Assurance Flashcards
Reporting alternatives - Specific Items
CAS 805 Report - Audit of a SINGLE F/S and Specific Elements, Accounts or Items of a F/S
- A report providing AUDIT level assurance on an INDIVIDUAL F/S or accounts, rather than F/S on the whole
- May not be a practical alternative if the F/S on the whole are not being audited
Review Engagements
CSRE 2400
- the objective of a review engagement is to OBTAIN LIMITED ASSURANCE about whether the F/S 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 F/S are not prepared, in all material respects, in accordance to ASPE or 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:
- > obtaining knowledge of the client’s business
- > making inquiries of mgt and client personnel
- > performing analytical procedures
Opening balances
CAS 510
- SUFFICIENT and APPROPRIATE evidence regarding opening balances being free from material misstatement MUST BE OBTAINED in order to issue an opinion
- Evidence maybe obtained by REVIEWING 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 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 are no requirements to send out A/R confirmations or attend INV counts, which are time sensitive and generally only required for audit level assurance
Control Deficiencies
What is the most efficient way to address control weaknesses?
Weakness / Deficiency - This is generally a case fact outlining something that might be deficient with the current controls
Implication - Go beyond case facts to explain the EFFECTS of the noted deficiency either on the F/S or on operations. To the extent possible, effects on the F/S 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 deficiency
Recommendation - 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
CAS 315, Appendix 2
- new or additional users
- management bias
- going concern
- debt covenants
- cash flow issues
- control issues
- new problems or issues
- significant growth in revenue 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
CAS 320
What is a misstatement?
What is a common base of materiality?
A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probably that the decision of a person who is relying on the FS and who has a reasonable knowledge of business and economic activities (THE USERS), would be changed or influenced
Common base= 5% of NORMALIZED net income before taxes for profit oriented entities
Qualitative and quantitative factors needs to 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%-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
If CONTROL RISK is assessed MAX, then NO RELIANCE may be placed on the controls, therefore cannot use test of controls and must use SUBSTANTIVE approach
If CONTROL RISK is assessed LESS than max, then SOME RELIANCE may be placed on controls, based on the results of Test of Controls, which could lower the amount of substantive work to be done @ year end -> COMBINED Approach
Use of an expert
CAS 500, Solar Panel Solutions
- 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 an audit evidence for the relevant assertion
Financial statements assertions
Class of transactions
What are the assertions for class of transactions?
- Assertions relating to the income statement:
- Occurence - transactions / events have OCCURRED that pertain to the entity
- Completeness - ALL transaction/ events are fully recorded
- Accuracy - amounts of transactions/events have been recorded APPROPRIATELY
- Cut off - transactions / events are recorded in the CORRECT ACCOUNTING PERIOD
- Classification - transactions/events are appropriately recorded in the PROPER ACCOUNTS
Financial statement assertions
Assertions for ACCOUNT BALANCES
What are the assertions for the account balances?
- Assertions relating to the Balance Sheet
- Existence - A, L and E exists
- Rights and Obligations - the entity has the right and control of the A, obligations of L
- Completeness - A, L, E that should have been recorded are recorded
- Valuation and allocation - A, L, E interest are included in the F/S @ the APPROPRIATE AMTS and any resulting valuation or allocation adj are appropriately recorded
Financial Statement Assertions
Presentation and Disclosure
What are the assertions for presentation and disclosure?
- Occurrence and rights and obligations - disclosed events, transactions, and other matters have occurred and pertain to the entity
- Completness - all disclosures that should have been included in the F/S are complete
- Classification and understandibility - F/S is appropriately presented and described, and disclosures are clearly expressed
- Accuracy and valuation - fianancial and other information are disclosed fairly and at appropriate amounts
Reporting alternatives - Compliance with agreement
Section 5815
Section 8600
Section 9100
Section 5815 Special Report - Audit reports on compliance with agreements, statutes and regulations
- A report stating compliance with the terms of the agreement, through procedures such as inspection, observation, inquiry, confirmation, recall, reperformance and analytical procedures - High level of assurance and therefore more costly alternative
Section 8600 - Reviews of compliance with agreements, statutes and regulations
- A report stating compliance with the terms of the agreement, through procedures such as inquiry, discussion and analysis - moderate level of assurance and therefore less costly alternative
Section 9100 Report - Results of Applying Specified Auditing Procedures
- A report providing the factual results of the specific procedures that can be chosen to be performed - No assurance provided but is the most flexible of all alternatives
Methods of collecting audit evidence
CAS 500 A10 - A25
Inspection - thorough exam of an item by the auditor
Observation - use of the senses to assess certain activities
Inquiry - obtain written or oral info from the client in response to questions
Confirmation - receipt of a written or oral response from an independent 3rd party verifying the accuracy of information
Recalculation - recheck the computations and math work completed by the client
Reperformance - redo other non-math procedures such as internal controls
Analytical procedures - use comparisons and relationships between financial and non-financial info to determine whether acct balances appear reasonable
Using the work of internal auditors
CAS 610.15, 610.29
The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating the following:
1. The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors; 2. The level of competence of the internal audit function; and 3. Whether the internal audit function applies a systematic and disciplined approach, including quality control
- In determining the nature and extent of work that may be assigned to internal auditors the external auditor shall consider:
- The amt of judgement involved in planning/performing audit procedures, and evaluating the audit evidence
- The assessed RMM
- The existence of significant threats to objectivity and competence of the internal auditor
Reporting alternatives - specific items
CAS 805 Report - Audit of a single f/S and specific elements, acts, or items of a F/S
Financial stmt - a report providing audit level assurance on individual financial statements or accounts, rather than financial statement as a whole
The auditor must:
- Comply with all CAS’s relevant to audit (CAS200)
- Determine the acceptable financial reporting framework to be applied and document the agreed terms of the audit engagement, including the expected form of any reports to be issued (CAS210)
CAS’s written in the context of an audit of F/s are to be adapted as necessary when applied to audits of other historic financial info
When forming an opinion and reporting on a single F/S or on a specific element of a F/S, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement
