various aspects of the accounting profession. In 1991, the National Federation of Accountants of Ecuador (FNCE) collaborated with the Institute of Accounting Research in Ecuador to issue the Accountant's Code of Ethics. However, the World Bank noted that the code of ethics is not actively enforced and recommended amending the existing code in line with the International Federation of Accountants' (IFAC) code of ethics. The World Bank also advised Ecuadorian authorities to establish an Audit Oversight Board for regulating the profession of public accountants. The FNCE is not listed as a member on the IFAC website.

The Principles

ISA 200 Objective and General Principles Governing an Audit of Financial Statements (effective 2006)

NC

According to the 2004 World Bank assessment, Ecuadorian auditing standards are based on ISAs. Existing ISAs were translated into Spanish and adopted as national auditing standards in 1999. However, in the following years the IAASB amended ISA 200 and at the time of the World Bank assessment, the equivalent NEA has not been updated accordingly.

ISA 210 Terms of Audit Engagements (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 220R Quality Control for Audits of Historical Financial Information (effective 2005)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 230R Documentation (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 260 Communications of Audit Matters With Those Charged With Governance (effective 2004)

NC

According to the 2004 World Bank report, ISA260 was promulgated by the IAASB after the 1999 adoption of ISAs in Ecuador. Since there was no ongoing process for updating the national standards at the time of the World Bank assessment, ISA260 had not been adopted.

ISA 300 Planning an Audit of Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (effective 2004)

NC

According to the 2004 World Bank report, ISA315 was promulgated by the IAASB after the 1999 adoption of ISAs in Ecuador. Since there was no ongoing process for updating the national standards at the time of the assessment, ISA315 had not been adopted.

ISA 320 Audit Materiality (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 330 The Auditor’s Procedures in Response to Assessed Risks (effective 2006)

NC

According to the 2004 World Bank report, ISA330 was promulgated by the IAASB after the 1999 adoption of ISAs in Ecuador. Since there was no ongoing process for updating the national standards at the time of the assessment, ISA330 had not been adopted.

ISA 402 Audit Considerations Relating to Entities Using Service Organizations (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 500 Audit Evidence (effective 2004)

NC

According to the 2004 World Bank assessment, Ecuadorian auditing standards are based on ISAs. Existing ISAs were translated into Spanish and adopted as national auditing standards in 1999. However, in the following years the IAASB amended ISA500 and at the time of the World Bank assessment, the equivalent NEA had not been updated.

ISA 501 Audit Evidence - Additional Considerations for Specific Items (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 505 External Confirmations (effective 2004)

NC

According to the 2004 World Bank report, ISA505 was promulgated by the IAASB after the 1999 adoption of ISAs in Ecuador. Since there was no ongoing process for updating the national standards at the time of the assessment, ISA505 had not been adopted.

ISA 510 Initial Engagements — Opening Balances (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 520 Analytical Procedures (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 530 Audit Sampling and Other Selective Testing Procedures (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 540 Audit of Accounting Estimates (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 545 Auditing Fair Value Measurements and Disclosures (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 550 Related Parties (effective 2004)

NC

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 560 Subsequent Events (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 570 Going Concern (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 580 Management Representations (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 600 Using the Work of Another Auditor (effective)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 610 Considering the Work of Internal Auditing (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 620 Using the Work of an Expert (effective 2005)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 700 The Auditor’s Report on Financial Statements (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 701 Modifications to the Independent Auditor's Report (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 710 Comparatives (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 720 Other Information in Documents Containing Audited Financial Statements (effective 2004)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.

ISA 800 The Auditor’s Report on Special Purpose Audit Engagements (effective 2006)

II

There is insufficient publicly available information as to Ecuador's compliance with this principle.