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Auditing 1 Refresher

Review- 1

Assurance Engagements

• What is an “assurance engagement”?

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Assurance Engagements

• What is an “assurance engagement”? • pursuant to an accountability relationship between two or more parties,

• a practitioner is engaged to issue a written communication expressing a conclusion concerning a subject matter for with the accountable party is responsible.

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Three Parties in an Assurance Engagement

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Assurance Engagements

• Assurance engagements can be very broad in nature.

• They include financial statement audits, review engagements, certain types of management consulting, and specialized reports.

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What is AUDITING?

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What is AUDITING? Auditing is the accumulation and evaluation of evidence

about information to determine and report on the degree of correspondence

between the information and established criteria.

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Five Key Components of Auditing

1. Quantifiable information to be audited (related to entity)

2. Criteria: normally generally accepted accounting principles (ASPE/IFRS).

3. Evidence gathering and evaluation 4. Competent, independent person 5. Reporting

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What is the difference between auditing and accounting?

accountant?

auditor?

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Can an auditor perform BOTH functions for the same client?

accountant?

auditor?

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Fundamental Principles of Professional Ethics • All professional accountants in Canada must abide by a code of professional conduct based upon six fundamental principles

• These include: • Integrity • Objectivity • Professional competence • Due care • Confidentiality • Professional behaviour

Professional Standards

Principles

Rules of conduct

Interpretations issued by provincial institutes (not technically enforceable)

ideal standards of ethical con- duct (general standards- e.g. confidentiality) enforceable minimum standards

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RPC: Basic Principles Governing Conduct

• Maintaining the good reputation of the profession

• Perform services with integrity, due care; sustain professional competence

• Be and remain free of influence (independence)

• Duty of confidence (confidentiality)

• Develop practice based upon professional excellence (advertising to be in good taste and accurate)

• Professional courtesy should be maintained

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Rules of professional Conduct

Association • Association is the term used to indicate a public accountants involvement with financial information

• Association typically occurs when: • Public accountant performs a service or consents

to the use of his/her name implying a services was performed with the information

• Third party indicate without consent of public accountant that he/she is associated with information

• Third part assumes that the public accountant is associated with the information

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Independence

• Independence in auditing means taking an unbiased viewpoint in the performance of audit tests, the evaluation of the results, and the issuance of the auditor’s reports.

• Three important concepts: • Independence in fact • Independence in appearance • Threats to independence

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Auditor Independence

Threats to independence • Self‐interest • Self‐review • Advocacy • Familiarity • Intimidation

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Legal Liability

Business Failure vs. Audit Failure • Business failure: when a business cannot repay its debts, perhaps due to poor management, a shift in demand, or economic factors

• Audit failure: when the auditor issues an incorrect audit opinion (e.g. an unqualified opinion when it should be qualified)

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Legal Liability

Expectation Gap • There is an expectation gap when two different groups expect different outcomes in a particular situation.

• Here, we use the term ‘expectation gap’ to refer to the difference between what users actually expect and what the audit report actually provides.

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Several legal terms apply to auditor liability:

• Contract→ failed to live up to their responsibilities agreeing to act as the auditor and explicit in engagement letter

• fraud - a false assertion made knowingly or recklessly

• tort action for negligence

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Several legal terms apply to auditor liability:

To establish negligence, plaintiff must prove: - defendant intended plaintiff to act on the assertion

- plaintiff did act on the assertion - plaintiff suffered a loss

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Auditor’s Defenses Against Negligence

lack of duty

absence of negligence

contributory negligence

absence of causal connection

absence of misstatement no damages

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Quality Control

• These standards clarify the minimum policies and procedures that firms should have in place.

• CICA Handbook Section CSQC‐1 describes general standards of quality control that are applied to firms performing assurance engagements.

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Elements of Quality Control

• Leadership and responsibilities within the firm • General ethical requirements • Independence • Client acceptance or continuance • General human resource policies • Professional development • Engagement performance procedures • Engagement QC review • Documentation

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Client Acceptance and Continuance

• The first stage in any audit engagement is client acceptance or continuance decision

• Step 1: Assess client integrity • Step 2: Assess audit firm’s ability to meet ethical requirements, service client

• Step 3: Prepare client engagement letter

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Objective of an Audit of Financial Statements

Per CAS 200: • Expression of an opinion • Are financial statements fairly presented? • Are financial statements in conformity with GAAP (ASPE/IFRS)?

• The audit is conducted by an independent auditor.

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What are management’s responsibilities with respect to financial reporting?

- adopting sound accounting policies - maintaining adequate internal controls - ensuring fairness of financial statement presentation

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What are the auditors’ responsibilities?

• expression of an opinion • reasonable assurance that material

misstatements are absent • plan and perform the audit in

accordance with GAAS

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Stages of an Audit

The main stages of an audit are 1.planning, 2.performing 3.reporting

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Preliminary Risk Identification

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Preliminary Risk Identification

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Preliminary Risk Identification

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Preliminary Risk Identification

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There are two types of fraud:

–Fraudulent financial reporting

–Misappropriation of assets

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Conditions for Fraud

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The auditor needs to maintain ‘‘professional skepticism ’’

What is the Auditor’s role in assessing Fraud Risk?

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Auditor Responsibilities when Fraud is Suspected or Detected

• Conduct audit procedures to confirm or dispel suspicions.

• Inform the appropriate level of management (above the suspected level of fraud);

• Inform audit committee when senior management fraud is suspected.

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Preliminary Risk Identification

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Preliminary Risk Identification

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Preliminary Risk Identification

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Preliminary Risk Identification

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What is the purpose of the audit report? The audit report is an explanation of the audit process and conclusions reached.

The report is the formal communica- tion between the auditor and the external users of the financial state- ments, primarily the shareholders.

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Standard Unqualified Independent Auditor’s Report (CAS 700)

• Report Title • Addressee • Introductory Statement • Management Responsibility • Auditor Responsibility • Opinion Paragraph • Basis for opinion • Name of public accounting firm • Date of the auditor’s report • Auditor’s address Review- 42

← NEWish

Key Enhancements‐ CAS 700

Enhanced auditor reporting of going concern (CAS 700)

Affirmative statement about • auditor’s independence • ethical responsibilities

Auditor responsibilities, key features of an audit → appendix

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New Audit Standard‐ CAS 701

KEY AUDIT MATTERS • Professional judgement → “most significant” in the audit of financial statements of the current period.

REQUIRED for listed entities (otherwise optional)

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Conditions Requiring a Departure From An Unqualified Report‐

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Audit Assertions cont’d Assertions About Classes of Transactions

Occurrence Transactions and events that have been recorded have occurred and pertain to the entity.

Completeness All transactions and events that should have been recorded have been recorded.

Accuracy Amounts and other data relating to recorded transactions and events have been recorded appropriately.

Cut‐off Transactions and events have been recorded in the correct accounting period.

Classification Transactions and events have been recorded in the proper accounts

Table 5.1

C-O-C-C-A + P

Audit Assertions cont’d

Assertions About Account Balances at Year End

Existence Assets, liabilities and equity interests exist.

Rights and obligations

The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

Completeness All assets, liabilities and equity interests that should have been recorded have been recorded.

Valuation and allocation

Assets, liabilities and equity interests are included in the financial report at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Table 5.2

C-E-R-V + P

What is audit EVIDENCE?

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• Confirmation • Analytical procedures • Inspection

(vouching/tracing documents) • Reperformance • Observation • Recalculation • Enquiries of client

Types of evidence

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CAIRORE

Five Evidence Decisions

1. RISK: Which risks could result in a risk of material misstatement at the assertion level?

2. NATURE: Which audit procedures to use 3. EXTENT: What sample size to select for a

given procedure 4. SELECTION: Which particular items to

select from the population 5. TIMING: When to perform the procedures

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S-A-A-E

Absolute vs. Reasonable Assurance

requires

absolute certainty

convincing evidence

high audit costs

requires

reasonable certainty

persuasive evidence

reasonable audit costs

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AR vs RMM ? Review- 52

set materiality, and

assess acceptable audit risk and inherent risk

What is acceptable audit risk?

Acceptable audit risk is the risk that the auditor is willing to accept that an unqualified

opinion will be issued for statements that are materially

misstated. Review- 53

audit risk

Audit Risk has 3 components which combine to make the audit risk model:

= x x inherent

risk control

risk

planned detection

risk

Risks of Material Misstatement

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Overall Financial Statement Level Risk

High level assessment of : • Pervasive risk • Risks that may potentially affect many account assertions

Consider: • Entity’s control environment • Economic conditions

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Audit Risk

• Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated (CAS 200) • This means the auditor gives an opinion that the

financial statements are fairly presented when they contain a significant error or fraud

• Audit risk can never be zero • Audit risk is reduced during planning by identifying the key risks and adjusting audit effort accordingly

What is materiality?

Note the reference to materiality in the audit report.

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Materiality

• Materiality guides audit planning, testing, and assessment of information in the financial statements

• Information is material if it impacts on the decision‐making process of users of the financial statements

• Information could be considered material because of its qualitative or quantitative characteristics

Audit Strategy

• An audit strategy consists of a planned approach to the conduct of audit testing, taking into account assessed risks.

• The strategy can be developed only after the client risk profile has been developed and risks assessed.

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After completing risk assessment, there is a decision to be made: Do we intend to rely upon internal controls?

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Audit risk = f Inherent risk Control risk Detection risk

High High Low

Audit strategy No (or very limited) tests of controls

Increased reliance on substantive tests of transactions and account balances

Audit risk = f Inherent risk Control risk Detection risk

Low Low High

Audit strategy Increased reliance on tests of controls

Reduced reliance on substantive tests of transactions and account balances

Table 4.3

Table 4.4