Electronic
Presentations
in Microsoft®
PowerPoint®
Prepared by
Brad MacDonald
SIAST
© 2003 McGraw-Hill
Ryerson Limited
Chapte
r
2
Assurance, Audit, and
Quality Control Standards
Copyright © 2003 McGraw-Hill Ryerson Limited
2
Learning Objective 1
Name the various practice standards for
internal, governmental, and independent
auditors, and identify their sources.
Chapter 2
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Practice Standards
Chapter 2 standards and sources:
Standards
Source
Assurance standards
CICA Handbook
Generally accepted auditing
standards (GAAS)
CICA Assurance
Standards Board
Quality control standards
Peer review
Provincial institutes
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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CICA Standard-Setting Process
Vice-president Studies and Standards has
overall responsibility for standard-setting.
– Oversees four directors:
• Accounting standards
• Assurance standards
• Criteria for control
• Research studies
To ensure due process, a number of key
steps are followed in setting standards.
Chapter 2
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Learning Objective 2
Outline the reasons for having general
assurance standards and give some
examples of assurance subject matters.
Chapter 2
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Assurance Standards
An assurance engagement:
– Is when a practitioner is
engaged to issue a written
communication expressing a
conclusion regarding a subject
matter for which the reporting
party is responsible.
Chapter 2
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Parties Involved in an
Assurance Engagement
User(s)
ACCOUNTABLE TO
CONCLUSION
SUBJECT
MATTER
Practitioner
Accountable party
(Management)
Chapter 2
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Assurance Standards
Assertion: A statement about some aspect
of a subject matter.
Assurance standards can be applied to
written and unwritten assertions.
– Unwritten – direct reporting engagements
– Written – attest engagements
• Audits and reviews are considered attest
engagements.
Chapter 2
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Assurance Standards
The assurance standards were created after
GAAS, and ideas from GAAS were
borrowed for the assurance standards.
– Major differences arise in the areas of
• practitioner competence
• internal control evaluation
• reporting
– Assurance standards are more general than
GAAS.
Chapter 2
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Learning Objective 3
Write and explain the eight CICA generally
accepted auditing standards (GAAS), and
explain how GAAS was or was not followed
in specific fact situations.
Chapter 2
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General Standard
The general standard
– “The examination should be performed and
the report prepared by a person or persons
having
adequate technical training and
proficiency in auditing with due care
and with an objective state of mind”
- Competence
- Due Professional Care
- Objectivity
Chapter 2
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Competence
Competence is gained through education and
experience.
– It allows the auditor to
• recognize underlying assertions made by
management
• decide which evidence is relevant to support
assertion
• select and perform procedures for obtaining
evidence
• evaluate evidence for reality and conformity to
GAAP
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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Objectivity
Auditors are expected to be unbiased and
impartial.
– Achieved by maintaining independence
• Independence in fact
• Mental attitude, state of mind
• Independence in appearance
• Covered by rules of professional conduct
– An auditor must not subordinate his/her
judgement to others.
Chapter 2
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Due Professional Care
Due care is best understood in the context
of the prudent auditor.
– A matter of what competent auditors do, and
how well they do it.
– Determination of due care must be reached
on the basis of facts and circumstances in the
case.
– Due care is frequently at issue in legal suits.
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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First Examination Standard
“The work should be adequately planned
and properly executed. If assistants are
employed they should be properly
supervised.”
– A written audit program is desirable.
– Understanding of the client’s business is an
absolute necessity.
– Timing is important for audit planning.
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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Second Examination Standard
“A sufficient understanding of internal control
should be obtained to plan the audit. When control
risk is assessed below maximum, sufficient
appropriate audit evidence should be obtained
through tests of controls to support the
assessment.”
– Internal control – a system’s capability to
prevent, detect, and correct errors.
– Understanding internal controls is the
foundation for assessment of control risk.
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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Third Examination Standard
“Sufficient appropriate audit evidence
should be obtained by such means as
inspection, observation, enquiry,
confirmation, computation and analysis, to
afford a reasonable basis to support the
content of the report.”
– Appropriate – evidence must be relevant and
reliable.
– Sufficient – not every transaction need be
examined.
Chapter 2
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Reporting Standards
1. “The report should identify the financial
statements and distinguish between the
responsibilities of management and the
responsibilities of the auditor.”
2. “The report should describe the scope of
the auditor's examination.”
Chapter 2
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Reporting Standards
3. “The report should contain either an
expression of opinion on the financial
statements or an assertion that an
opinion cannot be expressed.
– In the latter case, the reasons therefor
should be stated.”
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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Reporting Standards
4. “Where an opinion is expressed, it should
indicate whether the financial statements
present fairly, in all material respects, the
financial position, results of operations and
changes in financial position in accordance with
an appropriate disclosed basis of accounting,
which except in special circumstances should
be generally accepted accounting principles.
The report should provide adequate
explanation with respect to any reservation
contained in such opinion.”
Chapter 2
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Learning Objective 4
Describe the standard unqualified audit
report in terms of its communication of audit
standards and other messages.
Chapter 2
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Standard Unqualified Report
Unqualified – good, in that the auditor is not
calling attention to anything that may be
wrong in the statements.
– Auditing standards dictate use of a standard
report.
Qualified audit report – bad, in that the auditor
reports a departure from GAAP, or a limitation
in the scope of the audit.
Chapter 2
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The Standard Report
1. Title
Auditor’s report
2. Address
To the shareholders of ………
3. Notice of
audit
I have audited the balance sheet of ..........
as at .........., 20..... and the statements of
income, retained earnings and cash flow for
the year then ended. These financial
statements are the responsibility of the
company's management. My responsibility is
to express an opinion on these financial
statements based on my audit.
4. Responsibilities
Chapter 2
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Audit Report – Paragraph 2
5. Description of the audit
I conducted my audit in accordance with generally
accepted auditing standards. Those standards require
that I plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of
material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
Chapter 2
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Audit Report - Opinion Paragraph
6. Opinion
In my opinion, these financial statements
present fairly, in all material respects, the
financial position of the company as at
.........., 20..... and the results of its operations
and the changes in its financial position for
the year then ended in accordance with
generally accepted accounting principles.
7. Signature
Date
(Signed)
8. Date
City
Public Accountant
Chapter 2
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GAAS Reporting Standards
Generally accepted accounting principles :
– are required by 4th reporting standard
– Determination and application of GAAP may
require exercise of judgement.
Implicit report elements:
– consistent application of GAAP
– adequate disclosure
Chapter 2
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GAAS Reporting Standards
Report content:
– Report shall contain an opinion or an assertion
that an opinion cannot be expressed.
• Third reporting standard
– Opinion could be unqualified, qualified, or
adverse.
– Denial of opinion is declaration that no opinion
is given.
– An explanation is required whenever there is a
report reservation.
Chapter 2
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Learning Objective 5
Interpret GAAS in the context of a computer
environment.
Chapter 2
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GAAS in a Computer Environment
GAAS are not written with any special
reference to a computer environment.
– All of the general standards are applicable to
an audit in a computer environment
• The financial statements are the subject of
the final audit report, not the processes
used to prepare the report.
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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General Standard
Requires competence, due care, and
objectivity.
– Auditors must have a working knowledge of
computerized accounting and control
systems.
• Students must understand computer
terminology.
• Managers and partners must have
supervisory capability.
• Auditors may need to use the technical
expertise of specialists.
Chapter 2
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Examination Standards
Planning of audit engagement
– Care is required in getting the correct
personnel on the audit at the right time.
Internal control and risk assessment
– Computerized systems have built-in control
features that need to be evaluated.
Sufficient appropriate audit evidence
– Auditor will have to consider use of
“computer-assisted audit techniques”
(CAATs).
Chapter 2
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Learning Objective 6
Explain some of the characteristics of
“professional scepticism.”
Chapter 2
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Professional Scepticism
Auditors tend not to believe management
assertions; the tendency is to ask
management to “prove it.”
– This often makes audits more extensive (and
expensive).
– Scepticism must be balanced with an open
mind about the integrity of management.
• Auditors must be willing to accept the
apparent fact that there is no evidence of
error, fraud, or irregularities.
Chapter 2
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Learning Objective 7
List and explain the important requirements
of quality control standards for a PA firm.
Chapter 2
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Quality Control Standards
Quality control:
– Actions taken to evaluate compliance
with professional standards as defined
in the CICA Handbook and provincial
rules of professional conduct.
– Several frameworks for quality control
are available.
• Currently, no codified standard exists
in Canada.
Chapter 2
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Post-Enron Quality Control
Accountability boards have been
established in the US and Canada to
oversee public accounting.
– Boards will need to consider monitoring of
quality control, as well as other areas.
Chapter 2
Copyright © 2003 McGraw-Hill Ryerson Limited
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Practice Inspection
Practice inspection, peer review and quality
reviews are “audits of auditors.”
– Practice inspection – audit files and
documentation are reviewed by a third party.
• Evaluate conformity of auditor’s work with
the Handbook and rules of professional
conduct.
– Peer review and quality review are a review
of the quality of the overall practice aimed at
the firm rather than the individual.
Chapter 2
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