CHAPTER 1: INTRODUCTION AND OVERVIEW OF AUDIT AND

ASSURANCE

Auditing and Assurance Defined

An assurance engagement is defined as:
“An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to
express a conclusion designed to enhance the degree of confidence of the intended users other than
the responsible party about the outcome of the measurement or evaluation of an underlying subject
matter against criteria” CSAE 3000 C12

Key Auditing & Assurance Terms

 Applicable financial reporting framework
The financial framework selected by management to prepare the company's financial
statements (example: IFRS or ASPE)
 Assertions
Statements made by management regarding the recognition, measurement, presentation, and
disclosure of items in the financial statements
 Audit evidence: is the information used by the auditors to support the audit opinion
 Audit file: is the evidence and documentation of the verb that formed are kept as permanent
record to support the opinion issues
 Audit plan: is the list of description of audit procedure to be performed
 Audit Risk: the risk the auditor may express the wrong opinion
 Independent Audit Report: is the auditor’s opinion about the financial statements ….
 Internal Control: the processes implemented and maintained by management to help entities
achieve its objectives
 Material: amount or disclosure that is significant enough to make a difference to a user
EX: company reported $100k of income
 If the auditor found $1k different -> this is not material or immaterial
 If the auditor found $50k different -> this is material
  Materiality: maximum amount of misstatement (or omission) the auditor can tolerate and still
issue a clean opinion
 Sufficient and Appropriate Evidence: relates to the quantity and quality of the evidence
collected by the auditor
 Unmodified Opinion (unqualifed opinion): means that the financial statements are fairly
presented
 Working papers: the documentation created by the external auditors

Demand for Audit and Assurance Services

 The users of the financial statements are not limited to the shareholders or owners of the
business
 Other users can include:

o Investors: can include current or potential investors. Make decisions to buy, hold or sell
stake/shares in the organization
o Suppliers: may want to assess whether the entity can pay them back for goods supplied
o Customers: may look into going concern if it is to rely on the entity for goods
o Lenders: to assess whether loan repayments can be made as and when they fall due
o Employees: to assess whether they can pay entitlements, and stability may be assessed for
job security
o Governments: whether the entity is complying with regulations and paying appropriate
taxes
o General public: whether they should associate with the entity (future employee, customer
or supplier) what it does and plans to do in future

Sources of Demand for Audit & Assurance Services

Reasons why users demand financial statements include:

 Remoteness: users do not have access to information themselves

 Complexity: users do not have knowledge to be able to make disclosure choices
 Competing incentives: users may find it difficult to identify when management is presenting
biased information
 Reliability: as decisions are being made based on information presented, it is important that it
be reliable
Theoretical Frameworks
The demand for audit can be explained by the following three theories:

 Agency theory: Due to the remoteness of the owners from the entity, the owners have an
incentive to hire an auditor to assess information provided by management
 Information hypothesis: Due to the need for reliable information, users will demand that
information be audited to aid in decision making
 Insurance hypothesis: Investors demand audited financial statements to insure against
potential losses

Demand in a Voluntary Setting

 It is becoming more common to voluntarily disclose corporate social responsibility (CSR)
information in various forms
 This is because stakeholders are demanding information regarding:
o the entity’s impact on the environment and
o actions taken to reduce that impact
 Entities are not required to have CSR disclosures assured
 Assurance services are provided:
o to meet user demands for high-quality, reliable information and
o to demonstrate a high level of corporate responsibility

Different Assurance Services

The most common assurance services are:

1. Financial Statement audits

 An engagement designed to express an opinion about whether the financial statements are
prepared in all material respects in accordance with a financial reporting framework (CAS 200,
para. 11)

Notes: the Canadian Securities Administrators (CSA) requires that listed entities (entity listed on
a stock exchange) publish audited financial statements annually

 Limitations of an audit:
o There is no guarantee that the financial statements are free from error or fraud
o Judgment is required in the process of preparation of the financial statements
o The nature of financial reporting, the nature of audit procedures, and the need for the
audit to be performed within a reasonable period and at a reasonable cost (CAS 200)
2. Compliance audit
 Involves gathering evidence to ascertain whether rules, policies, procedures, laws and
regulations have been followed
 A tax audit is an example of a compliance audit

3. Performance audit
 Refers to the economy, efficiency and effectiveness of an organization’s activities
- Economy: refers to cost of inputs
- Efficiency: refers to the relationship between input and output
- Effectiveness: refers to the achievement of certain goals or productions of certain level of
work
 Usually done by internal auditors or can be outsourced to external auditors

4. Comprehensive audit
 Combines elements of financial statements audit, compliance audit, and operational audit
 Often occurs in the public sector

5. Internal audit
 Provides assurance about various aspects of an organization’s activities
 Often contain elements of operational audits, compliance audits, internal control assessments
and reviews

6. Corporate Social Responsibility (CSR) assurance

 Includes voluntary reporting about environmental, employee and social subject matter
 Incorporates both financial and non-financial information
 Auditor must consider the impact of environmental issues on their client’s financial statements
when conducting a financial statement audit

Example:
As users of the financial statements, suppliers would least consider which of the following aspects of
the financial statements?
a) solvency of the entity
b) profitability of the entity
c) return on investment of the entity
d) corporate social responsibility of the entity

Different Levels of Assurance

Auditors can provide varying levels of assurance when conducting assurance engagements
1. Reasonable assurance – gathering sufficient evidence to form a positive expression of opinion
regarding whether the information being assured is presented fairly
 Provides high but not absolute assurance
 Includes a “key audit matters” section
 Refer to Figure 1.3 in text for an example audit report

2. Limited assurance – gathering sufficient evidence to form a conclusion regarding the reliability
of the information being assured
 The auditor expresses a conclusion on whether anything has come to the auditors’ attention to
lead them to believe the information being assured is not in accordance with the financial
reporting framework
 A review of a company’s financial statements (referred to as a review engagement) is an
example of a review report. Refer to Figure 1.4 in text for an example report

3. No assurance – auditor reports on factual findings and does not express any opinion
 Includes a compilation engagement report (Figure 1.5)
 Here an auditor compiles the financial information as provided by the client ensuring
mathematical accuracy
 The auditor attached a report to this set of financial statements called a Notice to Reader

Different Audit Opinions

There are four types of audit opinions
 Unmodified = Unqualified = ‘Clean’ Opinion
 Modified = Qualified = ‘Except for’ Opnion
- Qualified Opinion
- Adverse Opinion
- Disclaimer Opinion

 Audit opinions are contained in audit reports provided by the auditor

  Most common is an unmodified audit report and contains an unmodified or ‘clean’ opinion.
(Figure 1.3)
 All other reports are modified opinions
Unmodified Report
o A clean audit opinion – the auditor concludes that the financial statements are
- fairly presented
- information provided in accordance with Canadian generally accepted auditing
standards
- no material misstatement
o An audit report may have unmodified opinion and include an emphasis of matter
paragraph
- Emphasis of matter: what results when auditor issue an unmodified audit opinion
when there is a significant issue that is adequately disclosed and there is a need to
draw the attention of the user to it in the audit report
o An emphasis of matter is used so that the reader can pay appropriate attention to the issue
raised, but does not change the auditor’s opinion (CAS 706)
Modified Report

 A qualified opinion
o is given when the auditor concludes that the financial statements contain a material
misstatement
o when issues are material but not pervasive to the overall financial statement
 Adverse opinion would arise when a financial statement is misstated and the misstatement
is material and pervasive
 Disclaimer of opinion
o Provided when the auditor is unable to obtain sufficient appropriate audit evidence
and
o there is material and pervasive

Preparers and Auditors

1. Preparers Responsibility
It is the responsibility of those charged with governance to prepare the financial statements.
The information should include the following attributes:
  Relevant: has an impact on the decisions made by users regarding the performance of
the entity
 Reliable: Information is free from material misstatements (errors or fraud)
 Comparable: Information needs to be comparable through time. Comparable against
the same entity over time and against other entities
 Understandable: Users need to be able to interpret the information presented in order
to make decisions
 Fair Presentation: requires the consistent and faithful application of accounting
standards or an applicable framework when preparing the statements

2. Auditors Responsibility
Auditor also has responsibilities relating to the audit
 Professional scepticism: maintaining independence of the entity and having a
questioning mind to thoroughly investigate all evidence presented
 Professional judgement: use of judgement based on level of expertise, knowledge and
training obtained by the auditor
 Due care: being diligent, applying technical and statue-backed standards, and
documenting (working paper) each stage of the audit process

3. Assurance Services Providers

Assurance services are provided by accounting and consulting firms
There are three tiers of assurance providers in Canada:
 Tier 1. The ‘Big 4’ (Deloitte, EY, KPMG, and PwC)
 Tier 2. National Accounting Firms comprised of firms with significant presence nationally
and most have international affiliations (e.g BMO)
 Tier 3. Made up of regional and local accounting firms

The Role of Regulators and Regulations

There are a number of regulators that impact the audit process. They include:

 Auditing and Assurance Standards Board (AASB)

o Responsible for the formulation of high-quality auditing and assurance standards
o AASB successfully adopted the International Standards on Auditing (ISA) issued by the
International Auditing and Assurance Standards Board (IAASB)
o A redraft of these standards including a “clarity” format are now referred to as Canadian
Auditing Standards (CAS)
o Responsible for issuing CAS plus others for:
- assurance engagements (CSAEs)
- review engagements
- compilation engagement standards

 Canadian Securities Administrator (CSA)

o Joint effort of provinces and territories security regulators
 o Regulates listed entity disclosure requirements
o Requires annual filing of auditing financial statements in accordance with Canadian
GAAP
o CEOs and CFOs required to certify that the annual statements are fairly presented

 Canadian Public Accountability Board (CPAB)

o Objective is to promote high quality audits
o Auditors required by CSA to be a member in good standing and pass CPAB inspection

 Toronto Stock Exchange (TSX)

o Largest stock exchange in Canada
o Requires those listed to follow Securities Act of Ontario, the relevant provincial
securities acts, and the CSA

 Chartered Professional Accountants of Canada (CPA Canada)

o The national body of the accounting profession in Canada with more than 200,000
members
o Includes professionals in public practice, industry, academia and government
o Requires further rigorous study and minimum work experience periods to join as
members

 Canadian Business Corporation Act (CBCA)

o For federally incorporated companies, CBCA requires audited financial statements for
those companies listed on Canadian stock exchanges
o Requires the use of Canadian generally accepted accounting principles
o Audits must be conducted in accordance with Canadian generally accepted auditing
standards as defined by the CPA handbook

Audit Expectation Gap

Is the difference between the expectations of assurance providers and financial statement or other
users

 Can be caused by unrealistic expectations including:

o The auditor providing complete assurance
o The auditor guaranteeing future viability of entity
o An unqualified opinion denotes complete accuracy
o The auditor will find all frauds
o The auditor has checked all transactions

Notes: We know these cannot be met by the auditor as the auditor provides reasonable assurance not
a guarantee

 The expectation gap can be reduced by:

o Auditors performing their duties appropriately, complying with standards and meeting the
minimum standards of performance
o Undertaking peer reviews of work performed
o Reviewing and updating auditing standards
o Educating the public
o Enhanced reporting explaining audit processes and levels of opinion auditors provide to the
entity
o Providers reporting accurately the level of assurance being provided