© Copyright FocusROI Inc 2010 C-PEM Introduction Webinar Stuart Hartley FCA [email protected]

© Copyright FocusROI Inc 2010

C-PEM IntroductionWebinar

Stuart Hartley [email protected]


Agenda..

C-PEM challenges and solutions

Tips for reducing the cost of audits

Other changes in C-PEM


Introducing C-PEM Released in June 2010

Volume 1 Core concepts Audits, reviews and

compilations

Volume 2 Practical Guidance Includes 2 integrated case

studies Part A Audits Part B Reviews Part C Compilations Part D Practice Aids

(forms, etc. on a CD)


The C-PEM Case StudiesCase Study A

Cambridge Furniture Inc.─ Case Study B

Kennedy & Co. ─

Business Furniture m anufacturing

$1.5 m illion $ 230,000

8 2 + owner

Sales

Staff

Furniture m anufacturing

Sam ple audit docum entation provided in C-PEMVolum e 2

Prim arily standard C-PEM

forms

Prim arily m emos to file

and condensedC-PEM form s


C-PEM Challenges & Solutions ….

1. Auditing standards have been clarified/revised Major changes The C-PEM Solution

2. Multiple Financial Reporting frameworks Major changes The C-PEM Solution

3. Applying CASs to Micro Sized Entities The C-PEM Solution

4. Reviews, compilations and other


Challenge #1

ALL Auditing standards have been clarified -- some revised (Re-written!)


“Clarified” Standards

Italics to specific “shalls”

New structure for auditing standards1. Introduction

2. Objectives

3. Definitions

4. Requirements (the auditor shall…)

5. Application and Other Explanatory Material

Current Italics

Change in number of paragraphs (not content) "Shalls"

282 A 100% increase in requirements 532


Impact of Clarified Standards

Plus Structure makes them easier to read/use Framework provides a consistent

approach “Shalls” make very clear what is required

Minus “Shalls” make very clear what is

required Standards are more prescriptive Change in practice is required New terminology to learn


The CAS Structure

1. 2. 3

Plan the audit

Performrisk assessment

procedures

Evaluate the audit evidence obtained

Prepare theauditor’s reportR

isk A

sses

s ment

Risk R

espo n

se

Rep

ort

i ng

Implement responses

to assessed RMM


CAS 200 - Overall Objectives 200.18

The auditor shall comply with all CASs relevant to the audit. A CAS is relevant to the audit when the CAS is in effect and the circumstances addressed by the CAS exist.

200.19 The auditor shall have an understanding of the entire text of a

CAS, including its application and other explanatory material, to understand its objectives and to apply its requirements properly.

200.21 To achieve the overall objectives of the auditor, the auditor shall

use the objectives stated in relevant CASs in planning and performing the audit


Tip 1… Read & understand the CAS

requirements CICA Handbook Part 1 C-PEM Volumes 1 and 2 Use of C-PEM Forms and practical aides

Staff training courses Webinars, etc.

Applying the new CASs effectively requires an investment to be made


Overall objective: Reduce audit risk to an acceptably low level

Overall Audit Objectives CAS 200

Specific CAS Objectives CASs 210-720

47 “sha lls ”

11 “sha lls ”

474 “sha lls ”

Applica tionm ate ria l



Firm Wide QC CSQC1

“Reducing audit risk to an acceptably low level”


CASs with more than 5 new “shalls”

CAS CAS Title Italics Shalls New Old HBCAS 600 Audits of group financial statements 7 40 33 6930CAS 700 Forming an opinion/reporting on F/S 12 38 26 5400CAS 250 Consideration of laws and regulations 3 18 15 5136CAS540 Estimates 1 16 15 5305CAS 570 Going concern 0 15 15 N/A CAS 550 Related Parties 5 18 13 6010CAS 705 Modifications to the opinion 10 23 13 5510CSQC1 CANADIAN STANDARD ON QUALITY CONTROL 35 47 12 GSF 1

CAS 210 Agreeing the terms of audit engagements 5 16 11 5110CAS 710 Comparative information 2 13 11 5701CAS 530 audit sampling 0 10 10 N/A CAS 510 Initial audit engagements — opening balances 0 9 9 variousCAS 560 Subsequent events 3 12 9 6550CAS 240 Fraud in an audit of financial statements 28 36 8 5135CAS 450 Evaluation of misstatements identified 3 11 8 5142CAS 260 Communication with those charged with governance 7 13 6 5751CAS 505 External Confirmations 4 10 6 5303CAS 330 The auditor's responses to assessed risks 21 26 5 5143CAS 580 Written representations 7 12 5 5370


Objective for Estimates

The objective of the auditor is to obtain sufficient appropriate audit evidence about whether:

(a) accounting estimates, including fair value accounting estimates, in the financial statements, whether recognized or disclosed, are reasonable; and

(b) related disclosures in the financial statements are adequate, in the context of the applicable financial reporting framework.


Estimates5305 Estimates CAS540

Current Italics

Subject matter "Shalls"

Risk Assessment Procedures 2Identifying and Assessing RMM 2Responses to the Assessed Risks 3Further Substantive Procedures 3Evaluating Reasonableness of Estimates 1

Disclosures 2Indicators of Possible Management Bias 1Written Representations 1

1 Documentation 1

1 Totals 16


Ris

k A

sses

smen

t

Ris

k R

espo

nse

Rep

orti

ng

W hat estim ates are required?

Have estim ates been prepared properlyusing consistent m ethodology?

Is the supporting evidence re liable?

How were the estim ates prepared?

How accurate were prior years estim ates?

Any evidence of m anagem ent b ias?Any evidence of fraud?

Are in accordance

w ith the of accounting estim ates

financial reporting fram ework?

financial s ta tem ents d isclosures

If a sign ificant risk, has d isclosure been m ade of the estim ation uncerta in ty?

O btain m anagem ent representations

Extent o f estim ation uncerta in ty involved?

How significant are the estim ates?

Is an expert required?

C-PEM overview of Estimates


Related Parties 6010 Related Parties CAS 550

Current Italics


1 Risk Assessment Procedures 71 Identifying and Assessing RMM 21 Responses to the Assessed Risks 5

Evaluating Accounting/Disclosure of Related Parties 11 Written Representations 11 Communication with Those Charged with Governance 1

Documentation 1

5 Totals 18


Ris

k A

sses

smen

t

Ris

k R

espo

nse

Rep

orti

ng

Identify re la ted parties includ ing changes from previous periods

Identify any other re la ted parties and if found ask why not previously identified

Understand nature, extent and purpose of transactions

If outside norm al course of business inspect underlying docum ents.

O btain evidence to support m anagem ents assertions about the

.nature, extent and

purpose of transactions

Is financia l sta tem ent d isclosure adequate?

Does audit op in ion need to be m odified if insuffic ient evidence availab le?

O btain m anagem ent representations

Report on any find ings

Consider sign ificant risks

Consider potentia l for fraud

Consider possib le fraud

Rem ain a lert for rela ted partytransactions throughout audit

C-PEM Overview of Related Parties


Use of External Confirmations

5303 External Confirmations CAS 505Current Italics


Use of confirmations 1Management's Refusal to allow confirm 2

2 Results of the External Confirmation Procedures 5Negative Confirmations 1

1 Evaluating the Evidence Obtained 11 Confirming accounts recievable 4 Totals 10


SamplingAudit sampling CAS 530

Current Italics


Sample Design, Size and Selection of Items for Testing 3Performing Audit Procedures 3Nature and Cause of Deviations and Misstatements 2Projecting Misstatements 1Evaluating Results of Audit Sampling 1

0 Totals 10


Subsequent Events

6550 Subsequent events CAS 560Current Italics


1 Events between Date of F/S and Date of Auditor's Report 41 Facts after Date of Report but before Date F/S are Issued 41 Facts Known to Auditor after F/S Issued 4

3 Totals 12


Materiality CAS 320

Financialstatem ent

leve l

‘Overall’ Materiality

‘ Overal l ’ Materiali tyPerformance

‘ Specifi c’ Material ity

Performance

‘Specifi c’ MaterialityAccount balance,class of transactions

and disclosures level

Q uantitative amo unt $


Going Concern Going concern CAS 570

Current Italics


Risk Assessment Procedures 2Evaluating Management's Assessment 4Additional Audit Procedures when events identified 1Audit Conclusions and Reporting 1Material Uncertainty Exists 3Going Concern Assumption Inappropriate 1Management Unwilling to Extend Its Assessment 1Communication with Those Charged with Governance 1Significant Delay in Approval of Financial Statements 1

0 Totals 15


Misstatements5142 Evaluation of Misstatements Identified CAS 450

Current Italics


1 Accumulation of Identified Misstatements 1Consideration of Identified Misstatements 2

1 Communication and Correction of Misstatements 2Evaluating the Effect of Uncorrected Misstatements 2Communication with Those Charged with Governance 2

1 Written Representation 1Documentation 1

3 Totals 11


Challenge #2

Multiple Appropriate Financial Reporting Frameworks (AFRFs)


GAAP until recently

Canadian GAAP

Privateentity

Listedentity

Governm ententity

Not forProfit


GAAP from 2011 Onwards

ASPE

ASPE+NFP

IFRS

IFR Sfor SM E?

PSAB

Privateentity

Listedentity

Governm ententity

Not forProfit


Multiple AFRFs

IFRS IFRS for SMEs

ASPE ASPE +NFP

PSAB

Number of Pages

2500 220 700 740 ?

Focus Listed Entities

SMEs SMEs NFPs Government

Source IASB IASB

IFRS and ASPE are Canadian GAAP


Challenge #3

Applying CASs to Micro Sized Entities

In Europe: Less than 1 million euros in revenue

– Equivalent to 1.3 million Canadian dollars Less than 10 employees


Reality of Micro Entity Audits

Limited number of F/S users Reduced risk

Unsophisticated business processes and accounting systems Few employees Ownership is concentrated Nature/quality of audit evidence available is less

than larger entity

Cost of an audit disproportionately high as compared to larger

entities


How CASs address SME audits… “The auditor’s objectives are the same for audits

of entities of different sizes and complexities. This does not mean that every audit will be

planned/performed in exactly the same way.

CASs recognize that specific audit procedures to be undertaken may vary considerably based on size of entity

“Applying ISAs Proportionately with the Size and Complexity of an Entity” issued by IFAC in August 2009.


CAS Applicability to SMEs

CAS Objectives

‘Auditor shall..’

Application &other material

Largerentities

Smallerentities

Practical guidance

+Considerations Specific

to Sm aller Entities

Practical guidanceon m eaning andim plem entation


Overall Audit Scope does not change

Entity Objectives Financial Statements

& Assertions

Governance

Leadership/ management

RevenueP rocesses

OtherP rocesses

Transactions

PurchasingP rocesses

PayrollP rocesses

Perv

asiv

e Pervasive

(entity level)

Informat ion Systems

Inh

eren

t R

isks C

ontrols


Still Required to Understand Internal Control

Pervasive areoften called entity level controls

Specific are oftencalled business process or application controls


Tip 2…Do not ignore the ‘Control Environment’.

The active involvement of an owner-manager may serve to mitigate transactional risks

(where segregation of duties not possible) in a small entity;

ControlEn v ironm e nt


Traditional Audit Phases

Client Acceptance Planning

Form Opinion

Perform Procedures

CompletedChecklists

M em o to file ConclusionsM em o for file

CompletedChecklists

BUT Where does the required risk assessment fit?


Tip 3…‘Risk assessment’ is NOT simply an ADD ON to rest of audit.

Risk assessment should enable the auditor to focus work on areas where the RMM is the highest and to reduce work on low risk areas.

This applies in any size audit.


Form Opinion

Perform Procedures

CompletedChecklists

M em o to file ConclusionsM em o for file

CompletedChecklists

+ Risk Assessm ent?x



Form Opinion

Perform Procedures

Risk Assessment Risk Response Reporting

AnalyticalProcedures

P relim im ary procedures A ud it p re-conditions

A ssessed R isks o f m ateria l m isstatem entat the FS & A ssertion Leve ls

Team D iscussionsO vera ll audit s trategy

Tests ofdetail

Tests ofcontrol?

O vera ll R esponses

D esign Furthe r A ud it p rocedures

S uffic ien t appropriate audit ev idence

C onclusions d raw nbased on evidence ob ta ined

Evaluate the audit evidence obtained

Risk assessm entprocedures


The Solution

Applying C-PEM to smaller entities


C-PEM A completely new version of PEM

that: Reflects the new clarified CASs

Additional guidance on reviews and compilations

Aims for an enlarged base of users An attractive book (in full color) for

partners/staff to read on the bus/train/gym workout or at home

More practical “how to” guidance Integrated case studies and completed

forms/memos


C-PEMForms

What C-PEM forms to use is always based on professional judgment

C-PEM Forms facilitate: Compliance with CAS requirements Ease of use with new objectives and instructions Capture of relevant audit evidence in one place Reuse (after updating) - for up to 3-4 years Ease of file review

C-PEM Forms require some staff training on their use. Designed for use by a knowledgeable auditor

C-PEM “Worksheets” are ONLY to be used when applicable

StandardForms

C ondensedForm s M em os

(based on form s)

S ize o f en tityLarge r S m alle r


Tip 4… Select appropriate Forms to Use

Select what C-PEM forms to use BEFORE work begins1. Standard forms2. Condensed forms3. Memo to file (using standard forms as a guide)

There is no reason why all three types of documentation cannot be used on the same audit.

If a matter is significant use the standard form, if straightforward use the condensed and if really simple use a memo.

Worksheets are only to be used when applicable


C-PEM forms structure

Financial Statements 100 series

Tax matters 200File completion 300

Planning 400Risk Assessment 500Risk Response 600Detailed audit plans A-ZZIncome statement 700Disclosure checklists 900

Form numbering

NOTE: Some form numbers have changed to better reflect their position in the audit process


Financial Reporting Frameworks – existing GAAP

900 – 999 FINANCIAL REPORTING FRAMEWORKS

905 FRF — Accounting standards for private enterprises To come—

959 FRF (Financial reporting framework) — Existing Canadian GAAP Read first

960 FRF — Existing GAAP — General

962 Worksheet FRF — Income taxes

963 Worksheet FRF — Long-term investments

964 Worksheet FRF — Leases

965 Worksheet FRF — Deferred charges, intangibles and goodwill

966 Worksheet FRF — Employee future benefits

967 Worksheet FRF — Financial instruments

968 Worksheet FRF — Supplementary

970 FRF Supplement — Not-for-profit entities


Key C-PEM Forms Planning (400 series)

Form # Name Year 1 Year 2 Year 3 Year 4 Year 5405-410 Preliminary activities

420 Materiality424 Scoping (+ later risk assessment)

425 Audit Team Discussions430 Overall Audit Strategy435 Risk assessment procedures

New Form prepared Form Updated


TIP 5… Spend time planning and saving costs

W hat does th is entity do?W ho are the key people? W hat are the key risks?

W hat m ateriality to use?Identify financial s tatem ent users and the ir needs

How could fraud occur?C onsider opportunities, p ressures and m otives. D eve lop som e fraud risk scenarios.

How w ill fraud risk be addressed?W hat changes are required to audit strategy?W ho is doing what, why and w hen?W hat docum entation is required?How w ill team com m unications take p lace?

W hat is our response to risks?W here is (using judgem ent)- m ore work required?- less or no work required?

W hat's changed th is year?Any new risk factors to address?

A udit TeamD iscuss ions


Tip 6 … Scope out low risk areas

Scope out immaterial/low risk areas or

Combine them and treat as one F/S area

Consider where work can be reduced EACH year

But consider whether an immaterial area is only small because of missing transactions


Key C-PEM Forms Risk Assessment (500 series)

Form # Name Year 1 Year 2 Year 3 Year 4 Year 5

510Identifying risks through understanding the entity

520/522 Risk assessment

525 Going concern

530/532 Entity Level control

545-560 Control design/implementation

424 Summary of Assessed Risks



Identify & assess risk

Scope of required risk assessment CAS 315.11-12

Key PointIdentify sources of risks not just effects on the F/S

Sources of Risk

External riskfactors

Interna l risk factors(nature o f entity)

R isks resulting fromentity ob jectives &

strategies

R isks from accounting

policies used

R isks identified from use o f Industry

perform anceindicators

Absence of re levant

In terna l controlsM ap sources of risk to possib le

errors/fraud in theF ina ncia l

S tatem ents

* R M M = R is ks o f m a te ria l m is s ta te m e nt

How: C-PEM 510, 510c or NFP 510


TIP 7 … Focus on causes of risks not the effects

The e ffectWater com ing through cie ling

The causeHole in the roof

Invento ry is overva lued S low dow n in econom y C u t o ff e rro rs found B ookkeeper p rone to m istakesE stim ates a re conservative O w ner w ants to m in im ize taxes


Assess Risks in One Place

Source of risk Result of risk Risk Assessment


Nature of Internal Control

Risks of material misstatement (RMM)

IC to prevent/detect error

Residual RMM

Low Risk High risk

Objective = F/S free from material misstatement


Control Risk – Two ApproachesTop Down Approach Bottom up Approach

W hat risks requirem itigation by control?

W hat risks requirem itigation by control?

Docum ent the operation of‘re levant’ in ternal controls

Docum ent internal controls (cradle to grave)

Are controls actually operating

Perform a walkthrough

Has m anagement m itigated the RM M in the F/S

Has m anagement m itigated the RM M in the F/S

W hat controls in p lace toprevent or detect/correct m isstatem ents from occurring?

W hat controls in p lace toprevent or detect/correct m isstatem ents from occurring?

ControlDesign

ControlDesign

ControlDocum entation

ControlDocum entation

ControlIm plem entation

Conclusion on Control Risk

Conclusion on Control Risk

ControlIm plem entation

RiskIdentification

RiskIdentification

You only need to evaluate controls ‘relevant’ to the audit


Consider using the matrices…Process xyz

Risk A Risk B Risk C Risk D

Assertion C E A A C A

Control IC Com

Control Procedure 1 CA P P

Control Procedure 2 IS D

Control Procedure 3 CA P P P

Control Procedure 4 M D

Control Procedure 5 CA P

Control Procedure 6 IS D D D

Conclusion on Control Design Y Y N Y

Can you identify the control weaknesses, control strengths & key controls?


Tip 8 … Focus on Changes

For risk assessment in year 2 focus only on changes

Identify any new risks and related controls Evaluate whether the relevant controls already

identified are still in operation (implementation)

If risk factors have not changed simply ensure the controls identified in year one are STILL in operation.

If no change, both control design and implementation have been addressed


Tip 9 … ROLL FORWARD

Plan for forms to be carried forward and updated

Most planning/risk assessment forms should ONLY be completed from scratch every 3-4 years (unless major changes have occurred)

Document evidence so that data collected can be reused.

Focus audit effort in year two onwards on what has changedand needs updating – not re-documenting existing data


Tip 10… Customize Your Risk Response

Base your response on the risk assessment --- Ensure work is directed to high risk areas and away from low risk areas


Key C-PEM Forms Risk Response (600 series)

Form # Name Year 1 Year 2 Year 3 Year 4 Year 5

6??

Applicable worksheets such as overall responses, sampling, estimates, related parties etc.

645Litigation, claims and non-compliance

650 Subsequent events

670 Use of journal entries

A-UU Detailed audit plans

7?? Income statement

900+ Financial reporting disclosures



File completion

Forming an Opinion (300 series)

Form # Name Year 1 Year 2 Year 3 Year 4 Year 5310 Checklist — Audit completion

320Notes on significant audit decisions

335Worksheet — Summary of identified misstatements

350 Written representations

360 Legal and other correspondence

370Worksheet — Matters for future consideration



Other changes in C-PEM


Review Engagements C-PEM Material

expanded Road map Forms basically

unchanged

The FoundationThe basic understanding of the entity

Volume 2 C hapter 35

Design and perform ance of review

engagem ent proceduresVolume 2 C hapter 35, 36

Assess PlausibilityVolume 2 C hapter 37

Review engagem ent

reportVol. 2 Chapter 38


Other Material in C-PEM Compilations

Updated material FOFI

No changes Primer on fraud Expanded sampling guidance Tips for Client Interviews


C-PEM Summary – A must BUY

Comprehensive guide to all the new CASs

Two bound volumes Illustrations in color Integrated case studies

Ideal training tool Extra copies available for staff

members User friendly forms

Practical and flexible practical aids


QuestionsPlease

Documents

© Copyright FocusROI Inc 2010 C-PEM Introduction Webinar Stuart Hartley FCA [email protected]