Lesson 1: Introduction to Auditing and Assurance

Definition of Assurance

• An independent professional service in which a provider expresses a conclusion on the outcome of the measurement of a subject matter against criteria

• Is valued because the auditor is independent and perceived to be unbiased with respect to the information being examined

Assurance Engagement

1. Existence of a three-party relationship (Auditor, Client, and External User)

2. Subject matter (Financial Statements)

3. Criteria (IFRS)

4. Gathering of sufficient appropriate evidence (Quantitative and Qualitative Information Being Audited)

5. Expression of opinion or conclusion (Auditor’s Report - see Figure 2-3, p.39 of the textbook)

Auditing

• Be done by a competent, independent person

• Accumulate and evaluate evidence regarding assertions about information

• Determine and report on the degree of correspondence between assertions and established criteria

Stages of Audit

1. Client Acceptance

2. Audit Planning

3. Assess Risk of Material Misstatement

4. Develop Risk Response

5. Perform Risk Responses

6. Conclusion

7. Reporting

Factors Ensuring a High-Quality Audit

1. Ethical requirements and quality control

2. Professional skepticism and professional judgement

3. Communication with management and those in charge of governance

4. Documentation

Difference Between Accounting and Auditing

One is the process of recording, classifying, and summarizing economic events that generate documents, and is performed by management. The other is the process of checking documents that were created in the accounting process, and it makes sure that management has correctly done the accounting in accordance with applicable standards such as IFRS.

Reasons for Auditing

Limiting information risk and ensure that a business decision is made based on accurate financial statements

Causes of Information Risk

• Remoteness of Information

• Bias and Motives of Management

• Voluminous Data

• Complex Exchange Transactions

Remoteness of Information

The owners and creditors of a business do not have access to the daily financial records of the company; therefore, they rely heavily on the company’s financial statements about the enterprise, which are the primary source of financial information about the organization

Voluminous Data

Increase in volume of transactions, impossible for financial statement users to examine the large number of transactions recorded in the company’s accounts

Complex Exchange Transactions

Users prefer having financial experts to examine complex transactions from an independent point of view

Common Types of Audits

1. Financial Statement Audit

2. Compliance Audit

3. Performance Audit

4. Sustainability Audit

Financial Statement Audit

Performed to add credibility to financial statements. Business owners, creditors, government agencies, labour unions rely on this info.

Compliance Audit

Performed to determine whether an organization is following policies and procedures designed by management, or if it is complying with terms of certain contracts, agreements, and legal requirements. The auditors report is submitted to the entity that issued the requirements

Performance Audit

(Operational) focuses on the organization’s operating procedures to evaluate its economy, effectiveness, and efficiency

Sustainability Audit

An assurance engagement assesses whether sustainability reports or parts of the reports are prepared in accordance with the applicable sustainability framework

Internal Auditors

Conduct audits of a financial, compliance, or operational nature. In-depth knowledge of the business allows them to examine more detail transactions and practices than an external auditor would examine. Assist external auditors.

Government Auditors

Appointed by government, are legislated by various jurisdictions to conduct all types of audits for ministries, departments, and agencies that report to the government

CRA Auditors

Perform compliance audits of taxpayers

Forensic Accountants and Fraud Auditors

External independent auditors (PAs) with investigative skills

Sustainability Auditor

Provides independent assurance on info presented in sustainability

Public Accountants

External, hired by shareholders and represent their interests

High Assurance

• Reasonable Assurance

• Audit of Historical Financial Statements

• Audit of Financial Info Other Than Financial Statements

• Audit of Effectiveness of Internal Control Over Financial Reporting

• Audit Controls of Service Organizations

Limited Assurance

• Review Engagement

• Assurance Engagement on Compliance with an Agreement or Regulations

• Assurance Engagement on Green Gas Statements

• Assurance Engagement on Other Nonfinancial Info

Non-Assurance

• Compilation

• Tax Services

• Management Advisory Services

• Accounting and Bookkeeping Services

Review Engagement

• Assesses the plausibility of financial statements through inquiry and analytical procedures

• Only involves audit testing of financial statements and tests of controls if there are inconsistencies from original expectations

• PA provides limited assurance with a conclusion statement, “nothing has come to our attention” in the report for this

Compilation Engagement

• Assist management in the prep of compiled financial info based on info provided by management

• PA provides bookkeeping services, monthly or quarterly financial statements, and tax services

• PA does not express an audit opinion or review conclusion in this report

Audit and Assurance Standards Board

• Sets GAAS (Generally Accepted Audit Standards") for financial statement audits and other services such as review engagements and compilations

Canadian Public Accountability Board

• Seeks to enhance audit quality

• One key role is its practice inspection program

Canadian Auditing Standards

• Adopted by AASB

• Constitute GAAS for an audit of financial statements and other historical info

Other Canadian Standards

• Apply if info is not an audit of historical financial info