Assurance Flashcards
Reporting alternatives – Specific items (Assurance)
Reference: CAS 805
• 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
Review engagements (Assurance)
Reference: CSRE 2400
• 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
Opening balances
Reference: CAS 510, paragraph 6(c)
- 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
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.
Common audit risk factors
- 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
Materiality
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
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
Financial statement assertions (Assurance)
- Assertions about classes of transactions and events for the period under audit:
- Occurrence – transactions and events that have been recorded have occurred and pertain to the entity
- Completeness – all transactions and events that should have been recorded have been recorded
- Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately
- Cut-off – transactions and events have been recorded in the correct accounting period
- Classification – transactions and events have been recorded in the proper accounts
- Assertions about account balances at the period end:
- Existence – assets, liabilities, and equity interests exist
- Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
- Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded
- 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:
- Occurrence and rights and obligations – disclosed events, transactions, and other matters have occurred and pertain to the entity
- Completeness – all disclosures that should have been included in the financial statements have been
- Classification and understandability – financial information is appropriately presented and described, and disclosures are clearly expressed
- Accuracy and valuation – financial and other information are disclosed fairly and at appropriate amounts
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
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
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
Audit Committee (Assurance)
• Purpose – to assist the board of directors in fulfilling its oversight of the company’s financial affairs and to liaise with the independent auditors.
• Composition
• Majority of member should be independent from the company.
• All members should have basic knowledge of finance and accounting.
• At least one member should have expert knowledge of finance and accounting.
• Duties/responsibilities
o Review and discuss with management and independent auditors any issues arising from the audit of the financial statements.
o Review and discuss audited financial statements with management and independent auditors.
o Oversee compliance with legal, tax and regulatory authorities.
o Monitor effectiveness of internal control processes and risk management systems.
