Office of the Auditor General of Canada CANADA’S ADOPTION OF INTERNATIONAL STANDARDS ON AUDITING 20 FACTS PREPARERS of FINANCIAL STATEMENTS SHOULD KNOW about the NEW CANADIAN AUDITING STANDARDS (CASs) John Rossetti, CA Assistant Auditor General - OAG Member - CICA AASB

Office of the Auditor General of Canada #1: Why Canada Adopted International Standards on Auditing (ISAs) ISAs follow a rigorous “due process” Most Canadian audit issues are not unique Impossible to harmonize with both the US and the international rules Canada had no influence over US GAAS, but did have a seat at the IAASB Allows for more effective use of resources

Office of the Auditor General of Canada #2: Effective Date for the New Canadian Auditing Standards (CASs) for audits of f/s for periods beginning on or after December 15, 2009 Co-ordinated with the effective date of the ISAs prepared in accordance with the new clarity format Not expected to be any additional new CASs issued before 2011

Office of the Auditor General of Canada #3: Types of Engagements the New CASs Apply to CASs only apply to the audits of f/s and other historical financial information Other types of assurance engagements (i.e. 5805, performance audits, review engagements) are not covered by CASs Related services (compilations, etc.) are also not addressed by the CASs The existing Handbook sections will apply in those cases

Office of the Auditor General of Canada #4: The New Format for the Canadian Auditing Standards CASs are presented in the international “clarity” format Each CAS consists of 5 sections:  Introduction  Objective  Definitions  Requirements  Application & other explanatory material

Office of the Auditor General of Canada #5: Organization of the Interim CICA Handbook (Assurance) Revised structure for an interim period  CASs – audits of financial statements  Other types of audits  Review engagements  Related services Interim structure needed while the CICA clarifies all of the inter-relationships between CASs and the existing standards Note that CASs have both major and minor differences from existing Canadian standards

Office of the Auditor General of Canada #6: Canadian Modifications to the International Standards To date, modifications have been rare These have been restricted to:  References to the IFAC Code of Conduct replaced by “relevant ethical requirements”  Maintaining existing protocols between auditors and the legal profession (JPS)  Eliminating the option of using “presents a true and fair view” from auditor’s reports A few CASs remain to be approved

Office of the Auditor General of Canada #7: Application of the CASs to F/S Preparers They don’t apply to preparers of f/s!!! CASs have authority only over auditors CASs require the auditor to deal with management and/or those charged with governance (TCWG) based on the audit “premise”, and to take specific actions if management/TCWG do not fulfil their responsibilities consistent with the “premise”

Office of the Auditor General of Canada #8: Changes to the “Terms of an Audit Engagement” Many more specific requirements for the auditor to include in the engagement letter Most importantly, the “preconditions for an audit” must exist:  Management must acknowledge and agree to the basic “premise” underlying an audit of financial statements; and  Management must be using an “acceptable” accounting framework as a basis for preparing the financial statements;

Office of the Auditor General of Canada #9. The “Premise” for Conducting an Audit under CASs Defined in CAS 200 Overall Objectives of the Independent Auditor Premise is that management, and where appropriate, those charged with governance have accepted certain responsibilities and made certain undertakings, namely...

Office of the Auditor General of Canada #9 (cont’d): The Premise Mgmt will prepare and present the f/s in accordance with the applicable accounting framework; and Mgmt will provide the auditor with:  All info relevant to the preparation of the f/s  Any additional info the auditor may request  Unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence

Office of the Auditor General of Canada #9 (cont’d): The Premise Preparing and presenting financial statements in accordance with the applicable reporting framework includes:  Designing, implementing and maintaining internal control over financial reporting;  Selecting appropriate accounting policies; and  Making accounting estimates that are reasonable in the circumstances

Office of the Auditor General of Canada #9 (cont’d): The Premise The premise does NOT mean, for example, that to fulfill its responsibilities management has to implement a flawless system of internal control over financial reporting, or necessarily undertake a SOX-type evaluation of internal control to receive a clean opinion on the financial statements

Office of the Auditor General of Canada #10: The “Applicable” Accounting Framework This is the accounting framework that is adopted by management Can be a “fair presentation” framework, or a “compliance” framework For example, PSAB would be an example of a “fair presentation” framework The CASs are designed to work with a broad range of accounting frameworks

Office of the Auditor General of Canada #11: Nature of an “Acceptable” Accounting Framework An accounting framework that is judged by the auditor to meet the needs of the intended users In most circumstances, the auditor cannot accept the engagement if he/she believes that the framework is not “acceptable” General purpose frameworks (i.e. IFRS, PSAB, US GAAP, etc.) are presumed to be acceptable for general purpose financial statements

Office of the Auditor General of Canada #12: Changes to the Format of the Auditor’s Report No substantial changes in format but... There are headings for each major section of the report There would also be headings for non- standard paragraphs May be divided into 2 sections if the auditor must report on other legal and/or regulatory requirements

Office of the Auditor General of Canada #12 (cont’d): New Format of the Auditor’s Report Independent Auditor’s Report TO: Appropriate Addressee Report on the Financial Statements We have audited... Management’s Responsibility Auditor’s Responsibility Opinion Emphasis of Matter (if any) Other Matter (if any) Report on Other Legal and Regulatory Requirements Auditor’s Signature Date

Office of the Auditor General of Canada #13: Changes to the Content of the New Auditor’s Report Management’s responsibilities have not changed, but the auditor’s report now contains a brief description of those responsibilities Auditor’s responsibilities – now includes a reference to relevant ethical standards Scope of the audit – also minor changes Auditor states: “ We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.”

Office of the Auditor General of Canada #14: The Date of the Auditor’s Report Under CASs The CAS specifies 2 pre-conditions for dating the auditor’s report First, mgmt has accepted responsibility for the preparation of the f/s Second, the f/s must be approved by the body responsible under law Result: generally, the date of the auditor’s report is the date that the Audit Committee/Board approves the f/s

Office of the Auditor General of Canada #15: The “Emphasis of Matter” Paragraph Must relate to a matter already discussed in the notes to the f/s Auditor believes the importance of the issue should be emphasized for users Not a qualification – the auditor must clearly indicate this in the “emphasis of matter” paragraph

Office of the Auditor General of Canada #16: The “Other Matter” Paragraph For a matter other than those that are presented and disclosed in the f/s In the auditor’s judgement, the matter is relevant to the users’ understanding of the audit Follows the “opinion” paragraph, and any “matter of emphasis” paragraph An “other matter” is not a qualification

Office of the Auditor General of Canada #15 & #16 – Required Communications If the auditor expects to include an “Emphasis of Matter” paragraph or an “Other Matter” paragraph, they shall communicate with those charged with governance (TCWG) regarding this expectation and the proposed wording

Office of the Auditor General of Canada #17: Changes to Communications with TCWG There are a number of subtle changes: Auditor must communicate the form, timing and general content of planned communications; Auditor must communicate on a timely basis; Evaluate whether the 2-way communication process is adequate for purposes of the audit;

Office of the Auditor General of Canada #17 (cont’d): Changes to Communications with TCWG Communicate significant findings in writing; Ask TCWG to have uncorrected misstatements booked May ask TCWG for representation on specific matters such as regarding the effect of uncorrected misstatements to the f/s as a whole

Office of the Auditor General of Canada #18: Communication of Deficiencies in Internal Control CASs distinguish between a deficiency in internal control, and a significant deficiency The auditor must communicate to an appropriate level of management all identified deficiencies in internal control All significant deficiencies must be reported in writing to TCWG Communication should be on a timely basis

Office of the Auditor General of Canada #19: Changes to Auditing “Related Parties” More detailed and extensive requirements Auditor must obtain an understanding of the controls management has established to:  Identify, account for and disclose RPTs  Authorize and approve significant transactions and arrangements with related parties; and  Authorize and approve significant transactions and arrangements outside the normal course of business Must inspect various documents and minutes for evidence of undisclosed related party relationships or transactions

Office of the Auditor General of Canada #20: What YOU Should Do to Prepare for the CASs Back to school!!! Discuss with your auditor Inform your senior management and those charged with governance Familiarize yourself with the new Handbook structure and the CASs written in the “clarity” format Enjoy being a part of history!

Office of the Auditor General of Canada THANK YOU!!