CANADA’S ADOPTION OF INTERNATIONAL STANDARDS

ON AUDITING

20 FACTS PREPARERS of FINANCIAL STATEMENTS

SHOULD KNOW about the NEWCANADIAN AUDITING STANDARDS (CASs)

John Rossetti, CAAssistant Auditor General - OAGMember - CICA AASB

#1: Why Canada Adopted International Standards on

Auditing (ISAs)

ISAs follow a rigorous “due process” Most Canadian audit issues are not uniqueImpossible to harmonize with both the US and the international rulesCanada had no influence over US GAAS, but did have a seat at the IAASBAllows for more effective use of resources

#2: Effective Date for the New Canadian Auditing Standards

(CASs)

for audits of f/s for periods beginning on or after December 15, 2009Co-ordinated with the effective date of the ISAs prepared in accordance with the new clarity formatNot expected to be any additional new CASs issued before 2011

#3: Types of Engagements the New CASs Apply to

CASs only apply to the audits of f/s and other historical financial informationOther types of assurance engagements (i.e. 5805, performance audits, review engagements) are not covered by CASsRelated services (compilations, etc.) are also not addressed by the CASsThe existing Handbook sections will apply in those cases

#4: The New Format for the Canadian Auditing Standards

CASs are presented in the international “clarity” formatEach CAS consists of 5 sections: Introduction Objective Definitions Requirements Application & other explanatory material

#5: Organization of the Interim CICA Handbook (Assurance)

Revised structure for an interim period CASs – audits of financial statements Other types of audits Review engagements Related services

Interim structure needed while the CICA clarifies all of the inter-relationships between CASs and the existing standards Note that CASs have both major and minor differences from existing Canadian standards

#6: Canadian Modifications to the International Standards

To date, modifications have been rareThese have been restricted to: References to the IFAC Code of Conduct

replaced by “relevant ethical requirements” Maintaining existing protocols between

auditors and the legal profession (JPS) Eliminating the option of using “presents a

true and fair view” from auditor’s reports

A few CASs remain to be approved

#7: Application of the CASs to F/S Preparers

They don’t apply to preparers of f/s!!!CASs have authority only over auditorsCASs require the auditor to deal with management and/or those charged with governance (TCWG) based on the audit “premise”, and to take specific actions if management/TCWG do not fulfil their responsibilities consistent with the “premise”

#8: Changes to the “Terms of an Audit Engagement”

Many more specific requirements for the auditor to include in the engagement letterMost importantly, the “preconditions for an audit” must exist: Management must acknowledge and agree to the

basic “premise” underlying an audit of financial statements; and

Management must be using an “acceptable” accounting framework as a basis for preparing the financial statements;

#9. The “Premise” for Conducting an Audit under CASs

Defined in CAS 200 Overall Objectives of the Independent AuditorPremise is that management, and where appropriate, those charged with governance have accepted certain responsibilities and made certain undertakings, namely . . .

#9 (cont’d): The Premise

Mgmt will prepare and present the f/s in accordance with the applicable accounting framework; andMgmt will provide the auditor with: All info relevant to the preparation of the f/s Any additional info the auditor may request Unrestricted access to those within the

entity from whom the auditor determines it necessary to obtain audit evidence

#9 (cont’d): The Premise

Preparing and presenting financial statements in accordance with the applicable reporting framework includes: Designing, implementing and maintaining

internal control over financial reporting; Selecting appropriate accounting policies; and Making accounting estimates that are

reasonable in the circumstances

#9 (cont’d): The Premise

The premise does NOT mean, for example, that to fulfill its responsibilities management has to implement a flawless system of internal control over financial reporting, or necessarily undertake a SOX-type evaluation of internal control to receive a clean opinion on the financial statements

#10: The “Applicable” Accounting Framework

This is the accounting framework that is adopted by managementCan be a “fair presentation” framework, or a “compliance” frameworkFor example, PSAB would be an example of a “fair presentation” frameworkThe CASs are designed to work with a broad range of accounting frameworks

#11: Nature of an “Acceptable” Accounting Framework

An accounting framework that is judged by the auditor to meet the needs of the intended usersIn most circumstances, the auditor cannot accept the engagement if he/she believes that the framework is not “acceptable”General purpose frameworks (i.e. IFRS, PSAB, US GAAP, etc.) are presumed to be acceptable for general purpose financial statements

#12: Changes to the Format of the Auditor’s Report

No substantial changes in format but . . .There are headings for each major section of the reportThere would also be headings for non-standard paragraphsMay be divided into 2 sections if the auditor must report on other legal and/or regulatory requirements

#12 (cont’d): New Format of the Auditor’s Report

Independent Auditor’s ReportTO: Appropriate AddresseeReport on the Financial Statements

We have audited . . .Management’s ResponsibilityAuditor’s ResponsibilityOpinionEmphasis of Matter (if any)Other Matter (if any)Report on Other Legal and Regulatory Requirements

Auditor’s SignatureDate

#13: Changes to the Content of the New Auditor’s Report

Management’s responsibilities have not changed, but the auditor’s report now contains a brief description of those responsibilitiesAuditor’s responsibilities – now includes a reference to relevant ethical standardsScope of the audit – also minor changesAuditor states: “ We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.”

#14: The Date of the Auditor’s Report Under CASs

The CAS specifies 2 pre-conditions for dating the auditor’s reportFirst, mgmt has accepted responsibility for the preparation of the f/sSecond, the f/s must be approved by the body responsible under lawResult: generally, the date of the auditor’s report is the date that the Audit Committee/Board approves the f/s

#15: The “Emphasis of Matter” Paragraph

Must relate to a matter already discussed in the notes to the f/sAuditor believes the importance of the issue should be emphasized for usersNot a qualification – the auditor must clearly indicate this in the “emphasis of matter” paragraph

#16: The “Other Matter” Paragraph

For a matter other than those that are presented and disclosed in the f/sIn the auditor’s judgement, the matter is relevant to the users’ understanding of the auditFollows the “opinion” paragraph, and any “matter of emphasis” paragraphAn “other matter” is not a qualification

#15 & #16 – Required Communications

If the auditor expects to include an “Emphasis of Matter” paragraph or an “Other Matter” paragraph, they shall communicate with those charged with governance (TCWG) regarding this expectation and the proposed wording

#17: Changes to Communications with TCWG

There are a number of subtle changes:Auditor must communicate the form, timing and general content of planned communications;Auditor must communicate on a timely basis;Evaluate whether the 2-way communication process is adequate for purposes of the audit;

#17 (cont’d): Changes to Communications with TCWG

Communicate significant findings in writing;Ask TCWG to have uncorrected misstatements bookedMay ask TCWG for representation on specific matters such as regarding the effect of uncorrected misstatements to the f/s as a whole

#18: Communication of Deficiencies in Internal Control

CASs distinguish between a deficiency in internal control, and a significant deficiencyThe auditor must communicate to an appropriate level of management all identified deficiencies in internal controlAll significant deficiencies must be reported in writing to TCWGCommunication should be on a timely basis

#19: Changes to Auditing “Related Parties”

More detailed and extensive requirementsAuditor must obtain an understanding of the controls management has established to: Identify, account for and disclose RPTs Authorize and approve significant transactions and

arrangements with related parties; and Authorize and approve significant transactions and

arrangements outside the normal course of business

Must inspect various documents and minutes for evidence of undisclosed related party relationships or transactions

#20: What YOU Should Do to Prepare for the CASs

Back to school!!!Discuss with your auditorInform your senior management and those charged with governance Familiarize yourself with the new Handbook structure and the CASs written in the “clarity” formatEnjoy being a part of history!

THANK YOU!!