Boring is not a Canadian Auditing Standard!

Foundation course Very demanding – come prepared! A note about professionalism Open door policy Feedback from past students

Heavy workload Course structure: starts off theoretical, moves into

application in second half Midterm: tight for time for a reason!

Questions?

Professional Accounting & Auditing Organizations

Nature of auditing Review of types of audits Activities of public accounting firms Generally Accepted Auditing Standards Auditing recommendations and standards The Auditor’s Report

5 major bodies in Canada providing a professional designation:

▪ CICA (CA)▪ Authority by Canada Business Corporations Act and

provincial acts to set accounting and auditing standards for pubic accountants.

▪ Assurance Standards Board (Assurance and Related Services Recommendations)

▪ CICA Handbooks ▪ CGAAC (CGA)▪ SMAC (CMA)▪ IIA (CIA)▪ ISACA (CISA)

Must be information in a verifiable form; Standards or criteria needed for evaluation

▪ GAAP;▪ Control criteria such as COSO;▪ Other best practices▪ Agreed on in advance

Accumulation and evaluation of evidence about information Competent, independent person Auditor’s report Economic role: reduces information risk

SubjectMatter

Auditor Accountable Party

User(s)

AccountabilityConclusion

International Federation of Accountants Publishes its own recommended international standards on auditing (ISA’s)

International Auditing and Assurance Standards Board CICA has adapted the ISA standards as they are, unless specific

customization is required for the Canadian context. CASs came into effect for audits of financial statements for periods ending

on or after December 14, 2010 Key focus on harmonization

A handy reference source: http://www.cica.ca/CAS/

Financial statement audits Compliance audits

Following specific procedures/rules Operational audits

Evaluates efficiency & effectiveness of ops Comprehensive audit

3 components (FS audit; compliance audit; value for money)

Audit report on internal controls (based upon criteria such as COSO or COCO)

Audits (of historical cost financial statements); Reviews (less assurance) Compilation (no assurance) Special report (opinion on compliance, or on

financial information) Tax services Management advisory services Accounting and bookkeeping services

Practice standards are general guides for professional work. Generally accepted auditing standards

(GAAS). Assurance standards. General Standards of Quality Control for

Firms Performing Assurance Engagements.

Quality control standards as reflected in peer reviews and practice inspections.

GAAS identify the objectives and key principles of the financial statement audit. GAAS provides a framework under which

all auditing standards are applied. The objectives and key principles are

found in CAS/ISA 200.

Auditing standards include Canadian Audit Practice Statements (CAPSs) and Audit Guidelines (AuGs). Standards remain the same over time

and for all audits.▪ Audit Procedures may vary based on the

organization being audited.

Objective of an audit: to express an opinion on whether financial statements are prepared appropriately in all material respects. Implies “Three-party accountability”.

General Standard Comply with relevant professional ethical requirements. Competence; Objectivity; Due Care

Examination Standards Conduct audit in accordance with CAS’s, and follow CAS to

determine procedures to be performed. “plan and perform the audit to reduce audit risk”; “reasonable

assurance” Sufficient understanding of internal controls must be obtained Sufficient appropriate audit evidence

Reporting standards Skepticism: “attitude of professional scepticism”

Identify financial statementsDistinguish between management &

auditor resp.Scope of auditor examinationExpression of an opinion on F/S’s, or

state that an opinion can’t be expressed

Do the F/S’s present fairly, in all material respects…

What is an auditor’s report? Formats

Standard unqualified auditor’s report Unqualified with explanatory wording Qualified Adverse/denial

Materiality Conditions requiring a departure

Primary product of the attestation process CICA Handbook requires public acct. to comm’n

nature and extent of involvement with the information audited.

Concept of “association” Requirements for issuing auditor’s report derived

from GAAS.

Report title Addressee (must be disclosed: often

shareholders) Introductory paragraph

Lists the F/S’’s, and that they were audited. Responsibilities: States FS’s are resp of

mgmt, and auditor’s resp is to express an opinion on them.

Description of an audit: An audit was performed in accordance with GAAS.

Description of an audit….contd’ Factual statement about what the auditor did. Audit designed to obtain reasonable assurance about

whether the F/S’s are free of material misstatement. Auditor believes evidence accumulated was appropriate

to express the opinion; Test basis.

Opinion paragraph The phrase “in our opinion”… professional

judgement. Opinion on the F/S’s, taken as a whole, and

conclusion about whether company followed an approp disclosed basis of accounting (usually GAAP).▪ Don’t blindly rely on GAAP – look @ substance of

transaction “presents fairly”… auditor cannot check every

transaction!

Name of public accounting firmPlace of issueAuditor’s report date

Completion date, not date of substantial completion.

No earlier than when sufficient appropriate audit evidence obtained. After those with recognized authority (such as the board) have approved the F/S’s.

INDEPENDENT AUDITOR'S REPORT [Appropriate Addressee] Report on the Financial Statements We have audited the accompanying financial statements of

ABC Company, which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair

presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility Our responsibility is to express an opinion on these financial

statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements present fairly, in

all material respects, the financial position of ABC Company as at December 31, 20X1, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor's report

will vary depending on the nature of the auditor's other reporting responsibilities.]

[Auditor's signature] [Date of the auditor's report] [Auditor's address]

Expanded reporting options under CAS Emphasis of matters paragraph (such as going concern

or change in accounting policy). Appropriately presented in the financial statements, but needs to be drawn to the users attention.

Typically:▪ Consistency (of accounting principles applied)▪ Accounting Uncertainty▪ Emphasis▪ Going Concern

Preceeds the opinion paragraph.• Other matters paragraph (matters other than those

presented or disclosed in the FS’s)

Only where: Scope limitation, but restriction confined to a

specific area; GAAP departure: effect can be quantified or

isolated If the condition being reported on is very

material… Adverse opinion. Auditor must either use the term “except

for”, or “except that”, or “except as”. Fairly rare.

[TO FOLLOW SECTION ON AUDITOR RESPONSIBILITES] Basis for Qualified Opinion The company's inventories are carried in the statement of

financial position at xxx. Management has not stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which constitutes a departure from International Financial Reporting Standards. The company's records indicate that had management stated the inventories at the lower of cost and net realizable value, an amount of xxx would have been required to write the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and shareholders' equity would have been reduced by xxx, xxx and xxx, respectively.

Qualified Opinion In our opinion, except for the effects of the matter described in

the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of ABC Company as at December 31, 20X1, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Overall F/S’s are SO materially misstated or misleading that they do not present fairly the financial position, results of operation, or changes in cash flow in accordance with GAAP.

[TO FOLLOW SECTION ON AUDITOR RESPONSIBILITES] Basis for Adverse Opinion As explained in Note X, the company has not consolidated the

financial statements of subsidiary XYZ Company it acquired during 20X1 because it has not yet been able to ascertain the fair values of certain of the subsidiary's material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost basis. Under International Financial Reporting Standards, the subsidiary should have been consolidated because it is controlled by the company. Had XYZ been consolidated, many elements in the accompanying financial statements would have been materially affected. The effects on the consolidated financial statements of the failure to consolidate have not been determined.

Adverse Opinion In our opinion, because of the significance of the matter discussed

in the Basis for Adverse Opinion paragraph, the consolidated financial statements do not present fairly the financial position of ABC Company and its subsidiaries as at December 31, 20X1, and their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards.

Auditor is unable to satisfy himself/herself that the overall F/S’s are fairly presented.

Often arises due to severe limitation on scope.

Can only arise from a lack of knowledge by the auditor about whether or not the F/S’s are fairly stated.

Basis for Disclaimer of Opinion The company's investment in its joint venture XYZ (Country X)

Company is carried at xxx on the company's statement of financial position, which represents over 90% of the company's net assets as at December 31, 20X1. We were not allowed access to the management and the auditors of XYZ, including XYZ's auditors' audit documentation. As a result, we were unable to determine whether any adjustments were necessary in respect of the company's proportional share of XYZ's assets that it controls jointly, its proportional share of XYZ's liabilities for which it is jointly responsible, its proportional share of XYZ's income and expenses for the year, and the elements making up the statement of changes in equity and statement of cash flows.

Disclaimer of Opinion Because of the significance of the matter described in the Basis

for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.

Auditor’s scope has been restricted Caused by client vs beyond control of auditor or client Effect on auditor report the same, but diff interpretations

of materiality Client imposed: mgmt trying to prevent discovery of

misstmt? Likely denial of opinion. If beyond client’s control: either qualification of scope or

opinion. Reservation paragraph needed to describe restriction.

Statements not in conformity with GAAP A qualified or adverse opinion depending on materiality

and pervasiveness.

If more than once condition requiring qualification… qualify opinion for each condition.

Report involving reliance on another auditor Primary auditor takes resp for the opinion; Primary auditor must assess secondary auditor’s qualifications,

competence and integrity; If a qualified or denial of opinion is necessary due to inability to

rely on secondary auditor’s work… the secondary auditor may be named.

Negative assurance: inappropriate “Nothing came to our attention that would lead us to

question…”

Essential for determining appropriate type of audit report to issue;

Pervasiveness of scope limitation or GAAP departure must also be considered.

Would the decision of a person who is relying on the F/S’s be changed???

If material, but does not overshadow F/S’s as a whole, qualifiedqualified.

If amounts material and pervasive: auditor must issue a denial of opinion or adverse opinion.

GAAP departure Misstmts must be compared with a measurement base

before materiality decision can be made % of net income before taxes, total assets, current

assets, etc. Consider combined effect of all unadjusted errors. SAD

If measurability uncertain: must disclose this. Scope Limitation

Look at the size of potential misstmts.

Required to be added to the audited financial statements by SOX;

Limited to internal controls over financial reporting Controls related to the accuracy of accounting/ recordkeeping,

and safeguarding of assets Typically performed as part of the audit engagement. These controls do NOT guarantee the financial statements

are free of material misstatement. Current evaluation will not necessarily apply to the future.

Conformity with an established criteria must be referenced, as well as concepts of materiality and a “fairly stated” management assessment.

Management: Sound accounting policies Maintaining adequate internal controls Making fair representations in the F/S’s Stated right in annual report

Auditors Perform audit with an attitude of professional

skepticism Seek reasonable assurance, not absolute

assurance Responsibilities relating to errors, frauds or

other irregularities?

Decision to accept or retain the client Understand the client’s business Plan and design audit approach

Aim: sufficient, appropriate audit evidence; minimize cost of accumulating evidence

Understand client’s internal controls and assess risk▪ Required by examination standard ii of GAAS▪ Allows auditor to evaluate how effective controls will be in preventing and

detecting errors, frauds, or irregularities Perform the audit tests and evaluate results

Perform test of controls▪ If control risk assessed below maximum, auditor can reduce the extent to

which accuracy of F/S amounts related to these controls must be validated; Substantive procedures (analytical and tests of details and balances)

▪ Analytical procedures: assess overall reasonableness of transactions or balances

▪ Tests of details: specific procedures testing for monetary misstatement Form an opinion and issue audit report