Chapter 2 Auditor's Professional Roles and Responsibilities Flashcards
How is the accounting profession in Canada regulated?
Since auditing is a critical function in the economy, it is extensively regulated to ensure it remains effective. In Canada, the regulation of professional accountants and auditors is a provincial responsibility, and varies somewhat depending on the legislation in different provinces. The profession also has a national umbrella organization that all provincial organizations are associated with. At the time of writing, the profession is being streamlined at both the national and provincial levels by uniting three formerly separate accounting designations (CA, CGA, CMA) into a single designation for Canadian professional accountants, the “CPA” (Chartered Professional Accountant). The national umbrella organization is CPA-Canada, and there are counterpart CPA associations in each province (e.g., CPA-Saskatchewan) and territory.
What distinguishes public accounting from other types of work professional accountants might perform?
When an accountant provides auditing and assurance services for use by the general public, this is referred to as ‘public accounting’. Public accounting is distinct from many other types of accounting-related work that do not produce information that the general public will use and possibly rely on, such as bookkeeping and financial statement and tax preparation for individuals or private companies. Since a person from the general public may not be able to assess whether an accountant is properly qualified and regulated to act in their best interest, to practice public accounting a person will meet higher standards than are required to do other types of non-public accounting work. Generally, a public accountant in Canada must have a CPA designation, and in many (most) provinces of Canada must obtain further qualification and licensing (e.g., in Ontario, from the Public Accountants’ Council of Ontario). In the case of public accounting that involves auditing publicly-traded companies’ financial statements, securities laws require the public accounting firm to be registered with the Canadian Public Accountability Board (CPAB). CPAB will inspect their financial statement audit work on public companies annually to provide the highest level of public protection, since these companies can sell their securities directly to the public.
Describe the five essential components of a professional ethics code for accountants?
Members of a CPA association are required to comply with the professional ethics code of their provincial association. Every ethics code has five similar components, requiring the member: to act with integrity; to remain objective; to maintain the professional competencies their work requires and to do their work with appropriate ‘due’ care; to keep confidential all information they acquire through their professional work, and; to behave professionally in a way that befits a well-respected profession.
For what types of work does a professional accountant require independence?
In public accounting engagements, CPAs must demonstrate they can be objective by remaining independent of any potentially conflicting interests, which includes being independent in fact and also independent as it would appear to an outsider.
How does independence in fact differ from independence in appearance? Why, and to whom, does the distinction matter?
Independence in fact means the auditor maintains an objective perspective in doing his or her work - this frame of mind is essential to performing an assurance role effectively, however it is not visible (or provable) to outsiders. The auditor’s independence must also be apparent to outsiders for them to believe the auditor’s opinion is in fact independent. Outsiders must see evidence that the CPA has no financial or other interest that would cause them to act in a biased way, rather than in the outside user’s best interest.
What are five situations that can threaten an auditor’s independence? Explain each situation in terms of the three-party accountability model.
The professional ethics codes for accountants identify five situations that can arise in a three-party accountability relationship and, if they exist, can threaten an auditor’s independence: self-review, self-interest, advocacy, familiarity and intimidation. An important theme here is that even in their public interest role, an auditor is still just a human being, and vulnerable to the usual human weaknesses and failings. The independence guidance attempts to bring these potential weaknesses to light, so auditors will have a better chance of seeing when they might be failing to remain impartial. A self-review threat means the auditor is checking his/her own work; in this case s/he cannot provide the critical, independent perspective that a user (third party) would expect. With a self-interest threat, the auditor has something personal to gain and so is not free to do what is in the user’s best interest - in that case his/her opinion will not meet the user’s needs. With an advocacy threat, the auditor has taken a personal stand in support of the first party’s positions, so they are invested in that and will have a hard time seeing objectively whether the position they publicly supported is wrong - again the auditor is not free to act in the user’s best interest. With a familiarity threat, the auditor is too friendly and close to the first party and that makes it more difficult for the auditor to suspect or believe that this well-known person would do anything wrong, or act against the best interests of the third party. In the case of an intimidation threat, the auditor is facing personal risk and naturally must put their own critical interests first, before they can meet their professional responsibilities. In an intimidation threat situation, an auditor would need to seek legal advice on how best to protect him/herself without violating their professional duties.
Explain the mechanism by which financial statement audits serve as an instrument of financial regulation.
Financial statement audits are required in various laws. Corporation laws require companies to produce audited annual financial statements (though private and smaller companies sometimes can waive this requirement), and securities laws require public companies to file audited financial statements within 90 days of their year end.
Why are processional accountants required to comply with GAAP and GAAS?
The professional ethics codes incorporate professional accounting and auditing standards, making compliance with these standards the bottom-line professional responsibility of professional accountants. CPA members meet the ethical requirements of professional competency and due care in performance their work by complying with requirements of the CPA-Canada standards for accounting (generally accepted accounting principles, GAAP, e.g., ASPE or IFRS) and auditing (generally accepted auditing standards, GAAS: CAS).
What are the overall objectives of a financial statement audit?
The overall objectives of a financial statement audit are stated in Canadian Auditing Standards (CAS) in the CPA-Canada Assurance Handbook, in CAS 200, “Overall Objective of the Independent Auditor, and the Conduct of the Audit in Accordance with Canadian Auditing Standards” CAS states a financial statement auditor’s overall objectives are: (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and (b) To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings. CAS 200 also sets out principles and fundamental concepts that underlie the auditing function.
What is meant by self-regulation? What are the effects of self-regulation on the profession in the post-Enron environment?
Self-regulation refers to the powers a professional group has in regulating its affairs without intervention by a government or a government established external regulator. These affairs include setting of standards, codes of conduct, education requirements, certification, and disciplining of members.
Since the failure of Enron in 2001, there has been increased involvement by outside agencies in the monitoring of the audit function. Auditing is increasingly viewed as a key pillar in capital markets, along with regulators and good governance practices. As a result external regulation of the profession has been increasing. In Canada, this has taken the form of increased monitoring of auditors of public companies via CPAB. CPAB however does not have the power to create audit and ethics standards as does the PCAOB in the U.S. Nevertheless, both CPAB and PCAOB are increasingly assertive monitoring the quality of audit practice and sanctioning auditors who do not meet their expectations. A major focus of inspections by CPAB and PCAOB is the quality of the audit. Quality generally refers to degree of conformity with standards and nature of procedures performed and their documentation. “Procedures” relate to acts to be performed. “Standards” deal with measures of the quality of performance of those acts and the objectives to be attained by the use of procedures. The standards are less subject to change. The standards provide the criteria for rejecting, accepting, or modifying a procedure in a given circumstance. An example of the relative stability of standards and procedures is found in the change from non-EDP to EDP systems. New procedures were required to audit EDP systems, but auditing standards remained unchanged and were the criteria for determining the adequacy of the new procedures.
The word “procedure” is used in SAS 46 (AU 390)–“Consideration of Omitted Procedures After the Report Date”–to refer to (1) an act to be performed and (2) sufficient competent evidence. SAS 46 speaks of omitted procedures and the relative seriousness of their omission. The importance of any “omitted procedure,” however, is the evidence the auditors failed to obtain. Merely omitting technical procedures is only a superficial analysis of an audit problem; the substance is the evidence not obtained.
The standard for due audit care is the care which would be exercised by the prudent auditor. The prudent auditor is one who exercises reasonable judgment, who is not expected to be omniscient, who is presumed to have knowledge special to his profession, who is expected to be aware of his own ignorance, who is expected to possess the skills of his profession whether he is a beginner or a veteran.
What are the differences between Canadian and U.S. accountability boards? Compare the differences in their monitoring reports. Which ones do you think are better?
The Canadian board (CPAB) is more self-regulatory in that the profession has more influence through having a higher percentage of board membership, the monitoring process is less public and more designed to help firms improve their practices. The CICA continues to set audit standards. The PCAOB, on the other hand, not only sets standards but also has a more confrontational and public approach in its monitoring process.
The most important difference is that PCAOB actually sets auditing and professional ethics standards for public company audits in the U.S. In Canada, audit standards are set by the CPA Canada while professional ethics standards are set by the provincial institutes/societies of CGAs, CMAs, and CAs. PCAOB reports are much more detailed disclosing the results of each inspection by firm, whereas CPAB reports are more generic providing an overall evaluation of the state of public company audits in Canada. Students generally find the PCAOB reports more interesting because they learn about problems identified for the firms they have accepted positions in. The CPAB report issued on April 3, 2012 on 2011 inspections was disappointed with the state of audits in Canada, particularly the implementation of audits in higher risk areas. “The Big 4 firms, which audit 94% of reporting issuers by market capitalization, had a GAAS deficiency rate of 20-26% on files inspected by CPAB.” Other audit firms had a 47% GAAS deficiency rate. CPAB found these results consistent with other regulators. This is not just a Canadian problem.
Identify several types of professional accountants and their organizations?
CA’s, CGA’s, and CMA’s are the old terms. They are all now CPAs and belong to CPA Canada and related provincial associations such as CPA Ontario.
What are some examples of assurance services rendered on representations other than traditional financial statements?
Examples of other assurance services rendered on representations other than financial statements are on issues such as the effectiveness of internal controls, vote counts at the Academy Awards, forecasts of financial information, efficiency of public sector activities.
• Vote counts (Academy Awards)
• Amount of prizes claimed to have been given in sweepstakes advertisements
• Investment performance statistics
• Characteristics claimed for computer software programs
• Also see the list of value for money audit engagements in chapter 1.
What are the three major areas of public accounting services?
The three major areas of public accounting services:
Accounting and auditing
Taxation
Management advisory services (consulting)
Locate Nortel’s audit committee report on the Internet. Is the OSC or the SEC website more user-friendly for investors?
The SEC site is more comprehensive but covers only the Canadian companies cross listed on U.S. exchanges.
