Assurance

Question 1

Reporting alternatives – Specific items

Audit & Assurance

Core – Level B; Elective – Level A

Answer 1

Reporting alternatives – Specific items (Assurance)
• CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
o A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole
o May not be a practical alternative if the financial statements on the whole are not being audited

Case: Atlantic Shellfish, TankCo
Reference: CAS 805

Question 2

Review engagements

Audit & Assurance

Core – Level B; Elective – Level A

Answer 2

Review engagements (Assurance)
• The objective of a review engagement is to obtain limited assurance about whether the financial statements as a whole are free from material misstatement
• A conclusion is formed on whether anything has come to the practitioner’s attention to cause them to believe the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework, i.e. ASPE, IFRS
• Limited assurance about the results of the examination is provided, with an explicit statement that an audit opinion is not expressed
• Report expresses negative assurance – “nothing has come to our attention…”
• Similar to an audit, independence is required as it is an assurance engagement
• Materiality must be determined
• Typical procedures include:
o Obtaining knowledge of the client’s business
o Making inquiries of management and client personnel
o Performing analytical procedures
Case: Elder Care Centre and Spa, King Street Theatre
Reference: CSRE 2400 

Question 3

Opening balances

Audit & Assurance

Core – Level B; Elective – Level A

Answer 3

Opening balances (Assurance)
• Sufficient and appropriate evidence regarding opening balances being free of material misstatement must be obtained in order to issue an opinion
• Evidence may be obtained by reviewing the previous auditor’s working papers, if the client has been audited before, or by performing specified audit procedures on the opening balances, if the client is being audited for the first time
• If the opening balances cannot be verified, it may be necessary to issue a qualified opinion or denial / disclaimer of opinion due to the scope limitation
• Generally, the opening balance scope limitation would not apply to a review engagement as there’s no requirement to send out A/R confirmations or attend inventory counts, which are time-sensitive and generally only required for audit level assurance

Case: TankCo
Reference: CAS 510, paragraph 6(c)

Question 4

Control Deficiencies

Audit & Assurance

Core – Level A

Answer 4

Control Deficiencies (Assurance)
•	The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation)
o	Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls
o	Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations.  To the extent possible, effects on the financial statements must be tied to assertions or at least the affected accounts must be outlined along with a discussion of how they might be affected by the deficiency
o	Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances.
Case: Culinary Crawl, Atlantic Shellfish, CHHP, TankCo, Ferguson Real Estate, Solar Panel Solutions

Question 5

Materiality

Audit & Assurance

Core – Level B; Elective – Level A

Answer 5

Materiality (Assurance)
• A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced
• Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities
• Materiality is not purely quantitative; qualitative factors must be considered
• Factors that may indicate the existence of one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users- i.e. “specific” materiality
• Performance materiality (generally 60% to 80% of materiality) means the amount less than materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality

Case: Dogani, Atlantic Shellfish, TankCo, Ferguson Real Estate, Solar Panel Solutions
Reference: CAS 320

Question 6

Audit approach

Audit & Assurance

Core – Level B; Elective – Level A

Answer 6

Audit approach (Assurance)
• If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed
• If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach
Case: Dogani, Atlantic Shellfish, TankCo, Solar Panel Solutions

Question 7

Financial statement assertions

Audit & Assurance

Core – Level B; Elective – Level A

Answer 7

Financial statement assertions (Assurance)
• Assertions about classes of transactions and events for the period under audit:
o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity
o Completeness – all transactions and events that should have been recorded have been recorded
o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately
o Cut-off – transactions and events have been recorded in the correct accounting period
o Classification – transactions and events have been recorded in the proper accounts
• Assertions about account balances at the period end:
o Existence – assets, liabilities, and equity interests exist
o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded
o Valuation and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
• Assertions about presentation and disclosure:
o Occurrence and rights and obligations – disclosed events, transactions, and other matters have occurred and pertain to the entity
o Completeness – all disclosures that should have been included in the financial statements have been
o Classification and understandability – financial information is appropriately presented and described, and disclosures are clearly expressed
o Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts
Case: Atlantic Shellfish, TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions;
Reference: CAS 315.A124

Question 8

Use of an expert

Audit & Assurance

Core – Level B; Elective – Level A

Answer 8

Use of an expert (Assurance)
• Evaluate the competence, capabilities and objectivity of the expert
• Obtain an understanding of the expert’s work
• Evaluate the appropriateness of the expert’s work as audit evidence for the relevant assertion
Case: Solar Panel Solutions
Reference: CAS 500.A37 - .A48
 

Question 9

Reporting alternatives – Compliance with agreement

Audit & Assurance

Core – Level B; Elective – Level A

Answer 9

Reporting alternatives – Compliance with agreement (Assurance)
• Section 5815 Special Report – Audit reports on compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inspection, observation, inquiry, confirmation, recalculation, reperformance and analytical procedures
o High level of assurance and therefore more costly alternative
• Section 8600 Report – Reviews of compliance with agreements, statutes and regulations
o A report stating compliance with the terms of the agreement, through procedures such as inquiry, discussion and analysis
o Moderate level of assurance and therefore less costly alternative
• Section 9100 Report – Results of Applying Specified Auditing Procedures
o A report providing the factual results of the specific procedures that can be chosen to be performed
o No assurance provided but is the most flexible of all alternatives

Case: TankCo, Ferguson Real Estate
Reference: 5815, 8600, 9100

Question 10

Methods of collecting audit evidence

Audit & Assurance

Core – Level B; Elective – Level A

Answer 10

Methods of collecting audit evidence (Assurance)
• Inspection – thorough examination of an item by the auditor
• Observation – use of the senses to assess certain activities
• Inquiry – obtain written or oral information from the client in response to questions
• Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information
• Recalculation – recheck the computations and mathematical work completed by the client
• Reperformance – redo other non-mathematical procedures such as internal controls
• Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable

Case: TankCo, Ferguson Real Estate, Roxanne Kalpert, Solar Panel Solutions, King Street Theatre, Lake Country Camping
Reference: CAS 500-A10-A25

Question 11

Using the work of internal auditors

Audit & Assurance

Core – Level B; Elective – Level A
 

Answer 11

Using the work of internal auditors
• The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following:
o The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors;
o The level of competence of the internal audit function; and
o Whether the internal audit function applies a systematic and disciplined approach, including quality control.
• In determining the nature and extent of work that may be assigned to internal auditors the external auditor shall consider:
o The amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence
o The assessed risk of material misstatement
o The existence of significant threats to objectivity and competence of the internal auditor

Reference: CAS 610.15, 610.29

Question 12

Reporting alternatives – Specific items

Audit & Assurance

Core – Level B; Elective – Level A

Answer 12

Reporting alternatives – Specific Items (Assurance)
CAS 805 Report – Audit of a Single Financial Statement and Specific Elements, Accounts or Items of a Financial Statement
• A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole

The auditor must
• comply with all CAS’s relevant to the audit (CAS 200)
• determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS 210)

CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information.
When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement.

Reference: CAS 805

Question 13

General assurance standards

Audit & Assurance

Core – Level B; Elective – Level A
 

Answer 13

General assurance standards (Assurance)
Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information.
• Attestation engagements (CSAE 3000): a party other than the practitioner measures or evaluates the underlying subject matter against the criteria
• Direct engagements (CSAE 3001): the practitioner measures or evaluates the underlying subject matter against the criteria
General standards:
• Before undertaking an assurance engagement, the practitioner should have a reasonable basis for believing the engagement can be completed in accordance with the relevant standards.
• The practitioner should seek management’s acknowledgment of responsibility for the subject matter as it relates to the objective of the engagement.
• The assurance engagement should be performed with due care and with an objective state of mind.
• The practitioner and any other persons performing the assurance engagement should have adequate proficiency in such engagements and collectively possess adequate knowledge of the subject matter.

Reference: CSAE 3000/CSAE 3001

Question 14

Responsibility of the Auditor for Assessment of Going Concern

Audit & Assurance

Answer 14

Responsibility of the Auditor for Assessment of Going Concern
• The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements
• Conclude if a material uncertainty exists that the entity cannot continue as a going concern
• Determine the implications on the auditor’s report
• Communicate with those charged with governance if events or conditions cast doubt on the going concern
Additional Audit Procedures When Conditions or Events Are Identified
• If no assessment has been made by management, request one
• Evaluate management’s plan for future actions
• Where there is a cash flow forecast and the forecast is a significant factor:
o Evaluate the reliability of underlying data
o Assess adequate support for assumptions
• Consider additional information
• Request written representations from management regarding future plans and feasibility
Impact on the Auditor’s Report if Material Uncertainty exists
• If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report
• If adequate disclosures are not made, qualified or adverse opinion

Reference: CAS 570

Question 15

Common audit risk factors

Audit & Assurance

Core – Level B; Elective – Level A

Answer 15

Common audit risk factors (Assurance)

• New or additional users
• Management bias
• Going concern
• Debt covenants
• Cash flow issues
• Control issues
• New problems or issues
• Significant growth in revenues or assets
• Legal claims
• High risk industry
• Complex systems
• Changes in operating environment
• New personnel
• Changes to information systems
• New technologies
• Changes in products or activities
• Corporate restructuring
• Expanded foreign operations
• New accounting pronouncements

Case: Dogani, Atlantic Shellfish, TankCo, Ferguson Real Estate, Solar Panel Solutions

Reference: CAS 315, Appendix 2

Question 16

Risks at overall financial statement level (OFSL)

Answer 16

Risk factors increasing OFSL risk:

• New policy allowing acceptance of cash
• New controller
• Existing financial reporting errors
• New investors and/or new lenders
• Reduction in available funding
• CEO (Shareholder) reduced involvement
• Complexity of projects and/or use of estimates
• Increase in debt leverage (new debt)
• Internal control issues
• Conflict of interest

Factors decreasing OFSL risk:

• No significant audit or accounting issues in prior year
• Low employee turnover
• Company focus is not profit maximization
• Lenders more concerned with property values more than financial results
• Other valid

Question 17

Independence rules

Answer 17

Threats to independence:

• Self-review
• Self-interest
• Advocacy
• Familiarity and/or intimidation

Threats to a practitioner’s independence can be categorized as follows:

• Self-interest threats - occur where the practitioner (or his or her firm) has a financial interest in the client, as in the following examples:

o Assurance team members involved in the assurance engagement and/or their immediate family members own shares of, or have made a loan to, the client.

o The client’s fees are significant in relation to the total fee base of the practitioner (or his or her firm).

o A loan is made by a client to an assurance team member that is outside of normal lending terms.

• Self-review threats - occur where the practitioner is in the position of having to form an opinion on his or her own work, as in the following examples:

o The practitioner, or an assurance team member, has recently been an employee or a director of the client and has had an opportunity to prepare original data or records for the client.

o The practitioner, or an assurance team member, has provided internal audit services, human resource services, valuations, information technology services, or corporate finance services to the client. The practitioner then provides assurance over these services.

• Advocacy threats - occur where the practitioner (or his or her firm) is perceived to promote, or actually promotes, the position of the client, as in the following examples:

o The practitioner (or his or her firm) promotes the sale of shares or other securities for the client. In this situation, the practitioner may or may not receive a commission for such sales.

o The practitioner (or his or her firm) represents the client in a legal dispute.

o The practitioner (or his or her firm) represents the client in negotiations with a third party, such as a major creditor of the client.

• Familiarity threats occur - where a close relationship exists between the practitioner and the client, creating an environment where it is difficult for the practitioner to behave with professional skepticism, as in the following examples:

o The practitioner (or his or her firm), or an assurance team member, has a long-standing association with the client.

o A former partner of the public accounting firm now holds a senior position (such as chief financial officer or chief operating officer) at the client.

o The practitioner, or an assurance team member, has accepted other than very minor gifts from the client.

o The practitioner, or an assurance team member, has accepted other than very minor gestures of hospitality from the client, such as tickets to a sporting event or meals.

• Intimidation threats - occur where the client intimidates the practitioner (or his or her firm), as in the following examples:

o The client threatens to replace the practitioner next year.

o There is pressure from the client to reduce the number of audit hours in an effort to reduce assurance engagement fees.

Documentation not required to achieve Level C

If we conclude that either the self-review or the self-interest threat the documentation should include the following information:

(i) a description of the nature of the engagement;
(ii) the threat identified;
(iii) the safeguard or safeguards identified and applied to eliminate the threat or reduce it to an acceptable level; and
(iv) an explanation of how, in the member’s or firm’s professional judgment, the safeguards eliminate the threat or reduce it to an acceptable level.