Chapter 1 Powerpoint

Auditing
A Practical Approach
Third Canadian Edition
Moroney, Campbell, Hamilton, Warren
Chapter 1
INTRODUCTION AND OVERVIEW OF

AUDIT AND ASSURANCE
LEARNING OBJECTIVES (1 of 2)
1. Define an assurance engagement
2. Explain why there is a demand for audit and
assurance services
3. Differentiate between types of assurance
services
4. Explain the different levels of assurance
5. Outline different audit opinions
Copyright ©2018 John Wiley & Sons, Inc. 2

LEARNING OBJECTIVES (2 of 2)
6. Differentiate between the roles of the preparer

and the auditor, and discuss the different firms
that provide assurance services
7. Identify the different regulators, legislation, and
regulations surrounding the assurance process
8. Describe the audit expectation gap

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 (1 of 3)
• 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 Risk – the risk the auditor may express

the wrong opinion
• 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

• 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

Demand for Audit and Assurance Services (1 of 4)
• The users of the financial statements are not

limited to the shareholders or owners of the
business
• Other users can include:
─ Investors: can include current or potential
investors. Decisions include to buy, hold or sell
stake in the organization

Demand for Audit and Assurance Services
(2 of 4)
• Other users can include (cont.):

─ Suppliers: may want to assess whether the
entity can pay them back for goods supplied
─ Customers: may look into going concern if it is
to rely on the entity for goods

(3 of 4)

─ Lenders: to assess whether loan repayments
can be made as and when they fall due
─ Employees: to assess whether they can pay
entitlements, and stability may be assessed for
job security

(4 of 4)

─ Governments: whether the entity is complying
with regulations and paying appropriate taxes
─ 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 (1 of 2)
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

Sources of Demand for Audit
& Assurance Services (2 of 2)
Reasons why users demand financial statements

include (cont.):
• 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 (1 of 2)
• It is becoming more common to voluntarily

disclose CSR information in various forms
• This is because stakeholders are demanding

information regarding:
─ the entity’s impact on the environment and
─ actions taken to reduce its impact

Demand in a Voluntary Setting (2 of 2)
• Entities are not required to have CSR

disclosures assured
• These services are provided:

─ to meet user demands for high-quality, reliable
information and
─ to demonstrate a high level of corporate social
responsibility

Different Assurance Services (1 of 9)
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)

Note the Canadian Securities Administrators (CSA)

requires that listed entities (entity listed on a
stock exchange) publish audited financial
statements annually

Limitations of an audit:
• There is no guarantee that the financial
statements are free from error or fraud
• Judgment is required in the process of
preparation of the financial statements

Limitations of an audit (cont.):

• 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
• 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

Different Levels of Assurance (1 of 6)
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

2. Limited assurance (cont.) – gathering sufficient

evidence to form a conclusion on the financial
statements to enhance the intended users
confidence
• 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
• An example includes a compilation engagement
• Here an auditor compiles the financial
information as provided by the client ensuring
mathematical accuracy

3. No assurance – auditor reports on factual

findings and does not express any opinion
(cont.)
• The auditor attached a report to this set of
financial statements called a Notice to Reader
• Refer to figure on next slide for an example
report
• Which level of assurance should Cloud 9
accept?

Example of a Notice to Reader

Different Audit Opinions (1 of 4)
• 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.
Refer to Figure 1.3 in text
• All other reports are modified opinions

• A report can be an unqualified modified report

when an emphasis of matter is added
• 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)

• Other modified reports are qualified (See Table

1.2 in text)
• A qualified opinion is given when the auditor
concludes that the financial statements contain
a material misstatement
• Can include a qualified or ‘except for’ opinion.
This is when issue(s) are material but not
pervasive

• Adverse opinion would arise when a financial

statement is misstated and the misstatement is
material and pervasive
• Disclaimer of opinion would arise when there is
an inability to obtain sufficient appropriate
audit evidence and is material and pervasive

Preparers and Auditors (1 of 4)
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)

Attributes of financial statements (cont.):

• 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
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 each stage of the
audit process

Assurance services are provided by accounting and

consulting firms
There are three tiers of assurance providers in
Canada:
Tier 1. The ‘Big 4’, which includes Deloitte, EY, KPMG and
PriceWaterhouseCoopers (PwC)
Tier 2. National Accounting Firms comprised of firms with
significant presence nationally and most have
international affiliations
Tier 3. Made up of regional and local accounting firms
The Role of Regulators and Regulations (1 of 6)
There are a number of regulators that impact the

audit process. They include:
• Auditing and Assurance Standards Board (AASB)

─ Responsible for the formulation of high quality
auditing and assurance standards
─ AASB successfully adopted the International
Standards on Auditing (ISA) issued by the
International Auditing and Assurance Standards
Board (IAASB)

• Auditing and Assurance Standards Board (AASB)

(cont.)
─ A redraft of these standards including a “clarity”
format are now referred to as Canadian
Auditing Standards (CAS)
─ Responsible for issuing CAS plus others for:
• assurance engagements (CSAEs)
• review engagements
• compilation engagement standards
• Canadian Securities Administrator (CSA)

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

• Canadian Public Accountability Board (CPAB)

─ Objective is to promote high quality audits
─ Auditors required by CSA to be a member in good
standing and pass CPAB inspection
• Toronto Stock Exchange (TSX)
─ Largest stock exchange in Canada
─ Requires those listed to follow Securities Act of
Ontario, the relevant provincial securities acts, and
the CSA
• Chartered Professional Accountants of Canada

(CPA Canada)
─ The national body of the accounting profession
in Canada with more than 20,000 members
─ Includes professionals in public practice,
industry, academia and government
─ Requires further rigorous study and minimum
work experience periods to join as members

• Canadian Business Corporation Act (CBCA)

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

Audit Expectation Gap (1 of 4)
• Is the difference between the expectations of

assurance providers and financial statement or other
users
• Can be caused by unrealistic expectations including:
─ The auditor providing complete assurance
─ The auditor guaranteeing future viability of entity
─ An unqualified opinion denotes complete accuracy
─ The auditor will find all frauds
─ The auditor has checked all transactions

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:

─ Auditors performing their duties appropriately,
complying with standards and meeting the
minimum standards of performance
─ Undertaking peer reviews of work performed
─ Reviewing and updating auditing standards

• The expectation gap can be reduced by (cont.):

─ Educating the public
─ Enhanced reporting explaining audit processes
and levels of opinion auditors provide to the
entity
─ Providers reporting accurately the level of
assurance being provided

Copyright
Copyright © 2018 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work
beyond that permitted by Access Copyright (The Canadian
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Department, John Wiley & Sons Canada, Ltd. The purchaser
may make back-up copies for his or her own use only and not
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assume no responsibility for errors, omissions, or damages
caused by the use of these programs or from the use of the
information contained herein.

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Auditing

INTRODUCTION AND OVERVIEW OF

Copyright ©2018 John Wiley & Sons, Inc. 2

6. Differentiate between the roles of the preparer

Copyright ©2018 John Wiley & Sons, Inc. 3

An assurance engagement is defined as:

Copyright ©2018 John Wiley & Sons, Inc. 4

• Applicable financial reporting framework –

• Assertions – Statements made by management

• Audit Risk – the risk the auditor may express

Copyright ©2018 John Wiley & Sons, Inc. 6

• Materiality – maximum amount of

Copyright ©2018 John Wiley & Sons, Inc. 7

• The users of the financial statements are not

Copyright ©2018 John Wiley & Sons, Inc. 8

• Other users can include (cont.):

Copyright ©2018 John Wiley & Sons, Inc. 9

• Other users can include (cont.):

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• Other users can include (cont.):

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Reasons why users demand financial statements

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Reasons why users demand financial statements

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The demand for audit can be explained by the

• It is becoming more common to voluntarily

• This is because stakeholders are demanding

Copyright ©2018 John Wiley & Sons, Inc. 15

• Entities are not required to have CSR

• These services are provided:

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The most common assurance services are:

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Note the Canadian Securities Administrators (CSA)

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Limitations of an audit (cont.):

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6. Corporate Social Responsibility (CSR)

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2. Limited assurance – gathering sufficient

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2. Limited assurance (cont.) – gathering sufficient

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3. No assurance – auditor reports on factual

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3. No assurance – auditor reports on factual

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Example of a Notice to Reader

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• Audit opinions are contained in audit reports

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• A report can be an unqualified modified report

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• Other modified reports are qualified (See Table

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• Adverse opinion would arise when a financial

Copyright ©2018 John Wiley & Sons, Inc. 35