Chapter 1 - Overview of Audit and Assurance

What is an assurance engagement?

A practitioner gathers sufficient appropriate evidence, evaluates a subject against criteria, and reports a conclusion that increases intended users’ confidence.

Whose confidence does an assurance engagement aim to increase?

Intended users other than the party responsible for the information.

What is an applicable financial reporting framework?

The accounting framework management uses to prepare financial statements, such as IFRS or ASPE.

What are management assertions?

Management’s claims about how financial statement items are recognized, measured, presented, and disclosed.

What is audit risk?

The risk of expressing an inappropriate audit opinion.

What is internal control?

Processes management establishes and maintains to help the entity achieve its objectives.

What makes a misstatement or omission material?

It is significant enough to influence a user’s decision.

What is materiality in an audit?

The threshold for misstatements or omissions the auditor can tolerate and still issue a clean opinion.

What does sufficient audit evidence mean?

Enough evidence. Sufficiency is about quantity.

What does appropriate audit evidence mean?

Evidence of adequate quality, meaning it is relevant and reliable.

Why do current and potential investors use financial statements?

To decide whether to buy, hold, or sell an ownership stake.

Why do suppliers use financial statements?

To assess whether the entity can pay for goods supplied.

Why do customers use financial statements?

To assess whether the entity can keep operating and supplying goods they rely on.

Why do lenders use financial statements?

To assess whether the entity can make loan payments when due.

Why do employees use financial statements?

To assess job security and whether the entity can pay wages and other entitlements.

Why do governments use financial statements?

To assess regulatory compliance and whether the entity pays the appropriate taxes.

Why does the general public use financial statements?

To understand the entity’s activities and plans and decide whether to deal with it.

How does remoteness create demand for assurance?

Users have limited direct access to the underlying information.

How does complexity create demand for assurance?

Users may lack the expertise to evaluate accounting and disclosure choices.

How do competing incentives create demand for assurance?

Management may have reasons to present biased information, and users may struggle to detect it.

How does reliability create demand for assurance?

Users need dependable information because they base decisions on it.

How does agency theory explain demand for audits?

Owners hire an auditor to assess what management reports because owners are removed from day-to-day operations.

How does the information hypothesis explain demand for audits?

Users want audited information because greater reliability helps them make decisions.

How does the insurance hypothesis explain demand for audits?

Investors see an audit as offering some protection against potential losses.

Why do companies voluntarily disclose CSR information?

Stakeholders want to know the entity’s environmental impact and how it is reducing that impact.

Why might an entity seek voluntary assurance on CSR disclosures?

To meet demand for reliable information and demonstrate corporate responsibility.

What is a financial statement audit?

An engagement that provides an opinion on whether the statements follow the applicable framework in all material respects.

What annual reporting requirement for listed entities does the chapter attribute to the CSA?

Listed entities must publish audited financial statements annually.

Why can a financial statement audit provide only reasonable assurance?

Financial reporting involves judgment, audit procedures have inherent limits, and the audit must be completed within reasonable time and cost.

What is a compliance audit?

An audit that checks whether rules, policies, procedures, laws, or regulations were followed. A tax audit is an example.

What does a performance audit assess?

The economy, efficiency, and effectiveness of an organization’s activities.

Who usually performs performance audits?

Internal auditors usually perform them, though external auditors can be hired.

What is a comprehensive audit?

An audit that combines financial statement, compliance, and performance audit elements. It is common in the public sector.

What is an internal audit?

Assurance over an organization’s activities, often including performance, compliance, and internal control assessments or reviews.

What does CSR assurance cover?

Voluntarily reported environmental, employee, and social information. It can include financial and non-financial measures.

How can environmental issues affect a financial statement audit?

The auditor considers how those issues could affect the client’s financial statements.

What is reasonable assurance?

A high level of confidence short of a guarantee. A financial statement audit provides reasonable assurance.

How is reasonable assurance expressed?

The auditor gives a positive opinion, such as stating that the financial statements present fairly in all material respects.

What section may a reasonable assurance audit report include?

A key audit matters section.

What is limited assurance?

A lower level of confidence than reasonable assurance. A financial statement review provides limited assurance.

How is limited assurance expressed?

The practitioner states whether anything came to their attention suggesting the statements depart materially from the applicable framework.

Which engagement provides no assurance?

A compilation engagement. The practitioner assembles financial information supplied by management and issues a Compilation Engagement Report.

What does management remain responsible for in a compilation?

The accuracy and completeness of the information it supplies and its choice of accounting basis.

What does the practitioner do in the compilation report example?

Helps prepare the financial information under CSRS 4200 and gives no audit opinion, review conclusion, or assurance.

What caution appears in the compilation report example?

The compiled financial information may be unsuitable for some readers’ purposes.

Where does the auditor communicate the audit opinion?

In the auditor’s report.

What is an unmodified or clean opinion?

The statements present fairly in all material respects under the applicable financial reporting framework.

What does an emphasis of matter paragraph do?

It draws attention to an important matter in the statements while leaving the audit opinion unchanged.

What is a qualified or “except for” opinion?

An issue is material but not pervasive. The statements are fairly presented except for the issue or its possible effects.

What does pervasive mean when choosing an audit opinion?

The effects are widespread, affect a substantial part of the statements, or are fundamental to users’ understanding.

When does the auditor issue an adverse opinion?

When sufficient evidence shows a misstatement is both material and pervasive.

When does the auditor issue a disclaimer of opinion?

When sufficient appropriate evidence cannot be obtained and the possible effects are both material and pervasive.

Who prepares the financial statements?

Management prepares them with oversight from those charged with governance. The auditor evaluates them and reports an opinion.

What makes financial statements relevant?

The information can affect users’ decisions about the entity.

What makes financial statements reliable?

They are free from material misstatement due to error or fraud.

What makes financial statements comparable?

Users can compare the same entity across periods and compare it with other entities.

What makes financial statements understandable?

Users can interpret the information well enough to use it in decisions.

What does fair presentation require?

Consistent and faithful application of the applicable accounting standards or framework.

What is professional scepticism?

Maintaining an independent, questioning mindset and critically evaluating the evidence.

What is professional judgment?

Using professional training, knowledge, and experience to make audit decisions.

What is due care in an audit?

Working diligently, applying relevant professional and legal standards, and documenting the audit work.

Which kinds of firms provide assurance services?

Accounting and consulting firms.

Who are Canada’s Tier 1 assurance providers?

The Big Four. Deloitte, EY, KPMG, and PwC.

Who are Canada’s Tier 2 assurance providers?

National accounting firms with a significant Canadian presence. Many have international affiliations.

Who are Canada’s Tier 3 assurance providers?

Regional and local accounting firms.