chapter 1 - introduction and overview of audit and assurance

8/18/2019 Chapter 1 - Introduction and Overview of Audit and Assurance

1/32

1. Defne an assurance engagement2. Explain why there is a demand or audit and assurance

services

3. Dierentiate between types o assurance services

. Explain the dierent levels o assurance

!. "utline dierent audit opinions

#. Dierentiate between the roles o the preparer and theauditor$ and discuss the dierent frms that provideassurance services

%. &dentiy the dierent regulators$ legislation$ andregulations surrounding the assurance process

'. Describe the audit expectation gap(opyright )ohn *iley + ,ons (anada$ -td. 1

INTRODUCTION AND OVERVIEW OF AUDIT AND ASSURANCE

CHAPTER 1

LEARNING OBJECTIVES


2/32

Auditing and Assurance Defined

• n assurance engagement is defned as/an engagement where a practitioner issues

a written report and concludes on a sub0ectmatter or which the accountable party isresponsible

• euires the existence o an

accountability relationship where oneparty is answerable to another or thesub0ect matter

(opyright )ohn *iley + ,ons (anada$ -td. 2


3/32

Ke Auditing !

Assurance Ter"s

• Applicable fnancial reportingramework 4 5he fnancial ramewor6selected by management to prepare the

company7s fnancial statements 8example9&:, or ,;E<

• Assertions 4 ,tatements made bymanagement regarding the recognition$

measurement$ presentation$ and disclosureo items in the fnancial statements

• Audit Risk 4 the ris6 the auditor mayexpress the wrong opinion

(opyright )ohn *iley + ,ons (anada$ -td. #


4/32

Ke Auditing !

Assurance Ter"s c$nt%d

• Internal Control 4 the processes implementedand maintained by management to help entitiesachieve its ob0ectives

• Material 4 amount or disclosure that is signifcantenough to ma6e a dierence to a user

• Materiality 4 maximum amount o misstatement8or omission< the auditor can tolerate and still issuea clean opinion

• Sucient and Appropriate Eidence 4 relatesto the uantity and uality o the evidencecollected by the auditor

(opyright )ohn *iley + ,ons (anada$ -td. &


5/32

De"and f$r Audit and Assurance

Ser'ices

• 5he users o the fnancial statementsare not limited to the shareholders orowners o the business

• "ther users can include9• Inestors9 can include current or potential

investors. Decisions include to buy$ hold orsell sta6e in the organi=ation

• Suppliers9 may want to assess whetherthe entity can pay them bac6 or goodssupplied

• Customers9 may loo6 into going concern iit is to rely on the entity or goods

(opyright )ohn *iley + ,ons (anada$ -td. (


6/32

De"and f$r Audit and Assurance

Ser'ices c$nt%d

• !enders9 to assess whether loan repaymentscan be made as and when they all due

• Employees9 to assess whether they can payentitlements$ and stability may be assessed

or 0ob security• "oernments9 whether the entity is

complying with regulations and payingappropriate taxes

• "eneral public9 whether they shouldassociate with the entity 8uture employee$customer or supplier$< what it does and plansto do in uture

(opyright )ohn *iley + ,ons (anada$ -td. )


7/32

S$urces $f De"and f$r Audit !

Assurance Ser'ices

• easons why users demand fnancialstatements include9• Remoteness9 users do not have access to

inormation themselves• Comple#ity9 users do not have 6nowledgeto be able to ma6e disclosure choices

• Competing incenties9 users may fnd itdi>cult to identiy when management ispresenting biased inormation

• Reliability9 as decisions are being madebased on inormation presented$ it isimportant that it be reliable

(opyright )ohn *iley + ,ons (anada$ -td. *


8/32

T+e$retica, Fra"e-$r.s

• 5he demand or audit can be explained bythe ollowing three theories9

• Agency theory9 Due to the remoteness othe owners rom the entity$ the owners havean incentive to hire an auditor to assessinormation provided by management

• Inormation hypothesis9 Due to the needor reliable inormation$ users will demandthat inormation be audited to aid in decision

ma6ing

• Insurance hypothesis9 &nvestors demandaudited fnancial statements to insure againstpotential losses

(opyright )ohn *iley + ,ons (anada$ -td. /


9/32

De"and in a V$,untar Setting

• &t is becoming more common to voluntarilydisclose (, inormation in various orms

• 5his is as sta6eholders are demandinginormation regarding the entitys impact on

the environment and actions ta6en to reducetheir impact

• Entities are not reuired to have (,disclosures assured

• 5hese services are provided to meet userdemands or high?uality$ reliableinormation and to demonstrate a high levelo corporate social responsibility



10/32

Different Assurance Ser'ices

• 5he most common assurance servicesare9

$% &inancial Statement audits

n engagement designed to express anopinion about whether the fnancialstatements are prepared in all materialrespects in accordance with a fnancial

reporting ramewor6 8(, 2@@$ para. 11<



11/32

Different Assurance

Ser'ices c$nt%d

• Aote the (anadian ,ecuritiesdministrators 8(,< reuires that

listed entities 8entity listed on astoc6 exchange< publish auditedfnancial statements annually



12/32

Different Assurance

Ser'ices c$nt%d

!imitations o an audit9• 5here is no guarantee that the fnancial

statements are ree rom error or raud• )udgment is reuired in the process o

preparation o the fnancial statements

• 5he nature o fnancial reporting$ the nature

o audit procedures$ and the need or theaudit to be perormed within a reasonableperiod and at a reasonable cost 8(, 2@@<



13/32

Different Assurance

Ser'ices c$nt%d

'% Compliance audit&nvolves gathering evidence to ascertainwhether rules$ policies$ procedures$ laws

and regulations have been ollowed• tax audit is an example o a compliance audit

(% )perational auditeers to the economy$ e>ciency and

eectiveness o an organi=ations activities• Bsually done by internal auditors or can be

outsourced to external auditors

(opyright )ohn *iley + ,ons (anada$ -td. 1#


14/32

Different Assurance

Ser'ices c$nt%d

*% Comprehensie audit(ombines elements o fnancialstatements audit$ compliance audit$ and

operational audit• "ten occurs in the public sector

+% Internal audit;rovides assurance about variousaspects o an organi=ations activities

• "ten contain elements o operational audits$

compliance audits$ internal controlassessments and reviews

(opyright )ohn *iley + ,ons (anada$ -td. 1&


15/32

Different Assurance

Ser'ices c$nt%d

,% Corporate Social Responsibility -CSR.assurance

• &ncludes voluntary reporting about environmental$employee and social sub0ect matter

• &ncorporates both fnancial and non?fnancialinormation

• uditor must consider the impact oenvironmental issues on their clients fnancialstatements when conducting a fnancialstatement audit

(opyright )ohn *iley + ,ons (anada$ -td. 1(


16/32

Different e'e,s $f Assurance

• uditors can provide varying levels oassurance when conducting assuranceengagements

$%Reasonable assurance 4 gatheringsu>cient evidence to orm a positiee#pression o opinion regarding whether

the inormation being assured is presentedairly 3 ;rovides high but not absolute assurance

3 eer to :igure 1.2 or an example audit report

(opyright )ohn *iley + ,ons (anada$ -td. 1)


17/32


c$nt%d

'%Moderate assurance 4 gathering su>cientevidence to orm a negatie e#pression oopinion regarding the reliability o theinormation being assured

• negative expression o opinion states that there

is nothing that has come to the attention o theauditor to lead them to believe the inormationbeing assured is not worthy of belief

• &s a lower level o assurance as being told /it isnot wrong is not as assuring as being told /it is

right• review o a companys fnancial statements

8reerred to as a review engagement< is anexample o a review report. eer to :igure 1.3 oran example report

(opyright )ohn *iley + ,ons (anada$ -td. 1*


18/32


c$nt%d

(%/o assurance 4 auditor reports on actualfndings and does not express any opinion

• n example includes a compilationengagement here an auditor compiles thefnancial inormation as provided by the clientensuring mathematical accuracy

• 5he uditor attached a report to this set ofnancial statements called a Aotice to eader

• eer to :igure 1. or example report

• *hich level o assurance should (loud Caccept

(opyright )ohn *iley + ,ons (anada$ -td. 1/


19/32

Different Audit O4ini$ns

• udit opinions are contained in auditreports provided by the auditor

• ost common is an unmodifed auditreport and contains an unmodifed or

/clean opinion. eer :igure 1.2• ll other reports are modifed opinions• report can be an unualifed modifed

report when an emphasis o matter isadded

• n emphasis o matter is used so that thereader can pay appropriate attention tothe issue raised$ but does not change theauditors opinion 8(, %@#<



20/32

Different Audit O4ini$ns c$nt%d

• "ther modifed reports are ualifed 85able 1.2<• ualifed opinion is given when the auditor

concludes that the fnancial statementscontain a material misstatement

• (an include a ualifed or /except or opinion. 5his is when issue8s< are material but notperasie

• dverse opinion would arise when a fnancialstatement is misstated and the misstatement

is material and pervasive• Disclaimer o opinion would arise when there is

an inability to obtain su>cient appropriateaudit evidence and is material and pervasive



21/32

5re4arers and Audit$rs

• &t is the responsibility o those charged withgovernance to prepare the fnancialstatements. 5he inormation should includethe ollowing attributes9• Releant9 has an impact on the decisions made by

users regarding the perormance o the entity

• Reliable9 &normation is ree rom materialmisstatements 8errors or raud<• Comparable9 &normation needs to be comparable

through time. (omparable against the same entityover time and against other entities

• 0nderstandable9 Bsers need to be able to

interpret the inormation presented in order toma6e decisions• &air 1resentation9 reuires the consistent and

aithul application o accounting standards or anapplicable ramewor6 when preparing thestatements



22/32

5re4arers and Audit$rs c$nt%d

• uditor also has responsibilities relating tothe audit

• 1roessional scepticism9 maintainingindependence o the entity and having a

uestioning mind to thoroughly investigate allevidence presented

• 1roessional 2udgement9 use o 0udgementbased on level o expertise$ 6nowledge and

training obtained by the auditor• 3ue care9 being diligent$ applying technical

and statue?bac6ed standards$ anddocumenting each stage o the audit process



23/32

5re4arers and Audit$rs c$nt%d

• ssurance services are provided byaccounting and consulting frms

• 5here are three tiers o assuranceproviders in (anada

• :irst tier the /Fig $ which includes Deloitte$Ernst + Goung$ H;I and;rice*aterhouse(oopers

• Aext tier Aational ccounting :irms comprised

o frms with signifcant presence nationallyand most have international a>liations

• Aext tier made up o regional and localaccounting frms

(opyright )ohn *iley + ,ons (anada$ -td. 2#


24/32

T+e R$,e $f Regu,at$rs

and Regu,ati$ns

• 5here are a number o regulators thatimpact the audit process. 5hey include9

• uditing and ssurance ,tandardsFoard 8,F<• esponsible or the ormulation o high

uality auditing and assurance standards• ,F successully adopted the

&nternational ,tandards on uditing 8&,<issued by the &nternational uditing andssurance ,tandards Foard 8&,F<

(opyright )ohn *iley + ,ons (anada$ -td. 2&


25/32

T+e R$,e $f Regu,at$rs and

Regu,ati$ns c$nt%d

• uditing and ssurance ,tandardsFoard 8,F< contd• redrat o these standards including a

/clarityJ ormat are now reerred to as(anadian uditing ,tandards 8(,<

• esponsible or issuing (, plus others

or assurance engagements 8(,Es


26/32

• (anadian ,ecurities dministrator 8(,<

• )oint eort o provinces and territories security

regulators• egulates listed entity disclosure reuirements

• euires annual fling o auditing fnancialstatements in accordance with (anadian I;

• (E"s and (:"s reuired to certiy that theannual statements are airly presented

(opyright )ohn *iley + ,ons (anada$ -td. 2)


Regu,ati$ns c$nt%d


27/32


Regu,ati$ns c$nt%d• (anadian ;ublic ccountability Foard

8(;F<

• "b0ective is to promote high uality audits

• uditors reuired by (, to be a member ingood standing and pass (;F inspection

• 5oronto ,toc6 Exchange 85,K<

• -argest stoc6 exchange in (anada• euires those listed to ollow ,ecurities ct

o "ntario$ the relevant provincial securitiesacts$ and the (,

(opyright )ohn *iley + ,ons (anada$ -td. 2*


28/32


Regu,ati$ns c$nt%d• (hartered ;roessional ccountants o

(anada 8(; (anada<• Aew body representing a merger o the

(anadian &nstitute o (hartered ccountants$the (ertifed Ieneral ccountants ssociationo (anada$ and the ,ociety o anagementccountants o (anada

• &ncludes proessionals in public practice$industry$ academia and government

• euires urther rigorous study and minimumwor6 experience periods to 0oin as members

(opyright )ohn *iley + ,ons (anada$ -td. 2/


29/32


Regu,ati$ns c$nt%d• (anadian Fusiness (orporation ct 8(F(<

• :or ederally incorporated companies$ (F(

reuires audited fnancial statements or thosecompanies listed on (anadian stoc6 exchanges

• euires the use o (anadian generallyaccepted accounting principles$ and auditsmust be conducted in accordance with

(anadian generally accepted auditingstandards as defned by the (; handboo6



30/32

Audit E64ectati$n 7a4

• &s the dierence between the expectations oassurance providers and fnancial statement orother users

• (an be caused by unrealistic expectations including9• 5he auditor providing absolute assurance

• 5he auditor guaranteeing uture viability o entity

• n unualifed opinion denotes complete accuracy

• 5he auditor will fnd all rauds

• *e 6now these cannot be met by the auditor as theauditor provides reasonable assurance not aguarantee

(opyright )ohn *iley + ,ons (anada$ -td. #


31/32

Audit E64ectati$n 7a4 c$nt%d

• 5he expectation gap can be reduced by9• uditors perorming their duties appropriately$

complying with standards and meeting theminimum standards o perormance

• Bnderta6ing peer reviews o wor6 perormed

• eviewing and updating auditing standards

• Educating the public

• Enhanced reporting explaining audit processesand levels o opinion auditors provide to the

entity• ;roviders reporting accurately the level o

assurance being provided

(opyright )ohn *iley + ,ons (anada$ -td. #1


32/32

CopyrightC$4rig+t 8 21( 9$+n Wi,e ! S$ns Canada: td; A,, rig+tsreser'ed; Re4r$ducti$n $r trans,ati$n $f t+is -$r.

chapter 1 - introduction and overview of audit and assurance

Documents