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© Copyright FocusROI Inc 2010 C-PEM Introduction Webinar Stuart Hartley FCA

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1 © Copyright FocusROI Inc 2010 C-PEM Introduction Webinar Stuart Hartley FCA shartley@focusroi.com

2 © Copyright FocusROI Inc 2010 Agenda..  C-PEM challenges and solutions  Tips for reducing the cost of audits  Other changes in C-PEM

3 © Copyright FocusROI Inc 2010  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 CCompilations  Part D Practice Aids (forms, etc. on a CD)

4 © Copyright FocusROI Inc 2010 The C-PEM Case Studies

5 © Copyright FocusROI Inc 2010 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

6 © Copyright FocusROI Inc 2010 Challenge #1  ALL Auditing standards have been clarified -- some revised (Re-written!)

7 © Copyright FocusROI Inc 2010 “Clarified” Standards  Italics to specific “shalls”  New structure for auditing standards 1.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" 282A 100% increase in requirements532

8 © Copyright FocusROI Inc 2010 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

9 © Copyright FocusROI Inc 2010 The CAS Structure 1. 2. 3

10 © Copyright FocusROI Inc 2010 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

11 © Copyright FocusROI Inc 2010 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

12 © Copyright FocusROI Inc 2010 Overall objective: Reduce audit risk to an acceptably low level

13 © Copyright FocusROI Inc 2010 CASs with more than 5 new “shalls”

14 © Copyright FocusROI Inc 2010 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.

15 © Copyright FocusROI Inc 2010 Estimates

16 © Copyright FocusROI Inc 2010 C-PEM overview of Estimates

17 © Copyright FocusROI Inc 2010 Related Parties

18 © Copyright FocusROI Inc 2010 C-PEM Overview of Related Parties

19 © Copyright FocusROI Inc 2010 Use of External Confirmations

20 © Copyright FocusROI Inc 2010 Sampling

21 © Copyright FocusROI Inc 2010 Subsequent Events 6550Subsequent eventsCAS 560 Current Italics Subject matter"Shalls" 1Events between Date of F/S and Date of Auditor's Report4 1Facts after Date of Report but before Date F/S are Issued4 1Facts Known to Auditor after F/S Issued4 3Totals12

22 © Copyright FocusROI Inc 2010 Materiality CAS 320

23 © Copyright FocusROI Inc 2010 Going Concern

24 © Copyright FocusROI Inc 2010 Misstatements

25 © Copyright FocusROI Inc 2010 Challenge #2  Multiple Appropriate Financial Reporting Frameworks (AFRFs)

26 © Copyright FocusROI Inc 2010 GAAP until recently

27 © Copyright FocusROI Inc 2010 GAAP from 2011 Onwards

28 © Copyright FocusROI Inc 2010 Multiple AFRFs IFRSIFRS for SMEs ASPEASPE + NFP PSAB Number of Pages2500220700740? FocusListed Entities SMEs NFPsGovern ment SourceIASB IFRS and ASPE are Canadian GAAP

29 © Copyright FocusROI Inc 2010 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

30 © Copyright FocusROI Inc 2010 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

31 © Copyright FocusROI Inc 2010 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. “Applying ISAs Proportionately with the Size and Complexity of an Entity” issued by IFAC in August 2009.

32 © Copyright FocusROI Inc 2010 CAS Applicability to SMEs

33 © Copyright FocusROI Inc 2010 Overall Audit Scope does not change

34 © Copyright FocusROI Inc 2010 Still Required to Understand Internal Control  Pervasive are often called entity level controls  Specific are often called business process or application controls

35 © Copyright FocusROI Inc 2010 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;

36 © Copyright FocusROI Inc 2010 Traditional Audit Phases BUT Where does the required risk assessment fit?

37 © Copyright FocusROI Inc 2010 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. 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. x

38 © Copyright FocusROI Inc 2010

39 The Solution  Applying C-PEM to smaller entities

40 © Copyright FocusROI Inc 2010 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

41 © Copyright FocusROI Inc 2010 C-PEM Forms 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

42 © Copyright FocusROI Inc 2010 Tip 4… Select appropriate Forms to Use Select what C-PEM forms to use BEFORE work begins 1.Standard forms 2.Condensed forms 3.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 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

43 © Copyright FocusROI Inc 2010 C-PEM forms structure Financial Statements100 series Tax matters200 File completion 300 Planning400 Risk Assessment500 Risk Response600 Detailed audit plansA-ZZ Income statement700 Disclosure checklists900 Form numbering NOTE: Some form numbers have changed to better reflect their position in the audit process

44 © Copyright FocusROI Inc 2010 Financial Reporting Frameworks – existing GAAP

45 © Copyright FocusROI Inc 2010 Key C-PEM Forms

46 © Copyright FocusROI Inc 2010 TIP 5… Spend time planning and saving costs

47 © Copyright FocusROI Inc 2010 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 Consider where work can be reduced EACH year But consider whether an immaterial area is only small because of missing transactions

48 © Copyright FocusROI Inc 2010 Key C-PEM Forms

49 © Copyright FocusROI Inc 2010 Identify & assess risk  Scope of required risk assessment CAS 315.11-12  Key Point Identify sources of risks not just effects on the F/S How: C-PEM 510, 510c or NFP 510

50 © Copyright FocusROI Inc 2010 TIP 7 … Focus on causes of risks not the effects

51 © Copyright FocusROI Inc 2010 Assess Risks in One Place Source of riskResult of riskRisk Assessment

52 © Copyright FocusROI Inc 2010 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

53 © Copyright FocusROI Inc 2010 Control Risk – Two Approaches You only need to evaluate controls ‘relevant’ to the audit

54 © Copyright FocusROI Inc 2010 Consider using the matrices… Process xyz Risk ARisk BRisk CRisk D Assertion CE AAC A Control IC Com Control Procedure 1 CAP P Control Procedure 2 IS D Control Procedure 3 CAPP P Control Procedure 4 MD Control Procedure 5 CA P Control Procedure 6 ISDD D Conclusion on Control Design YY N Y Can you identify the control weaknesses, control strengths & key controls?

55 © Copyright FocusROI Inc 2010 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 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

56 © Copyright FocusROI Inc 2010 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 changed and needs updating – not re-documenting existing data Document evidence so that data collected can be reused. Focus audit effort in year two onwards on what has changed and needs updating – not re-documenting existing data

57 © Copyright FocusROI Inc 2010 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 Base your response on the risk assessment --- Ensure work is directed to high risk areas and away from low risk areas

58 © Copyright FocusROI Inc 2010 Key C-PEM Forms

59 © Copyright FocusROI Inc 2010 File completion

60 © Copyright FocusROI Inc 2010  Other changes in C-PEM

61 © Copyright FocusROI Inc 2010 Review Engagements  C-PEM Material expanded  Road map  Forms basically unchanged

62 © Copyright FocusROI Inc 2010 Other Material in C-PEM  Compilations  Updated material  FOFI  No changes  Primer on fraud  Expanded sampling guidance  Tips for Client Interviews

63 © Copyright FocusROI Inc 2010 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

64 © Copyright FocusROI Inc 2010 Questions Please


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