Day 2 Audit role
Audit planning memo (RAMP: Risk/Approach/Materiality/Procedure)
- Sometimes the case may ask you to point out the change to the audit plan
Step 1: Risk assessment:
Financial statement level risks: assess the risk the financial statements will be materially
misstated + why increased risk of material misstatement (talk generally about materially
misstatement)
- A risk that relates pervasively to the financial statements as a whole and potentially
affects many assertions.
Risk factors (normally 5):
Describe the risk factor using case facts
Logically explain how the factor could cause pervasive MM – so what
Case fact + which means + increases/decrease RMM
 Increase factor:
o Inherent risk: due to fraud or error before controls
 Anything new this year:
 Newly hired accounting clerk
 Which means he may not be familiar with the company
and some transactions may not been recorded properly
errors and increases the risk that other undetected errors
may exist. Increase RMM.
 A new plan which is based on the percentage of the net income
 management bias to underestimate the net income.
Increase RMM.
 New accounting system
 we are unfamiliar with the controls surrounding the new
system and this could be resulting in errors in the financial
statements, increase RMM.
 First year of operation of new business and/or Rapid expansion
 Which means client might not have taken the time in
developing the proper accounting policies and control
procedures, increase RMM
 First time client need to consolidate FS
 There could be errors in the consolidated FS because client
lack of experience in consolidating FS, increase RMM
 New acquisition of subsidiary in current year
 there could be errors made on purchase price allocation in
the first year of acquisition, due to incorrect fair value of
asset, liability and goodwill, increase RMM
 parent company’s management lack of experience in
dealing with transaction for the subsidiary, management
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may not know how to account for these transaction,
increase RMM
Management bias:
 Go public/buyer/creditor
 Additional users relying on the audit report increases user
reliance, increase inherent risk.
 Bonus
 Poor financial health, going concern issue
 Sell the shares (sale of business)
 IPO, new debt issuance
 bank covenant
 Which means Management bias to increase net income
for the loan/overstate the revenue and understate the
expenses more risk of material misstatement
 Revenue is decreasing/Operating costs have been increasing
 which is impacting AFL’s financial performance.
 This could create pressure for management to adopt
aggressive accounting practices, particularly in relation to
revenues, to increase earnings per share.
Financial reporting errors & detected/Complexity of FR: (inter-company
transaction, revenue recognition on xxx fee)
 which increases the risk that other undetected errors may exist,
increase RMM.
Accounting transaction involve significant amount of estimate and
assumption (lawsuit and warranty)
 significant estimation uncertainty in several accounting areas,
increase RMM.
New client - opening balance
 This is the first-time year-end audit
 which means the opening balance has not been audited
before and it could contain material misstatement in the
opening balance, increases RMM.
 which means we are not familiar with client’s accounting,
control and business process, we might not be able to
identify all material misstatement, increase RMM
 Audit opening balance
 Review predecessor’s working papers
 Evaluate whether procedures performed in current period
provide evidence
 May need to perform specific audit procedures
 Undetected errors in the opening balances due to the fact
that the financial statements have never been audited
Indication of fraud
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Control Risk: internal control to prevent error
 CFO is sick/left
 less oversight on the financial reporting process, result in material
misstatement in FS may not be detected, increase control risk
 Weak control environment  fraud/errors
 Which means there will be a lack of controls and could result in
additional misstatements in the financial statements, increase
RMM.
 Lack of audit committee
 Lack of audit committee high level review on financial reporting
process result in material misstatement in FS may not be
detected, increase control risk
 Board does not meet on quarterly basis
 Poor corporate governance and lack of board oversight result in
material misstatement in FS not being detected, increase control
risk
 Lack of timely review and approval of FS
 Material misstatement in FS may not be detected on timely basis,
increase control risk
 Significant control/system deficiencies/in adequate control
 Control/system deficiencies result in accounting data maybe loss
or manipulated, increase control risk
 Untested new system
 No indication that the system is tested, result in potential errors
arise during the conversion process, increase control risk
 Lack segregation of duty may increase the likelihood of undetected F/S
errors or frauds
 Staff has access to complete accounting cycle
 Lack of general computer controls make the systems susceptible to loss
of data or intrusion by unwanted parties
 Management poor attitude toward control: appropriate controls may not
be in place or employees may put little effort into following and
executing controls
 Management override on controls. This sets a tone at the top for
disregard of controls.
 Lack of IT policies: employees may act inappropriately, putting data and
system at risk
Decrease factor:
o Internal audit department: SPH has a competent internal audit team, which
means errors and misstatements could be caught and corrected, decrease RMM.
o
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management and employee might be manipulating the FS to
cover up fraud, therefore auditor might not be able to rely on
management representation, increase risk of fraud and RMM,
o
o
o
o
o
o
o
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Privately held company with few users of the F/S: less likelihood of an error
being considered material  decrease RMM
Competent and experienced CFO, well-established audit committee  auditors
can put more reliance on the work produced by the management  decrease
RMM
Company and management have good reputation, they are less likely to
manipulate FS, decrease RMM
Good long past relationship, experience with audit client, we have good
understanding of client’s accounting, control, business process, we are more
likely to detect all misstatements, decrease RMM
strong board governance/audit committee, good tone on top, board is actively
involve overseeing management action, decrease RMM in the FS
strong internal control is more likely to detect and prevent accounting errors,
decrease RMM
no significant accounting issue in prior year, there is assurance on opening
balance, which decrease RMM
Conclusion: based on the above risk factors, overall financial statement risk
(low/medium/high), due to weaker control environment, new accounting staff…
Example:
Step 2: Audit approach:
Approach
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Case facts + which means because
Negative factors:
o Internal control deficiency, which means control was not able to detect errors,
increase control risks.
o BOD only meet once in 2022, which means there is a lack of oversight for FFTY
operations and performance by BOD, increase control risks.
o The company’s policies and procedures have not been documented for boards
review, which suggests that the control on the decision process is bad and
control risk is high.
o Controller resigned for personal reasons, which means there is not an oversight
on the financial statement and result in errors in the financial statement,
increase control risks.
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Positive factors:
o Management committee meets regularly to review the actual and budgeted
statements and make operational decisions, which means there is a good
oversight over the financial statement, decrease control risk.
o SPH has a competent internal audit team, which means errors and
misstatements could be caught and corrected, which decrease control risk
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We will obtain detailed understanding, document and assess internal control, IT control
and the IT system, (especially when there are new IT system) relevant to the audit and
evaluate the design effectiveness and determine whether we can test and rely on
control for the purpose of the audit
Discuss at least 4 factors based on specific sales/purchase/inventory cycle
o What is the control, what is the implication of control weakness, conclude on
high control risk and it weaken control environment,
o Particularly with lack of segregation of duty
o Owner manager small business, lack of adequate control and segregation of
duty
Conclude on control environment is
o Effective, use combined audit approach, rely and test control to the possible
extent and use CAAT, for area we cannot rely on control, we will perform
substantive testing
o Ineffective/lacking controls, use substantive audit approach, increase the
nature and extent of the audit testing to obtain reasonable assurance on FS,
increase audit hours and audit fees
Other situations
o low volume of transaction with high dollar amount, we will focus on a
substantive audit approach to obtain reasonable assurance, We are increasing
the nature and extent of our procedures, the audit hours and audit fees will
likely increase
o In highly automated environment, and or high volume of transaction with small
dollar amount, I recommend combined audit approach, we will perform some
test of control and rely on the control for some area of audit testing to extent
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possible, and test substantively to obtain reasonable assurance in areas we
cannot rely on control
Highly automated environment, consider using CAAT
Conclusion: To conclude, given the higher RMM, we will adopt a more substantive approach,
we will need to gather more evidence, higher quality evidence and perform more substantive
testing. This requires more audit hours and higher fees. We need to make client aware of this as
soon as possible.
Concludes substantive or combined approach, supported by 3 items
To make sound decisions regarding which areas to audit using a combined approach and which
ones to audit substantively, the following assessments are relevant:
- Assessment of the control environment from your FSL risk assessment
- Assessments of any accounting cycles you have performed
o Strength and weakness
- Assessments of any control risks you made when discussing assertion-level risks
Use as many of the above assessments as are possible given the case facts to decide which
areas of the audit can be audited using a combined approach and which must be done 100%
substantively.
- Staffing needs (number, experience levels, specialists) - Tight deadline
- Nature (quality) of evidence needed
- Extent (quantity) of evidence needed
- Timing (proximity to year-end) of evidence gathering
e.g.
Internal control
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Internal audit did not report any material weaknesses or significant deficiencies in
internal controls during 2021.
Also (with the exception of sales-related controls in the children’s books division), our
walkthroughs of the sales, purchases, and payroll cycle support the adequacy of SPH’s
internal controls.
Conclusion: Therefore, control risk should be assessed below maximum, and a combined
audit approach would continue to be appropriate.
Control environment
- Several control weaknesses were identified in the children’s books division, starting
from Yolanda’s November 1 start date.  control risk is high
- Conclusion: As such, it is recommended that FE adopt a combined audit approach, with
increased substantive testing in the children’s books division, particularly from
November 1 to December 3
 revenue cycle?
 Purchase/other expense with no internal control weakness?
Step 3: Materiality
Overall materiality
- Base
o Users + needs
 Shareholder: concerned about net income, as they use audited F/S to
evaluate the financial performance of the company and their dividends
are related to profitability.
 Bank/Debt holder: concerned about net income, as they use it to
evaluate whether company has the ability to repay debt.
 Potential investor: Concern with the profitability of the company that
could impact purchase price and they use audited FS to determine the
purchase price.
 Management: net income  max bonuses
o Select the base with support
o Revised net income based on accounting issues/non-recurring income
o Interim financial statement result must be annualized, state that materiality
must be reassess when the year end result is obtained
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Sensitivity (%) – more/less (3-7%)
o May link to events: IPO?
o Don’t link to risks
 Given Michael is the only user and he's heavily involved in the operations
of the business, his sensitivity to misstatements is likely low, so going
with the high end of the range at 10% would be a safe choice here.
 Private/public company
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E.g., Given that users are concern with the profitability of the
company, it would be appropriate to use 3% to 7% of net income
before tax to calculate materiality, given that user’s tolerance of
misstatement is low, lower end 5% of net income before tax
should be use, but the company is currently having net losses,
therefore, we cannot use net loss to calculate materiality.
o  Revenue as the base
Non-for-profit entity/loss position
 1% to 3% total expense
o Use 2% of total expense
 E.g., Given that the users are sensitive to the earning of the
company, we can use 1% to 3% of total revenue, given that user’s
tolerance of misstatement is low, lower end 1% of revenue should
be use
 0.5% to 2% of total assets or revenue
Performance materiality (60%-80%)
- Risk (RMM)
o High: 60%
o Low: 75%
- PM is used to reduce the possibility of aggregate misstatements exceeding overall
materiality. Given that the risk on financial statement level is assessed as high, I would
recommend 60% to be used.
Specific materiality
 40% of overall materiality  (AR, inventory, etc), because they have the great impact on
user, as they are used as collateral/ use for calculation of covenant, purchase price
o Calculate SM
Conclusion: materiality should XX amount, PM should be XX amount, SM should be XX amount
CAS 320 - Materiality in planning and performing an audit
A4. Determining materiality involves the exercise of professional judgment. A percentage is
often applied to a chosen benchmark as a starting point in determining materiality for the
financial statements as a whole. Factors that may affect the identification of an appropriate
benchmark include the following:
- The elements of the financial statements (for example, assets, liabilities, equity,
revenue, expenses);
- Whether there are items on which the attention of the users of the particular entity's
financial statements tends to be focused (for example, for the purpose of evaluating
financial performance users may tend to focus on profit, revenue or net assets);
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The nature of the entity, where the entity is in its life cycle, and the industry and
economic environment in which the entity operates;
The entity's ownership structure and the way it is financed (for example, if an entity is
financed solely by debt rather than equity, users may put more emphasis on assets, and
claims on them, than on the entity's earnings); and
The relative volatility of the benchmark.
A5. Examples of benchmarks that may be appropriate, depending on the circumstances of the
entity, include categories of reported income such as profit before tax, total revenue, gross
profit and total expenses, total equity or net asset value. Profit before tax from continuing
operations is often used for profit-oriented entities. When profit before tax from continuing
operations is volatile, other benchmarks may be more appropriate, such as gross profit or total
revenues.
A8. Determining a percentage to be applied to a chosen benchmark involves the exercise of
professional judgment. There is a relationship between the percentage and the chosen
benchmark, such that a percentage applied to profit before tax from continuing operations will
normally be higher than a percentage applied to total revenue. For example, the auditor may
consider five percent of profit before tax from continuing operations to be appropriate for a
profit-oriented entity in a manufacturing industry, while the auditor may consider one percent
of total revenue or total expenses to be appropriate for a not-for-profit entity. Higher or lower
percentages, however, may be deemed appropriate in the circumstances.
Example:
Performance materiality
A13. Performance materiality (which, as defined, is one or more amounts) is set at less than
materiality for the financial statements as a whole to reduce aggregation risk to an
appropriately low level.
Step 4: Audit procedure -> separate Doc.
Step 5: Completion Stage
Opinion
Types of opinion:
 Unqualified (Unmodified) opinion (CAS700): nothing wrong
 Qualified (modified) CAS705: something is wrong, issue with an emphasis of
matter
 Adverse: material and pervasive
 Disclaimer: scope of limitation (inability to obtain SAAE)
Error
Types of misstatements (CAS 450.A6)
- Factual misstatements are misstatements about which there is no doubt.
e.g. Management recorded $1k expense but the invoice says $2k
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Judgmental misstatements are differences arising from the judgments of management
including those concerning recognition, measurement, presentation and disclosure in
the financial statements (including the selection or application of accounting policies)
that the auditor considers unreasonable or inappropriate.
e.g. Management recorded $10K AFDA for its $1M AR balance, but perhaps should be$20K
based on historical results
Ask manage to adjust first, do not just issue qualified opinion.
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Projected misstatements are the auditor's best estimate of misstatements in
populations, involving the projection of misstatements identified in audit samples to the
entire populations from which the samples were drawn.
e.g. Management recorded $1K expense but the invoice says $2K
- There are $999K remaining expense recorded that have yet to be tested
- Likely misstatement – extrapolate $999K of error? Unreasonable
- Further possible misstatement – what if we just happen to pick the only
- wrong invoice – sampling risk
we should test more samples and if still has error  projected to population
Guidance on the determination of projected misstatements and evaluation of
the results is set out in CAS 530.
As long as your errors are not material, you can issue an unqualified opinion
e.g. $400K error but $500K materiality
CAS 706 - Emphasis of matter paragraphs and other matter paragraphs in the independent
auditor's report
Emphasis of matter
Definition: A paragraph included in the auditor's report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor's judgment,
is of such importance that it is fundamental to users' understanding of the financial statements.
(CAS 706.7(a))
Examples from CAS 706.A5, A7
- Litigation
- Significant subsequent event
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Early application of new accounting standards users 用F/S 和别的公司比
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Major catastrophe 会影响明年的业务
Going concern issues
Requirement: Makes a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the F/S.
Indicates that the auditor’s opinion is not modified in respect of the matter emphasized.
Other matter
Definition: A paragraph included in the auditor's report that refers to a matter other than those
presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to
users' understanding of the audit, the auditor's responsibilities or the auditor's report. CAS
(706.7(a))
Examples from CAS 706.A9-A15
 A9: Planning and scoping matters
 A10: Inability to withdraw from audit
 A13: Reporting on multiple sets of financial statements: different reporting framework
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Restriction on distribution of auditor report:专门给某人使用
First year audit
Key Audit Matter (auditor’s attention)
Purpose
2. The purpose of communicating key audit matters is to enhance the communicative value
of the auditor's report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the
financial statements ("intended users") to assist them in understanding those matters that, in
the auditor's professional judgment, were of most significance in the audit of the financial
statements of the current period. Communicating key audit matters may also assist intended
users in understanding the entity and areas of significant management judgment in the audited
financial statements. (Ref: Para. A1-A4)
Definition: Those matters that, in the auditor's professional judgment, were of most
significance in the audit of the financial statements of the current period. Key audit matters are
selected from matters communicated with those charged with governance. CAS 701.8
 calculate materiality
Considerations per CAS 701.9
 Significant risks identified
 Significant judgments required
 Effect on the audit during the period
 Difficulties in auditing going concern issues
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Accounting estimated with significant risks: recognize revenue for long-term
contract(brand new), percentage of completion is difficult to determine
Issues of significant public interest
Materiality and basis for its calculation
The level of unadjusted audit difference
Auditor’s most significant assessment of RMM and how they were dealt
Disclosure of key assumption: range of possible outcome
What is included in the audit report per CAS 701.13
 Why it is a KAM
 How it is addressed in the audit
Guidance between KAM vs EoM, summarized from CAS 706.A1-A3
o When CAS 701 applies, the use of Emphasis of Matter paragraphs is not a substitute for
a description of individual key audit matters.
o Matters that are determined to be key audit matters in accordance with CAS 701 may
also be, in the auditor's judgment, fundamental to users' understanding of the financial
statements. In such cases, in communicating the matter as a key audit matter in
accordance with CAS 701, the auditor may wish to highlight or draw further attention to
its relative importance. – assertion level difficulty audit
o There may be a matter that is not determined to be a key audit matter in accordance
with CAS 701 (i.e., because it did not require significant auditor attention), but which, in
the auditor's judgment, is fundamental to users' understanding of the financial
statements (e.g., a subsequent event). If the auditor considers it necessary to draw
users' attention to such a matter, the matter is included in an Emphasis of Matter
paragraph in the auditor's report in accordance with this CAS. – 不会影响今年F/S但是
user也需要知道. Let user know before read the F/S
Step 6: Opening Balances
Initial engagement Opening balance, client upgrade review to audit this year or first year
audit
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For audit there is a requirement to obtain an understanding of the client’s control
environment, which is not required for review engagement
Opening balance
o review procedures performed last year would not be sufficient to satisfy CAS
requirement on opening balance
o no assurance engagement was performed in prior year
o We need to perform audit level procedure such as AR confirmation and attend
to inventory count (and apply rollback procedures) to obtain audit level
assurance on the opening balance
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If we cannot obtain reasonable assurance on opening balances, we have
to issue a qualified opinion due to scope limitation
Audit of Opening balance (CAS 510)
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Risk of material misstatement in the opening balances
Test for existence, completeness and valuation
If the client being audited previously,
o obtain audited FS and related working paper from previous auditor to ensure
sufficient and appropriate audit evidence have been obtained
if the client being audited for the first time, perform procedure to obtain assurance
over opening balances
Cash and Long term debt, Send loan confirmation to confirm the opening cash and loan
balance
AR and AP, the collection and payment of opening AR and AP in the current period will
provide audit evidence of their existence, completeness, and valuation
PPE, Obtain PPE continuity schedule to verify opening balances, and vouching to invoice
to ensure addition and disposal have been properly recorded, and recalculate
depreciation to ensure it is accurate
Inventory
o attend to inventory count at different locations as soon as possible, and perform
sheet to floor testing for existence of inventory, perform floor to sheet testing for
completeness of inventory. apply rollback procedure to determine the beginning
inventory balance
o Rollback calculation, Current inventory balance addback cost of sales less new
purchases
o If we cannot obtain reasonable assurance on inventory balance, we will issue
qualified opinion due to scope limitation, we need to advice the client to
communicate with the bank immediately to determine whether a qualified opinion
is acceptable
Comparative information
 since prior year FS is not audited, prior year FS information will be mark as unaudited,
we would have to include other matter paragraph in the auditor’s report stating that the
prior year FS are unaudited
Deadline for the audit engagement
 Pay attention to the current date and the date audit needs to be completed by
o if the deadline is too tight, we need to determine we will be able to complete the
engagement before the deadline
General assurance standard
 we need to ensure we perform the engagement with due care and objective state of
mind
 we need to ensure the engagement team have adequate proficiency with the client’s
business and industry
 we need to ensure the engagement is properly planned, directed, and supervised by the
engagement partner
Conclusion
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Whether to accept the engagement or not
Step 7: Client Acceptance and Continuance
- Management integrity
- Independent issues:
o Self-interest threats
o Self-review threat
o Familiar threats: partner has audited the firm for a long time
o Intimidation threats
o Advocacy threat
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Independence of mind: objectivity 利益冲突
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Independence of appearance:在外人看来你们有没有关系
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Conflict of interest: provide advice to purchaser and seller
Violation of professional standard: auditor compensated based on contingent fee
Resources needed (expertise, time, team member)
Whether F/S is prepared in accordance with GAAP
Any scope limited issue
Deadline
Implementation of safeguards

Self-interest: (a direct financial interest or material indirect financial interest in an
assurance client)
o Sold stock if have investment in client’s company
o Talk to client’s audit committee to pay outstanding fee
o Auditor cannot receive contingent fee, should tell client that your fee is based on
workload
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Self-review: (a person on the engagement team being, or having recently been, an
officer or director of the client)
o Cannot perform both bookkeeping and audit, only one
o Transaction consulting: perform advisory and audit is self-review unless there is
sufficient case facts saying they are not conflict. i.e. owner is the key user and
auditor communicate with him said that some works cannot be performed
o If one team in a company do bookkeeping and another do audit 
independence of appearance
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Familiarity threat:
o If manager jump to client’s company after the engagement  independence of
appearance  manager should change an engagement
o Family relationship: 要看family member’s position。如果只是customer service,
it won’t impact F/S.如果是中等职位（F/A, accountant）, assess whether the
work has decision making ability  the auditor can stay in the engagement but
cannot audit related parts
o The audit firm can rotate auditors but stick with the client
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Intimidation threat: (client threaten to replace the auditor or puts budget pressure to
reduce audit fees)
o consult with client’s audit committee, BoD governance persons
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Advocacy threat: (acting as an advocate for or on behalf of an assurance client in
litigation or in resolving disputes with third parties)
o auditor cannot promote client’s sales (When the auditor promote the client’s
position)
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Firm policies (partner rotation)
AO 1 - Engagement issues
Engagement issue is something that could:
 Affect the performance of the engagement, usually by affecting scope or detection risk.
o The auditor was unable to obtain sufficient appropriate evidence that the FS are
free from material misstatement (we will call this a scope limitation)
 Affect the opinion or other content of the audit report.
Steps – W/I/R
 Specify the issue using case facts.
 Describe the issue's implications.
 Suggest specific ways to mitigate the implications.
 State how you would address any implications that can't be mitigated.
Types 1: Independence threat increase detection risk
- Independence threat: Anything that would impair the professional judgment or
objectivity of the member, firm or a member of the firm (independence in fact) or
which, in the view of a reasonable observer, would impair the professional judgment or
objectivity of the member, firm or a member of the firm (independence in appearance)
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o Self-Interest
o Self-Review
o Advocacy
o Familiarity
o Intimidation
Detection risk is the risk the auditor fails to detect a material misstatement if their
judgment or objectivity is impaired due to one or more independence threats, that
increases the likelihood that they will fail to detect or will ignore, consciously ignore
material misstatements in the financial statements.
the connection between independence threats and engagement issues comes via the
impact on detection risk.
Types 2: Opening balances (first time audit) – Scope limitation
- go through every items on the balance sheet
- come up with procedures that we can perform to get evidence regarding the key
assertions for each balance, and then ensure that the evidence indicates that none of
those assertions were misstated in some fashion for 2021 that would result in a material
misstatement in the 2022 numbers that we are auditing.
Types 3: Deadline pressure – detection risk
- It also doesn’t provide recommendations on how to deal with the issue, with is a flaw.
o Could ask client to talk to bank and see if deadline can be pushed back.
o Could assign more staff and more-experienced staff.
o Rigorous quality control review throughout audit as well.
Types 4: Audit report
- Unaudited comparative figures should be highlighted in an Other Matters paragraph
- If unable to get SAAE re: some opening balances, then would have to qualify opinion
due to scope limitation
- Based on FR analysis, TankCo is offside on debt covenants, so may need to report
Material Uncertainty Related to Going Concern
Step 8: Special report
Template:
1. User needs: bank, Upon request by the lender, the borrower will furnish a special
report, audited by an independent public accountant, calculating the provisions of this
agreement.
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Level of assurance
Types of work (procedures)
Report result (opinion/conclusion)
Cost
User needs
Recommendation
Special reports general discussion (CSRS 4400 is an alternative for all
special report)
General standard
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We must perform the engagement with due care and objective state of mind
Engagement team must have adequate proficiency in the subject matter
Engagement should be properly planned, directed and supervised by the engagement
partner
Deadline for the audit engagement,
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Pay attention to the current date and the date audit needs to be completed by
o if the deadline is too tight, we need to determine we will be able to complete the
engagement before the deadline
Obtain clarification from client
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Obtain clarification from the user, on the level of assurance, whether opinion is
required,
Obtain clarification from the user, clarify unclear terms of criteria of the engagement,
what is consider qualified vendor
Obtain clarification from the user, what is consider cost, revenue
Identify the User’s needs
o Use some case fact to described what clients want
 Level of assurance? Audit provides high assurance, review provides
moderate and negative assurance, CSRS4400 does not provide assurance
 High level assurance for dispute, accuracy in calculations
 Opinion required? Only audit provides an opinion
 Cost for the engagement? Budget constraint etc
Application of CAS 805 or CSRE 2400
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Single financial statement or specific account or accounts on financial statement
Revenue reported to landlord to calculate rent based on % of sales, calculate royalty
payment
R&D expense spending for grant criteria
Common area cost reported by landlord to tenants
Cost schedule for insurance claim
CAS 805 (audit financial information, single financial statement, specific element on FS)
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Discuss definition of cost/revenue that needs to be clarified
Level of assurance, Provide high level assurance on the accuracy of the financial
information, single set up FS, and specific element on FS
Work involved, Auditor will perform audit level procedure such as recalculation,
reperformance, confirmation etc to obtain reasonable assurance on the accuracy of the
financial information
Cost, expensive engagement because audit level procedure is performed and audit
opinion is provided
Report, Auditor would provide an opinion as whether the company complied to the
agreement
User’s need, this report will meet the user’s need because user want the highest level of
assurance
CSRE 2400 (recently replaced review financial information other than FS to replace 8100
and 8500)
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Discuss definition of cost/revenue that needs to be clarified
Level of assurance, Provide moderate and negative assurance to assess the plausibility
of financial information, single set up FS, and specific element on FS
Work involved, accountant will focus on review level procedure analytical procedure,
discussion and enquiry with management to assess plausibility of financial information
Cost, this is less expensive than audit engagement because only review level procedure
is performed
Report, accountant will state nothing has come to accountant attention to suggest that
the financial information is not accurate
User’s need, this report will not meet the user’s need because it does not provide high
level of assurance
CSRS 4400 (related services, Report on result of audit procedures)
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No assurance provided, no audit opinion, the report provides factual result from
applying specified auditing procedures
client and other parties and auditor must agree on the procedures to be performed
The parties involved will interpret the results of the procedures
Cost the least, because it focus on high risk areas only and does not provide assurance
and audit opinion
User’s need, this report will not meet the user’s need because it does not provide any
assurance
Application of CSAE 3530 (attestation engagement) AND CSAE 3531 (direct engagement)
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Compliance to terms of government grant agreement
Compliance to terms of bank agreement
Compliance to terms of franchisee agreement
Compliance to certification standard, because certification constitute an agreement
between the certification institute and the company
Recommendation on which report to use
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I recommend this report because user wants (level of assurance, audit opinion, cost
concern) therefore, this report will address user’s concern
Audit level assurance, need opinion do an audit, need some assurance but did not
mention opinion, do a review, no assurance do 9100, obtain clarification on the
requirement from the parties involved
In a situation of dispute or conflict of interest, must do an audit to provide adequate
assurance to the user
CPA can provide assurance and opinion, but cannot provide guarantee
2 key questions
- Whenever you are asked to discuss special engagement options, start with two
questions to help you understand what they want.
Question 1: What is the subject matter?
- Consider whether the subject matter is financial information (i.e. sales, revenue,
expenses, assets, or liabilities) or non-financial information?
- This question will help you to identify the relevant standard
Question 2: What is the level of assurance required?
- Are they looking for reasonable assurance, limited assurance, or none?
When writing your response:
- start by discussing 2-3 possible options. Discuss what it is, scope, procedures,
requirements, opinion to be issued, and pros and cons
- then make a recommendation for what you think is the best option (based on the
subject matter and level of assurance required)
- discuss any questions that you may want to ask or any clarifications (i.e. they did not
clearly state the level of assurance required
(1) CAS 805: Special Considerations - Audits of Single FS and Specific Elements, Accounts or
Items of a FS
- Scope
o CAS 805 deals with audit of a single F/S or of a specific element, account or item
of a F/S - the subject matter is financial information
o Examples of specific elements, accounts or items of a F/S
 Accounts receivable, inventory, the recorded value of identified
intangible assets
 A schedule of net tangible assets, including related notes
 A schedule of disbursements in relation to a lease property
o A normal financial audit will cover all financial statements, but CAS 805 will focus
on a specific item
- Assurance level = reasonable assurance/ high level of assurance
Requirements:
1) Must comply with all other CAS standards relevant to an audit because CAS 805 is part
of CAS
a. because this is very similar to a full audit, you can discuss everything that you
would discuss for a full audit
2) If the auditor is not also engaged to audit the entity's complete set of F/S, they must
determine whether the audit of a single FS or of a specific element of those FS is
practicable
a. Because all other CAS standards apply, so we need to understand the entity and
its internal control, calculate materiality and etc.
b. This is basically the same work as a full audit but we may not be able to get all
those information if we are only engaged to work on a small part of it.
c. This can be phrased as a con if the auditor is not engaged in the full audit, or as a
pro if the auditor has audited the full set of F/S
3) Materiality level: usually lower than a normal audit on the complete set of F/S because
it only covers a specific area (so the value of account balances will be lower)
4) Procedure: basically any audit procedures, inspection, observation, confirmation,
recalculation, etc.
5) Opinion to be issued
a. Issue an opinion on whether the specific element/account/item is prepared, in
all material aspects, in accordance with applicable requirements (IFRS or ASPE)
b. Opinion must be issued separately
c. If the auditor expresses an adverse opinion or disclaimer of an opinion on the
complete set of FS, they are generally NOT allowed to include in the same
auditor's report an unmodified opinion on a single FS or a specific element that
forms part of those FS
(2) CSAE 3530: Attestation Engagements to Report on Compliance
- Scope:
-
1) To provide assurance on management's statement of an entity's compliance with
specified requirements at a point in time, or for a specified period of time.
2) This reporting option assumes that the management will prepare a statement of
compliance (key difference between CSAE 3530 and CSAE 3531).
3) Examples:
 Requirements in a funding agreement specifying the purposes for which
funding received by an entity must be spent
 Requirements in leasing agreement
 Covenants contained in loan agreements or bond indentures
 Performance requirements set out in policy or legislation (i.e. hospital
wait times)
Assurance level = reasonable assurance OR limited assurance
Requirements for each type of assurance level:
1) Reasonable assurance: The practitioner will express an opinion on whether
management's statement of compliance are fairly stated
 Obtain an understanding of the entity, its environment, and specified
requirements document to identify risks of material non-compliance
 The practitioners are also required to obtain an understanding of internal
control over the preparation of information that will be reported in
management's statement of compliance and controls related to ensuring
and monitoring compliance with the criteria
 Perform procedures such as inspection, observation, inquiry,
confirmation, recalculation, reperformance, and analytical procedures
 If the auditor also audits the financial statements, they should have
already obtained understanding about the entity, but they still need to
update their understanding towards the specified requirements
2) Limited assurance: The practitioner will draw a conclusion on whether anything
has come to their attention that causes them to believe that management's
statement of compliance is not fairly stated
 Identify areas where material non-compliance with the specified
requirements is likely to arise
 Obtain an understanding of the entity and how management evaluates
compliance
 But do NOT need to understand and evaluate internal controls
 Procedures are limited to inquiry and analytical procedures; will perform
additional procedures if matters has come to their attention to cause
them believe that management's statement of compliance is materially
misstated
 Less costly than reasonable assurance engagement
3) CASE 3531: Direct Engagement to Report on Compliance
- Scope
-
o The practitioner directly evaluates the subject matter against the applicable
criteria, there is no management statement of compliance (compare to CASE
3530 above)
o The practitioner, NOT management, measures the underlying subject matter
against criteria
Assurance level = reasonable assurance OR limited assurance
Requirements
o The practitioner will issue an opinion on whether the subject matter is in
compliance with the applicable criteria in all material aspects
o Practitioner decides on what the nature and scope of the underlying subject
matter to be reported will be.
o Practitioner decides the applicable criteria to be used
4) CSRS 4400: Agreed Upon Procedures Engagement
- Assurance level
o This not an audit or review engagement, it provides no assurance over the
subject matter
- Requirements
o The practitioner will perform procedures that are agreed upon with the engaging
party and communicate its findings from those procedures
o The engaging party must determine the procedures to be performed and
acknowledge that the procedures performed are appropriate for the purpose of
the engagement
o Allow greatest flexibility for the engaging party to decide what procedures they
want the practitioner to perform
Step 9 - Disclosure document review
Specifically, CAS 720 outlines the following that the auditor of the financial statements would
be required to do:
Objectives
11. The objectives of the auditor, having read the other information, are:
(a) To consider whether there is a material inconsistency between the other information and
the financial statements;
(b) To consider whether there is a material inconsistency between the other information and
the auditor's knowledge obtained in the audit;
(c) To respond appropriately when the auditor identifies that such material inconsistencies
appear to exist, or when the auditor otherwise becomes aware that other information appears
to be materially misstated; and
(d) To report in accordance with this CAS.
14. The auditor shall read the other information and, in doing so shall: (Ref: Para. A23-A24)
(a) Consider whether there is a material inconsistency between the other information and
the financial statements. As the basis for this consideration, the auditor shall, to evaluate their
consistency, compare selected amounts or other items in the other information (that are
intended to be the same as, to summarize, or to provide greater detail about, the amounts or
other items in the financial statements) with such amounts or other items in the financial
statements; and (Ref: Para. A25-A29)
(b) Consider whether there is a material inconsistency between the other information and
the auditor's knowledge obtained in the audit, in the context of audit evidence obtained and
conclusions reached in the audit. (Ref: Para. A30-A36)
15. While reading the other information in accordance with paragraph 14, the auditor shall
remain alert for indications that the other information not related to the financial statements
or the auditor's knowledge obtained in the audit appears to be materially misstated.
Inconsistencies (other information and financial statement)
- revenue increase
- net earnings improvement
- long-term debt-to-asse ratio
- Accounting errors need to be updated
Inconsistencies (other information and auditor’s knowledge)
- franchisee timing, organic products, franchise agreement term, franchise royalty
percentage, franchisee operating period, growth plans
Responding When a Material Inconsistency Appears to Exist or Other Information Appears to
Be Materially Misstated
16. If the auditor identifies that a material inconsistency appears to exist (or becomes aware
that the other information appears to be materially misstated), the auditor shall discuss the
matter with management and, if necessary, perform other procedures to conclude whether:
(Ref: Para. A39-A43)
(a) A material misstatement of the other information exists;
(b) A material misstatement of the financial statements exists; or
(c) The auditor's understanding of the entity and its environment needs to be updated.
21. The auditor's report shall include a separate section with a heading "Other Information",
or other appropriate heading, when, at the date of the auditor's report:
(a) For an audit of financial statements of a listed entity, the auditor has obtained, or expects
to obtain, the other information; or
(b) For an audit of financial statements of an entity other than a listed entity, the auditor has
obtained some or all of the other information. (Ref: Para. A52)
22. When the auditor's report is required to include an Other Information section in
accordance with paragraph 21, this section shall include: (Ref: Para. A53)
(a) A statement that management is responsible for the other information;
(b) An identification of:
(i) Other information, if any, obtained by the auditor prior to the date of the auditor's report;
and
(ii) For an audit of financial statements of a listed entity, other information, if any, expected to
be obtained after the date of the auditor's report;
(c) A statement that the auditor's opinion does not cover the other information and,
accordingly, that the auditor does not express (or will not express) an audit opinion or any form
of assurance conclusion thereon;
(d) A description of the auditor's responsibilities relating to reading, considering and
reporting on other information as required by this CAS; and
(e) When other information has been obtained prior to the date of the auditor's report,
either:
(i) A statement that the auditor has nothing to report; or
(ii) If the auditor has concluded that there is an uncorrected material misstatement of the
other information, a statement that describes the uncorrected material misstatement of the
other information.
Auditor’s responsibility under CAS 720
1) Auditor needs to read the disclosure document and ensure that the other information is
not materially inconsistent with the audited financial statements.
a. Support with case facts by identifying the inconsistencies + procedures
2) Auditor needs to ensure that there is no material inconsistency between the information and
what the auditor’s knowledge is of the client
a. Support with case facts by identifying the inconsistencies
3) Auditor take action to address inconsistencies
a. Discuss with management on the inconsistencies and perform additional procedures
Step 10 – Independence issue
- W/I/R template
Self-interest threat: When you have financial interest in the client
Self-review threat: When you are providing consulting services and auditing services; you audit
your own work
Familiarity threat: When the partner becomes a board/senior management on the client
Familiar threat: When you are friends with the client, been auditing the client for a long time
Advocacy threat: When the auditor promotes the client’s position
Intimidation threat: When the client puts pressure on the auditor; Client threats the auditor
Self-interest threat
Weakness: auditor or immediate family member has equity or debt investment (financial
interest) in the client, or auditor accepting gift from client, or auditor has economic
dependence on a client (large client to the firm) and concern losing the client, auditor providing
consulting services
Implication: risk of self-interest threat and impairs auditor’s independence, we have financial
interest in the client
Recommendation: apply safeguard by having different partner and engagement team perform
the audit engagement
Self-review threat
Weakness: auditor’s firm is providing consulting (accounting/valuation) services to the client
and also providing the audit, or performing bookkeeping services on accounting data that will
later be use for the audit
Implication: risk of self-review threat because we might be auditing some of the consulting
work that we performed and impairs auditor’s independence
Recommendation: apply safeguard by having different partner and engagement team perform
the audit engagement
Familiarity threat
Weakness: auditor has been working with the client for a long time, auditor has family member
working for the client or former partner are now in management/board position with the client,
or auditor and client been friends for a long time
Implication: risk of familiarity threat and impairs auditor’s independence
Recommendation: apply safeguard, different partner and engagement team perform the audit
Intimidation threat
Weakness: client threaten to replace the auditor or puts budget pressure to reduce audit fees
Implication: risk of intimidation threat and impairs auditor’s independence
Recommendation: apply safeguard, auditor should communicate with the board of director
immediately to stop management behaviour
Step 11: Conflict of interests
- The candidate discusses the conflicts of interest at AFL and recommends specific
components that AFL should consider in developing a conflict-of-interest policy.
Conflict of interests: A conflict of interest occurs when an individual’s personal interests such as
family, friendships, financial, or social factors could compromise his or her judgements,
decisions, or actions in the workplace.
-
Policy:
Family relationship ahead of the company’s best interest.
the accounts payable clerk put his own financial interest ahead of his employment at
AFL.
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-
A definition of conflict of interest – The definition should be clear, non-technical, and
broad enough that it includes a range of factors. For example, the policy developed
should not just be limited to financial interests.
Examples of conflicts of interest to help staff understand what conflicts of interest they
might encounter.
Procedures to follow – The conflict-of-interest policy should outline procedures to
follow to avoid the conflict of interest and also procedures to deal with a conflict of
interest that has occurred.
Step 12 – Internal audit – CAS 610
Reliance on internal auditor/secondary auditor/component auditor/specialist
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
Determine the need for audit expert
o Nature and complexity of the subject matter
o Auditor’s expertise with the subject matter
o Risk of material misstatement
o Implication on other area of financial statement
Competence, capabilities, and objectivity of the expert
Evaluating the Internal Audit Function
15. 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:
(a) The extent to which the internal audit function's organizational status and relevant
policies and procedures support the objectivity of the internal auditors; (Ref: Para. A5-A9)
-
-
(b)
Reporting structure
o Internal auditors shall be independent.
 Belvin is responsible for confirming the independence of internal audit to
the audit committee, at least annually
o Internal auditors should have direct access to the board, rather than reporting to
management.
o Board of directors should oversee internal audit function.
Avoid self-review bias
o Louise was loaned to the accounting department effective December 15, 2021.
As Louise could have direct operational responsibilities or authority over
activities that are audited now or in the future by internal audit, this could result
in a violation of the objectivity of internal audit.
The level of competence of the internal audit function; and (Ref: Para. A5-A9)
need a conclusion
(c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control
-
-
Whether the internal audit function has appropriate quality control policies and
procedures
o Belvin submitted an annual risk-based internal audit plan for approval.
o The audit managers are responsible for planning internal audits, which are then
performed by the auditors.
Conclusion:
- Rely or not
- Recommendation
Using the Work of the Internal Audit Function
21. If the external auditor plans to use the work of the internal audit function, the external
auditor shall discuss the planned use of its work with the function as a basis for coordinating
their respective activities. (Ref: Para. A24-A26)
22. The external auditor shall read the reports of the internal audit function relating to the
work of the function that the external auditor plans to use to obtain an understanding of the
nature and extent of audit procedures it performed and the related findings.
23. The external auditor shall perform sufficient audit procedures on the body of work of the
internal audit function as a whole that the external auditor plans to use to determine its
adequacy for purposes of the audit, including evaluating whether:
(a) The work of the function had been properly planned, performed, supervised, reviewed
and documented;
(b) Sufficient appropriate evidence had been obtained to enable the function to draw
reasonable conclusions; and
(c) Conclusions reached are appropriate in the circumstances and the reports prepared by the
function are consistent with the results of the work performed.
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Additional work we need to perform on the expert’s report
o Obtain understanding of the field of expertise
o Inquire the expert to understand the method being used
o Review expert’s assumption, calculation and supporting documentation
o Perform analytical procedures and reperform calculation
o Assess consistency with other results and value
Communicate with them to ensure they are aware of our requirement
o Risk identified in the FS statement and assertion level
o Nature, timing and extent of the audit procedures
o How external auditor planned on use of their work to assist with the external
audit
Review their work performed to ensure sufficient and appropriate audit evidence has
been obtained
Recommendation
- Review the internal audit charter, to confirm Belvin’s responsibilities as it relates to
internal audit’s objectivity.
- Review the resumés of Belvin, the audit managers, and the auditors, to ensure that they
have the credentials and experience required for their positions.
- Review minutes of the audit committee, to ensure that Belvin is reporting matters
discovered by internal audit to them.
- When reviewing the work of internal audit, check for evidence that Belvin has reviewed
the work.
To use the work of internal audit with respect to sales, general and administrative costs,
payroll, and sales and marketing, review the planning of the audits, nature and extent of work
performed, and conclusions reached. This would include re-performing a sample of the
procedures performed by internal audit.
Step 13 – SAM and impact on audit opinion (CAS 450)
Error evaluation and audit reporting
1. Identified the misstatements (accounting issues and proposed adjustments discovered
during the audit)
2. Summarize misstatements in work chart, compare pre-tax income misstatement with
materiality
Additional work required (CAS 450)
1) Additional testing
The samples size only contain 10 entries, but the accumulated errors are close to specific
materiality, there is a risk that material is misstated on FS. We need to increase the sample size
and process additional test to determine whether it is material.
2) Evaluate the nature of the errors
3) Discuss errors with management
4) Increase sample size
Audit plan revision
1) Discuss the need to revise audit risk assessment, control environment and audit
approach, materiality and performance materiality.
Audit reporting (CAS 705)

Conclude on pre-tax income misstatement exceed materiality, suggest the financial
statement is materially misstated
o If management is willing to adjust for all material misstatements, we can issue an
unqualified opinion, unqualified opinion is required for IPO or continue to
remain on public stock exchange
o If management is not willing to adjust for material misstatement, we will issue a
qualified opinion if misstatements are material but not pervasive
o If management is not willing to adjust for material misstatement, we will issue an
adverse opinion if misstatements are material and pervasive
Step 14: Interim FS review (Section 7060)
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Nature of procedure
o greater use of estimate, more discussion on FS items, fewer request from auditors for
supporting documentation
Time required by staff
o Less time required to prepare the supporting documentation
o Less time required to respond to auditor’s question
Cost
o Less work compare to year end audit, result in less cost
User of auditor’s report
o Only meant for audit committee, not for public use
First time consideration
o Audit firm can leverage year end work performed last year, to reduce the cost for
interim audit
Step 15 – CAS 240 - the auditor's responsibilities relating to fraud in an audit of financial
statements
Definitions
12.For purposes of the CASs, the following terms have the meanings attributed below:
(a) Fraud – An intentional act by one or more individuals among management, those charged
with governance, employees, or third parties, involving the use of deception to obtain an unjust
or illegal advantage.
(b) Fraud risk factors – Events or conditions that indicate an incentive or pressure to commit
fraud or provide an opportunity to commit fraud
Requirements
Professional Skepticism
13. In accordance with CAS 200, 5 the auditor shall maintain professional skepticism throughout
the audit, recognizing the possibility that a material misstatement due to fraud could exist,
notwithstanding the auditor's past experience of the honesty and integrity of the entity's
management and those charged with governance. (Ref: Para. A8-A9)
Responses to the Assessed Risks of Material Misstatement Due to Fraud
Overall Responses
29. In accordance with CAS 330, the auditor shall determine overall responses to address the
assessed risks of material misstatement due to fraud at the financial statement level.
Audit Procedures Responsive to Assessed Risks of Material Misstatement Due to Fraud at the
Assertion Level
31. In accordance with CAS 330, the auditor shall design and perform further audit procedures
whose nature, timing and extent are responsive to the assessed risks of material misstatement
due to fraud at the assertion level.
Written Representations
40. The auditor shall obtain written representations from management and, where appropriate,
those charged with governance that:
(a) They acknowledge their responsibility for the design, implementation and maintenance of
internal control to prevent and detect fraud;
(b) They have disclosed to the auditor the results of management's assessment of the risk that
the financial statements may be materially misstated as a result of fraud;
(c) They have disclosed to the auditor their knowledge of fraud, or suspected fraud, affecting
the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii Others where the fraud could have a material effect on the financial statements; and
(d) They have disclosed to the auditor their knowledge of any allegations of fraud, or suspected
fraud, affecting the entity's financial statements communicated by employees, former
employees, analysts, regulators or others.
Communications to Management and with Those Charged with Governance
41. If the auditor has identified a fraud or has obtained information that indicates that a fraud
may exist, the auditor shall communicate these matters, unless prohibited by law or regulation,
on a timely basis with the appropriate level of management in order to inform those with
primary responsibility for the prevention and detection of fraud of matters relevant to their
responsibilities
Application
Responses to the Assessed Risks of Material Misstatement Due to Fraud
A35.The auditor may respond to identified risks of material misstatement due to fraud by, for
example, assigning additional individuals with specialized skill and knowledge, such as forensic
and IT experts, or by assigning more experienced individuals to the engagement
Unpredictability in the Selection of Audit Procedures (Ref: Para. 30(c))
A37. Incorporating an element of unpredictability in the selection of the nature, timing and
extent of audit procedures to be performed is important as individuals within the entity who
are familiar with the audit procedures normally performed on engagements may be more able
to conceal fraudulent financial reporting. This can be achieved by, for example:
-
Performing substantive procedures on selected account balances and assertions not
otherwise tested due to their materiality or risk.
Audit procedures:
- Make inquiries and undertake interviews of existing accounts payable clerks in relation
to their use of the system and daily activities and assess any unusual or inconsistent
responses among the group.
- Test all cheques issued that were $2,500 or less by obtaining copies and assessing to
whom they were paid. For any payments made to suppliers that are not on the
approved supplier list, investigate further.
o For example, by obtaining a system record of all deleted suppliers and crossreferencing details to see if they match. We can then trace any matches to user
activity records to determine who created and deleted the supplier to assess if a
legitimate business purpose existed and if other irregularities exist (e.g.,
supplier’s address matches the employee’s address).
Fraud risk Assessment
Issue
Management has noted some concerns regarding the operations of PonyUp
Analysis
o Clients have complained of being charged lesson rates of $40 per hour when the official
rates is $30.
o Ms. Devanney has never taken a vacation, which makes detection of irregularities very
difficult.
o Meghan and Sarah signed different cheques for same vendor, when the supplier was
approached for a refund, he stated that two computers were sold, whereas only one
was received.
o Receptionists collect money from Rider who is not listed on the schedule on the
instruction of Ms. Devanney without proper notation on the schedule.
Recommendation. Management should conduct an independent investigation to verify the
veracity of Ms. Devanney irregularities as these factors suggest occurrence of fraud and may be
responsible for why previous owner chose to sell the business due to inability to turn out
significant profit.
Fraud Types:
- fraudulent financial reporting
- Misstatements resulting from misappropriation of assets
Fraud risk factor:
- RMM
- Incentives
-
Opportunities
Rationalization
Example:
Additional financing
Risk factor – Similar to RMM with case facts
- Juliette is in the process of obtaining additional financing from a new lender, to support
Bold’s investment in automation.
Incentive – like implication (so what)
- Simon and Juliette have incentive for Bold to show revenues and profits that would
justify investment by the new lender. Any investor or lender will be interested in seeing
improving trends or better-than-industry averages. If the new financing is not received,
this could impact Bold’s growth in 2023 and onwards, given how competitive the
industry has become.
Opportunity – detailed example how to commit the fraud
- Juliette is involved in negotiating sales contracts, authorizing purchases, and signing
cheques. Simon also has control over authorizing purchases and signing cheques.
- They would also be involved in authorizing journal entries and reviewing the monthly
statements. Therefore, there would be many opportunities to increase revenues or
decrease expenses in the financial statements.
Rationalization:
- Simon and Juliette will want to ensure that Bold is profitable so that the new lender is
interested in loaning additional funds, and so that Bold can continue its operations,
meet its growth targets, and continue to employ its current employees.
Step 16 – Key audit matters
Key audit matters standard reference
-
Revenue recognition
o Higher RMM
o CAS 240
o 2. The purpose of communicating key audit matters is to enhance the
communicative value of the auditor's report by providing greater transparency
about the audit that was performed. Communicating key audit matters provides
additional information to intended users of the financial statements ("intended
users") to assist them in understanding those matters that, in the auditor's
professional judgment, were of most significance in the audit of the financial
statements of the current period. Communicating key audit matters may also
assist intended users in understanding the entity and areas of significant
management judgment in the audited financial statements.
-
-
-
Intangible asset and goodwill
o Higher RMM
o Public company
o Estimation uncertainty regarding the useful lives of those assets that have finite
useful lives.
PPE
o a publicly traded company, TMB may have an incentive to capitalize amounts
that should instead be expensed
Income taxes
o Given that accounting estimates are required to determine deferred tax
balances, and audit teams often require the assistance of an income tax expert
to obtain sufficient, appropriate audit evidence
Step 17 – Auditor’s responsibilities related to IPO
 Audit firm will be subject to CPAB oversight through practice inspection
 Independence rules:
o family of firm members cannot have accounting or oversight roles at the client
o partner and quality control reviewer rotate every 5 years
o firm cannot provide other consulting services such as valuation, internal audit,
IT, HR services to client
 Procedure related to prospectus
o Read the prospectus ensure there are no misrepresentation.
o Perform the review procedures such as enquiry, discussion and analytical
procedure to assess the plausibility of prospectus.
Step 18 - Internal control weakness (WIR)
Type 1: Internal control deficiency (W/I/R) – normally 3 can get C
- Resident payments and deposits
- Approval of purchases
- Matching of invoices to purchase requisitions and delivery slips
- Backup of staff
Weakness:
- normally case facts
o Prices are not consistent
o No bank reconciliation performed
o No review/approval  fraud? (e.g.)
o Cheque signatories
o No segregation of duties
o No criteria?
o Employee can change anything?
o Employees determine credit limit?
o Cybersecurity breaches
o bad debts are written off after only three phone calls.
Implication:
- What will happen?
o Cash is stolen, fraud?
- Would bring a lot of costs to the company and could reduce/hurt company’s profits.
- brand reputation could be negatively
- This provides an opportunity for expenses to be incurred on behalf of the company that
are not legitimate.
- Result in material misstatement in the FS and incorrect business decisions are made
based on incorrect FS, result in financial loss to the company
- Risk of unauthorized approval of unauthorized expenses, result in financial loss to the
company
- This could result in OCR not being able to meet short term cash obligations. Further,
OCR has no experience working with ZEL and there is a concern as to whether ZEL can
be trusted to hold such a large deposit.
- If personal data is breached, it could lead to negative reputational risks, which could
reduce revenue and cause increased costs in order to remedy breaches.
- The fact that the write-offs are not approved by the CFO or the board, or followed up
on, could leave room for more bad debtsmto occur in the future, which would lead to
increased bad debt expenses.
- There is a risk that a cheque gets completed incorrectly or made out to a fictitious
payee.
Recommendation:
- I recommend [who do what when where] by [explaining how to do to ensure [weakness
gets addressed)
- All expenses over a certain limit should be approved by an owner prior to purchase, and
for all other transactions, all invoices should be approved prior to the cheques being
prepared. In addition, all invoices should be marked “paid with cheque #XXX” once a
payment has been issued. That way, the possibility of an expense being suspicious or
duplicated without the owners noticing will be reduced. Every cheque should have an
invoice or other appropriate documentation attached to it at the time of signing so that
the owners can verify the validity of the expenses.
- One of the owners should be responsible for reviewing the bank reconciliations and the
supporting documentation on a monthly basis
- be formal records kept that they can review to determine if these same discrepancies
are happening every week. This would highlight incidents where incorrect codes for the
same products are consistently being entered or where customers are stealing items by
not scanning them. If the company determines that the loss is significant for these
items, additional controls could be implemented to detect this fraudulent behaviour by
customers.
-
Each cheque should be signed by two owners. This will prevent owners from being
able to withdraw money by themselves and will also ensure that if Mrs. Devanney
submits a duplicate invoice, at least one owner will see it twice
Day 3
Step 1 - Compilation engagement – CSRS 4200
Description of engagement
6. A compilation engagement is not an assurance engagement. The engagement does not
require the practitioner to perform procedures to verify the accuracy or completeness of the
information provided by management. Accordingly, the practitioner does not express an audit
opinion or a review conclusion or provide any form of assurance on the compiled financial
information.
Preparing the Compiled Financial Information
30. The practitioner shall prepare the compiled financial information, including a note in the
compiled financial information that describes the basis of accounting applied in the preparation
of the compiled financial information.
Engagement acceptance
24. Prior to accepting or continuing a compilation engagement, the practitioner shall:
(a) Make inquiries of management regarding the intended use of the compiled financial
information, including whether that information is intended to be used by a third party
(b) Obtain an acknowledgment from management of the basis of accounting expected to be
applied in the preparation of the compiled financial information.
25. When the compiled financial information is intended to be used by a third party, the
practitioner may accept or continue the engagement if, according to management, the third
party:
(a) Is in a position to request and obtain further information from the entity; or
(b) Has agreed with management the basis of accounting to be applied in the preparation of
the compiled financial information.
27. The agreed terms of the engagement shall be recorded in an engagement letter or other
suitable form of written agreement and shall include.
Engagement performance
Ethical Requirements
21. The practitioner shall comply with relevant ethical requirements. (Ref: Para. A13-A14)
Professional Judgment
22. The practitioner shall exercise professional judgment in performing a compilation
engagement. (Ref: Para. A15-A16)
Performing the Engagement
The Practitioner's Knowledge
29. The practitioner shall obtain knowledge of the following matters, sufficient to be able to
perform the compilation engagement: (Ref: Para. A33)
(a) The entity's business and operations; (Ref: Para. A34)
(b) The entity's accounting system and accounting records; and (Ref: Para. A35)
(c) The basis of accounting to be applied and, where applicable, the accounting policies used,
in the preparation of the compiled financial information.
Discussing with Management Significant Judgments for Which Assistance Has Been Provided
31. When the practitioner assists management with significant judgments used in the
preparation of the compiled financial information, the practitioner shall discuss those
judgments with management, so that management understands their impact on the compiled
financial information and accepts responsibility for them. (Ref: Para. A40)
Reading the Compiled Financial Information
32. After preparing the compiled financial information, the practitioner shall read the
compiled financial information in light of the practitioner's knowledge of the entity and the
basis of accounting applied in the preparation of the compiled financial information, and
consider whether such compiled financial information does not appear misleading. (Ref: Para.
A41)
Bringing Matters to the Attention of Management
33. If the practitioner becomes aware of matters that cause the compiled financial
information to appear misleading, the practitioner shall bring these matters to the attention of
management and request additional or corrected information.
Withdrawing from the Engagement
34. If management does not provide additional or corrected information, as required by
paragraph 33, or if the practitioner is otherwise unable to complete the engagement, the
practitioner shall withdraw from the engagement and inform management of the reasons for
withdrawing.
The Compilation Engagement Report
39. The compilation engagement report shall include the following: (Ref: Para. A14, A46-A48)
(a) The title "Compilation Engagement Report";
(b) An addressee (management or those charged with governance, as appropriate);
(c) A statement that, on the basis of information provided by management, the practitioner
has compiled the financial information;
(d) Identification of the financial information that has been subject to the compilation
engagement;
(e) The date of the compiled financial information or the period to which it relates;
(f) A reference to the note in the compiled financial information that describes the basis of
accounting applied in the preparation of the compiled financial information;
(g) A description of management's responsibilities for the:
(i) Compiled financial information, including the accuracy and completeness of the
underlying information used to compile it; and
(ii)
Selection of the basis of accounting;
(h) A description of the practitioner's responsibilities to:
(i) Perform the engagement in accordance with this CSRS;
(ii) Comply with relevant ethical requirements; and
(iii) Assist management in the preparation of the compiled financial information;
(i) An explanation that:
(i) The practitioner did not perform an audit engagement or a review engagement, nor was
required to perform procedures to verify the accuracy or completeness of the information
provided by management; and
(ii) The practitioner does not express an audit opinion or a review conclusion, or provide any
form of assurance on the compiled financial information; (Ref: Para. A46)
(j) A caution to readers that the compiled financial information may not be appropriate for
their purposes; (Ref: Para. A47)
(k) The practitioner's signature;
(l) The date of the compilation engagement report; and
(m) The practitioner's address.
Independence
A14. Relevant ethical requirements do not require the practitioner to be independent of the
entity for a compilation engagement. However, when the practitioner may be seen by a
reasonable observer as lacking independence, the relevant ethical requirements may require
disclosure in the compilation engagement report.
Independence threat: Anything that would impair the professional judgment or objectivity of
the member, firm or a member of the firm (independence in fact) or which, in the view of a
reasonable observer, would impair the professional judgment or objectivity of the member,
firm or a member of the firm (independence in appearance)
- Self-Interest
o The payment terms of the barter for the compilation engagement in exchange
for the one year of free puppy training may create a self-interest threat.
- Self-Review
- Advocacy
- Familiarity
o due to the friendship between you and Andrea. Andrea could be too
sympathetic of your interests or too accepting of your work
- Intimidation
AREAS
Description of
engagement
IDENTIFES
EXPLAINS
2 of the following:
 Andrea compiles/arranges F/S based on information you
provide



Andrea ensures mathematical accuracy
No procedures to verify accuracy/completeness of information
provided
No assurance provided (must note at least 1 engagement that
provides assurance – i.e., review or audit)
Engagement
acceptance
2 of the following:
 Make inquiries regarding use of compiled information and use
by third party
 Obtain acknowledgement of basis of accounting expected to
be applied
 Andrea can accept engagement because Erin’s parents can
request/obtain further information
 Andrea can accept engagement if Erin’s parents agree to
ASPE as basis of accounting
 Sign engagement letter
Engagement
performance
2 of the following:
 Comply with relevant ethical requirements
 Exercise professional judgment
 Obtain knowledge of K9’s business and operations
 Obtain knowledge of K9’s accounting system and records
 Obtain knowledge of basis of accounting applied (ASPE)
 Discuss significant judgments with Erin
 Read the compiled information to assess whether misleading
 If misleading, request additional/corrected information and if
not provided, withdraw
Engagement
report
2 of the following:
 F/S compiled from information supplied by Erin
 Reference to note that describes basis of accounting applied
(ASPE)
 Description of Erin’s (management’s) responsibilities
 Description of Andrea’s (practitioner’s) responsibilities
 Did not perform audit or review engagement
 Audit opinion or review conclusion not expressed / no form of
assurance provided (only award if in the context of
“Engagement Report” explicitly and not from points awarded
above)
 Caution to readers that compiled information may not be
appropriate for their purposes
Independence
threats
Identifies 1 threat to independence supported by case facts and
explains why it’s a threat
Independence
requirements
No requirement to be independent but must disclose the lack of
independence
Step 2: Difference between review and compilation engagement
Accounting standard
- Review
o In accordance with IFRS or ASPE
-
Compilation
o would not need to be in accordance with IFRS or ASPE
o require you to disclose the basis of accounting used in a note
Purpose of engagement
- Review
Objectives
12. The practitioner's objectives in a review of financial statements under this CSRE are to:
(a) Obtain limited assurance, primarily by performing inquiry and analytical procedures,
about whether the financial statements as a whole are free from material misstatement,
thereby enabling the practitioner to express a conclusion on whether anything has come to the
practitioner's attention that causes the practitioner to believe the financial statements are not
prepared, in all material respects, in accordance with an applicable financial reporting
framework; and
(b) Report on the financial statements as a whole and communicate as required by this CSRE.
-
Compilation
14. The practitioner's objectives in a compilation engagement under this CSRS are to:
(a) Assist management in the preparation of the compiled financial information in accordance
with a basis of accounting selected by management, based on information provided by
management; and
(b) Report in accordance with this CSRS.
Type of work
- Review
o planning
 risk assessment
 setting of a materiality figure,
 obtaining an understanding of the business’ internal controls and its
environment, including the applicable financial reporting framework.
 However, the practitioner does not need to evaluate the design or
effectiveness of the internal controls.
o Inquiry and analytical procedures
- Compilation
o Business operation
o Accounting system
Independence
- Review
A18. In the case of an engagement to review financial statements, the relevant independence
and other ethical requirements require that the practitioner be independent of the entity
whose financial statements are reviewed. The relevant independence and other ethical
requirements describe independence as comprising both independence of mind and
independence in appearance. The practitioner's independence safeguards the practitioner's
ability to form a conclusion without being affected by influences that might otherwise
compromise that conclusion. Independence enhances the practitioner's ability to act with
integrity, to be objective and to maintain an attitude of professional skepticism.
- Self-review
- Self-interest
o Compilation
 Disclose
Management responsibilities
- Review
o responsible for the preparation and fair presentation of the financial statements
in accordance with the chosen framework discussed above.
- Compilation
o the financial information included in the report ensuring that the information
used to compile it is accurate and complete.
Amount of work/fee
o Review
 More time, higher cost
o Compilation
 Less time, lower costs
Second time note:
Notes from David
- All we have to do is point out what they did wrong, and provide a new risk assessment,
new approach, new materiality, new procedures.
- LOT of people make the mistake on reviewing other people's audit plan.
- When we review other people's audit plan, WE NEED TO POINT OUT THE DEFICIENCIES
of their audit plan FIRST, then do a RAMP
- If we don’t point out the current problem with other people's audit plan, that’s
automatically an RC.
Auditor’s responsibility for IPO





Audit firm will be subject to CPAB oversight through practice inspection
family of firm members cannot have accounting or oversight roles at the client
partner and quality control reviewer rotate every 5 years
firm cannot provide other consulting services such as valuation, internal audit, IT, HR
services to client
Procedure related to prospectus
o Read the prospectus ensure there are no misrepresentation
o Perform the review procedures such as enquiry, discussion and analytical
procedure to assess the plausibility of prospectus
Audit vs. Review engagement (2018 Day 3-3)
- Level of assurance
o Audit: reasonable assurance
o Review: limited assurance
- Opinions to be issued.
o Audit: express an opinion that the the financial statement is fairly presented and
free from material misstatement
o Review: express a conclusion on whether anything has come to the practitioner's
attention that causes the practitioner to believe the financial statements are not
prepared, in all material respects, in accordance with an applicable financial
reporting framework
- Work done:
o Audit: more procedures involved, including third-party confirmation,
reperformance, recalculation, analytical procedures.
o Review: less procedure used, including inquiry and analytical procedures.
- Cost and time:
o Audit: more expensive and more time needs to be spent on the audit
engagement
o Review: less expensive and less time needs to be spent on the review
engagement