Auditor’s Professional Roles and Responsibilities.

Auditor’s Professional Roles and Responsibilities

The Current Environment of Auditing

One of self-regulation in Canada

The audit environment has undergone a profound change following several spectacular corporate failures

• As a result of these failures

• In 2002, drastic legislation was passed in the United States

2

Sarbanes-Oxley Act

•SOX and the financial disasters that led to it have had an impact around the world:

• In Canada

• The Canadian Coalition for Good Governance

• Canadian companies

3

SOX created the Public Company Accounting Oversight Board:

In 2003, the first actions of the PCAOB were to:• conduct an inspection

• create a registry system

• conduct a review of

• take on the task of

4

SOX has had impact on management and auditors in the U.S., including:

• Management certification of

• Evaluation of internal control

• Closer regulation of the profession

• Greater responsibilities assigned

• Increased importance

5

Self-Regulation

Prior to 2002, the profession was largely self-regulating around the world.

• Trust in a self-regulated audit profession changed with the U.S. corporate scandals.

• In the U.S.

• In Canada

6

Regulation of Public Accounting

Regulation of public accounting in Canada is a provincial matter.

• In recent years

• In addition to provincial regulations, other factors affect the profession

7

Practice Standards

Practice standards are general guides for professional work. Four areas:

1. Generally accepted auditing standards

2. Assurance standards.

3. General Standards of Quality Control for Firms Performing Assurance Engagements.

4. Quality control standards

8

Generally Accepted Auditing Standards (GAAS)

GAAS identify the objectives and key principles of the financial statement audit.

• GAAS provides a

• The objectives and key principles are found in CAS 200.

9

Auditing StandardsAuditing standards also include:

•Canadian Audit Practice Statements (CAPSs)

• Standards remain the same

• Audit Procedures may vary

•Auditing procedures: are not audit standards

• Specialized activities

10

Objectives of the Audit of Financial Statements

The overall objective of the audit is to:

1.enable the auditor to

2.on whether the financial statements are prepared

3.in all

4.with an applicable (acceptable) financial reporting framework.

11

GAAS• General Standard

• Examination Standards

• Reporting Standards

12

General StandardThe auditor should comply with relevant professional ethical requirements relating to audit engagements.

Three areas:

13

• Due professional care• Observe

• Proper planning

• Due care

14

CompetenceCompetence is gained through Competence allows the auditor to:1.recognize underlying assertions

2.decide which evidence

3.select and perform procedures

4.evidence evaluation for

15

Objectivity and Independence

Auditors are expected to be

This is achieved by maintaining independence.

• Independence in fact

• Independence in appearance

16

Due Professional Care

Due care is best understood in the context of the

Due care is a matter of what

• Determination of due care must be reached

• Due care is frequently

17

GAAS Examination StandardsThese standards set the

The standards also relate to the

•CAS 200 main influence on examination standards•Conduct of an audit

•Scope of an audit

•Reasonable assurance

•Audit risk and materiality

•Planning and supervision

•Internal control assessment

•Sufficient and appropriate audit evidence

18

Conduct of an audit• The auditor should conduct an audit in accordance with

Scope of an audit• In determining the audit procedures to perform in accord

with CAS’s “scope of an audit,”

19

Reasonable assurance

•The auditor should obtain reasonable assurance that the financial statements taken as a whole are

20

Audit Risk and Materiality

•The auditor should plan and perform an audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.

•Risk relates to evidence gathering

21

Planning and supervision

•CAS 300 contains several considerations for planning and supervision of an audit.

1. Preparing an audit program and supervising the audit work.

2. Obtaining knowledge of the auditee’s business.

3. Dealing with differences of opinion among the audit firm’s own personnel.

22

A written audit program is desirable.

• The audit program is a list of procedures

Understanding of the client’s business is an absolute necessity.

•How does the auditor get this understanding?

23

Auditors on the audit team may not always agree on audit decisions.

• Procedures for documenting

• The basis for the final audit decision

24

Timing is important consideration in audit planning.

• Audit planning needs to begin

• Some audit procedures can be conducted at an interim date, a date weeks or months before the fiscal year-end.

25

Internal Control Assessment

CAS 315.12-23 requires an understanding of the auditee’s internal control

Good internal control reduces the probability of errors or irregularities in the financial statements.

26

Sufficient Appropriate Evidential Matter

CAS 200 requires auditors to obtain enough evidence to justify opinions.

• The standards require sufficient

27

Reporting Standards

The report should identify the financial statements and

The auditor should determine whether the financial reporting framework adopted by management in preparing the financial statements

28

Reporting Standards

The auditor should refer to CASs 700 and 705 when expressing an opinion on a complete set of general purpose financial statements

29

Standard Unqualified Report

Unqualified audit report

Auditing standards dictate use of a standard report.

A qualified audit report

30

Standard Unqualified Report

The standard unqualified contains a number of features, as well as a standard wording.

See simple example on the next page.

31

To the Shareholders of

Report on the Financial Statements

We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 201x, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation 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 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 financial statements.

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

OpinionIn our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at December 31, 20x1, and of its financial performance and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Auditor’s signatureDate of the reportAuditor’s address

32

The Standard Report

Generally Accepted Accounting Principles (GAAP)

The auditor’s opinion reflects accordance with Canadian GAAP

• GAAP can come from a variety of sources.

• The auditor’s opinion implies• Accounting principles used

• Accounting principles used

• Statement and notes

• Classification and summarization

• Statements are accurate

33

Consistency

Prior to 1991

•Today - no reference to consistency is made in the unqualified audit report where no accounting changes had been made, or when changes are properly disclosed.

34

Adequate Disclosure

The audit opinion also implies that there is adequate disclosure of

• Evaluating disclosure requires

• Lack of disclosure is a departure from GAAP

35

Report Content:Report shall contain either an expression of opinion or an assertion that an opinion cannot be expressed.

• Opinion could be

• Disclaimer of opinion is

• When there is a reservation

36

Auditing Definition

“A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain a degree of correspondence between the assertions and established criteria and communicating the results to interested users..”

37

Assurance Standards

An assurance engagement:

• “An engagement where, 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 which the accountable party is responsible.”

38

Assertion: A statement about some aspect of a subject matter.

•Typically management make such assertions regarding their financial statements

•Can you think of any other assertions?

39

Assurance standards can be applied to written and unwritten assertions.

• Unwritten • The type of assurance engagement in which

• Written • Audits and reviews

• the public accountant is expressing an opinion

40

Public Accountant Engagements1. Assurance Engagements

• Audits

• Reviews

• Direct Reporting Engagements

2. Non Assurance Engagements

41

Parties Involved in an Assurance Engagement

SUBJECT MATTER

User(s)

CONCLUSION ACCOUNTABLE TO

Accountable party

(Management)

Practitioner

42

SOX and Internal Control

An important assurance engagement that is now required

Audit the internal control statement

43

Quality Control Standards

PA firms need to observe GAAS in their audits

Quality control:

• Actions taken to by a PA firm to evaluate

44

Elements of Quality Control

Quality control frameworks have been developed by the CPA Canada, the IFAC, and by the AICPA.

45

46

Quality Control Area First Priority Second Priority

A. Clients

1 Independence and Objectivity *

2 Prohibited Investments *

3 Conflicts of Interest *

4 Confidentiality *

5 Acceptance and Continuance *

6 New Client Proposals *

B. Personnel

1 Hiring *

2 Assignment *

3 Performance Evaluation *

4 Advancement *

5 Continuing Professional Education *

6 Restriction of Professional Staff Activities *

C. Engagement Procedures

1 Engagement Letters *

2 Planning and Execution *

3 Documentation *

4 Supervision and Review *

5 Resolution of Differences of Opinion *

6 Consultation with Peers *

7 Independent review *

8 Management Letters *

Implementing a Quality Control System

47

Quality Control Area First Priority Second Priority

D. Practice Administration

1 Use of Firm Name *

2 Access to Client Files *

3 Security of Confidential Information *

4 Retention of Files *

5 Software Usage and Security *

6 Technical Reference materials *

7 Litigation and Professional Conduct *

8 Advertising and Promotion *

9 Solicitation of Clients *

E. Quality Control Review Program

1 Internal Review *

2 Monitoring Client Services *

3 Monitoring Quality Control *

4 Premerger Review *

Total Elements 17 16

Accountability Boards Quality Control

In Canada Accountability boards have been established

Have introduced new rules geared to improving auditor independence including:

48

Monitoring of Quality Control

Practice inspection, peer review and quality reviews are “audits of the auditors.”

• Practice inspections

• Quality inspections

• Peer review

49