CHAPTER 2 The Financial Statement Auditing Environment

List the main audit team members from highest to lowest level.

Partner, Manager, Senior/In-Charge, Associate/Staff.

What does the Partner do?

Agrees on scope, ensures audit is properly planned/conducted, supervises team, reviews work, concludes on evidence, and signs the audit repor

What does the Manager do?

Plans/schedules the audit, approves the audit program, reviews working papers/statements/report, oversees seniors and staff, and reports issues to the partner.

What does the Senior/In-Charge do?

Helps plan the audit, prepares budgets, assigns tasks, supervises associates, performs procedures, gathers evidence, and reports issues to the manager.

What does the Associate/Staff do?

Performs assigned audit procedures, documents the work, and reports issues to the senior.

What Canadian law/regulation strengthened audit oversight?

Bill 198/The Budget Measure Act — helped create the Canadian Public Accountability Board (CPAB).

What is NI 52-109 in Canada?

A rule requiring certification of disclosure in issuers’ annual and interim filings.

U.S. vs Canada audit oversight bodies?

U.S. = PCAOB; Canada = CPAB.

What is the auditor’s responsibility?

to provide reasonable assurance that the financial statements are free of material misstatement, whether caused by error, fraud, or illegal acts.

Can auditors provide absolute assurance?

No. Auditors provide reasonable assurance, not a guarantee.

Why can’t auditors guarantee all misstatements are detected?

Because audit evidence has limits, and fraud can be difficult to detect.

What is management primarily responsible for?

Maintaining effective internal control and ensuring the fairness of the financial statements.

Who is responsible for preparing fair financial statements: management or the auditor?

Management is responsible; the auditor provides reasonable assurance through the audit.

Management makes the statements; auditors check the statements.

What shapes the external auditor’s environment?

The business or entity being audited.

Why does the auditor need to understand the client’s business?

Because audit tools and procedures depend on the nature of the entity’s business.

What is a model of business?

A simplified way to understand how businesses operate, even though industries can look very different.

Why is a business model useful in auditing?

It helps auditors understand the client’s operations, risks, transactions, and financial statements.

What are the main parts of an organization’s operations auditors should understand?

Governance, business objectives/strategies, business processes, risks, controls, and reporting.

What are the 5 broad business processes?

Financing, purchasing, human resources, inventory management, and revenue.

Why does an auditor need to understand an organization’s operations?

To identify risks, understand controls, and know how transactions flow into the financial statements.

Why do business organizations exist?

To create value for their stakeholders.

Why is corporate governance needed?

To oversee and supervise managers who manage invested resources.

Who is primarily responsible for management oversight in Canadian corporations?

The board of directors.

What does the audit committee do?

Oversees the organization’s internal and external audit work.

List the 5 basic business processes auditors use to organize a financial statement audit.

Revenue, Financing, Purchasing, Human Resource Management, Inventory Management.

Why do auditors organize an audit by business processes?

To understand how business transactions flow through the company and into the financial statements.

Why might understanding the characteristics of an entity’s business model be important for a financial statement auditor?

It helps the auditor identify risks, understand transactions, and choose the right audit procedures.

How might auditing differ for an automobile manufacturer versus a bank?

The auditor focuses on different risks and processes: a manufacturer has more inventory, production, and cost risks, while a bank has more loan, interest, credit, and

List the main Canadian organizations that affect auditing.

CSA, CPA Canada, CPAB, AASB, and AcSB.

What do CPAB, AASB, and AcSB stand for?

CPAB = Canadian Public Accountability Board; AASB = Auditing and Assurance Standards Board; AcSB = Accounting Standards Board.

List the main international organizations that affect auditing/accounting standards.

IASB and IAASB.

What do IASB and IAASB stand for?

• IASB = International Accounting Standards Board

• IAASB = International Auditing and Assurance Standards Board.

What are the 3 auditing standard setters relevant to Canada/internationally?

AASB, CPAB, and IAASB.

What does the AASB do?

Sets auditing standards for nonpublic company audits in Canada.

What does CPAB do?

Oversees public company audits in Canada.

What does the IAASB do?

Sets international auditing and assurance standards used in many countries.

What are the 4 categories of principles underlying an audit?

Purpose/premise, auditor responsibilities, audit performance, and reporting.

What is the purpose of an audit?

To increase users’ confidence by giving an opinion on whether the financial statements are fairly presented.

What is management responsible for in an audit?

Preparing fair financial statements, maintaining internal control, and giving the auditor access to information and people.

What are auditors responsible for?

Having competence, following ethical requirements, using professional skepticism, and applying professional judgment.

What does the auditor do to obtain reasonable assurance?

Plans and supervises the audit, sets materiality, assesses risks, and obtains sufficient appropriate audit evidence.

Why can’t auditors provide absolute assurance?

Because audits have inherent limitations, including financial reporting limits, audit procedure limits, and time/cost constraints.

What does the auditor provide at the end of the audit?

A written audit report with an opinion, modified opinion, or denial/disclaimer of opinion.

Who sets Canadian Auditing Standards?

AASB — Auditing and Assurance Standards Board.

Who sets International Standards on Auditing?

IAASB — International Auditing and Assurance Standards Board.

What are CAS and ISA like in nature?

hey are generally broad/principle-based standards, not step-by-step rules.

What are the CAS numbering categories?

CAS 200 = General principles/responsibilities
CAS 300–499 = Planning and risk assessment
CAS 500 = Audit evidence
CAS 600 = Using work of others
CAS 700 = Audit conclusions/reporting
CAS 800–999 = Special considerations

What is ethics?

A code of conduct based on moral duties that guides how people should behave.

What do CPA Rules of Professional Conduct provide?

Guidance for acceptable behaviour for auditors and CPAs.