Audit and Assurance

Question 1

Reporting alternatives – Specific items

Audit & Assurance

Answer 1

Reporting alternatives – Specific Items (Audit & Assurance)
CAS 805 Report – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
* A report providing audit level assurance on individual financial statements or accounts, rather than financial statements on the whole
* May not be a practical alternative if the financial statements on the whole are not being audited
The auditor must
* comply with all CAS’s relevant to the audit (CAS 200)
* 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 (CAS 210)

CAS’s written in the context of an audit of financial statements are to be adapted as necessary when applied to audits of other historic financial information.
When forming an opinion and reporting on a single financial statement or on a specific element of a financial statement, the auditor shall apply the requirements in CAS 700, adapted as necessary in the circumstances of the engagement. Reference: CAS 805

Question 2

Review engagements

Audit & Assurance

Answer 2

Review engagements (Audit & Assurance)
* The objective of a review engagement is to obtain limited assurance about whether the financial statements 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 financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework, i.e. ASPE, 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:
o Obtaining knowledge of the client’s business
o Making inquiries of management and client personnel
o Performing analytical procedures

Reference: CSRE 2400

Question 3

Opening balances

Audit & Assurance

Answer 3

Opening balances (Audit & Assurance)
* Sufficient and appropriate evidence regarding opening balances being free of material misstatement must be obtained in order to issue an opinion
* Evidence may be obtained by reviewing the 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 the 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’s no requirement to send out A/R confirmations or attend inventory counts, which are time-sensitive and generally only required for audit level assurance

Reference: CAS 510, paragraph 6(c), 10

Question 4

Control Deficiencies

Audit & Assurance

Answer 4

Control Deficiencies (Audit & Assurance)
* The most effective format to address controls weaknesses consists of a short statement of the problem (deficiency), its potential effect(s) on the financial statements or operations (implication) and suggestions to address the matter (recommendation)
o Deficiency (D) – this is generally a case fact outlining something that might be deficient with the current controls
o Implication (I) – here, we go beyond case facts to explain the effects of the noted deficiency either on the financial statements or on operations. To the extent possible, effects on the financial statements 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 the deficiency
o Recommendation (R) – this involves suggesting a solution to rectify the noted deficiency that is specific and practical given the case facts and circumstances.

Question 5

Common audit risk factors

Audit & Assurance

Answer 5

Common audit risk factors (Audit & Assurance)

• New or additional users
• Management bias
• Going concern
• Debt covenants
• Cash flow issues
• Control issues
• New problems or issues
• Significant growth in revenues 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

Reference: CAS 315, Appendix 2

Question 6

Materiality

Audit & Assurance

Answer 6

Materiality (Audit & Assurance)
* A misstatement in financial statements is considered to be material if, in the light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities (the user), would be changed or influenced
* Common base = 5% of Normalized Net Income before Taxes (NIBT) for profit-oriented entities
* Materiality is not purely quantitative; qualitative factors must 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% to 75% 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

Reference: CAS 320

Question 7

Audit approach

Audit & Assurance

Answer 7

Audit approach (Audit & Assurance)
* If Control Risk assessed at Maximum, then no reliance may be placed on controls, resulting in no Tests of Controls, and a Substantive approach must be followed
* If Control Risk assessed at less than Maximum, then some reliance may be placed on controls, based on results of Tests of Controls, which could lower the amount of substantive work to be done at year-end. Such an approach is generally referred to as a Combined approach

Reference: CAS 330

Question 8

Financial statement assertions

Audit & Assurance

Answer 8

Financial statement assertions (Audit & Assurance)
* Assertions about classes of transactions and events for the period under audit:
o Occurrence – transactions and events that have been recorded have occurred and pertain to the entity
o Completeness – all transactions and events that should have been recorded have been recorded
o Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately
o Cut-off – transactions and events have been recorded in the correct accounting period
o Classification – transactions and events have been recorded in the proper accounts
o Presentation – transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable
* Assertions about account balances at the period end:
o Existence – assets, liabilities, and equity interests exist
o Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity
o Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded
o Accuracy, valuation, and allocation – assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
o Classification – assets, liabilities, and equity interests have been recorded in the proper accounts
o Presentation – assets, liabilities, and equity are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable

Reference: CAS 315.A188-A191

Question 9

Use of an expert

Audit & Assurance

Answer 9

Use of an expert (Audit & Assurance)
* 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 audit evidence for the relevant assertion

Reference: CAS 500.A35 - .A58

Question 10

Reporting alternatives – Compliance reporting

Audit & Assurance

Answer 10

Reporting alternatives – Compliance reporting (Audit & Assurance)
* CSAE 3530 Report: Attestation engagement — A reasonable assurance or limited assurance engagement to report on management’s statement of an entity’s compliance with agreements, specified authorities, or a provision thereof
o A report concluding on whether management’s stated compliance with the terms of the agreement is fairly stated
* CSAE 3531 Report: Direct engagement — A reasonable assurance or limited assurance engagement to report on an entity’s compliance with agreements, specified authorities, or a provision thereof
o A report stating compliance with the terms of the agreement
* CSRS 4400 Report – Agreed-upon Procedures
o A report providing the factual results of the specific procedures that can be chosen to be performed
o No assurance provided but is the most flexible of all alternatives

Reference: CSAE 3530, 3531, Section 4400

Question 11

Methods of collecting audit evidence

Audit & Assurance

Answer 11

Methods of collecting audit evidence (Audit & Assurance)
* Inspection – thorough examination of an item by the auditor
* Observation – use of the senses to assess certain activities
* Confirmation – receipt of a written or oral response from an independent third party verifying the accuracy of information
* Recalculation – recheck the computations and mathematical work completed by the client
* Reperformance – redo other non-mathematical procedures such as internal controls
* Analytical procedures – use comparisons and relationships between financial and non-financial information to determine whether account balances appear reasonable
* Inquiry – obtain written or oral information from the client in response to questions

Reference: CAS 500.A14-A25

Question 12

Using the work of internal auditors

Audit & Assurance

Answer 12

Using the work of internal auditors (Audit & Assurance)
* 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:
o The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors;
o The level of competence of the internal audit function; and
o 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:
o The amount of judgment involved in planning/performing audit procedures, and evaluating the audit evidence
o The assessed risk of material misstatement
o The existence of significant threats to objectivity and competence of the internal auditor

Reference: CAS 610.15, 610.29

Question 13

General assurance standards

Audit & Assurance

Answer 13

General assurance standards (Audit & Assurance)
Standards for assurance engagements OTHER THAN audits of financial statements and other historical financial information.
* Attestation engagements (CSAE 3000): a party other than the practitioner measures or evaluates the underlying subject matter against the criteria
* Direct engagements (CSAE 3001): the practitioner measures or evaluates the underlying subject matter against the criteria
General standards:
* Before undertaking an assurance engagement, the practitioner should have a reasonable basis for believing the engagement can be completed in accordance with the relevant standards.
* The practitioner should seek management’s acknowledgment of responsibility for the subject matter as it relates to the objective of the engagement.
* The assurance engagement should be performed with due care and with an objective state of mind.
* The practitioner and any other persons performing the assurance engagement should have adequate proficiency in such engagements and collectively possess adequate knowledge of the subject matter.

Reference: CSAE 3000/CSAE 3001

Question 14

Responsibility of the Auditor for Assessment of Going Concern

Audit & Assurance

Answer 14

Responsibility of the auditor for assessment of going concern (Audit & Assurance)
* The external auditor should obtain sufficient appropriate audit evidence about management’s use of the going concern assumption in preparation of the financial statements
* Conclude if a material uncertainty exists that the entity cannot continue as a going concern
* Determine the implications on the auditor’s report
* Communicate with those charged with governance if events or conditions cast doubt on the going concern
Additional Audit Procedures When Conditions or Events Are Identified
* If no assessment has been made by management, request one
* Evaluate management’s plan for future actions
* Where there is a cash flow forecast and the forecast is a significant factor:
o Evaluate the reliability of underlying data
o Assess adequate support for assumptions
* Consider additional information
* Request written representations from management regarding future plans and feasibility
Impact on the Auditor’s Report if Material Uncertainty exists
* If adequate disclosures are made in the financial statements, unmodified option but include an emphasis of matter in the auditor’s report
* If adequate disclosures are not made, qualified or adverse opinion

Reference: CAS 570

Question 15

NPO audit procedure

Answer 15

Many of the audit procedures used in a not-for-profit organization will be similar to those used for profit-oriented entities
For accounting issues unique to not-for-profit organizations, ensure properly accounted for
Internal control may be an issue where there is a small number of staff or heavy reliance on volunteers for staff functions
Consider audit reporting implications – not unusual to have “soft” qualification re completeness of donation revenue

Audit procedures unique for not-for-profit organizations:
Review agreements or other documents to ensure all restricted contributions properly accounted for. Ensure all contribution restrictions complied with.

Donated goods and services – if recorded, ensure criteria to record have been met. Obtain evidence to support fair value.

Contributions receivable – ensure criteria for recognition are met. For pledges, use case facts to assess amount recorded (e.g., past history, source of pledges).

Contributed capital assets – obtain evidence to support fair value.

Question 16

Foreign Exchange Transactions - audit Procedures

Answer 16

Obtain contracts for foreign exchange transactions
Obtain evidence to support foreign exchange rates and ensure appropriate rates applied
Recalculate foreign exchange calculations (e.g., foreign exchange gain / loss, forward contract)

Question 17

Non Monetary transactions - audit procedures

Answer 17

Ensure all non-monetary transactions are identified and properly accounted for
Obtain evidence, using case facts, to support fair value

Question 18

Government assistance - audit procedure

Answer 18

Ensure government assistance is accounted for properly (e.g., offset against expense or capital item)
Obtain evidence, using case facts, to ensure terms of government funding complied with
Consider if separate engagement or report on compliance required (audit versusreview level of assurance) and identify specific procedures required to support special report

Question 19

Contingencies - audit Procedure

Answer 19

Obtain evidence to support prediction of likely outcome and estimated loss (e.g., subsequent events, legal letter, specialist report)

Question 20

Payroll - Audit Procedures

Answer 20

Test of controls:
Trace names andwages or salary rates to personnel department records
Trace time to time reports approved by supervisors
Test for fictitious employees by going from payroll back to HR records
Verify payroll deductions
Agree to payroll cheques andaccounting records

Substantive audit procedures:
For executive payroll, agree salary to contracts, director’s minutes or other authorization
Check computation of commission expense
Analytical review

If using payroll service:
Similar procedures for payroll as noted above
Consider CAS 402, Audit Considerations Relating to an Entity Using a Service Organization

Question 21

Revenue and other expenses - Audit procedures

Answer 21

Primary Audit Objectives – Occurrence, Completeness, Accuracy, Cut-off andPresentation / Disclosure

Substantive audit procedures:

Verify revenue not previously addressed – link to work performed on related balance sheet account, if applicable
Sales – accounts receivable
Investment income – investments
Gain on disposal – capital assets

Verify expenses not previously addressed – link to work performed on related balance sheet account, if applicable
COGS - inventories
Bad debt expense – accounts receivable
Amortization, repairs and maintenance, loss on disposal – property, plant and equipment
Various expenses (e.g., rent, property taxes, insurance) – prepaid expenses
Interest – interest-bearing debt
Stock compensation plans – review documentation, obtain evidence re share prices, obtain evidence to support inputs into calculations
Verify significant other expenses
Analytical procedures

Question 22

Equity - Audit Procedure

Answer 22

Primary Audit Objectives – Existence, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Verify capital stock transactions
Confirm shares outstanding with independent registrar and stock transfer agent, if applicable
Verify dividends (e.g., review directors’ minutes)

Question 23

Income Taxes - audit procedures

Answer 23

Primary Audit Objectives – Existence, Completeness, Valuation and Presentation / Disclosure
Substantive audit procedures:
Obtain evidence to support current income taxes (e.g., review tax return, CRA assessment notices)
Obtain evidence to support deferred (future) taxes:
Review evidence supporting temporary difference balances andtax rates used.
For deferred (future) income tax assets, obtain evidence, using case facts, to support criteria for recognition.

Question 24

Interest Bearing debt - audit procedures

Answer 24

Primary Audit Objectives – Existence, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Confirm with debtor
Review debt documentation
Verify borrowing and repayment transactions
Assess whether debt provisions have been met (e.g., debt covenants)
Consider consequences if not met (e.g., disclosure, assess going concern)
Audit related expense account at the same time
Analytical procedures

Question 25

AP and Other Liabilities - Audit procedure

Answer 25

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Confirm with suppliers – select suppliers based on volume of purchases rather than year-end balances to ensure completeness
Reconcile year-end balances to suppliers’ statements
Search for unrecorded liabilities
Cutoff
Analytical procedures
Warranty provision:
Obtain and review documentation re warranty policy
Verify warranty transactions (e.g., warranty sales and costs)
Obtain evidence to support provision calculations and assess reasonableness

Question 26

Development costs - Audit Procedure

Answer 26

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Continuity schedule for development costs – verify additions, disposals and amortization calculations
Obtain evidence, using case facts, to assess whether development criteria have been met (may need to link back to users’ needs and biases)
Obtain evidence to assess appropriateness of costs capitalized
Ensure amortization method, rate and commencement of recording is appropriate
Valuation – impairment?

Question 27

Leases - Audit Procedures

Answer 27

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Evaluate finance (capital) lease criteria:
Review lease agreement
Obtain evidence to support estimated economic life
Obtain evidence to support interest rate used to calculate present value
Obtain evidence to support fair values (e.g., leased asset at inception of lease, purchase option)
Consider link back to biases or big picture (e.g., impact on compliance with debt covenant)
If opting not to apply IFRS 16, obtain evidence to support one of the two exemptions (i.e., lease term per lease agreement or verify low value assessment)
If finance (capital) lease, see also PPE procedures

Question 28

Intangible Assets - Audit Procedures

Answer 28

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Continuity schedule for intangible assets – verify additions, disposals and amortization calculations
Obtain evidence to support additions. Assess appropriateness of capitalized costs – future benefit – accumulation of costs for a developed asset, such as a patent.
Amortization
Assess factors supporting a claim of an indefinite life.
Ensure amortization method and rate is appropriate for asset.
Obtain evidence to support estimates for useful life and residual value/ salvage value
Valuation
Assess factors (using case facts) to determine if impairment.
Verify recoverable amount / fair value.
Ensure assumptions re estimated future cash flows are supported and reasonable.
Verify goodwill impairment test.
If using revaluation model, obtain evidence to support fair values

Question 29

PPE - Audit procedures

Answer 29

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Continuity schedule for PPE – verify additions, including allocation to components, disposals and amortization calculations
Physical inspection of significant PPE additions
Assess appropriateness of costs capitalized – link back to users’ needs or biases
Review repair and maintenance expense for capital items inappropriately expensed
Ensure amortization method and rate is appropriate for asset. Obtain evidence to support estimates for useful life and residual /salvage value.
Analytical procedures
Costs of dismantling and removing the item and restoring the site (asset retirement obligations) – obtain evidence to support estimated future costs.
Valuation
Assess factors (using case facts) to determine if impairment.
Verify recoverable amount / fair value.
Ensure assumptions re estimated future cash flows are supported and reasonable.
If using revaluation model, obtain evidence to support fair values

Question 30

Investment in Associates - Audit procedures

Answer 30

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Ensure investment properly classified as significantly influenced investment based on case facts.
If choose not to use the equity method, consider if appropriately using the exemptions provided in IFRS standards or the cost method option under ASPE.
Verify transactions (e.g., purchases and sales) throughout the year
Verify valuations used in purchase price allocation
Verify calculation of equity income(e.g., obtain subsidiary’s I/S)
Verify dividend income re investment (e.g., review minutes of subsidiary)
Valuation (impairment)
Assess factors (using case facts) to determine if impairment.
Verify recoverable amount / market value.
Ensure assumptions re estimated future cash flows are supported and reasonable.

Question 31

Inventories - Audit procedures

Answer 31

Inventory – Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
COGS – Primary Audit Objectives – Occurrence, Completeness, Accuracy, Cut-off and Presentation / Disclosure
Tests of controls – purchases transactions:
Agree details for purchase requisition, receiving documentation and purchase invoice.
Review for approval of prices, quantities, mathematical accuracy and account allocation.
Agree to payments and accounting records.
Substantive audit procedures:
Attend physical inventory count – gives evidence as to existence but not rights (ownership)
Observe taking of physical inventory
Perform test counts both ways (from count sheets to physical inventory and vice versa)
Review obsolete or damaged inventory
Audit roll-forward period if inventory counted before year-end
If inventory held by third-party or off-site, obtain confirmation and consider physical inventory count procedures
Analytical procedures
Cut-off
Inventory costing – verify
Valuation – lower of cost or net realizable value – obtain evidence to verify

Question 32

Asset held for sale - audit procedures

Answer 32

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Assess whether criteria for classification as held for sale have been met
Valuation – verify fair value and costs to sell
Ensure appropriate presentation

Question 33

AR and revenue - audit procedures

Answer 33

A/R – Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Revenue – Primary Audit Objectives – Occurrence, Completeness, Accuracy, Cut-off andPresentation / Disclosure
Tests of controls – revenue – go from shipping documents to sales invoices to accounting records to ensure all shipped orders have been billed and recorded
Substantive audit procedures:
Confirm A/R with customers – gives evidence as to existence but not valuation (see External Confirmations – CAS 505)
Consider testing subsequent receipts
Analytical procedures
Cut-off
Valuation – assess collectability (e.g., review aged A/R listing)
Revenue recognition
Obtain evidence to support (IFRS standards, steps in revenue model which are high risk; ASPE, revenue recognition criteria). Consider biases re revenue recognition – aggressive? timing?
Consider fraud risk factors re revenue recognition (CAS 240)
Review contracts / agreements if relevant
Percentage complete – obtain evidence to support estimated % complete (e.g., engineering reports). Evaluate whether a loss on the contract is expected.

Question 34

Investment - financial assets - audit procedures

Answer 34

Primary Audit Objectives – Existence, Rights, Completeness, Valuation andPresentation / Disclosure
Substantive audit procedures:
Ensure financial asset properly classified as to type and that classification as current is appropriate
Confirm securities held by third parties
Physically inspect securities on hand
Verify transactions (e.g., purchases andsales) throughout year
Verify transaction costs and ensure properly accounted for
Audit related revenue accounts (OCI adjustments if applicable for IFRS standards)
Analytical procedures
Cut-off
Valuation (fair value) – verify market values
Valuation (impairment) - IFRS standards :
Assess factors (using case facts) re credit risk
Verify expected credit loss values used / appropriate discount rate
Ensure assumptions re estimated future cash flows are supported and reasonable.
Valuation (impairment) - ASPE:
Assess factors (using case facts) to determine if impairment
Verify recoverable amount / market value.
Ensure assumptions re estimated future cash flows are supported and reasonable.
Convertible debt – review documentation re conversion option, obtain evidence re interest rate used and review calculations

Question 35

Going concern - audit procedures

Answer 35

Need to assess situations where there are events or conditions that cast significant doubt on the entity’s ability to continue as a going concern
Look at case facts that may cause doubt as to going concern assumption
Understanding the entity and its environment, including knowledge of the industry in which the company is operating and economic conditions
F/S analysis
Discussions with management and others, if necessary
Review of budgets and forecasts
Consider management’s assessment re going concern and their plans to address
Auditor needs to review and evaluate the accounting treatment, disclosure and presentation

Question 36

Cash - audit procedures

Answer 36

While cash may not be material, significant audit time will be spent on cash as most transactions go through the cash account. As well, cash is the most liquid asset and is therefore at high risk of theft. Accordingly, the assessment of internal controls for cash will be critical.
Primary Audit Objectives – Existence, Rights, Completeness andPresentation / Disclosure
Substantive audit procedures:
Bank confirmation
Count cash on hand
Verify bank reconciliation items
Cut off
Restricted cash?

Question 37

Verbs to be used in audit procedures

Answer 37

Examine
Inspect
Verify
Test
Assess
Analyze
Confirm
Review
Reconcile
Observe
Trace
Calculate
Document
Interview
Evaluate
identify
Compare
Sample
Count
Recompute
Compare
Match
inquire
Evaluate
Investigate
Report

Question 38

Purpose of the verb used in Audit procedures

Answer 38

Achieve
Accomplish
Attain
Fulfill
Realize
Implement
Execute
Establish
Create
Promote
Enhance
Advance
Facilitate
Develop
Enable
Promote
Initiate
Support
Generate
Innovate

Guarantee
Secure
Assure
Confirm
Verify
Safeguard
Insure
Confirm
Affirm
Protect