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Copyright © 2011 Pearson Canada Inc. Auditing: The Art and Science of Assurance Engagements Chapter 2: The Public Accounting Profession.

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Presentation on theme: "Copyright © 2011 Pearson Canada Inc. Auditing: The Art and Science of Assurance Engagements Chapter 2: The Public Accounting Profession."— Presentation transcript:

1 Copyright © 2011 Pearson Canada Inc. Auditing: The Art and Science of Assurance Engagements Chapter 2: The Public Accounting Profession

2 Auditing, Canadian Eleventh Edition Chapter 2 Learning Objectives 1.Describe the organizational structure of public accounting firms. 2.Describe the organizations involved in the development and maintenance of Canadian GAAS (generally accepted auditing standards) for public accountants. Explain how these standards are enforced. 3.Identify the characteristics of quality control for financial statement audits. Copyright © 2011 Pearson Canada Inc. 2-2

3 Auditing, Canadian Eleventh Edition Public Accounting Firms There are more than 1000 public accounting firms in Canada. Four categories: Big Six international firms, other international and national firms, large local and regional firms and small local firms. Copyright © 2011 Pearson Canada Inc. 2-3

4 Auditing, Canadian Eleventh Edition Structure of Public Accounting Firms The structure of public accounting firms should foster independence, competence and mitigate litigation risk. The organizational form used by many public accounting firms is that of a sole proprietorship or a partnership. (Continued) Copyright © 2011 Pearson Canada Inc. 2-4

5 Auditing, Canadian Eleventh Edition Structure of Public Accounting Firms (Continued) The organizational hierarchy in a typical public accounting firm includes partners, managers, supervisors, seniors or in-charge auditors, and assistants. Copyright © 2011 Pearson Canada Inc. 2-5

6 Auditing, Canadian Eleventh Edition Professional Accounting Organizations The professional accounting/auditing organizations represented in Canada are: –Canadian Institute of Chartered Accountants –Certified General Accountants Association of Canada –Society of Management Accountants of Canada –Institute of Internal Auditors (Continued) Copyright © 2011 Pearson Canada Inc. 2-6

7 Auditing, Canadian Eleventh Edition Professional Accounting Organizations (Continued) These organizations coordinate the examination processes, provide for continuing education activities, fund research projects, produce relevant publications, and engage in standard setting and peer review processes. Copyright © 2011 Pearson Canada Inc. 2-7

8 Auditing, Canadian Eleventh Edition Sources of Auditing Standards The Canadian Institute of Chartered Accountants (CICA) sets accounting and auditing standards in Canada. Canadian accounting and auditing standards are moving toward conformity with international standards. Copyright © 2011 Pearson Canada Inc. 2-8

9 Auditing, Canadian Eleventh Edition International Standards on Auditing The ISAs (International Standards on Auditing)have been adopted as Canadian Auditing Standards, (CASs) which are effective for the audits that end after December 14, 2010. Copyright © 2011 Pearson Canada Inc. 2-9

10 Auditing, Canadian Eleventh Edition Generally Accepted Auditing Standards (GAAS) GAAS are broad guidelines that help auditors in fulfilling their professional responsibilities. General: qualifications and conduct Examination: performance of the audit Reporting: describing the results Copyright © 2011 Pearson Canada Inc. 2-10

11 Auditing, Canadian Eleventh Edition Structure of GAAS Copyright © 2011 Pearson Canada Inc. 2-11

12 Auditing, Canadian Eleventh Edition Review Question 2-8, p. 41 Discuss GAAP and GAAS. Copyright © 2011 Pearson Canada Inc. 2-12

13 Auditing, Canadian Eleventh Edition General: Qualifications and Conduct The general standard involves due care in the performance of all aspects of auditing. The auditor must be technically qualified and experienced in those industries in which the auditor has clients. Copyright © 2011 Pearson Canada Inc. 2-13

14 Auditing, Canadian Eleventh Edition Examination: Performance of the Engagement The auditor is required to conduct the audit using a risk-based approach. The engagement should be well planned and executed, with proper supervision of assistants, to ensure an adequate audit. (Continued) Copyright © 2011 Pearson Canada Inc. 2-14

15 Auditing, Canadian Eleventh Edition Examination: Performance of the Engagement (Continued) Supervision is essential in auditing because most of the field work or examination is done by less experienced staff members. Copyright © 2011 Pearson Canada Inc. 2-15

16 Auditing, Canadian Eleventh Edition Reporting: Results The report describes the auditor’s responsibilities, management’s responsibilities, the financial statements that were audited, the scope of the engagement and the auditor’s opinion. (Continued) Copyright © 2011 Pearson Canada Inc. 2-16

17 Auditing, Canadian Eleventh Edition Reporting: Results (Continued) Specific wording is required in the auditor’s report. If the standard opinion cannot be provided, standards explain when and how the report should be modified. Copyright © 2011 Pearson Canada Inc. 2-17

18 Auditing, Canadian Eleventh Edition Discussion Problem 2-20, p. 42 This practice problem shows you what can go wrong when GAAS is not followed. Take a look at this problem and identify what Holmes did wrong (or simply did not do!) in the context of GAAS. Copyright © 2011 Pearson Canada Inc. 2-18

19 Auditing, Canadian Eleventh Edition Copyright © 2011 Pearson Canada Inc. Quality Control Why is it important for the public accounting firm to have quality control procedures? What could go wrong without them? 2-19

20 Auditing, Canadian Eleventh Edition Copyright © 2011 Pearson Canada Inc. Quality Control Defined Consists of the methods used to make sure that the firm meets its professional responsibilities. Includes the organizational structure of the PA firm and its procedures. Helps to ensure that GAAS is follows on every audit. 2-20

21 Auditing, Canadian Eleventh Edition New Quality Control Standard The new CICA Handbook Section CSQC-1 (formerly GSF-QC) describes general standards of quality control that are applied to firms performing assurance engagements. These standards clarify the minimum policies and procedures that firms should have in place. (Continued) Copyright © 2011 Pearson Canada Inc. 2-21

22 Auditing, Canadian Eleventh Edition New Quality Control Standard (Continued) Changes in CSQC-1 include: the timing of quality control reviews (to occur before the audit opinion is issued) a requirement for more specific documentation about independence, consultation, and assessment of evidence. (Continued) Copyright © 2011 Pearson Canada Inc. 2-22

23 Auditing, Canadian Eleventh Edition New Quality Control Standard (Continued) The changes also codify monitoring of quality control procedures and procedures for dealing with complaints. Copyright © 2011 Pearson Canada Inc. 2-23

24 Auditing, Canadian Eleventh Edition Canadian Public Accountability Board (CPAB) The CPAB was created by the provincial securities commissions, the Office of the Superintendent of Financial Institutions, and the CICA to help improve the public’s confidence in independent auditing. The CPAB has developed an oversight program that involves regular inspections of those public accounting firms that audit Canadian public companies. Copyright © 2011 Pearson Canada Inc. 2-24

25 Auditing, Canadian Eleventh Edition Copyright © 2011 Pearson Canada Inc. Elements of Quality Control 1.Leadership and responsibilities within the firm - e.g. an organizational culture that promotes audit quality. 2. General ethical requirements - e.g. general ethical principles of integrity, objectivity, professional competence and due, confidentiality. (Continued) 2-25

26 Auditing, Canadian Eleventh Edition Copyright © 2011 Pearson Canada Inc. Elements of Quality Control (Continued) 3. Independence - e.g. develop, communicate and monitor policies and procedures to ensure that the firm complies with the independence guidelines. 4. Client acceptance or continuance - e.g. document annual risk assessment processes, including evaluation of a client’s management integrity and auditor competence and independence. (Continued) 2-26

27 Auditing, Canadian Eleventh Edition Copyright © 2011 Pearson Canada Inc. Elements of Quality Control (Continued) 5. General human resource policies - e.g. have adequate hiring policies that ensure competence and integrity of personnel. 6. Extent of professional development - e.g. employees adequately trained in the skills needed to conduct audits. 7. Engagement performance - e.g. have adequate processes and procedures to ensure that the audit is conducted in accordance with GAAS. (Continued) 2-27

28 Auditing, Canadian Eleventh Edition Elements of Quality Control (Continued) 8. Engagement quality control review: e.g. use of second or independent partner review, technical review, documentation and compliance with quality control processes. 9. Documentation: e.g. hard copy or electronic format, file retention, storage, security and back-up for audit documentation, correspondence, policies, and procedures. Copyright © 2011 Pearson Canada Inc. 2-28

29 Auditing, Canadian Eleventh Edition Discussion Problem 2-16, p. 41 Identify the elements of quality control. Copyright © 2011 Pearson Canada Inc. 2-29

30 Auditing, Canadian Eleventh Edition Practice Inspection Practice inspections ensure the existence of, and adherence to, quality control standards. Inspections may be administered by professional associations, provincial institutes, ordre, or the CPAB. Copyright © 2011 Pearson Canada Inc. 2-30

31 Auditing, Canadian Eleventh Edition Discussion Problem 2-18, p. 42 Evaluate the benefits of practice inspection. Copyright © 2011 Pearson Canada Inc. 2-31

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