Lesson 1: Introduction to Auditing and Assurance

Assurance

An independent professional service in which an assurance provider expresses a conclusion on the outcome of the measurement or measurement of a subject matter against criteria.

Criteria for 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

A process to:

• 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 Process

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 Relevant to Audit Process

• Ethical requirements and quality control

• Professional skepticism and professional judgement

• Communication with management and those in charge of governance

• Documentation

Distinction between Accounting and Auditing

The former is recording, classifying, and summarizing economic events that generate documents. The latter 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.

Audit Purpose

To reduce information risk and ensure that a business is made based on accurate financial statements

Causes of Information Risk

• Remoteness of the info

• Bias and Motives of Management

• Voluminous Data

• Complex Exchange Transactions

Remoteness of the 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.

Bias and Motives of Management

The management and employees of a company may have goals and objectives that differ from those of the owners or users of the financial information.

Example of Bias and Motives of Management

Management and employees may wish to maximize earnings because their year-end bonuses are based on a percentage of net income. The owners, on the other hand, may wish to minimize net income so that income taxes will be reduced. The best way the owners have to ensure their goals are met is to hire independent auditors to conduct an examination of the financial statements and accounting policies of the business.

Voluminous Data

As a company grows, so does the volume of its transactions. It is almost impossible for users of the financial statements—even with access to all of the accounting records—to examine the large number of transactions recorded in the company’s accounts. It is more economical to have an auditor examine these records and present an audit report to all users of the data.

Complex Exchange Transactions

Because of the complexity of many financial transactions between organizations, users of financial information generally prefer to have a financial expert 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

Involves the examination of financial statements to determine if they are in accordance with an applicable accounting framework. It is the most common type of assurance engagement. The underlying reason for performing such an audit is to add credibility to the financial statements. Any company that publicly trades its securities is required to have an audit.

Compliance Audit

Is conducted to determine whether an organization is following certain procedures and policies as designed by management, or whether the organization is complying with the terms of certain contracts, agreements, and legal requirements that it must follow. The auditor reports the results to the specific entity that issued the requirements (whether it is management or a government agency) rather than to many outside users, as in the case of a financial statement audit.

Performance Audit

(Operational) audit focuses on the organization’s operating procedures to evaluate its economy, effectiveness, and efficiency. Criteria are usually set by management and do not necessarily have to be defined in dollar amounts. Operational audits are not limited to accounting and are, therefore, more difficult to evaluate objectively than compliance or financial statement audits. The end result of this audit is a list of recommendations to management for improving operations.

Sustainability Audit

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

Types of Auditors

• Internal Auditors

• Government Auditors

• Canada Revenue Agency Auditors

• Forensic Accountants and Fraud Auditors

• Sustainability Auditor

• Public Accountants (External Auditors)

Internal Auditors

Not independent of the company that employs them. Conduct audits of a financial, compliance, or operational nature in various departments or areas of the business. Their in-depth knowledge of the business allows them to examine more detailed transactions and practices than an external auditor would examine. Often assist the external auditor. Report directly to senior personnel, to a high executive officer, or to the audit committee of the board of directors.

Government Auditors

Auditors General are appointed by government. Legislated by various jurisdictions to conduct all types of audits for the ministries, departments, and agencies that report to the government. Note that even though these auditors are employees of the government, they are considered to be independent enough to audit other government departments.

Canada Revenue Agency Auditors

Perform compliance audits of taxpayers to determine whether or not they have complied with government regulations such as personal tax laws, corporate tax laws, goods and services tax laws, and trusts laws.

Forensic Accountants and Fraud Auditors

External independent auditors (PAs) with investigative skills. They investigate financial statement fraud, bribery, money laundering, computer hacking, and other types of fraudulent activities.

Sustainability Auditor

A professional, often a public accountant, who provides independent assurance on the information presented in an organization’s sustainability report. This report includes data and disclosures related to environmental, social, and governance (ESG) performance.

Public Accountants (External Auditors)

Most financial statement audits are conducted by PAs who are not employees of the company being audited. These auditors are hired by the shareholders and represent their interests. Large international firms, as well as smaller national and regional firms, not only conduct financial statement audits—they also perform compliance and operational audits, and provide bookkeeping, tax, and management consulting services.

Types of Assurance Engagements

• High Assurance (Reasonable Assurance)

• Limited Assurance

• Non-assurance

High Assurance (Reasonable Assurance)

• Audit of Historical Financial Statements

• Audit of Financial Information 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 Information

Non-Assurance

• Compilation

• Tax Services

• Management Advisory Services

• Accounting and Bookkeeping Services

Review Engagement

Assesses the “plausibility” of the financial statements through inquiry and analytical procedures during the engagement. Generally does not involve audit testing of the financial statements, such as independent confirmation, nor does it involve tests of controls, unless there are inconsistencies or variances from the original expectations. The PA only provides limited assurance with a Conclusion statement: “nothing has come to our attentions”. The PA must perform their work with due care and an objective state of mind.

Compilation Engagement

Assist management in the preparation of the compiled financial information based on information provided by management. The PA mainly provides bookkeeping services, monthly or quarterly financial statements, and tax services. Effective for periods ending on or after December 14, 2021, the new standard CSRS (Canadian Standard for Related Services) 4200 of the CPA Canada Handbook applies to all these. The PA only provides assistance in compiling financial information and does not perform procedures to verify the accuracy or completeness of the information provided by management. The PA does not express an audit opinion or a review conclusion or provide any other form of assurance. Unlike audits and reviews, the PA does not need to be independent, but the threat to independence must be disclosed if there is not an adequate safeguard.

Canadian Auditing Standards

• Public Accounting Industry

• Canadian Auditing Standards (CASs)

• Quality Control of Audit

Public Accounting Industry

CPA Canada helps the provincial accounting bodies to set uniform standards of qualification for admission of CPAs and ensures that its members maintain appropriate standards of professional conduct. Canada’s AASB (Audit and Assurance Standards Board) sets the GAAS (Generally Accepted Audit Standards) for financial statement audits and other services such as review engagements and compilations. CPAB (Canadian Public Accountability Board) is a regulatory board that seeks to enhance audit quality. One of its key roles is its practice inspection program.

Canadian Auditing Standards Role

AASB has also adopted International Standards on Auditing (ISAs) as Canadian Auditing Standards (CASs), which are part of the CPA Canada Handbook-Assurance. More specifically, the CASs constitute GAAS for an audit of financial statements and other historical financial information. Therefore, performing an audit of financial statements in accordance with CASs complies with such incorporating or other governing legislation.

Quality Control of Audit

Since the global financial crisis in 2008-09, CPA Canada has enhanced its quality control standards and methods to ensure that the public accounting firm can meet its professional responsibilities to clients and comply with CASs consistently on every engagement including:

• CPA Canada Handbook-Assurance requires internal policies and procedures that the firms should have developed to ensure compliance with six quality control elements. See Table 2-3 (p. 43) for those components and corresponding quality objectives.

• External Inspections: the provincial CPA organizations will review the firm’s quality control processes and individual audit and/or review engagement files every three years to ensure higher quality audits and improved firm practices.

Other Canadian Standards (OCSs)

Apply if the information is not an audit of historical financial information. When a standard for a specific issue does not exist in the CPA Canada Handbook, the auditor must turn to other authoritative sources. These sources may be standards issued by AICPA, ASB, or PCAOB (all in the United States), by the International Federation of Accountants, or textbooks and journals published by these associations.