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Auditor’s Professional Roles and Responsibilities.

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1 Auditor’s Professional Roles and Responsibilities

2 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

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 Auditing Standards Auditing 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

11 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

12 GAAS General Standard Examination Standards Reporting Standards 12

13 General Standard The auditor should comply with relevant professional ethical requirements relating to audit engagements. Three areas: 13

14 Due professional care Observe Proper planning Due care 14

15 Competence Competence 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

16 Objectivity and Independence Auditors are expected to be This is achieved by maintaining independence. Independence in fact Independence in appearance 16

17 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

18 GAAS Examination Standards These 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

19 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

20 Reasonable assurance The auditor should obtain reasonable assurance that the financial statements taken as a whole are 20

21 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

22 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

23 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

24 Auditors on the audit team may not always agree on audit decisions. Procedures for documenting The basis for the final audit decision 24

25 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

26 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

27 Sufficient Appropriate Evidential Matter CAS 200 requires auditors to obtain enough evidence to justify opinions. The standards require sufficient 27

28 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

29 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

30 Standard Unqualified Report Unqualified audit report Auditing standards dictate use of a standard report. A qualified audit report 30

31 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

32 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. Opinion In 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 signature Date of the report Auditor’s address 32 The Standard Report

33 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 Statement and notes Classification and summarization Statements are accurate 33

34 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

35 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

36 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

37 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

38 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

39 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

40 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

41 Public Accountant Engagements 1.Assurance Engagements Audits Reviews Direct Reporting Engagements 2.Non Assurance Engagements 41

42 Parties Involved in an Assurance Engagement SUBJECT MATTER User(s) CONCLUSION ACCOUNTABLE TO Accountable party (Management) Practitioner 42

43 SOX and Internal Control An important assurance engagement that is now required Audit the internal control statement 43

44 Quality Control Standards PA firms need to observe GAAS in their audits Quality control: Actions taken to by a PA firm to evaluate 44

45 Elements of Quality Control Quality control frameworks have been developed by the CPA Canada, the IFAC, and by the AICPA. 45

46 46 Quality Control AreaFirst PrioritySecond Priority A. Clients 1Independence and Objectivity * 2Prohibited Investments * 3Conflicts of Interest * 4Confidentiality * 5Acceptance and Continuance * 6New Client Proposals * B. Personnel 1Hiring* 2Assignment* 3Performance Evaluation* 4Advancement* 5Continuing Professional Education* 6Restriction of Professional Staff Activities* C. Engagement Procedures 1Engagement Letters* 2Planning and Execution* 3Documentation* 4Supervision and Review* 5Resolution of Differences of Opinion* 6Consultation with Peers* 7Independent review* 8Management Letters* Implementing a Quality Control System

47 47 Quality Control AreaFirst PrioritySecond Priority D. Practice Administration 1Use of Firm Name * 2Access to Client Files * 3Security of Confidential Information * 4Retention of Files * 5Software Usage and Security * 6Technical Reference materials * 7Litigation and Professional Conduct * 8Advertising and Promotion * 9Solicitation of Clients * E. Quality Control Review Program 1Internal Review* 2Monitoring Client Services* 3Monitoring Quality Control* 4Premerger Review* Total Elements1716

48 Accountability Boards Quality Control In Canada Accountability boards have been established Have introduced new rules geared to improving auditor independence including: 48

49 Monitoring of Quality Control Practice inspection, peer review and quality reviews are “audits of the auditors.” Practice inspections Quality inspections Peer review 49

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