Electronic Presentations in Microsoft ® PowerPoint ® Prepared by Brad MacDonald SIAST © 2003 McGraw-Hill Ryerson Limited

Copyright © 2003 McGraw-Hill Ryerson Limited Chapte r 2 2 Assurance, Audit, and Quality Control Standards

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 23 Learning Objective 1 Name the various practice standards for internal, governmental, and independent auditors, and identify their sources.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 24 Practice Standards Chapter 2 standards and sources: Assurance standardsCICA Handbook Generally accepted auditing standards (GAAS) CICA Assurance Standards Board Quality control standardsPeer review Provincial institutes StandardsSource

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 25 CICA Standard-Setting Process Vice-president Studies and Standards has overall responsibility for standard-setting. –Oversees four directors: Accounting standards Assurance standards Criteria for control Research studies To ensure due process, a number of key steps are followed in setting standards.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 26 Learning Objective 2 Outline the reasons for having general assurance standards and give some examples of assurance subject matters.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 27 Assurance Standards An assurance engagement: –Is when a practitioner is engaged to issue a written communication expressing a conclusion regarding a subject matter for which the reporting party is responsible.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 28 Parties Involved in an Assurance Engagement SUBJECT MATTER User(s) CONCLUSION ACCOUNTABLE TO Accountable party (Management) Practitioner

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 29 Assurance Standards Assertion: A statement about some aspect of a subject matter. Assurance standards can be applied to written and unwritten assertions. –Unwritten – direct reporting engagements –Written – attest engagements Audits and reviews are considered attest engagements.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 210 Assurance Standards The assurance standards were created after GAAS, and ideas from GAAS were borrowed for the assurance standards. –Major differences arise in the areas of practitioner competence internal control evaluation reporting –Assurance standards are more general than GAAS.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 211 Learning Objective 3 Write and explain the eight CICA generally accepted auditing standards (GAAS), and explain how GAAS was or was not followed in specific fact situations.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 212 The general standard –“The examination should be performed and the report prepared by a person or persons having General Standard adequate technical training and proficiency in auditing - Competence and with an objective state of mind” - Objectivity with due care - Due Professional Care

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 213 Competence is gained through education and experience. –It allows the auditor to recognize underlying assertions made by management decide which evidence is relevant to support assertion select and perform procedures for obtaining evidence evaluate evidence for reality and conformity to GAAPCompetence

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 214Objectivity Auditors are expected to be unbiased and impartial. –Achieved by maintaining independence Independence in fact Mental attitude, state of mind Independence in appearance Covered by rules of professional conduct –An auditor must not subordinate his/her judgement to others.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 215 Due Professional Care Due care is best understood in the context of the prudent auditor. –A matter of what competent auditors do, and how well they do it. –Determination of due care must be reached on the basis of facts and circumstances in the case. –Due care is frequently at issue in legal suits.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 216 First Examination Standard “The work should be adequately planned and properly executed. If assistants are employed they should be properly supervised.” –A written audit program is desirable. –Understanding of the client’s business is an absolute necessity. –Timing is important for audit planning.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 217 Second Examination Standard “A sufficient understanding of internal control should be obtained to plan the audit. When control risk is assessed below maximum, sufficient appropriate audit evidence should be obtained through tests of controls to support the assessment.” –Internal control – a system’s capability to prevent, detect, and correct errors. –Understanding internal controls is the foundation for assessment of control risk.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 218 Third Examination Standard “Sufficient appropriate audit evidence should be obtained by such means as inspection, observation, enquiry, confirmation, computation and analysis, to afford a reasonable basis to support the content of the report.” –Appropriate – evidence must be relevant and reliable. –Sufficient – not every transaction need be examined.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 219 Reporting Standards 1. “The report should identify the financial statements and distinguish between the responsibilities of management and the responsibilities of the auditor.” 2. “The report should describe the scope of the auditor's examination.”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 220 Reporting Standards 3. “The report should contain either an expression of opinion on the financial statements or an assertion that an opinion cannot be expressed. –In the latter case, the reasons therefor should be stated.”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 221 Reporting Standards 4. “Where an opinion is expressed, it should indicate whether the financial statements present fairly, in all material respects, the financial position, results of operations and changes in financial position in accordance with an appropriate disclosed basis of accounting, which except in special circumstances should be generally accepted accounting principles. The report should provide adequate explanation with respect to any reservation contained in such opinion.”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 222 Learning Objective 4 Describe the standard unqualified audit report in terms of its communication of audit standards and other messages.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 223 Standard Unqualified Report Unqualified – good, in that the auditor is not calling attention to anything that may be wrong in the statements. –Auditing standards dictate use of a standard report. Qualified audit report – bad, in that the auditor reports a departure from GAAP, or a limitation in the scope of the audit.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 224 These financial statements are the responsibility of the company's management. My responsibility is to express an opinion on these financial statements based on my audit. The Standard Report Auditor’s report1. Title 2. AddressTo the shareholders of ……… 3. Notice of audit I have audited the balance sheet of as at , and the statements of income, retained earnings and cash flow for the year then ended. 4. Responsi- bilities

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 225 Audit Report – Paragraph 2 I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 5. Description of the audit

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 226 Audit Report - Opinion Paragraph In my opinion, these financial statements present fairly, in all material respects, the financial position of the company as at , and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles. 6. Opinion (Signed) Public Accountant 7. Signature 8. Date Date City

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 227 GAAS Reporting Standards Generally accepted accounting principles : –are required by 4 th reporting standard –Determination and application of GAAP may require exercise of judgement. Implicit report elements: –consistent application of GAAP –adequate disclosure

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 228 GAAS Reporting Standards Report content: –Report shall contain an opinion or an assertion that an opinion cannot be expressed. Third reporting standard –Opinion could be unqualified, qualified, or adverse. –Denial of opinion is declaration that no opinion is given. –An explanation is required whenever there is a report reservation.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 229 Learning Objective 5 Interpret GAAS in the context of a computer environment.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 230 GAAS in a Computer Environment GAAS are not written with any special reference to a computer environment. –All of the general standards are applicable to an audit in a computer environment The financial statements are the subject of the final audit report, not the processes used to prepare the report.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 231 General Standard Requires competence, due care, and objectivity. –Auditors must have a working knowledge of computerized accounting and control systems. Students must understand computer terminology. Managers and partners must have supervisory capability. Auditors may need to use the technical expertise of specialists.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 232 Examination Standards Planning of audit engagement –Care is required in getting the correct personnel on the audit at the right time. Internal control and risk assessment –Computerized systems have built-in control features that need to be evaluated. Sufficient appropriate audit evidence –Auditor will have to consider use of “computer-assisted audit techniques” (CAATs).

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 233 Learning Objective 6 Explain some of the characteristics of “professional scepticism.”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 234 Professional Scepticism Auditors tend not to believe management assertions; the tendency is to ask management to “prove it.” –This often makes audits more extensive (and expensive). –Scepticism must be balanced with an open mind about the integrity of management. Auditors must be willing to accept the apparent fact that there is no evidence of error, fraud, or irregularities.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 235 Learning Objective 7 List and explain the important requirements of quality control standards for a PA firm.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 236 Quality Control Standards Quality control: –Actions taken to evaluate compliance with professional standards as defined in the CICA Handbook and provincial rules of professional conduct. –Several frameworks for quality control are available. Currently, no codified standard exists in Canada.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 237 Post-Enron Quality Control Accountability boards have been established in the US and Canada to oversee public accounting. –Boards will need to consider monitoring of quality control, as well as other areas.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 238 Practice Inspection Practice inspection, peer review and quality reviews are “audits of auditors.” –Practice inspection – audit files and documentation are reviewed by a third party. Evaluate conformity of auditor’s work with the Handbook and rules of professional conduct. –Peer review and quality review are a review of the quality of the overall practice aimed at the firm rather than the individual.