Assurance Flashcards
Acceptance
Preconditions
- Financial reporting framework is appropriate
- Obtain agreement from management
- Auditor’s responsibility
- Management’s responsibility
Independence
- Threats
- Safeguards
- Engagement Letter
Scope Limitations
- Opening balance for new audit
- Floods or fires that destroyed evidence
- Management not providing information
Independence
- There is the requirement for auditors to maintain independence in fact and independence in appearance
- Responsibility to consider whether any threats to independence.
- Responsibility to implement safeguards to eliminate these threats or to reduce these threats to an acceptable level
- Use of safe guards
- Self-interest: financial interest in the client
- Self-review: having to form opinion on own work
- Advocacy: promotes the position of the client
- Familiarity: close relationship exists between the client
- Intimidation: client intimidates the practitioner
- Profession safeguards such as education and training
- Client safeguards such as the implementation of policies and procedures to ensure that F/S are fairly presented
- Practitioner safeguards: the implementation of firm policies and procedures that ensure compliance with independence The documentation should include the following
- A description of the nature of the engagement;
- The threat identified;
- The safeguard or safeguards identified and applied to eliminate the threat or reduce it to an acceptable level;
- An explanation of how thevsafeguards eliminate the threat or reduce it to an acceptable level.
Assertions Balance Sheet
- Existence
- Completeness
- Rights and obligations
- Valuation and allocation
Assertions Income Statement
- Occurrence
- Completeness
- Accuracy
- Cut-off
- Classification
Substantive Procedures
- Inspection
- Observation
- Inquiry
- External confirmation
- Recalculation
- Re-performance
- Analytical Procedures
Rules of Professional Conduct
Objectivity
Integrity
Competence
Confidentiality
Professional Behavior
Going Concern
Management’s Responsibility
Make a 12-month assessment of the company’s ability to continue as a going concern
Going Concern Auditor’s Responsibility
Assess if management has done an appropriate job of supporting the assumption.
In circumstances of doubt, assess whether projected cash flow and the related assumptions are appropriate.
CAS 570.09 Auditor’s Objectives
Determine whether management has completed an assessment of the going-concern assumption.
Discuss assessment with management and determine whether identified any events or conditions that could cast significant doubt on ability to continue as going concern and management’s plans to address them.
If an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the going-concern assumption, and inquire of management whether events or conditions exist that may cast doubt on the entity’s ability to continue as a going concern.
If it is determined the entity is no longer a going concern, the financial statements need to be restated using liquidation values. If it is not restated, then an adverse opinion will be expressed.
Materiality Percentages
- 3% to 7% of normalized income before tax
- 1% to 3% of revenues or expenses
- 1% to 3% of total assets
- 3% to 5% of equity
Not-for-profit entities
- 1% to 3% of revenues or expenses
- 1% to 3% of total assets
Auditor Expert
Determine need of an expert:
- will require an expert to obtain sufficient and appropriate audit evidence that
- We need to document the need for the expert. In this case, due to the nature and significance of the matter and its complexity, using an expert to assist with this is required.
- The risk of misstatement is high,
Competence, capabilities, and objectivity of the auditor’s expert:
- Assessment required for each engagement
- Professional credentials
- Experience and expertise
- Objectivity
Additional Work:
- Confirm competence and capabilities of expert
- Obtain understanding of the field of expertise
- Make inquiries of the expert/understand methodologies used
- Review the expert’s assumptions, calculations and supporting documentation
- Perform analytical procedures and re-perform calculations
- Assess consistency with other values/results
Evaluation of Misstatements
A qualified opinion is issued when:
- the auditor concludes that misstatements, either individually or in aggregate, arematerial, but not pervasive to the financial statements, or
- the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
An adverse opinion is issued when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
- A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Per the CAS, pervasive effects on the financial statements are those that:
- are not confined to specific elements, accounts or items of the financial statements;
- if so confined, represent or could represent a substantial proportion of the financial statements; or
- In relation to disclosures, are fundamental to users’ understanding of the financial statements.
Interim Financial Statement
Objective
- To assist the audit committee in discharging its responsibilities with respect to interim financial statement that are to be issued under the provisions of securities legislation.
Other important elements of the interim review include:
- The auditor’s interim review report is intended solely for the audit committee, so it is restricted.
- When the auditor of the annual financial statements also performs interim financial statement reviews, the auditor is able to update their understanding of the entity and its environment on a continuing basis.
- The regulatory deadlines for filing interim financial statements often require a tight timeline for concluding on the interim financial statements.
Nature of procedures
- Interim review are typically inquiry and analytical procedures.
- The timeline is typically very short for interim financial statements and therefore precludes management from developing information and documentation to the same extent as a year-end audit. Therefore, the auditor will allow a greater use of estimates for the interim financial statements.
Time required from SPS staff
- Will spend less time preparing for the interim review (as less documentation is needed) and also less time addressing questions from the auditors while they are on site
- o However, in aggregate throughout the year (when taking into account both interim reviews and the year-end audit), staff will likely end up spending more time than if there was only a year-end audit.
Cost
- As there is less work involved on the part of the auditor, the fees associated with the interim financial statement review will be substantially less than the year-end financial statement audit.
- In addition, you may find that the year-end audit fees decrease as a result of the auditors being able to gain an understanding of the company’s significant transactions earlier in the year and leveraging that understanding during the audit.
Use of auditor’s report
- Unlike the year-end audit report, the interim review report is issued to the audit
- committee only and is not intended for public use. Therefore, SPS’s interim review report cannot be used for any other purpose.
- However, in cases where a modified conclusion is required, to avoid being associated with false or misleading information, a written interim review report will be issued by the auditor.
First-Time Considerations
- If year-end financial statements already prepared, the work can be leveraged to reduce costs
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Due Diligence
- Comprehensive review and analysis of a company’s organization, business, operations and finances, whereby one company tries to learn as much as possible about a target company.
- In addition to gathering information, due diligence also involves verifying and evaluating the information obtained.
- Performing Due Diligence
- practitioner reaches a general understanding with the client
- Nature of the engagement
- The type of report to be issued
- Any restrictions on the distribution of the report
- Overall risk assessment
- Procedures developed and performed to address risks identified
- Report on the procedures performed and the factual results including any errors found
- State that the procedures performed are not sufficient to constitute an audit
- Include a disclaimer of opinion in the report.
- Following areas of the business are often examined
- financial review
- operational review and analysis
- tax areas of concern / investigation
- Completeness of liabilities
- Fair value and existence of assets
- practitioner reaches a general understanding with the client
IPO Prospectus
- Subject to specific independence rules contained in rules of professional conduct
- Will need a separate engagement to consent to the use of audit report that will be included in the offering documents
- Key terms of the engagement include that the auditor makes no representations regarding question of legal interpretation and we will not be performing an engagement to audit or review the offering document as a whole.
- Therefore, we are not providing assurance over the offering document
- Read prospectus and other info like minutes
- Perform review procedues such as inquiry and analytics
- If pro-forma statements
- Verify historical information
- Make inquiries about basis management used
- Recalculate pro-forma using basis
- Verify that statements are accurately reproduced
- No assurance
Interim Filings
- No review required for interim financial statements
- Must issue interim quarterly
- Review required for unaudited financial statements
- Inquiry analytic and discussion
Audit Committee
- Requirements
- Must have at least 3 members
- Must be independent from organization
- Must be financially literate
- Tasks
- Review and implement new accounting policies
- Oversee the internal and external audit function
- Ensures that internal controls are in place
- Ensures that the independence and qualifiations of external auditors
