GAAP/GAAS Updates 2010-2011
Table of Contents
CICA Handbook  Accounting  Part I  International Financial Reporting Standards (IFRS)
Adopting International Financial Reporting Standards (IFRS)
CICA Handbook  Accounting  Part II  GAAP for Private Enterprises
GAAP for Private Enterprises
CICA Handbook  Accounting  Part III  Accounting Standards for Not-for-Profit Organizations
Section 4400  4470 Not-for-Profit Organizations
CICA Handbook  Accounting  Part V  Accounting Standards
Section 1000 Financial Statement Concepts (Internally Developed Intangible Assets)
Section 1400 General Standards of Financial Statement Presentation
Section 1506 Accounting Changes
Section 1530 Comprehensive income
Section 1535 Capital Disclosures
Section 1582 Business Combinations
Section 1601 Consolidated Financial Statement and Section 1602 Non-controlling Interests
Section 1651 Foreign Currency Translation
Section 3031 Inventories
Section 3051 Investments
Section 3055 Interests in Joint Ventures
Section 3056 Joint Arrangements
Section 3064 Goodwill and Intangible Assets
Section 3251 Equity
Section 3465 Income Taxes
Section 3820 Subsequent Events
Section 3831 Non-monetary Transactions
Section 3840 Related Party Transactions
Section 3855 Financial instruments – Recognition and Measurement
Section 3862 Financial Instruments – Disclosures
Section 3865 Hedges
Section 3870 Stock-based Compensation And Other Stock-Based Payments
CICA Handbook  Assurance  Part I and II
New Structure
CICA Handbook  Assurance  Part I  Canadian Standards on Quality Control
CSQC 1 – Quality Control for Firms that Perform Audits and Reviews of Financial Statements
(Formerly called GSF-QC: Quality Control Standards)
1
GSF-QC Quality Control Standards (replaced by CSQC 1 – Quality Control for Firms that Perform
Audits and Reviews of Financial Statements)
CICA Handbook  Assurance  Part I  Canadian Auditing Standards (CSAs)
The Clarity Project
Adopting International Standards on Auditing (ISAs)
CAS 200 Overall Objective of the Independent Auditor, and the Conduct of an Audit in Accordance with
Canadian Auditing Standards
CAS 210 Agreeing the Terms of Audit Engagements
CAS 220 Quality Control for an Audit of Financial Statements
CAS 230 Audit Documentation
CAS 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
CAS 250 The Auditor’s Responsibilities Relating to Laws and Regulations in an Audit of Financial
Statements
CAS 260 Communications with those Charged with Governance
CAS 265 Communicating Deficiencies in Internal Control
CAS 300 Planning an Audit of Financial Statements
CAS 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the
Entity and its Environment
CAS 320 Materiality in Planning and Performing an Audit and CAS 450 Evaluation of Misstatements
Identified During the Audit
CAS 450 Evaluation of Misstatements Identified during the Audit
CAS 402 Audit Considerations Relating to an Entity Using a Service Organization
CAS 500 Audit Evidence
CAS 501 Audit Evidence Regarding Specific Financial Statement Account Balances and Disclosures
CAS 505 External Confirmations
CAS 510 Initial Audit Engagements – Opening Balances
CAS 520 Analytical Procedures
CAS 530 Audit Sampling
CAS 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
Disclosures
CAS 550 Related Parties
CAS 560 Subsequent Events
CAS 570 Going Concern
CAS 580 Written Representations
CAS 600 Special Considerations  Audits of Group Financial Statements (Including the Work of
Component Auditors)
CAS 610 The Auditor’s Consideration of the Internal Audit Function
CAS 620 Using the Work of an Auditor’s Expert
CAS 700 Forming an Opinion and Reporting on Financial Statements
CAS 705 Modifications to the Opinion in the Independent Auditor’s Report
CAS 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Reports
CAS 710 Comparative Information  Corresponding Figures and Comparative Financial Statements
CAS 720 The Auditor’s Responsibility in Relation to Other Information in Documents Containing
Audited Financial Statements
2
CAS 800 Special Considerations  Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks
CAS 805 Special Considerations  Audits of Single Financial Statements and Specific Elements,
Accounts, or Items of a Financial Statement
CAS 810 Engagements to Report on Summary Financial Statements
CICA Handbook  Assurance  Part I  Other Canadian Standards  General Assurance and
Auditing (5000-5970)
Section 5021 Authority of Auditing and Assurance and Other Guidance for Engagements
Section 5030 Quality Control Procedures for Assurance Engagements Other Than Audits of Financial
Statements
Section 5295 An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of
Financial Statements
Section 5970 Auditor’s Report on Controls at a Service Organization
CICA Handbook  Assurance  Part I  Other Canadian Standards  Specialized Areas (7050-7600)
Section 7200 Auditor Assistance To Underwriters And Others
CICA Handbook  Assurance  Part I  Other Canadian Standards Review Engagements (81008600)
Section 8200 Public Accountant’s Review of Financial Statements
CICA Handbook  Assurance  Part I  Other Canadian Standards  Related Services (9100-9200)
Section 9110 Agreed-upon Procedures Regarding Internal Control over Financial Reporting
Section 9200 Compilation Engagements
CICA Handbook  Assurance  Part II  Assurance Recommendations  General Assurance and
Auditing (5000-5970)
Section 5095 Reasonable Assurance and Audit Risk
Section 5110 Terms of the Engagement
Section 5141 Understanding the Entity and Its Environment and Assessing the Risks of Material
Misstatement
Section 5142 Materiality
Section 5143 The Auditor’s Procedures in Response to Assessed Risks
Section 5145 Documentation
Section 5300 Audit Evidence
Section 5301 Analysis
Section 5305 Audit of Accounting Estimates
Section 5310 Audit Evidence Considerations When an Entity Uses a Service Organization
Section 5370 Management Representations
Section 5400 The Auditor’s Standard Report
CICA Handbook  Assurance  Part II  Assurance Recommendations  Specific Items  Audit of
Financial Statements (6010-6930)
Section 6550 Subsequent Events
Section 6930 Reliance on Another Auditor
3
CICA Handbook  Accounting  Part I  International
Financial Reporting Standards (IFRS)
Adopting International Financial Reporting Standards
(IFRS)
(Substantial changes Feb. 2009; major additions and deletions Feb. 2010)

In January 2006, the AcSB announced its decision to move financial reporting for
Canadian publicly accountable enterprises to a single set of “globally accepted highquality standards” — namely, IFRSs issued by the IASB.

At that point in time, the term “publicly accountable enterprises” was used in the
same sense as that of section 1300 of the Handbook.

An entity has public accountability if:
o it has issued debt or equity securities in a public market; or
o it holds assets in a fiduciary capacity for a broad group of outsiders.

Effectively, the definition is such that it applies to all entities other than those
described in the chart below.
4

In September 2008, the AcSB further refined the definition:
o A PAE is a profit-oriented entity that has issued (or is in the process of issuing)
debt or equity securities that are (or will be) outstanding and traded in a public
market, or holds assets in a fiduciary capacity for a broad group of outsiders.

“A public market” is defined in section 1300, Differential Reporting.

NFPs do not fall within the definition, even if such an organization happens to meet
one or more of the criteria for a profit-oriented enterprise to be considered a PAE.

In February 2008, the AcSB confirmed that publicly accountable enterprises will be
required to report using the Canadian version of IFRS-based standards for fiscal
periods beginning on or after January 1, 2011.

Financial statements for years ending December 31, 2008 and 2009 will have to
disclose an enterprise’s plan for convergence and any anticipated effects that will
arise with the change to IFRSs, with 2009 reports providing a greater degree of
quantification of the effects of the change.

For firms with a December 31st year end, financial statements for the year ending
December 31, 2010 will be the last year of reporting under current Canadian GAAP.

If a firm’s year end is other than December 31st, then that is when the new
standards become effective.

For example, a firm with a November 30th year end would apply current GAAP for its
year end November 30, 2011.

It would apply the new standards for the fiscal period beginning December 1st, 2011.

Consequently, it would be 2012 before all publicly accountable firms are using IFRS.

As noted, for affected firms, financial statements for the year ending
December 31, 2011 will be the first year of reporting under IFRS-based Canadian
GAAP.

The AcSB will maintain separate versions of the Handbook (pre/post IFRS) as it
currently does with its pre/post financial instruments versions.
5

In May 2008, the CSA issued Staff Notice 52-320, providing guidance to an issuer on
disclosure of expected changes in accounting policies relating to an issuer’s
changeover to International Financial Reporting Standards as the basis for preparing
its financial statements.

The guidance applies to disclosure relating to each financial reporting period in the
three years before the first year for which an issuer prepares its financial statements
in accordance with IFRS.

Essentially, the CSA Staff Notice reinforces the CICA requirements to begin disclosing
information as early as interim statements prepared in 2009.

In April 2008, the AcSB released an exposure draft entitled Adopting IFRSs in
Canada.

The ED itself was only 13 pages — but it came with a 2,400 page appendix — all
IFRSs as of January 1, 2007!

The goal of the ED was not seek comments on individual issues, but rather to identify
any areas where problems could arise.

In its review of comments received, the AcSB noted that respondents presented no
compelling arguments for why one or more of the IFRSs exposed in the omnibus ED
should not be applied in Canada.

It further noted that a large majority of respondents were not concerned about the
possibility of some entities in Canada choosing to adopt IFRSs in advance of the
mandatory changeover date.
6

Therefore, the AcSB decided to continue with its plans to incorporate the IFRSs
exposed in the omnibus ED into the Handbook in mid-2009.

In March 2009, the AcSB released an exposure draft with the imaginative title
Adopting IFRSs in Canada, II.

As noted above, respondents did not provide any compelling reasons as to why the
subjects covered in the April 2008 ED (the 2007 IFRS set) should not be adopted in
Canada.

The 2009 ED dealt with changes made after the 2007 Bound Volume was published.

The ED also finalized the definition of a publicly accountable enterprise, confirmed the
effective date of the transition and dealt with the disposition of EIC Abstracts that are
part of current GAAP.

Furthermore, the ED presented a preliminary draft of new introductory material to be
included in the Handbook once it contains IFRSs.

Therefore, IFRSs will replace the current standards and interpretations applicable to
publicly accountable enterprises, effective for interim and annual financial statements
relating to fiscal years beginning on or after January 1, 2011.

Private enterprises and not-for-profit organizations will be permitted to adopt IFRSs
once they have been included in the Handbook, but will not be required to do so.

The definition of a publicly accountable enterprise is stated in a positive manner —
not by what it had not done (as was the case before).

A publicly accountable enterprise is an entity, other than a not-for-profit organization,
or a government or other entity in the public sector that:
o has issued, or is in the process of issuing, debt or equity instruments that are, or
will be, outstanding and traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets); or
o holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses.

The AcSB expects to issue a third and final omnibus Exposure Draft of IFRSs in mid2009, and to incorporate the IFRSs in all three omnibus Exposure Drafts into the
Handbook by the end of 2009 (unless the IASB replaces or amends one of these
IFRSs, in which case the new or amended standard will be incorporated in its place).
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7
CICA Handbook  Accounting  Part II  GAAP for Private
Enterprises
GAAP for Private Enterprises
(Substantial additions Jan. 2010)
Background

When it announced the “move” to IFRS early in 2006, the AcSB noted that “one size
does not necessarily fit all” and stated that it would pursue separate strategies for
public and private enterprises.

The AcSB proposed a comprehensive examination of the needs of the financial
statement users of private enterprises to determine the most appropriate financial
reporting approach.

In May 2007, the AcSB published an Invitation to Comment [ITC] and a Discussion
Paper [DP] to solicit stakeholders’ views as to the best approach.

Possibilities ranged from a set of standards not very different from current standards
to a set of standards substantially different from current standards to something “in
between.”

The AcSB set October 31, 2007 as the deadline for comments.

The AcSB planned to develop the individual standards once they assessed feedback
from constituents.

The timing of development and implementation of private enterprise standards would
vary depending on the approach taken.

The DP also addressed enterprises with no significant external users.

In June 2008, the AcSB issued its FYI Bulletin outlining decisions taken by the Board
during the previous six months.

The most critical decision taken was that neither full IFRSs nor the proposed IFRS for
SMEs would be used as a starting point for standards applicable to private
enterprises.

Instead, a “made in Canada” version would be created.

There will be no size test — an entity will not be subject to a size test or other
qualifiers such as unanimous consent as a condition of applying the standards for
private enterprises.
8

Private enterprises will be given a free choice to elect to follow (a) full IFRS, (b) these
standards being developed, or (c) no specific standards at all.

The conceptual framework will be the same for both publicly and non-publicly
accountable enterprises.

The definitions of assets, liabilities, revenue and expenses and the
recognition/derecognition criteria must be the same.

The existing CICA Handbook − Accounting will be used as a starting point for drafting
purposes.
o The AcSB noted that there had been a strong demand from stakeholders to
produce the standards for private enterprises as soon as possible, and this factor
appears to be the basis for the AcSB’s decision to base private enterprise
standards on the existing Handbook.

Nevertheless, the AcSB acknowledged that there are a number of areas in the
existing Handbook that are problematic for private enterprises.

These areas will be examined and if appropriate, changes will be made to the
standards, primarily based on cost/benefit considerations.

The AcSB identified the problematic areas as financial instruments, consolidation and
accounting for affiliates, future income taxes, asset retirement obligations, employee
future benefits, leases, current/non-current classification, goodwill and intangible
assets, and stock-based compensation.

A complete reconsideration will be given to the existing disclosure requirements.

The AcSB expects the disclosure requirements in the standards for private enterprises
to be significantly fewer than in the existing Handbook.

In April 2009, the AcSB finally released for comment its exposure draft entitled
Generally Accepted Accounting Principles for Private Enterprises.

Comments on the exposure draft were due July 31, 2009.

The ED consisted of:
o a summary of significant changes to standards in the existing Handbook;
o specific questions on which the AcSB would like input from stakeholders;
o proposed text that differs significantly from that in the existing standards; and
o a listing of all proposed disclosure requirements.
9

The ED gave a clear definition of what will constitute a private enterprise — it was a
profit-oriented enterprise that:
o has not issued, and is not in the process of issuing, debt or equity instruments that
are, or will be, outstanding and traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional
markets); and
o does not hold assets in a fiduciary capacity for a broad group of outsiders as one of
its primary businesses.

The ED’s disclosure requirements focus on three types of disclosures:
o accounting policies — disclose whatever is necessary for users to understand and
analyze the financial statements;
o risks and uncertainties — disclose whatever is necessary to enable users to
evaluate the likelihood of an enterprise meeting its cash flow obligations; and
o unusual events — disclose whatever is necessary for users to understand the
financial statements and changes from prior periods.

The PE GAAP standards would be effective for annual financial statements relating to
fiscal years beginning on or after January 1, 2011.

The AcSB plan was to issue the final standards by the end of 2009 so as to permit
early adopter the option of using the new standards for 2009 calendar year-end
financial statements.

As a final “check,” the AcSB intends to review the overall effectiveness of the
proposed standards for private enterprises and reassess its strategy for this sector
after the standards have been in place for approximately five years.
Significant Changes Contemplated for Private Enterprise GAAP
Financial instruments

All aspects of accounting for financial instruments are set out in a single proposed
standard, section 3856, Financial Instruments.

Most of the accounting choices that are available in the current set of financial
instruments standards will be eliminated.

Financial assets and liabilities, with two exceptions, will be measured at cost or
amortized cost.

Derivatives that are not part of a designated hedging relationship will be measured,
both initially and subsequently, at fair value.
10

Investments in equity securities for which prices are quoted in an active market will
be measured, both initially and subsequently, at their quoted market value.

Subsequent changes in measurement of such financial instruments will be reported in
net income.

Enterprises have the option of ascribing a nil value to the conversion option in
convertible debt — in essence permitting convertible debt to be presented entirely as
a liability.

Certain preferred shares issued as part of tax planning arrangements that would
otherwise be classified as a liability will be classified as equity.

Hedging remains optional.

Hedge accounting will follow an accrual-based model, and will be permitted only when
the critical terms of the hedging instrument match those of the hedged item.

Enterprises will not be required to assess hedge effectiveness.

However, an enterprise will be required to determine that the critical terms of the two
components of the hedging arrangement continue to match.

A single impairment model will apply to all financial assets.

Impairment losses are to be recognized immediately in net income.

An impairment loss will be recognized when there are indicators of impairment
and the carrying amount of an asset at the assessment date exceeds the highest of:
o the present value of the future cash flows expected from holding the asset;
o the net amount that could be realized
from selling the asset; and
o the net amount that could be realized from exercising any rights to collateral.

Significant assets are to be assessed individually, but assets that are individually
insignificant may be assessed in groups on the basis of similar credit risk
characteristics.

Impairment losses may be reversed if, at a subsequent reporting date, there is a
change in the circumstances that previously indicated impairment.

However, the carrying amount of the asset can be increased only to an amount no
greater than it would have been had the impairment not occurred.
11
Employee Future Benefits

Section 3461, Employee Future Benefits, will permit an enterprise to apply a
simplified approach to account for its defined benefit plans for which the only
members are the controlling owner, his or her spouse, or both.

Many, but not all, “individual pension plans” will qualify for this simplified approach.

The proposed approach will use the actuarial valuation prepared for funding purposes
to measure the obligation and recognize all actuarial gains and losses and past
service costs in income when they occur.

All other types of employee future benefit plans will apply the recognition and
measurement requirements in existing section 3461.
Asset Retirement Obligations

Section 3110, Asset Retirement Obligations, will use a different measurement
approach (taken from IAS 37, Provisions, Contingent Liabilities and Contingent
Assets), which should be easier to apply.

Accordingly, an asset retirement obligation will be measured at “the best estimate of
the expenditure required to settle the present obligation at the end of the reporting
period.”

The best estimate is to be based on management’s experience and judgment and
take into account the probabilities of different outcomes, as well as the time value of
money.
Internally Developed Intangible Assets

Section 3064, Goodwill and Intangible Assets, will allow an enterprise an accounting
policy choice: either capitalize qualifying development costs incurred on internally
developed intangible assets that meet the criteria set out in existing section 3064, or
expense them as incurred.

Section 3064 will retain the current differential reporting requirement that enterprises
test goodwill and other intangible assets not subject to amortization on an “events
and circumstances basis.”

In addition, the methodology for impairment testing and write-downs will be
simplified.

Finally, testing will be done at the reporting unit level, removing the need to allocate
fair values to individual assets.
12

It can be argued that all the changes proposed for section 3064 are positive and
should reduce some of the burden faced by private enterprises.
Stock-based Compensation

Section 3870, Stock-based Compensation and Other Stock-based Payments, will
replace the minimum value method (that is, the ability to ignore volatility in
measuring stock based compensation) with the calculated value method.

Under the calculated value method, an enterprise will estimate the volatility that is
needed as an input to a stock option pricing model, based on an appropriate sector
index.

Note that the use of this value does not address the more fundamental question of
how meaningful is the derived value for the stock options.
Income taxes

Section 3465, Income Taxes, will offer an accounting policy choice between the taxes
payable method and the future income taxes method.

Basically, the requirements substantially the same as currently permitted under
differential reporting.

Note that this may change once the IASB ED on Income Tax is finalized.
Investments

Section 1590, Subsidiaries, will offer an accounting policy choice, allowing an
enterprise to account for subsidiaries either by consolidating them, or using either the
cost or equity method.

Section 3051, Investments, will offer an accounting policy choice, allowing an
enterprise to account for significantly influenced investees using either the cost or
equity method.

Section 3055, Interests in Joint Ventures, will offer an accounting policy choice,
allowing an enterprise to account for interests in joint ventures using one of
proportionate consolidation, the cost method or the equity method.

As with income taxes, the joint venture GAAP might change once section 3056 is
finalized.
Business Combinations

The ED proposes that Sections 1582, Business Combinations, 1601, Consolidated
Financial Statements, and 1602, Non-controlling Interests, all apply with an
immediate effective date.
13

This approach is interesting in that publicly accountable enterprises do not have to
apply these sections until at least 2011.

The AcSB concluded that a number of current sections and Guidelines are not
generally relevant to private enterprises — the following will be specifically excluded:
o Section 1300, Differential Reporting
o Section 1701, Segment Disclosures
o Section 1751, Interim Financial Statements
o Section 3480, Extraordinary Items
o Section 3500, Earnings per Share
o Section 4100, Pension Plans
o Section 4211, Life Insurance Enterprises — Specific Items
o Section 4250, Future-Oriented Financial Information
o AcG-3, Financial Reporting by Property and Casualty Insurance Companies
o AcG-7, The Management Report
o AcG-8, Actuarial Liabilities of Life Insurance Enterprises — Disclosure
o AcG-9, Financial Reporting by Life Insurance Enterprises
o AcG-11, Enterprises in the Development Stage

In addition, section 3856 would supersede the following Handbook sections:
o 1530, Comprehensive Income;
o 1535, Capital Disclosures;
o 3020, Accounts and Notes Receivable;
o 3025, Impaired loans;
o 3210, Long-term Debt;
o 3855, Financial Instruments —Recognition and Measurement;
o 3861, Financial Instruments — Disclosure and Presentation;
o 3862, Financial Instruments — Disclosures;
14
o 3863, Financial instruments — Presentation;
o 3865, Hedges;
o AcG-2, Franchise Fee Revenue; and
o AcG-12, Transfers of Receivables.

The exposure draft contains a new section, Section 1500, First-time Adoption, which
sets out specific transitional provisions for first-time adoption of the new private
enterprise standards.

The objective of section 1500 is to ensure that a private enterprise’s first financial
statements prepared in accordance with the new standards contain high-quality
information that:
o is transparent for users and comparable over all periods presented;
o provides a suitable starting point for accounting under the new standards; and
o can be generated at a cost that does not exceed the benefits to financial statement
users.

In general, Section 1500 will require private enterprises to apply the private
enterprise standards retrospectively.

However, section 1500 provides different transitional provisions for specific standards
when the AcSB believes the cost of retrospective application would exceed the
benefit.

Refer to paragraph 1500.09 for the “shopping list. Furthermore, section 1500 will
prohibit retrospective application of some aspects of standards.

Refer to paragraphs 1500.25 to .32.

Section 1500 will require private enterprises to:
o recognize all assets and liabilities whose recognition is required by the standards;
o not recognize items as assets or liabilities if the standards do not permit such
recognition; and
o reclassify items that it recognized previously as one type of asset, liability or
component of equity, but are recognized as a different type of asset, liability or
component of equity under the standards.

The exposure draft contains a new section, Section 1521, Balance Sheet, which sets
out the form and content of a private enterprise’s balance sheet.
15

The section will complement section 1520, Income Statement.

Like section 1520 which deals with income statement issues, the section is a
“shopping list” for the required components of the balance sheet, with crossreferences to the appropriate sections in the Handbook.

Basically, section 1521 is similar to parts of IAS 1, Presentation of Financial
Statements, in that it sets out how the financial statements are to be presented.
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CICA Handbook  Accounting  Part III  Accounting
Standards for Not For Profit Organizations
Section 4400  4470 Not for Profit Organizations
(Substantial changes Feb. 2009; changes Jan. 2010)
Background

In August 2007, the AcSB issued an omnibus exposure draft of proposed
amendments to, and a new section for, the not-for-profit part of the Handbook.

The amendments represent the first major revisions to the NFP material since the
4400 series of sections was issued in 1996.

Since 1996, there have been revisions to many of the Handbook sections on which
parts of the 4400 series were based; however, not all the amendments have been
carried forward to the corresponding section in the 4400 series.

The proposals in the exposure draft fall into three categories: new requirements,
changes to existing requirements, and conforming and clarifying amendments.

The objective of the proposals is to improve financial reporting by NFPs in the context
of current Canadian GAAP prior to the adoption of IFRSs as GAAP for publicly
accountable profit-oriented enterprises.

The first amendment was to provide additional guidance to clarify the application of
section 1100.

In particular, specific reference to Accounting Guidelines and EIC Abstracts as well as
other primary sources of GAAP in the Introduction to Accounting Recommendations
that Apply Only to Not-for-Profit Organizations was added to assist NFPs in applying
section 1100.
16

Next, amendments to the Reporting of internally restricted net assets and net assets
invested in capital assets were made:
o section 4400 now describes the different treatment accorded internal and external
restrictions on net assets in general, rather than on net assets invested in capital
assets, specifically.
o An NFP reporting internally restricted amounts will now be required to disclose
what these amounts represent and how they were determined, including the
extent to which related debt has been taken into account.

Third, amendments related to the reporting gross amounts of revenues and expenses
were made:
o Paragraph 4400.37 used to state that “revenues and expenses should be disclosed
at their gross amounts,” but the material that followed tended to undermine that
principle.
o The proposals amend the existing language to make clear the objective of
paragraph 4400.37.

With respect to the Statement of Cash Flows, amendments to section 4400 will
require NFPs to apply section 1540. As a result, NFPs will no longer be permitted to
group cash flows from financing and investing activities.

Changes related to Interim financial statements were also made.

Specifically, proposed amendments to section 4400 made section 1751 applicable to
the relatively rare situations where an NFP is required to prepare interim financial
statements in accordance with GAAP.

In order to clarify requirements related to capitalization, amortization, and writedown of capital assets, amendments to section 4430 stipulate that an NFP that
chooses to recognize capital assets must subsequently depreciate them and assess
them for impairment.

A conforming amendment to section 4460 would result in paragraph 4460.02
conforming with paragraph 3840.02 in respect of employee future benefits.

Finally, the disclosure of allocated fundraising and general support costs would be
expanded and reflected in a new Handbook section.

Section 4470 requires NFPs that are making allocations of general support and
fundraising costs to other functions to disclose:
o the policies adopted for the allocation of expenses among functions
o the nature of the expenses being allocated
17
o the basis on which such allocations have been made
o the functions to which they have been allocated.

Furthermore, the allocations that are to be disclosed are those made after individual
expenses have been attributed among the functions to which they relate and all of
the expenses of a function have been accumulated within that function.

In June 2008, the AcSB approved all the amendments to the standards in the 4400
series of Handbook sections proposed in the omnibus exposure draft, with one
exception.

Amendments to section 4450 would have required that all assets controlled directly or
indirectly by an NFP, and all obligations to which those assets are subject, be
recognized in the NFPs statement of financial position

Specifically, section 4450 would require all controlled entities to be consolidated.

The changes would eliminate the current consolidation exemption available when an
NFP has a large number of individually immaterial controlled organizations

The AcSB did not proceed with proposed amendments to section 4450, pending the
outcome of its deliberations on the future basis for setting standards for the not-forprofit sector.

All of the other amendments proposed in the August 2007 exposure draft were
approved with no significant changes.
Effective Date

The revisions apply to interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2009.

Given that a private enterprise will not be required to apply the current financial
instruments standards, on October 15, 2008, the AcSB decided to alter the
requirements for not-for-profit organizations also.

Not-for-profit organizations may defer adoption of sections 3862 and 3863, until
interim and annual financial statements relating to fiscal years beginning on or after
October 1, 2008.

In the meantime, they would continue to apply the pre-section 3861 set of standards
for private enterprises.

This decision recognizes that many not-for-profit organizations might not yet have
adopted Sections 3862 and 3863 and, subject to the outcome of the AcSB’s
forthcoming consultations on future directions in setting standards for the NFP sector,
may be in a position to apply the proposed set of standards for private enterprises.
18
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CICA Handbook  Accounting  Part V  Accounting
Standards
Section 1000 Financial Statement Concepts (Internally
Developed Intangible Assets)
(Substantial changes Feb. 2009; minor changes Jan. 2010)
Background

In December 2005, the AcSB issued an exposure draft to modify sections 1000 and
3062.

The proposed changes reinforced the principle-based approach to the recognition of
costs as an asset in accordance with section 1000. The objective was to eliminate the
practice whereby items were recognized as assets even though they did not meet the
definition and recognition criteria in section 1000.

To accomplish these objectives, the AcSB intended to delete paragraphs 1000.26 and
1000.51, to remove any ambiguity about the rationale for the recognition of assets.

The removal of paragraph 1000.51 turned out to be quite controversial — it
essentially removed the matching principle from the conceptual framework!

In addition, guidance was to be added to section 3062 (replaced by section 3064),
regarding the recognition of internally developed intangible assets not addressed by
other Handbook sections.

Specifically, section 3062 would define an intangible asset as “… an asset other than
goodwill or a financial asset (as defined in section 3055) that lacks physical
substance.”

It is this second change that was most important — no longer would it be necessary
for an intangible to be acquired in order to be recognized in the financial statements.

The criteria for recognition of an internally generated intangible asset were essentially
the same as those for the deferral of development costs (see paragraph 3450.21).

An internally developed intangible asset should be recognized only when all of the
following criteria are met:
o the intangible asset is clearly defined and its cost can be reliably identified and
measured;
19
o the technical feasibility of producing, marketing or using the intangible asset has
been established;
o the management of the enterprise has both the intention and ability to produce,
market or use the intangible asset;
o adequate technical, financial and other resources exist, or are expected to be
available, to complete the development and permit the use or sale of the
intangible asset; and
o the management of the enterprise can demonstrate that the intangible asset will
generate probable future economic benefits by demonstrating, among other
things, the existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset.

As a result of these changes, Canadian practice was to have been aligned with
international practice with respect to the accounting treatment of start-up and similar
costs.

However, comments received required that the AcSB issue a re-exposure draft in
early third quarter of 2007.

The re-ED maintained much of the original intent, but it recognized that redundancy
would occur and proposed to alleviate that issue.

The main changes from the 2005 ED related to the incorporation of guidance directly
from current IFRSs and the related withdrawal of section 3450.

Section 1000 changes include removal of material potentially permitting the
recognition of assets that would not otherwise meet the definition of an asset or the
recognition criteria.

As well, guidance from the IASB Framework for the Preparation and Presentation of
Financial Statements has been added to clarify the distinction between assets and
expenses.

Section 3064 includes guidance from IAS 38, Intangible Assets, on the definition of an
intangible asset and the recognition of internally generated intangible assets, and the
“transfer” of material related to section 3450 into section 3064.

See Section 3064 for more information.
Effective Date

The changes to section 1000 and section 3064 are effective for fiscal years beginning
on or after October 1, 2008.
20
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Section 1400 General Standards of Financial Statement
Presentation
(Minor changes Feb. 2009)
Background

In October 2003, section 1400 was released in conjunction with section 1100. It
replaced the existing section 1500 of the same name. Sections 1100 and 1400 were
effective for fiscal years beginning on or after October 1, 2003.
Going Concern Changes — June 2007

As of June 1, 2007, neither Canadian nor US GAAP addressed management’s
responsibility when there is substantial doubt about an entity’s ability to continue as a
going concern.

On the other hand, GAAS in both Canada and the US does deal with going concern
issues, although not in the same manner.

In Canada, the project resembled the Cheshire cat from Lewis Carroll’s novels — now
you see it, now you don’t.

Beginning in March 2004, the AcSB consulted with the AASB’s Going Concern Task
Force to assess the going concern guidance found in IAS 1.

Then, in December 2005, the AcSB decided to discontinue the project, as it believed
amendments were not warranted at that time.

In May 2006, the AcSB reconsidered and issued an exposure draft proposing to adopt
paragraphs 23 and 24 from IAS 1 into Canadian GAAP. Given that IAS 1 guidance is
followed in US practice — specifically through AICPA AU Section 341, The Auditor’s
Consideration of an Entity’s Ability to Continue as a Going Concern — it was not
surprising that the AcSB was convinced to reinstitute the project.

Sections 23 and 24 read as follows:
23. When preparing financial statements, management shall make an assessment of
an entity’s ability to continue as a going concern. Financial statements shall be
prepared on a going concern basis unless management either intends to liquidate the
entity or to cease trading, or has no realistic alternative but to do so. When
management is aware, …, of material uncertainties related to events or conditions
that may cast significant doubt upon the entity’s ability to continue as a going
concern, those uncertainties shall be disclosed. When financial statements are not
prepared on a going concern basis, that fact shall be disclosed, together with the
21
basis on which the financial statements are prepared and the reason why the entity is
not regarded as a going concern.
24. In assessing whether the going concern assumption is appropriate, management
takes into account all available information about the future, which is at least, but is
not limited to, twelve months from the balance sheet date. The degree of
consideration depends on the facts in each case. When an entity has a history of
profitable operations and ready access to financial resources, a conclusion that the
going concern basis of accounting is appropriate may be reached without detailed
analysis. In other cases, management may need to consider a wide range of factors
relating to current and expected profitability, debt repayment schedules and potential
sources of replacement financing before it can satisfy itself that the going concern
basis is appropriate.

Given that IAS 1 guidance is followed in US practice — specifically through AICPA AU
Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going
Concern — it is not surprising the AcSB reinstituted the project.

The key issues remained the same:
o What is management’s responsibility to assess the appropriateness of the going
concern assumption;
o Under what circumstances would the going concern assumption not be
appropriate; and
o If the going concern assumption is not appropriate, what financial statement
disclosures should be made.
Summary of Changes — June 2007

In June 2007, section 1400 was amended as follows:
o Management is required to make an assessment of an entity’s ability to continue
as a going concern;
o The assessment must take into account all available information about the future,
which is at least, but is not limited to, twelve months from the balance sheet date;
o Financial statements must be prepared on a going concern basis unless
management intends either to liquidate the entity, to cease trading or cease
operations, or has no realistic alternative but to do so;
o When financial statements are not prepared on a going concern basis, that fact
must be disclosed, together with the basis on which the financial statements are
prepared and the reason why the entity is not regarded as a going concern;
22
o disclosure is required of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going concern.
Application (entities)

The requirements apply to both profit-oriented and not-for-profit organizations.
Effective date

The requirements are effective for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2008.
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Section 1506 Accounting Changes
Background

In September 2003, the AcSB issued an exposure draft of proposed amendments to
section 1506 which would converge the section with equivalent amendments to U.S.
GAAP and with existing international accounting standards.

The AcSB decided to wait and finalize a harmonized standard subsequent to the
expected completion of a similar project to amend U.S. GAAP.

Finally, the AcSB released the updated section in July 2006.
Summary of Changes

Under the revised section, a change in accounting policy could be made only when it
is required by a primary source of GAAP or results in a reliable and more relevant
presentation in the financial statements.

Further, unless the primary source of GAAP contains specific transitional provisions, a
change in accounting policy would have to be applied retroactively.

An exception exists if it is impractical to apply the change retroactively. The notion of
impracticability is defined in the section.

Section 1506 requires that material prior-period errors be corrected retroactively.

New disclosures are required in respect of changes in accounting policies, changes in
accounting estimates, and correction of errors.

In other respects, the section remains the same — there are no changes to the
underlying notions of what constitutes an accounting change, what constitutes a
prior-period adjustment, or what is meant by an accounting error.
23
Effective Date

The revisions apply to interim and annual financial statements relating to fiscal years
beginning on or after January 1, 2007.
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Section 1530 Comprehensive income
(Minor changes Feb. 2009)
See under section 3855 for the history of changes to the topic of Financial Instruments.
Background

In April 2005, the AcSB released three new Handbook sections:
o Section 3855 Financial Instruments — Recognition and Measurement
o Section 3865 Hedges
o Section 1530 Comprehensive Income

An integral part of the FASB standards on recognition and measurement of financial
instruments is the ability to present certain gains and losses outside net income, in
other comprehensive income.

Accordingly, it was necessary to create this same ability within Canadian generally
accepted accounting principles.
Application (entities)

Although the requirements apply to both profit-oriented and not-for-profit
organizations, section 1530 itself does not apply to the latter organizations.

Instead, equivalent requirements were added to section 4400, using terminology
appropriate for not-for-profit organizations.

In substance, the requirements are the same.
Summary of Changes

Section 1530 defines comprehensive income as the change in the value of net assets
that is not due to owner activities, that is, investments or distributions.

Further, section 1530 uses the term other comprehensive income to refer to
revenues, expenses, gains, and losses that are reported outside of net income.
24

The Statement of Comprehensive Income must have the same prominence as other
financial statements that constitute a complete set of financial statements, in both
annual and interim financial statements.

The Statement of Comprehensive Income comprises:
o net income for the period;
o each component of revenue, expense, gain, or loss that is required by primary
sources of GAAP to be recognized in other comprehensive income; and
o a total.

An enterprise must disclose separately adjustments to reclassify amounts of revenue,
expense, gain, or loss previously recognized in other comprehensive income to the
income statement, as well as the amount of income tax expense or benefit allocated
to each component of other comprehensive income.

Exchange gains and losses arising from the translation of the financial statements of a
self-sustaining foreign operation, previously recognized in a separate component of
shareholders’ equity (as per section 1650), are now recognized in a separate
component of other comprehensive income.

When comparative statements are provided for earlier periods, section 1530 requires
restatements only for the following items:
o foreign currency translation of self-sustaining foreign operations;
o appraisal increase credits; and
o donations from non-owners, unless impractical.
Effective Date

As part of the financial instruments “package,” this section was to apply to interim
and annual financial statements relating to years commencing on or after October 1,
2006. CICA Handbook Release 39 of June 2006 deferred implementation to interim
and annual financial statements relating to fiscal years beginning on or after October
1, 2007. Deferral does not apply to non-for-profit organizations.
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25
Section 1535 Capital Disclosures
(Substantial changes Feb. 2009; minor changes 2010)
See sections 3855 and 3862 for a detailed history of changes to Financial Instruments.
Background

Section 1535 requires disclosures about capital, and is harmonized with the
amendment to IAS 1 for capital disclosures.

It applies to all entities, irrespective of whether they have financial instruments.

This section requires:
o the disclosure of qualitative information regarding an entity’s objectives, policies
and processes for managing capital.
o
an entity must disclose quantitative data about what it regards as capital.
o An entity must disclose whether it has complied with any externally imposed
capital requirements and, if not, the consequences of such non-compliance.

The requirements were effective for fiscal periods beginning on or after October 1,
2007.

Subsequent to implementation, and as with section 3862, the AcSB concluded that
relief for non-publicly accountable enterprises was warranted.

It was acknowledged that most non-publicly accountable enterprises do not have
complex capital structures requiring active management.

There was also some question as to whether the value of the information required by
section 1535 was greater than the costs of preparing it.

In July 2008, the AcSB amended section 1535 to limit a non-publicly accountable
enterprise with externally imposed capital requirements to disclose only the
nature of its capital requirements and how it manages those requirements, along with
information about compliance with those capital requirements.

A non-publicly accountable enterprise without externally imposed capital
requirements would be exempt from the requirements of section 1535.
Effective Date

This change was effective for fiscal years beginning on or after August 1, 2008, with
earlier adoption permitted.
26
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Section 1582 Business Combinations
(Substantial changes Feb. 2009; minor changes Jan. 2010)
Background

In August 2005, the AcSB issued an exposure draft proposing to replace section 1581
with section 1582.

The changes were converged with proposals issued in June 2005 by the IASB and the
FASB.

Harmonization would enable cross-border and/or international compliance.
Application

Section 1582 would not apply to the following:
o
the formation of joint ventures
o
combinations involving only enterprises or businesses under common control
o
combinations between not-for-profit organizations or the acquisition of a forprofit business by a not-for-profit organization.
Summary of Proposed Changes

The ED proposals represented a significant change in the way we account for business
combinations.

The proposals require an acquirer to recognize an acquired business at its fair value
as at the acquisition date rather than at its cost.

Moreover, the acquirer would have to measure the fair value of the acquiree, as a
whole, as of the acquisition date.

Furthermore, the acquirer will have to measure and recognize the individual
assets acquired and the liabilities assumed at their fair values at the acquisition
date, with limited exceptions.

The proposals would apply even if the acquirer obtains control of a business by
acquiring less than 100% of the equity interests in the acquiree.

The underlying presumption is that the acquirer obtains control of the acquiree at the
acquisition date and therefore becomes responsible and accountable for all of the
27
acquiree’s assets, liabilities, and activities, regardless of the percentage of
its ownership in the acquiree.

One of the limited exceptions cited earlier relates to goodwill.

In general, goodwill is to be measured and recognized as the excess of the fair value
of the acquiree, as a whole, over the net amount of the recognized identifiable
assets acquired and liabilities assumed.

Without evidence to the contrary, the fair value of the consideration would be used
to determine the fair value of the acquired business.

Equity instruments issued as part of the purchase consideration are measured at fair
value on the acquisition date rather than on the date the terms of the business
combination are agreed to and announced.

Other exceptions related to the following:
o long-lived assets (or a disposal group) classified as held for sale
o future income-tax assets or liabilities
o assets or liabilities related to the acquiree’s employee-benefit plans

These would be measured in accordance with the specific generally accepted
accounting principles called for by their Handbook sections.

With respect to income taxes:
o The acquirer will have to exclude any changes in the amount of its future incometax benefits that are recognizable as a result of that business combination.
o Section 3465 will be amended to require that such changes be recognized either in
income from continuing operations in the period of the combination, or directly to
contributed surplus, depending on the circumstances.

A final exception relates to leases:
o If the acquiree is a lessee to an operating lease, no asset or related liability would
be recognized — provided the lease is at market terms.

Another major change relates to negative goodwill:
o Section 1581 does not provide for the recognition of negative goodwill.
o If a business combination is effected as a bargain purchase, section 1581 requires
that the excess of fair value over the consideration paid be first offset against nonmonetary assets, and then, if necessary, against monetary assets.
28
o Under section 1582, the acquirer will account for that excess by reducing
goodwill until the goodwill related to that business combination is reduced to
zero. Then, recognize any remaining excess in income.

Another aspect of the proposed revisions relates to the required reporting subsequent
to acquisition. These changes are covered in under section 1600.

Although the IASB and the FASB had agreed on the principles underlying accounting for noncontrolling interests, they had not agreed on specific provisions.
Definitions

Besides the preceding changes, section 1582 incorporated some significant definitional
changes:
o The business must contain all of the inputs and processes necessary for it to
continue to conduct normal operations after the transferred set is separated from
the transferor, particularly the ability to sustain a revenue stream.
o Section 1582 defines a business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return in
the form of dividends, lower costs, or other economic benefits directly to investors
or other owners, members or participants.
o Under section 1581, control was not specifically cited as a determinant of the
acquirer; instead, specific factors are identified.
o Section 1582 states that the acquirer is the entity that obtains control of the
acquiree, using the definition of control in IAS 27.
o Only if it is not clear which of the combining entities is the acquirer would the
section 1581 factors be considered to determine the acquirer.
o See also sections 1601 and 1602, Non-controlling Interests
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Section 1601 Consolidated Financial Statement and
Section 1602 Non-controlling Interests
Background

The 2005 Business Combinations exposure draft indicated that the AcSB had delayed proposing
changes to section 1600 pending finalization of the international standard, since the eventual
release would likely influence the details of a Canadian standard on non-controlling interests.
29

In January 2008, the IASB issued a revised IFRS 3, Business Combinations, together with
amended IAS 27, Consolidated and Separate Financial Statements.

The IASB’s standards became effective for fiscal years beginning on or after
July 1, 2009.

In January 2008, the AcSB decided to split section 1600 into two new sections.

The AcSB decided to defer the release of section 1582, which incorporated the provisions of the
revised IFRS 3, so that it could be issued concurrently with sections 1601 and 1602.

In April 2008, the AcSB released its exposure draft for Section 1602 based on the IASB’s
amended IAS 27.

However, the AcSB decided against incorporating all of IAS 27 into Canadian GAAP now
because it did want to change current standards which differ from IFRSs.

Doing so would result in a mixture of new and old requirements which would only have to be
changed again in 2011:
o IAS 27 includes a definition of control that differs from that in section 1590, and it
could result in changing which entities are required to be consolidated.
o SIC-12, Consolidation — Special Purpose Entities, is not the same as AcG-15,
Consolidation of Variable Interest Entities.
o IAS 27 does not include guidance on investment companies that is comparable to
AcG-18, Investment Companies.

In deciding not to adopt all of IAS 27 now, those requirements of section 1600 that
do not involve non-controlling interests can remain unchanged in a proposed new
section 1601.

By separating the guidance for non-controlling interests from that for other aspects of
consolidation, it was easier to distinguish the guidance that is new from the guidance
that is unchanged.

Section 1601 carried forward the requirements for preparing consolidated financial
statements after acquisition and some aspects of consolidation at the date of a
business combination but remove the existing guidance on non-controlling interests.

Most of section 1600’s provisions on preparing consolidated financial statements at
the date of a business combination were replaced by guidance in section 1582.

A new section 1602 entitled Non-controlling interests (NCIs) was issued to provide
guidance on accounting for non-controlling interests subsequent to a business
combination.
30

Lastly, the AcSB intends to delete all illustrative examples from section 1600.

It believed that the examples available in both IFRSs and US GAAP would be
appropriate in applying Canadian GAAP.

Section 1602 is the same as IAS 27 with respect to non-controlling interests other
than the disclosure requirements.

The AcSB decided against including the disclosure requirements of IAS 27 in section
1602 as they are similar in nature and extent to those in existing Handbook sections.

The key principles for the revisions are:
o NCIs would be reported as a separate component of equity.
o Changes in ownership interests in a subsidiary that do not result in a loss of control
would be accounted for as capital transactions.
o On loss of control, any retained interest would be re-measured to fair value on the
date control is lost with the gain or loss recognized in income.
o Net income or loss and each component of other comprehensive income would be
attributed to the controlling interests and NCI, based on relative ownership
interests or other contractual arrangements.
o This would include circumstances when the NCI’s share of losses exceeds its
interest in the equity of the subsidiary.
o The consolidated income statement would show the consolidated net income and
comprehensive income and the amounts attributable to the controlling interest
and to the NCI.
Effective Date

The IASB’s standards became for fiscal years beginning on or after July 1, 2009.

In the ED, the AcSB stated that sections 1582, 1601, and 1602 will be mandatory for
fiscal years beginning on or after January 1, 2011 with earlier adoption permitted.

The three new Sections would have to be implemented concurrently.

Balances relating to business combinations completed prior to the implementation
date are to presented in accordance with sections 1601 and 1602 but are not to be
re-measured until an entity adopts IFRSs for the first time.

In January 2009, the Handbook was updated (Release 53) finalizing these changes.
31

Section 1581 was moved to the Superseded section of the Handbook to provide
guidance until the three sections became effective.

This is one of the few times that the Handbook specified that a standard is to be
applied prospectively:
o The sections apply to business combinations for which the acquisition date is on or
after the beginning of the first annual period beginning on or after January 1,
2011.
o Earlier adoption is permitted.
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Section 1651 Foreign Currency Translation
Summary of Changes

Section 1650 was updated and replaced by section 1651.

Most of the changes were due to the introduction of sections 3855 and 3865.

These changes are related to exceptions that are no longer necessary, crossreferences that have changed, or terminology that has changed.

Other changes were due to the introduction of section 1530:
o
Previously, exchange gains and losses arising from the translation of the financial
statements of self-sustaining operations were to be deferred and included as a
separate component of shareholders’ equity.
o
Now, that component is part of other comprehensive income.
Effective Date

As part of the financial instruments “package,” this section was to apply to interim
and annual financial statements relating to years commencing on or after October 1,
2006. CICA Handbook Release 39 of June 2006 deferred implementation to interim
and annual financial statements relating to fiscal years beginning on or after October
1, 2007. Deferral does not apply to non-for-profit organizations.
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Section 3031 Inventories
(Minor changes Feb. 2009)
32
Background

In June 2006, the AcSB issued an exposure draft to replace current section 3030.

The revised section 3031 provides more explicit guidance on the measurement and
disclosure requirements for inventories than did section 3030

It is the first section to reflect the AcSB’s strategic goal of adopting IASB standards
for publicly accountable enterprises.

With the exception of additional material addressing not-for-profit entities (which
neither the IASB nor the FASB deal with), section 3031 is fully converged with IAS 2
and FASB 151.

In keeping with the move to IFRS, the paragraph numbering in section 3031 has been
aligned with that of IAS 2, “Inventories.”
o When a particular paragraph in IAS 2 has not been adopted, it is identified as "[Not
used]”
o When a paragraph or sub-paragraph not in IAS 2 has been added, the paragraph
or sub-paragraph is numbered so as to maintain this symmetry (for example, 08A,
09A, 39A, 39B, 39C, and so on)
Application (entities)

Section 3031 applies to all inventories of all entities, including not-for-profit
organizations, except the following:
o work in progress arising under construction contracts, including directly related
service contracts
o financial instruments
o contributions not recognized by not-for-profit organizations in accordance with
paragraph 4410.16

There is also a scope exemption from the measurement (but not the disclosure)
requirements for agricultural inventories up to and including the point of harvest.

The inventories measurement exemption also applies to the following:
o producers of agricultural and forest products
o agricultural produce after harvest
o minerals and mineral products to the extent that they are measured at net
realizable value in accordance with well-established practices in those industries
33
o
commodity broker-traders who measure their inventories at fair value less costs
to sell
Summary of Changes

Section 3031 requires the following:
o measurement of inventories at the lower of cost and net realizable value —
rather than the unspecified term “market”
o allocation of fixed production overhead based on normal capacity levels, with
unallocated overhead expensed as incurred
o the cost of inventories of items that are not ordinarily interchangeable, and goods
or services produced and segregated for specific projects, is to be assigned by
specific identification of their individual costs
o consistent use (by type of inventory with similar nature and use) of either FIFO or
weighted average cost formula to measure the cost of other inventories. LIFO
has been proscribed
o reversal of previous write-downs to net realizable value when there is a
subsequent increase in the value of inventories
o disclosure of the accounting policies used, carrying amounts, amounts recognized
as an expense, write-downs, and the amount of any reversal of any write-downs
recognized as a reduction in expenses

There are no differential reporting exemptions.
Effective Date

Section 3031 is effective for interim and annual financial statements for fiscal years
beginning on or after January 1, 2008, with earlier application encouraged.

Section 3031 requires that an entity apply the recommendations either:
o to the opening inventory for the period and adjust opening retained earnings by
the difference in the measurement of opening inventory (prior periods are not
restated); or
o retrospectively and restate prior periods in accordance with section 1506.
Consequential Amendments

Paragraph 1520.03(r) inserted, which added “the amount of inventories recognized as
an expense during the period” to the required income statement disclosures.
34

Paragraph 1520.04(c) deleted to remove “the amount of cost of goods sold” from the
desirable income statement disclosures.

Paragraphs 1751.18 and 1751.26 amended in Interim financial statements to remove
references to the LIFO method.

Paragraph 3061.04, Property, plant and equipment amended to include guidance on
the accounting for spare parts and servicing equipment

Paragraph 3062.03, Goodwill and other intangible assets amended to exempt from
that standard, intangible assets that are within the scope of section 3031. Note that
section 3062 has now been replaced by section 3064; however, paragraph 3064.03
retains the scope exclusion from section 3062.
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Section 3051 Investments
Summary of Changes

Section 3051 represents a mix of old and new recommendations.

The key factor is the nature of the investment — if it is a financial instrument, it falls
under the aegis of section 3855

The changes also reflect the change in terminology resulting from the implementation
of section 3855.

For example, there are no longer “portfolio” investments, “temporary” investments,
or “long-term” investments.

There are just “investments.”

A substantive change relates to what constitutes an other-than-temporary loss in the
value of an investment.

Previously, section 3050 afforded unclear guidance as to what was meant by an
other-than-temporary loss.

Now, a significant or prolonged decline in the fair value of an investment below its
carrying value is evidence of an other-than-temporary loss in value of an investment.
Effective Date

As part of the financial instruments “package,” this section was to apply to interim
and annual financial statements relating to years commencing on or after October 1,
2006. CICA Handbook Release 39 of June 2006 deferred implementation to interim
35
and annual financial statements relating to fiscal years beginning on or after October
1, 2007. Deferral does not apply to non-for-profit organizations.
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Section 3055 Interests in Joint Ventures
Summary of Changes

Implementation of amendments to section 3831 required amendments to section
3055, Joint ventures:
o When the venturers are unrelated, transfers will be measured at fair value since
there is a significant change in cash flow configuration.
o When the venturers are related, transfers will be deemed related party
transactions.

Section 3831 applies to all non-monetary transactions initiated in periods beginning
on or after January 1, 2006.
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Section 3056 Joint Arrangements
(Substantial changes Feb. 2009; additions Jan. 2010)
Background

In October 2007, the IASB published ED 9 Joint Arrangements, to replace IAS 31.

ED 9 is part of the process to bring about the convergence of IFRS and US GAAP.

In November 2007, the AcSB issued a corresponding ED to amend section 3055.

As part of the adoption of the proposed IFRS in Canada prior to the complete
changeover to IFRSs, the AcSB proposed retaining the guidance for joint venture
transactions in paragraphs 3055.26-.40 by adding it to paragraph 27 of ED 9, since
similar guidance is not contained within ED 9.

Likewise, the AcSB has decided not to make other conforming changes to existing
Canadian GAAP and, therefore, Canadian GAAP and IFRSs will differ in a minor way in
respect of joint arrangements until the complete changeover to IFRSs.
36

In other respects, the scope of section 3056 does not diverge from that of section
3055 — unanimous agreement is still required between the key parties that have the
power to make the financial and operating policy decisions for the joint arrangement.

The exposure draft carries forward modified versions of the three types of joint
arrangement identified in IAS 31.

For the first two types — Joint Operations and Joint Assets — the description of these
types and the accounting for them is consistent with Jointly Controlled Operations and
Jointly Controlled Assets in IAS 31.

The third type of joint arrangement is a Joint Venture which is accounted for using
equity accounting — a major change from section 3055 — which previously required
proportionate consolidation for all types of joint ventures.

The underlying principle of both EDs is that the parties to a joint arrangement must
recognize their contractual rights and obligations arising from the arrangement.

Accordingly, the EDs focus on the recognition of assets and liabilities by the parties to
the joint arrangement.

Accounting for a right leads to the recognition of an asset, and accounting for an
obligation leads to the recognition of a liability.

Thus, a joint asset would be recognized when the party has exclusive rights to a
share of the asset and the economic benefits generated from that asset.

This approach is similar to the way both section 3065 and IAS 17 deal with leases:
the right to use an asset in a joint arrangement and the right to use an asset in
accordance with a lease contract.

There are two key changes proposed by the exposure draft:
o The first is the elimination of proportionate consolidation for a jointly controlled
entity.
o The second change is the introduction of a ‘dual approach’ to the accounting for
joint arrangements.

The elimination of proportionate consolidation will have a fundamental impact on the
income statement and balance sheet.

Under the equity method, entities will replace the line-by-line proportionate
consolidation of the income statement and balance sheet with a single net result and
a single net investment balance.
37

The IASB has justified the withdrawal of proportionate consolidation by arguing that
the method leads to recognition of assets that an entity does not control and liabilities
for which it has no obligations.

The AcSB ED makes no comment regarding this assertion — implicitly agreeing with
the IASB.

The dual approach will also significantly affect the manner in which joint
arrangements are addressed.

The dual approach takes the perspective that a single joint arrangement may contain
more than one type — for example, Joint Assets and a Joint Venture.

The party to such a joint arrangement accounts first for the assets and liabilities of
the Joint Assets arrangement and then uses a residual approach to equity
accounting for the Joint Venture part of the joint arrangement.

The dual approach reflects the IASB’s view that entities must separate transactions
into their components to properly understand their economic substance::
o For instance, the sale of goods and an associated service contract for those goods
requires that the sale and service components be accounted for separately, even if
they are part of the same contract.

However, a key weakness of the dual approach is the use of equity accounting for the
residual interest.

In fact, the use of equity accounting is a major problem with ED 9: under
proportionate consolidation, investors had a sense of what comprised the assets and
liabilities of the joint venture.

Under the equity method, investors will be presented a single line item representing
the net assets of the joint venture.

Investors will have to do the work to determine how the joint venture’s assets and
liabilities align with the venturer’s assets and liabilities.

How is this a step forward?

The AcSB intends for section 3056 to become effective as part of the complete
adoption of IFRSs.

Canadian entities would be permitted, but not required, to adopt the new standard
before then.

When the IASB publishes the new standard in final form, the AcSB would publish it as
a Handbook section with a deferred mandatory effective date and permit early
adoption.
38

At the April 2008 meeting, the IASB received a report summarizing the main
objections to the exposure draft:
o The changes introduced are too far reaching — many respondents believed that
the reference to “rights to use” an asset and the elimination of proportionate
consolidation require further research and should not be addressed in a short-term
project.

Many respondents objected to the removal of joint control from the definition of joint
assets and joint operations, arguing that doing so lessens the importance of joint
control and does not reflect the essence of these joint arrangements.

Accordingly, the Board did nothing for more than a year.

The ED was brought back to the IASB for consideration in May 2009.

The main stumbling block related to the definitions regarding “control.”

After much debate, the IASB agreed to modify the definitions contained in the ED

There would only be two types of joint arrangement (that is, “joint operations” and “joint
ventures”) instead of three, as stated in ED 9 (that is, “ joint operations,” “ joint assets,” “joint
ventures”).

The Board also modified the definition of “joint arrangement” to “agreements that establish the
terms by which two or more parties agree to undertake and jointly control an activity.”

The IASB also concluded that it was not was possible to define a rebuttable presumption that
would trigger a consistent and appropriate classification of whether a joint arrangement was a
joint operation or a joint venture (or whether it had elements of both).

However, it was agreed that joint arrangements not established through a separate
entity would be “joint operations.”

One aspect the Board did not address was the decision to proscribe proportionate
consolidation.

There was considerable opposition to this decision in the comment letters.

Notwithstanding, it is the IASB’s intention to release the final standard before the end
of 2009.
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Section 3064 Goodwill and Intangible Assets
(Material added Feb. 2009; minor changes Jan. 2010)
39
See also section 1000 for the history of the changes on this topic.
Background

Section 3064 changes include the inclusion of guidance from IAS 38, Intangible
Assets, on the definition of an intangible asset and the recognition of internally
generated intangible assets, and the “transfer” of material related to section 3450
into section 3064.

In particular, section 3064 now adopts IAS 38’s requirement that an intangible asset
meet key three criteria.

Specifically, an intangible asset is an identifiable, non-monetary asset without
physical substance.

An asset meets the identifiability criterion in the definition when it:
o is separable, i.e., capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, asset or liability; or
o arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligation.

For intangible assets acquired separately, or as part of a business combination, there
is a presumption that the criteria are met.

On the other hand, section 3064 (and IAS 38) takes the position that (almost) all
internally-generated intangible assets are to be expensed as incurred.

Section 3064 makes an exception for development expenditures, but imposes strict
conditions (paragraph 3064.40) on the recognition of such assets.

The conditions are the much the same as those that previously were found in
paragraph 3450.21.

Effectively, except for development expenditures, section 3064 prohibits the
recognition of internally generated intangibles.

Paragraph 3064.46 specifically states that internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognized
as intangible assets.

Paragraph 3064.47 notes that expenditures on internally generated items such as
brands, mastheads, etc. cannot be distinguished from the cost of developing the
business as a whole.
40

However, externally acquired items can be recognized as intangible assets since
they will meet the three recognition criteria cited earlier.

Section 3450: withdrawn, since assets developed as a result of research and
development activities would be included within the scope of Section 3064.
Effective Date

The changes to section 1000 and section 3064 are effective for fiscal years beginning
on or after October 1, 2008.
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Section 3251 Equity
Background

Section 3251 replaced section 3250, Surplus.

It established standards for the presentation of equity and changes in equity during
the reporting period.

The requirements of section 3251 are in addition to those in sections 1530, 3240, and
3260.
Summary of Changes

According to section 3251:
o
Equity is the residual interest in the assets of the enterprise after deducting all
of its liabilities.
o
Contributed surplus comprises amounts paid in by equity holders.
o
Retained earnings represents the accumulated balance of net undistributed
earnings of the entity, after taking into account refundable taxes and other
amounts that are supposed to be charged or credited to the account.
o
Accumulated other comprehensive income comprises the accumulated
balance of all components of other comprehensive income recognized in section
1530.

Section 3251 requires separate presentation of the various components giving rise to
changes in equity each period.

Likewise, it requires disclosure of the various components that comprise equity.
41

Compliance with statutory requirements regarding how certain items of equity are to
be designated does not override the basic classifications of the section.

In other respects, section 3251 retains the same requirements as section 3250.
Effective Date

As part of the financial instruments “package,” this section was to apply to interim
and annual financial statements relating to years commencing on or after October 1,
2006. CICA Handbook Release 39 of June 2006 deferred implementation to interim
and annual financial statements relating to fiscal years beginning on or after October
1, 2007. Deferral does not apply to non-for-profit organizations.
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Section 3465 Income Taxes
(Added January 2010)
Background

In March 2009, the IASB published an exposure draft to replace IAS 12, the standard
relating to Income Taxes.

In April 2009, the AcSB issued a corresponding ED to replace section 3465.

The Income Tax ED (IAS 12), FASB Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, and section 3465 of the Handbook (Income
Taxes), all share a common approach — the temporary difference approach.


The objective of that approach is to recognize the income tax that would be
payable or recoverable if an entity’s assets and liabilities were recovered or
settled at their present carrying amount.
In a move that echoes the capital asset/property, plant and equipment terminology
flip-flop, the ED refers to “deferred taxes” rather than “future income taxes.”
Summary of Proposed Changes

IAS 12, SFAS 109 and section 3465 differ in a number of ways, including different
exceptions to the temporary difference approach and differences relating to the
recognition and measurement of deferred tax assets and liabilities, and the allocation
of tax amounts to the components of comprehensive income and equity.

The ED requires deferred tax assets to be recognized in full.
42

However, the net carrying amount should equal the highest amount that is more
likely than not to be realizable against taxable profit.

A valuation allowance will need to be established, if necessary, to record any
difference between the full amount of the deferred tax asset and the net carrying
amount.

The ED means that the Canadian GAAP approach to definition of the tax basis of an
asset will change.

Currently, it is the higher of amount deductible on use or sale, regardless of intent.

Why is this a “big deal”?

GAAP requires that we determine if there will be a future income tax asset or liability.

The challenge arises from the fact that the tax value for the purpose of calculating
future income tax is not necessarily the value on the tax schedules.

Think of class 10.1 assets under the Income Tax Act.

You cannot have recapture, a terminal loss or a capital loss on a class 10.1 asset —
but you can have a capital gain.

The problem — the capital gain can only be determined upon sale of the asset.

Assume you have an asset you have classified as held-for-trading.

This classification means, for tax purposes, that any gains or losses on sale could
(would?) be treated as income gains and losses rather than capital gains and losses.

The asset was acquired for $10,000 — which means that the tax basis of the
investment is $10,000.

The tax amount is deductible in determining taxable income only on disposition.

However, as a held-for-trading financial instrument, it is supposed to be carried at
fair value.

The fair value is readily determined as $5,000, and so that is the amount by which it
is reported on the balance sheet.

The tax basis is $10,000 and the accounting basis is $5,000 — giving rise to
temporary difference.

The problem with all this: will any future gains and losses be income or capital?
43

Furthermore, the ED requires that deferred taxes be derived based on an amount
equal to the highest amount that is more likely than not to be realizable against
taxable profit.

The ED refers to “applicable substantively enacted tax law” whereby the
measurement of a tax asset or liability related to an asset is determined by the
consequences of the sale of the asset for its current carrying value.

In other words, the “use” criterion is gone.

This presentation will differ from section 3465, which requires the recognition of a
future income tax asset to the extent it is more likely than not to be realized and
permits, but does not require, a separate valuation allowance.

This change should not affect the net deferred tax asset recognized since it is form
over substance.

The proposed standard is expected to improve financial reporting by clarifying various
aspects of the requirements in IAS 12.

It eliminates many of the differences between the accounting for income tax under
IFRSs and US GAAP.

The proposed standard will remove old IAS 12’s exception to the recognition of
deferred taxes on the initial recognition of an asset or liability when a basis difference
exists.

Instead, the ED’s measurement approach implements the following steps:
o First, record the asset or liability (excluding any entity-specific tax effects) that
resulted in the initial temporary difference in accordance with applicable IFRSs;
o Next, recognize a deferred tax amount based on the difference between the
carrying amount of the asset or liability and the tax basis available to the entity;
o Then, recognize an allowance against or premium in addition to the deferred tax
liability.

Note that the premium or allowance would be part of the deferred tax asset or
liability.

The ED will require a two-step approach for the recognition of deferred tax assets:
o First, recognize deferred tax assets for deductible temporary differences, unused
tax losses and unused tax credits carried forward, and measure them at the
appropriate rate; then
44
o Reduce deferred tax assets by a valuation allowance, so that the net amount
equals the highest amount that is more likely than not to be realizable against
taxable profit.

The ED requires the use of average rates that are expected to apply to the expected
taxable profit of the periods in which temporary differences are expected to reduce;
section 3465 is less specific.

While both the ED and section 3465 require the use of substantively enacted tax rates
to measure income tax assets and liabilities, the ED includes more general guidance
on when tax rates are substantively enacted and does not include guidance specific to
Canadian legislative processes (as is done by section 3465).

One area that has had considerable attention the past few years is what is known as
uncertain tax positions.

Tax positions are considered “uncertain” if some degree of doubt exists over whether
amounts reported by the enterprise to taxation authorities will be accepted.

Section 3465 is silent in this area; authoritative guidance is FASB FIN 48.

The ED proposes that, with a few specified exceptions, deferred tax assets and
liabilities should be recognized for all temporary differences, and the carry forward of
unused tax losses and tax credits, rather than only those likely to be accepted by
taxation authorities.

The ED requires the use of a probability-weighted average amount of all possible
outcomes applied to uncertainties in both current and deferred tax amounts.

The proposals in the ED apply to the accounting for all domestic and foreign taxes
that are based on taxable profit.

Income tax for a parent or an investor in an associate or joint venture also includes
tax payable on distributions by the subsidiary on behalf of the parent, or by an
associate or joint venture on behalf of the investor.

Investment tax credits is excluded from the scope of the ED, but accounting for
temporary differences that arise from such grants or investment tax credits is
included.

A key difference between the ED and section 3465:
o The ED defines an investment tax credit as “relating directly to the acquisition of
depreciable assets” while section 3465 includes all qualifying expenditures
prescribed by tax legislation, whether or not they are made for depreciable assets.
o A deferred tax liability for temporary differences related to the liability component
of a compound financial instrument must be recognized — currently, if an
45
enterprise is able to settle the instrument without the incidence of tax, no
temporary difference is recognized.

Another key difference between the ED and section 3465 relates to intercompany
asset transfers:
o Under section 3565, tax expense from intercompany sales is deferred until the
related asset is sold or disposed of, and no future taxes are recognized for the
purchaser’s change in tax basis.
o No such exception is provided to the temporary-difference approach under the
IASB proposals.
o Under the ED, any taxes paid or recovered by the seller as a result of the transfer
are recorded as an asset or liability in the consolidated financial statements until
the gain or loss is recognized by the consolidated entity.

The ED exception to the temporary difference approach is restricted to an investment
in a foreign subsidiary or joint venture that is essentially permanent in duration and it
is apparent the temporary difference will not reverse in the foreseeable future.

The section 3465 exclusion to all investments in subsidiaries and joint ventures would
be curtailed.

The ED does not provide an exception from the general requirement to recognize
deferred tax amounts due to temporary differences arising:
o from the difference between the historical exchange rate and the current exchange
rate translations of the cost of non-monetary assets or liabilities of integrated
foreign operations; and
o in consolidated financial statements as a result of a difference between the tax
basis of an asset in the purchaser’s tax jurisdiction and its cost recognized in the
consolidated financial statements.

The ED will require that deferred tax assets and liabilities be classified as either
current or non-current on the basis of the financial reporting classification of the
related non-tax asset or liability.

IAS 1, Presentation of Financial Statements, currently requires all deferred tax to be
classified as non-current.

The IASB expects to issue the revised version of IAS 12 (IFRS 10?) in the summer of
2010, possibly to become effective in 2011.

However, the IASB has lately used an extended phase-in time (e.g., IFRS 3), so the
standard may not become effective until 2012.
46

Canadian firms transitioning to IFRS in 2011 will need to decide whether to adopt the
proposals on one of the following bases:
o the new standard for all periods presented (i.e., 2010 and 2011); or
o existing IAS 12 for any period presented that starts before the date the standard is
issued and the new standard for subsequent periods.

As noted in a June 2009 article by Karlene Mulraine, Canadian firms may find the
option permitting entities to apply the new standard to all periods presented more
favourable, as the alternative approach will require entities to learn and apply existing
IAS 12 solely for the purpose of preparing results for a comparative period.

The following table is taken from Deloitte & Touche LLP’s May 2009 Special Edition
Countdown newsletter.
Note: Data is not representative of Deloitte’s current views.
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47
Section 3820 Subsequent Events

In March 2004, the AcSB issued an exposure draft of proposed amendments to
section 3820.

The key change was to define the subsequent event period as being from the date of
the balance sheet to the date the financial statements are authorized for issue.

This change would extend the “subsequent” period from the current “date of
completion.”

Another change was to define the “date of authorization of issue” and to require that
this date — and who authorized the statements for issue — be disclosed in the notes
to the financial statements.

The original exposure draft was intended to apply to all entities.

There were to be no exceptions for not-for profits or exclusions under differential
reporting.

The revisions were intended to be effective for fiscal periods beginning on or after
January 1, 2005.

As a consequence of feedback from the initial exposure draft, a re-exposure draft was
released in March 2005.

The key change was to differentiate between publicly and non-publicly accountable
enterprises in specifying the requirements for application.

The revisions will harmonize this GAAP with IASB standards.

There will still be a U.S./Canadian GAAP difference since the U.S. GAAP defines the
subsequent period to be the period between the balance sheet date and the date the
financial statements are issued.

An entity will be required to adjust amounts recognized in its financial statements for
subsequent events that

o
occur between the balance sheet date and the date of authorization for issue of
the financial statements;
o
provide evidence of conditions that existed at balance sheet date;
o
are material.
The subsequent events review includes consideration of whether the entity is, or will
remain, a going concern.
48

Entities that choose to follow U.S. GAAP will comply with section 3820.

An entity will be required to disclose the financial effects on its financial statements
for subsequent events that:
o
occur between the balance sheet date and the date of authorization for issue of
the financial statements;
o
relate to conditions that arose after the balance sheet date;
o
would influence the economic decisions of users made on the basis of the
financial statements taken as whole.

Publicly accountable enterprises are “public enterprises, co-operative business
enterprises, regulated financial institutions and regulated financial institution holding
companies, enterprises subject to rate regulation, government business enterprises
and government business-type organizations.”

Non-publicly accountable enterprises include small and/or private enterprises, notfor-profit organizations, and pension plans.

Assuming the revisions proposed are approved, the “new” section 3820 would apply
to financial statements covering interim and annual periods ending on or after June
30, 2006, with earlier adoption encouraged.

A publicly accountable enterprise must search for, identify, and report subsequent
events that occur between the balance sheet date and a date no earlier than the date
of authorization for issue.

For non-publicly accountable enterprises, the end-point is the date of completion.

A publicly accountable enterprise will be required to adjust amounts recognized in its
financial statements for subsequent events that
o
provide evidence of conditions that existed at balance sheet date;
o
are material;
o
occur between the balance sheet date and the date of authorization for issue of
the financial statements.

The subsequent events review includes consideration of whether the entity is, or will
remain, a going concern.

Entities that choose to follow U.S. GAAP will automatically comply with section 3820.

A publicly accountable entity will be required to disclose the financial effects on its
financial statements for subsequent events that
49
o
between the balance sheet date and the date of authorization for issue of the
financial statements;
o
relate to conditions that arose after the balance sheet date; and
o
would influence the economic decisions of users made on the basis of the
financial statements taken as whole.
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Section 3831 Non-monetary Transactions
Background

Section 3831 replaced section 3830, Non-monetary exchanges.

The revisions harmonize section 3830 with the FASB’s revisions to APB 29, Exchanges
of Productive Assets and the IASB’s revisions to IAS 16, Property, Plant and
Equipment.
Effective Date

Section 3831 applies to all non-monetary transactions initiated in periods beginning
on or after January 1, 2006.

The section provides for early adoption as of July 1, 2005.

In no case is retroactive application permitted. There is to be no restatement of
balances resulting from prior transactions.
Summary of Changes

Key change is that all non-monetary transactions will be measured at fair value
unless
o
the transaction lacks commercial substance;
o
the transaction is an exchange of a product or property held for sale in the
ordinary course of business for a product or property to be sold in the same line
of business to facilitate sales to customers other than the parties to the
exchange;
o
neither the fair value of the assets or services received nor the fair value of the
assets or services given up can be reliably measured;
50
o
the transaction is a non-monetary, non-reciprocal transfer to owners that
represents a spin-off or other form of restructuring or liquidation.

Gone is the need to determine whether an exchange results in the “culmination of the
earnings process.”

Likewise, determining whether the assets exchanged are similar productive assets will
no longer be necessary.

Focus is now on “commercial substance.”

o
Commercial substance is deemed to occur when a transaction causes an
identifiable and measurable change in the economic circumstances of an entity.
o
Because the commercial substance tests require assessment of all cash flows, the
10% cash “boot” has been eliminated.
Two tests determine whether commercial substance is present as follow:
o
The first test compares the configuration of the asset-specific or service-specific
cash flows before and after the transaction.
o
The second test compares entity-specific values.

Commercial substance occurs when either the difference in cash flow configuration or
entity-specific value is significant relative to the fair value of the assets exchanged.

Cash flow configuration looks at the risk, timing, and amounts of the cash flows
directly associated with the assets or services exchanged.

A transaction will have commercial significance if there is a significant difference in
any of these elements relative to the fair values of the assets exchanged.

The test is a straight comparison.

Entity-specific value is the present value of after-tax cash flows expected from both
the continuing use of an asset and the proceeds at the end of its useful life.

The test is broader than the one related to cash flow configuration.

Moreover, the difference must be significant relative to the fair value of assets
exchanged.

Implementation required consequential amendments to remove references in other
Handbook sections to either the culmination of the earnings process or the exchange
of similar assets, or both.
51


Implementation also required consequential amendments to section 3055, Joint
ventures:
o
When the venturers are unrelated, transfers will be measured at fair value since
there is a significant change in cash flow configuration.
o
When the venturers are related, transfers are deemed related party transactions.
Implementation also required amendments to section 3840, Related party
transactions:
o
Commercial substance replaces the “culmination of the earnings process” test for
both normal course transactions and transactions not in the normal course of
operations.
o
On the other hand, exchanges of products or property held for sale in the normal
course of business to facilitate sales to customers will be measured at carrying
value.
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Section 3840 Related Party Transactions

Implementation of section 3831 (effective January 2006) also required amendments
to section 3840, Related Party Transactions.

Commercial substance replaced the “culmination of the earnings process” test for
both normal course transactions and transactions not in the normal course of
operations.

Exchanges of products or property held for sale in the normal course of business to
facilitate sales to customers are to be measured at carrying value.
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Section 3855 Financial instruments – Recognition and
Measurement
(Substantial changes Feb. 2009; changes Feb. 2010)
See also section 1530, Comprehensive Income, section 1535, Capital Disclosures,
section 3861, Financial Instruments  Disclosure and Presentation, section 3862,
Financial Statements  Disclosures, and section 3863, Financial Instruments 
Presentation, and section 3865, Hedges.
The following table and related notes (prepared by Deloitte & Touche) summarize the
requirements addressed in this document.
52
Note: Data is not representative of Deloitte’s current views.

Note 1: Sections 3862 and 3863 replaced section 3861 as of October 1, 2006.
However, the following entities can elect to continue to apply section 3861 in place of
sections 3862 and 3863, rate-regulated enterprises that have not issued, nor are in
the process of issuing, public debt or equity securities.

Note 2: In 2008, section 3855 was amended to permit reclassification of certain
assets. If an entity chose to reclassify an asset prior to November 1, 2008, it could
effect the change as at any date from July 1, 2008 to October 31, 2008.
Reclassifications made after November 1, 2008 can only be applied prospectively.

Note 3: Not-for-profit organizations may elect to replace the disclosure requirements
of section 3861 with those in section 3862, and section 3863, but are not required to
do so.

Note 4: Not-for-profit organizations may elect accounting policies to ignore
derivatives embedded in contracts such as leases and insurance contracts as well as
any non-financial contracts or, separately, any derivatives that may be embedded
therein.
53

Note 5: Non-publicly accountable enterprises can choose to follow the XFI version of
the Handbook. If a non-publicly accountable enterprise chooses to adopt the newer
financial instruments standards, all of the standards apply. However:

They may elect an accounting policy to ignore derivatives embedded in contracts such
as leases and insurance contracts.

They may elect an accounting policy to ignore non-financial contracts including any
derivatives that may be embedded therein.

They may elect the first day of the first year in which Section 3855 is applied as the
transition date for identifying embedded derivatives (other than any to which the
policy options apply).

Note 6: Non-publicly accountable enterprises may elect to continue to apply the
disclosures in section 3861.

Note 7: Non-publicly accountable enterprises are not required to provide summary
quantitative risk information or a sensitivity analysis if they choose to adopt section
3862.

Note 8: Non-publicly accountable enterprises are required to make the reduced
disclosures in Section 1535 externally imposed capital requirements, if applicable,
effective August 1, 2008.
Background

In April 2005, the AcSB released three new Handbook sections:
o
Section 3855: Financial Instruments — Recognition and Measurement
o
Section 3865: Hedges
o
Section 1530: Comprehensive Income

Enterprises that reported in accordance with US GAAP were also to comply with
Canadian GAAP.

In addition, the AcSB revised section 3250, Surplus, and re-issued it as section 3251,
Equity.

Finally, a host of related amendments were required for section 3860 as well as
changes to sections such as 1650, 3025, 3050, etc.

The standards were to apply to financial instruments held by all entities, including
not-for-profit organizations.
54

Paragraph 3855.07 scoped out a veritable “laundry list” of instruments to which the
section would not apply, and it noted circumstances under which the exclusions would
not apply.

The sections were intended to be applicable to interim and annual financial
statements relating to years commencing on or after October 1, 2006 for all
entities.

Retroactive application was not permitted.

On March 1, 2006, pending completion of research into the financial reporting needs
of users of non-publicly accountable enterprises, the AcSB decided to defer the
mandatory effective dates of the sections.

Accordingly, for non-publicly accountable enterprises, the sections were to be
applicable to interim and annual financial statements relating to years commencing
on or after October 1, 2007.

On October 1, 2008, the CICA released a statement “updating” interested parties on
the AcSB’s private enterprise strategy.

The release referred to a July 3rd update wherein it was reported that “the AcSB had
taken several steps to address the challenge of developing private enterprise financial
reporting standards that are timely and relevant to the market they serve.”

The update contained a bombshell — as part of the solution, the AcSB decided that
private enterprises would not be required to apply current financial instruments
standards.

What was so unexpected was a decision by the AcSB to waive exposure of the
Handbook changes giving effect to this decision.

Sections not applicable included:
o 1530, Comprehensive Income
o 1651, Foreign Currency Translation
o 3051, Investments
o 3251, Equity
o 3855, Financial Instruments – Recognition and Measurement
o 3862, Financial Instruments – Disclosures
o 3863 Financial Instruments – Presentation
55
o 3865, Hedges

Private enterprises that have already adopted these sections were not required to
revise their reporting.

Private enterprises that have yet to prepare their statements could report on the
basis of the standards in the Handbook prior to the issue of the revisions on financial
instruments.

On April 30, 2009, the AcSB released for comment an exposure draft entitled GAAP
for Private Enterprises.

When (not if) the exposure draft’s proposals are implemented, accounting for
financial instruments for private enterprises will differ considerably from that for
public enterprises.

Sometime in 2009, a new financial instruments standard will be exposed for
comment, with the following details:
o Existing differential options will be required rather than being optional.
o There will be fewer measurement categories of financial instruments than in
section 3855 and no measurement choices for individual instruments.
o Investments in equity securities with readily determinable fair values and freestanding derivatives outside a hedging relationship will be measured at fair value.
o All other financial instruments will be measured at cost or amortized cost, with no
option to measure them at fair value.
o Impairment of financial assets will be recognized and measured in accordance with
the requirements of various standards currently in the XFI version of the
Handbook.
o A simplified hedge accounting model will be available.
o Derivative instruments in a qualifying hedging relationship may be accounted for
on an accrual basis or when settled on sale or maturity.
o A simplified model for dealing with equity derivatives embedded in liabilities, such
as convertible debt, will be explored.
o Finally, all contracts to buy or sell non-financial items, and derivatives embedded
therein, will be scoped out of the standard.

Up until October 2008, an entity could not reclassify a financial instrument out of
the held-for-trading category while it is held or issued, so care had to be taken with
initial designation.
56

While the “due diligence” requirement has not be lifted, illiquidity in the credit
markets had a tremendous impact on fair values.

Accordingly, section 3855 was amended to permit transfers out of the held-fortrading category if a financial asset is no longer held for the purpose of selling it in
the near term (even if the asset may have been acquired principally for the purpose
of selling it in the near term) … if the requirements in paragraph 3855.80A are met.

And what does paragraph 3855.80A say?
o A financial asset to which paragraph 3855.80(c) applies may be reclassified out of
the held-for-trading category only in “rare” circumstances.

Transfers into the category are still proscribed.

Section 3855 was also amended to permit limited transfers out of the available-forsale category:
o A financial asset … that would have met the definition of loans and receivables (if it
had not been designated as available for sale) may be reclassified … to the loans
and receivables category if the entity has the intention and ability to hold the
asset for the foreseeable future or until maturity.

In both cases:
o If an entity reclassifies a financial asset … the financial asset should be reclassified
at its fair value on the date of reclassification.
o The fair value of the financial asset on the date of reclassification becomes its new
cost or amortized cost, as applicable.

If an entity reclassifies a financial asset out of the held-for-trading category, any gain
or loss already recognized in net income is not reversed.

If an entity reclassifies a financial asset out of the available-for-sale category, any
gain or loss already recognized in other comprehensive income in accordance with
paragraph 3855.76(b) should be amortized to net income over the remaining life of
the asset using the effective interest method.

If an entity reclassifies a financial asset out of the available-for-sale category, any
difference between the new amortized cost and maturity amount should be
amortized over the remaining life of the financial asset using the effective interest
method, similar to amortization of premium and discount.
Effective Date

These amended provisions were released in 2008 apply to reclassifications made on
or after July 1, 2008.
57

An entity could not reclassify a financial asset in accordance with these amendments
before July 1, 2008.

Any reclassifications made on or after November 1, 2008 took effect from the date of
the reclassification.

Reclassifications before November 1, 2008 were able to take effect from July 1, 2008
or a subsequent date.

Given that we are long past that date, reclassifications can only be made
prospectively.

Reclassifications cannot be applied retrospectively to reporting periods ended before
July 1, 2008.

If there is a change in circumstances such that it is no longer appropriate to classify
an investment as held-to-maturity, it should be reclassified as available-for-sale and
re-measured at fair value.

The difference between its carrying amount and fair value should be accounted for in
accordance with the treatment for changes in fair value of available-for-sale financial
assets.

When a quoted market price in an active market becomes available for a financial
asset for which such a price previously was not available, the asset should be remeasured at fair value.

The difference between its carrying amount and fair value is also accounted for in
accordance with the treatment for changes in fair value of available-for-sale financial
assets.

Another change made in 2008 to section 3855 relates to recoverability (think asset
backed commercial paper).

If a financial asset is reclassified and the entity subsequently increases its estimates
of future cash receipts as a result of increased recoverability of those cash receipts,
the effect of that increase is recognized as an adjustment to the effective interest rate
from the date of the change in estimate rather than as an adjustment to the carrying
amount of the asset at the date of the change in estimate.
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58
Section 3862 Financial Instruments - Disclosures
(Substantial changes Feb. 2009; minor changes Jan. 2010)
Background


In April 2006, the AcSB issued an exposure draft of three new standards: two related
to the disclosure (section 3862) and presentation of financial instruments (section
3863), and one related to disclosures about capital (section 1535).
Consistent with the moves to IFRS, the paragraph numbering in section 3862 has
been aligned with that of IFRS 7:
o when a particular paragraph or sub-paragraph in IFRS 7 has not been adopted, it
is identified as “[Not used]” (e.g., .13);
o when it has been necessary to add a paragraph or sub-paragraph not included in
IFRS 7, the paragraph or sub-paragraph is numbered so as to maintain this
correspondence (e.g., 3862.13A).

Similarly, the Appendices correspond to those in IFRS 7.

When a particular Appendix in IFRS 7 has not been adopted, it is listed where it
otherwise would have appeared in the section and its disposition is indicated.

One part of IFRS 7 that has not been adopted relates to hedge disclosures.

Rather than adopt IFRS 7’s requirements, paragraph 3862.21A specifies that an
entity that holds or issues derivatives, non-derivative financial assets or nonderivative financial liabilities that are designated and qualify as hedging items is to
follow the disclosure requirements of section 3865.

Section 3862 replaced the disclosure requirements of section 3861, Financial
Instruments — Disclosure and Presentation, and was harmonized with IFRS 7.

Section 3862 placed increased emphasis on disclosures about risks associated with
both recognized and unrecognized financial instruments and how these risks were
managed.
Summary of Requirements

Section 3862’s requirements for an entity to disclose the significance of financial
instruments for its financial position and performance are considerably more extensive
relative to those of section 3861.

However, the disclosures about fair value, although revised, are not substantially
different from those of section 3861.
59

These requirements are less detailed than those of Section 3861 in certain areas (for
example, terms and conditions) and more so in others (for example, reclassifications,
collateral, allowance for credit losses, compound financial instruments with multiple
embedded derivatives, and defaults and breaches).

Section 3862’s requirements for the disclosure of qualitative and quantitative
information about exposure to risks arising from financial instruments have been
revised from, and are more extensive than, those of Section 3861.

The qualitative disclosures must describe management’s objectives, policies and
processes for managing such risks.

The quantitative disclosures must provide information about the extent to which the
entity is exposed to credit risk, liquidity risk and market risk (i.e., currency risk,
interest rate risk, and other price risk).

Section 3862 requires that the disclosures related to the risks faced by an entity must
either be incorporated directly into the financial statements or incorporated by crossreference from the financial statements to some other statement, such as a
management commentary or risk report.

If cross-referenced, the originating report must be available to users of the financial
statements on the same terms as the financial statements and at the same time.

Effectively, without the information — either directly or incorporated by crossreference — the financial statements are deemed incomplete.

In 2008, CGA-Canada issued a Practice Alert as part of the Public Practice Manual
subscription service.

The release detailed the disclosure requirements of section 3862, as well as
describing the nature of those disclosures.

Members whose responsibility includes compliance with section 3862 should seek out
this Practice Alert.

Section 3863 carried forward unchanged the presentation requirements of section
3861 (which was based on IAS 32).

Sections 3862 and 3863 both had an effective date of October 1, 2007.

Although, section 3862 applied to all entities, paragraphs .42A and .42B provided
some relief for non-publically accountable enterprises:
o An enterprise that qualifies under section may elect to disclose the information
required by paragraphs 3862.25-.30A only for financial assets and financial
liabilities, both recognized and unrecognized, for which fair value is readily
obtainable.
60

Also, such enterprises may elect to disclose the fair value required by paragraph
3862.37(b1)(i) only for those financial assets for which fair value is readily
obtainable.

Basically, the differential reporting option relieves an entity of having to estimate fair
value if an active market does not exist.

It also reduces the extent of the disclosures since reference to active markets reduces
the extent of disclosures necessary.

In July 2008, section 3862 was amended such that non-publicly accountable
enterprises would not be required to disclose an analysis of their sensitivity to market
risks.

The changes were effective for interim and annual financial statements for fiscal years
beginning on or after August 1, 2008.

In July 2008, section 3862 was also amended such that non-publicly accountable
enterprises could elect the date of adoption of section 3855 as the transition date for
recognizing embedded derivatives.

The changes were also effective for interim and annual financial statements for fiscal
years beginning on or after August 1, 2008.

However, these changes were rendered moot with the October 2008 decision to
exempt private enterprises from the ambit of sections 3862 and 3863.

Instead, limited disclosures will be required as part of section 3856
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Section 3865 Hedges
Summary of Requirements

Section 1650 used to deal with foreign currency hedges, and AcG-13 used to specify
when hedge accounting may be used, as well as when and how it should be
discontinued.

Section 3865 extends section 1650’s guidance to all financial instruments and
expands AcG-13 by prescribing the actual accounting treatment.

One critical factor to bear in mind is that hedge accounting is optional.

Hedge accounting ensures that the timing of the income recognition on the hedging
item matches that of the hedged item.

Care is required in designating the hedged item and the hedging item.
61

Derivatives cannot be designated as hedged items, only hedging items.

An anticipated transaction may be hedged but may not be a hedging item.

Hedges can be designated as fair value hedges, cash flow hedges, or hedges of a net
investment in a self-sustaining foreign operation.

Because hedge accounting is optional, a hedging relationship must be designated and
documented before hedge accounting may be applied.

Documentation includes the risk management objective and strategy for the
relationship, as well as the method for assessing the effectiveness of the hedge on an
ongoing basis.

A fair value hedge is a hedge of the exposure to changes in the fair value of all or a
portion of a recognized asset or liability, or previously unrecognized firm commitment
attributable to a specified risk.

All gains and losses from both the hedged item and the hedging item attributable to
the hedged risk are recognized in current period net income.

The carrying amount of any hedged item is adjusted for the gain or loss on the
hedged risk.

Hedge accounting does not apply to investments in equity instruments that cannot be
reliably measured at fair value, but instead are measured at cost in accordance with
section 3855.

A cash flow hedge is a hedge of the exposure to variability in cash flows of a
recognized asset or liability or a forecasted transaction attributable to a specified risk
or variability in cash flows of a firm commitment attributable to foreign currency risk.

The portion of the gain or loss on the hedging item determined to be effective is
recognized in other comprehensive income.

The ineffective portion is handled in the same manner as the instrument would be
treated under section 3855.

The accumulated gains or losses in other comprehensive income are recognized in net
income in the same period that the resultant asset, liability, or anticipated transaction
affects net income.

However, section 3865 specifies that non-derivative financial assets or liabilities, or a
group of non-derivative financial assets or liabilities (provided all items in the group
are similar), can only be used to hedge foreign currency risk exposure.

A hedge of a net investment in a self-sustaining foreign operation follows the same
accounting as a cash flow hedge.
62

Lastly, internal hedging arrangements qualify for hedge accounting only when the
hedge is a cash flow hedge of foreign currency risk in an anticipated transaction.

Since most intra-group transactions are eliminated on consolidation, internal hedging
arrangements qualify for hedge accounting treatment for financial reporting purposes
only.

However, internal hedging arrangements may qualify for hedge accounting in the
separate financial statements of individual entities within a consolidated group,
provided they otherwise meet the criteria of section 3865.

A hedging relationship ends no later than the contractual repayment date of the
hedged item.

When the hedged item has no contractual repayment date, the hedging relationship
ends no later than the earliest date on which payment could be demanded.

Section 3865 specifies how to deal with any gains or losses previously recognized in
other comprehensive income when a hedge of an anticipated transaction
subsequently results in the recognition of a:
o financial asset or financial liability; or
o non-financial asset or non-financial liability.

The treatment differs depending on which type results.

When an asset designated and accounted for as a hedged item becomes impaired,
the change in carrying amount due to impairment should be recognized after
adjusting the carrying amount of the hedged item in accordance with the provisions
of section 3865.

Disclosures must enable users of an entity’s financial statements to understand its
objectives for holding or issuing the hedging items, the entity’s strategies for
achieving those objectives, and the effect of hedge accounting on the financial
statements.
Effective Date

As part of the financial instruments “package,” this section was to apply to interim
and annual financial statements relating to years commencing on or after October 1,
2006. CICA Handbook Release 39 of June 2006 deferred implementation to interim
and annual financial statements relating to fiscal years beginning on or after October
1, 2007. Deferral does not apply to non-for-profit organizations.
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63
Section 3870 Stock-based Compensation and Other StockBased Payments
Background

Section 3870 contains standards for the recognition, measurement, presentation, and
disclosure of expenses and liabilities resulting from such transactions entered into by
profit-oriented enterprises in exchange for goods and services.

Section 3870 applies to all types of stock-based awards, the most common of which
are stock, stock options, warrants, and stock appreciation rights (SARs).

It also applies to circumstances where liabilities are incurred based on the price of
stock or other equity instruments.

Before the latest update, section 3870 would have had no effect on income
measurement, for most enterprises with stock-based awards.

For enterprises with stock appreciation rights and/or awards settled in cash, there
would have been a significant impact on opening retained earnings for the year of
adoption; in addition, there would have been ongoing income statement impact.

And there it might have stayed, if not for Enron.

The actions of Enron’s senior management gave impetus to a move to recognize the
costs associated with issuing stock options.

The IASB issued an exposure draft in late 2003.

The IASB position was that stock options were not “free.”

There were to be no exceptions from the requirements to recognize an expense when
stock-based compensation was issued.

IFRS 2, issued in March 2004, confirmed that approach.

The AcSB also concluded that an enterprise should recognize the “real” cost of issuing
stock-based compensation.
Effective Date

In November 2003, the AcSB announced that section 3870 would be amended
effective January 1, 2004.
Summary of Changes

All stock-based compensation would result in expense being recognized in the income
statement.
64

Section 3870 requires that the fair value method be used to account for the cost of
stock-based compensation.

The previously permitted alternative of recognizing no costs, and reporting the proforma impact in the notes, has been prohibited.

Fair value must be measured using an option-pricing model, such as the BlackScholes or binomial tree option-pricing model.

The IASB position is that there are to be no exceptions from the requirements to
recognize an expense when stock-based compensation is issued.

The Canadian exception is that the minimum value method is only acceptable for nonpublic entities.

Compliance with section 3870 would, for the most part, result in conformance with
IFRS 2.

Enterprises other than public enterprises, co-operative enterprises, deposit-taking
institutions, and life insurance enterprises were permitted to defer application of the
revised section 3870 until January 1, 2005.

However, they were required to disclose pro-forma net income and pro-forma EPS if
the provisions of section 3870 would otherwise apply.
Employees

Employees: The recipient of an award is deemed to be an employee if the grantor
exercises, or has the right to exercise, sufficient control over that individual to
establish an employer/employee relationship as determined by law.
Public Enterprise

Public enterprise: An enterprise whose equity securities trade in a public market, or is
one which has made a filing with a securities commission in preparation for the sale
of any class of equity securities in a public market, or is controlled by an enterprise
defined in (1) or (2).
Vesting

Vesting refers to the “earning of rights to” something. An award of stock-based
compensation becomes vested at the date on which the employee’s right to receive or
retain shares of stock or cash under the award is no longer contingent on the
employee remaining in the service of the enterprise or the achievement of a
performance condition (other than the achievement of a target stock price or
specified amount of intrinsic value).
Fair value of a Stock Option
65

The fair value of a stock option is determined using a model that, as of the grant
date, takes the following into account:
o
the exercise price;
o
the expected life of the option;
o
the current price of the underlying stock;
o
the expected volatility of the underlying stock;
o
the expected dividend; and
o
the risk-free interest rate.
Compensation Cost

Section 3870 will cause volatility in the reported earnings of enterprises subject to its
requirements.

Compensation cost is now re-measured at each reporting date based on changes in
the underlying stock’s market value over the option’s exercise price.

Compensation cost will be amortized over the service or vesting period.

Furthermore, depending on the nature of the award, the employee’s ability to
demand cash instead of equity, and the company’s past practice, such awards may
have to be reported as liabilities on the balance sheet, rather than equity.
Direct Awards of Stock

Compensation expense should be recorded for direct awards of stock to employees
and non-employees.

For awards earned over a period rather than immediately, the compensation is to be
expensed over the service or vesting period.
Modification of an Award

Normally, when an award is modified, it is deemed to have been cancelled and a new
award is issued.

However, if the modification results in an award becoming more valuable, the original
award is deemed to have been exchanged for a new award.

The incremental value must be measured and reported in the financial statements.
66
Repurchase of Instruments

If an enterprise repurchases an equity instrument (option), the amount of cash or
other assets exchanged or the liabilities incurred are to be charged to equity.

If the amount paid exceeds the fair value of the instrument(s) repurchased, the
excess is shown as an expense on the income statement of the period in which the
repurchase takes place.
Business Combinations

Section 3870 does not deal with business combinations. They are scoped out by
subparagraph 3870.06(a).

Appendix A of section 1581 requires that stock options granted as part of the
purchase consideration in a business combination be measured at their fair value and
included in the cost of the purchase.
Classification

If an instrument is to be settled in cash or other financial assets, the award is
classified as a liability.

If the award is to be settled with equity, the instrument is shown as equity.
New Disclosure Requirements

An enterprise must describe its accounting policy with respect to stock-based
compensation.

It must describe any employee plans and the general terms of such awards.

It must describe any non-employee plans, provided those plans are significant.

Section 3870 adds new requirements for the disclosure of the following:
o
Most disclosures are the same as those previously stipulated by EIC-98;
o
weighted average grant-date fair values of options and equity instruments
granted during the reporting period;

Separate disclosure of weighted average exercise prices and weighted average fair
values of options, where the exercise price is less than, equal to, or greater than the
market price as of the date of the grant; and

A description of the method used, as well as any significant assumptions made, to
estimate the fair values of options, including weighted average information on riskfree interest rates, expected lives, volatilities, and dividends.
67
Requirements to Account for Stock-Based Awards

Stock-based awards granted to employees are accounted for using the fair value
method.

A direct award of stock must be accounted for at fair value. Stock options with a
nominal exercise price are considered direct awards of stock.
o Awards that are required, or expected, to be settled in cash must be accounted for
as a liability and re-measured on an ongoing basis at each reporting date based
on changes in the fair value of the underlying stock.
o Stock appreciation rights to be settled by issuing equity instruments are measured,
at the company’s option:

at fair value, or

in a manner similar to the accounting method applied to awards that are
required, or expected, to be settled in cash.
Compensation Cost

When an enterprise accounts for stock-based compensation awarded to employees,
the other “side” of the transaction is the cost recognized.

This compensation cost is dependent on a number of factors, one of which is the
service period over which the instruments vest.
Vesting Methods

Section 3870 defines two methods of vesting: graded and cliff.

The graded method is used when an award vests in specific quanta over a specific
period, for example, 25% over each of four years.

Each of the quanta is treated as a separate award, with each award having its own
separate service period and vesting date.

The cliff method is also known as the “rateable” method. Here, compensation cost is
recognized using the straight-line method over the service period, which is the period
of the award.

The key point is that the award vests at a specific time, for example, at the end of the
third year. Until that time, none of the award is vested. It is an all-or-nothing option.
68
Tandem Awards

Tandem awards are the most troublesome of all employee stock-based compensation
arrangements.

These awards are stock options in form, but are direct awards in substance.

Their accounting is further complicated by the fact that the method of settlement
affects the choice.

If the method of settling the award is the employee’s choice, it must be accounted for
as a liability.

If the choice rests with the issuer, it is normally accounted for as an equity, unless
the enterprise has a history of settling in cash, in which case the award must be
accounted for as a liability.
Non-employee Awards

Non-employees are grantees who are not employed by the granting enterprise. Nonemployee awards also include non-reciprocal transfers.

As with employee awards, section 3870 requires that all stock-based awards granted
to non-employees be accounted for at fair value.
Equity Instruments

If tradable equity instruments are issued, the fair value of the instruments is used to
measure the transaction.

If non-tradable equity instruments are issued, the fair value of the goods and services
received or the fair value of the instruments issued is used to measure the
transaction, depending on which is more reliable.
Measurement Date

The asset or cost is recognized as if cash had been paid.

The measurement date is the earlier of:
o date performance is complete, or
o commitment date.
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69
CICA Handbook  Assurance  Part I and II
New Structure
(added Feb. 2010)

On June 23, 2009, the CICA replaced the existing Handbook – Assurance with a new,
two-volume version.

The action came about as a result of the decision to adopt the International
Standards on Auditing (ISAs) as Canadian Auditing Standards (CASs).

The CASs are based on ISAs that have been redrafted as part of the International
Auditing and Assurance Standards Board’s (IAASB’s) project to improve the clarity of
its standards.

Each CAS is the same as the corresponding ISA, except for limited changes made if
and only if appropriate.

In rare circumstances, CASs contain Canadian-specific wording, resulting from the
AASB’s amendments to wording in the ISAs.

These “Canadian” amendments are made only if the AASB’s criteria for such
amendments are met.

The CASs clearly indicate to readers where and when these amendments occur and
provide readers with the wording in the corresponding ISA.

For example, paragraph CA12 of CSQC 1 reads:
o In Canada, relevant ethical requirements discuss the familiarity threat that may be
created by using the same senior personnel on an assurance engagement over a
long period of time and the safeguards that might be appropriate to address such
threats.
o In ISQC 1, this paragraph states: The IFAC Code discusses the familiarity threat
that may be created by using the same senior personnel on an assurance
engagement over a long period of time and the safeguards that might be
appropriate to address such threats.

As noted above, The CICA Handbook – Assurance has been separated into Parts I and
II.

Part I consists of:
o the Preface to the CICA Handbook – Assurance, which is effective as of December
15, 2009;
70
o all CASs, which become effective for audits of financial statements for periods
ending on or after December 14, 2010;
o CSQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial
Statements, and Other Assurance Engagements, which is effective as of December
15, 2009;
o and all other Sections and Guidelines (applicable to engagements other than audits
of financial statements) that have been retained and carried forward from the
existing Handbook.

Part II consists of the financial statement auditing standards in the existing CICA
Handbook – Assurance, which remain in effect until the effective date of the CASs,
along with all other Sections and Guidelines in the existing Handbook.

All audits of financial statements for periods ending before December 14, 2010 should
be performed in accordance with these existing Canadian generally accepted auditing
standards (GAAS).
71
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CICA Handbook  Assurance  Part I  Canadian Standards
on Quality Control
CSQC 1 – Quality Control for Firms that Perform Audits
and Reviews of Financial Statements (Formerly called
GSF-QC: Quality Control Standards)
(added Feb. 2010)

CSQC 1, General Standards of Quality Control for Firms Performing Assurance
Engagements, replaces the GSF-QC material in the Handbook.

There are changes to the scope of the standard and a number of new concepts and
requirements are introduced as well.

CSQC 1 links with CAS 220 the same way the GSF-QC material linked with section
5030 in the old Handbook.

The authority and application of CSQC 1 is set out within the standard in paragraphs
4 to 9 and paragraphs 13 to15, as well as in paragraph A1.

Unlike the rest of the CAS material (indeed any other material in Part 1 of the
Handbook), CSQC 1 is effective as of December 15, 2009.

Note that CAS 220 retains a 2010 effective date.

For the interim, section 5030 should be followed.

Like the GSF-QC, CSQC 1 is not part of assurance standards, which include Canadian
generally accepted auditing standards (GAAS).
However, CSQC 1 forms part of the generally accepted standards of practice of the
profession.

CSQC 1 (like CAS 220) requires the completion of the engagement quality control
review and resolution of any differences of opinion on or before the date of the
auditor’s report (we’ll cover that under CASs 560 and 700).

This represents a significant change from the GSF-QC material which required that
the engagement quality control review be completed before the date of issuance of
the engagement report.

Currently, the date of substantial completion of examination is used as the date of the
auditor’s report.
72

For many firms, the date of the engagement report was (significantly) earlier than the
date of issuance of that report.

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that
the auditor’s report be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion
on the financial statements.

Consequently, the implementation of CSQC 1 (and CAS 220) will likely represent a
significant change in practice.

CSCQ 1 also modifies the scope of certain requirements.

Specifically, it (as well as CAS 220) uses the term “listed entity” rather than the
existing Canadian term “public enterprise.”

While there is no significant difference in the requirements and guidance relating to
most aspects of the monitoring process, there is a significant difference with respect
to who can perform the inspection of completed engagements.

CSQC 1 is more rigorous than the GSF-QC wherein it requires that those performing
the engagement or the engagement quality control review not be involved in
inspecting the completed engagement.

Meeting this requirement may create a challenge for smaller firms.

In addition, CSQC 1 is more rigorous with respect to:
o specific engagement quality control review procedures regarding discussion of
significant matters and review of financial statements or other subject matter
information and the proposed report;

o
maintaining of engagement quality control reviewer’s objectivity and the firm’s
response when the objectivity is impaired;
o
assembly of the final engagement files on a timely basis after the engagement
reports have been finalized; and
o
monitoring procedures specific to the circumstance where firms within a network
operate under common monitoring policies and procedures and these firms place
reliance on such a monitoring system.
For audits of financial statements of listed entities, CSQC 1 requires the rotation of
the engagement partner and the individuals responsible for the engagement quality
control review, and where applicable, others subject to rotation requirements, after a
specified period in compliance with relevant ethical requirements.
73

As noted, the wording in application material in CSQC 1 regarding the timing of the
inspection of completed engagements is different from that in GSF-QC.

Nevertheless, the same underlying principle drives the determination of the nature,
timing and extent of the inspection cycle for completed engagements.
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GSF-QC Quality Control Standards (replaced by CSQC 1 –
Quality Control for Firms that Perform Audits and Reviews
of Financial Statements)
(no changes Feb. 2010)
Background

GSF-QC General standards of quality control for firms performing assurance
engagements — GSF-QC — was the first standard to be published in the CICA
Handbook — Assurance that is outside assurance standards.

Notwithstanding, it forms part of generally accepted auditing standards for auditors.

GSF-QC establishes a framework and provides guidance on quality-control policies
and procedures applicable to assurance engagements (collectively, “the system of
quality control”) to be established by a firm that performs assurance engagements.
Effective Date

The recommendations were effective December 1, 2005.

However, for a firm registered with CPAB, the effective date was January 1, 2005.
Summary of Changes


A firm must establish a system of quality control designed to provide it with
reasonable assurance of the following:
o
the firm and its personnel comply with professional standards and regulatory and
legal requirements
o
that reports issued by the firm or the practitioner are appropriate in the
circumstances
Specifically, a firm must establish policies and procedures designed to provide the
firm with reasonable assurance of the following:
o
It and its personnel maintain independence in all required circumstances, and it is
notified of breaches of independence requirements.
74
o
It identifies and assesses the potential sources of risks associated with a client
relationship or a specific assurance engagement.
o
It has sufficient personnel with the competencies and commitment to ethical
principles necessary to perform its assurance engagements.
o
Any assurance team assigned to an engagement collectively possesses the
competencies necessary to complete the engagement.
o
Appropriate consultation takes place on difficult or contentious matters.
o
Sufficient resources are available to enable consultation to happen.
o
Differences of opinion are dealt with and resolved.
o
It deals appropriately with complaints and allegations that its work fails to comply
with professional standards and regulatory and legal requirements.
o
Appropriate documentation is available to provide evidence of the operation of
each element of its system of quality control.

Lastly, a firm must establish policies and procedures requiring an engagement
quality-control review for all audit engagements to report on the financial statements
of a public enterprise.

A firm must also establish criteria for considering whether such a review should be
performed for other assurance engagements.
Additions to GSF-QC

The main features of the additions to GSF-QC follow:
o
introduction of a new element to the firm’s system of quality control, namely
engagement documentation
o
a requirement for a firm to establish policies and procedures designed to
maintain the confidentiality, safe custody, integrity, accessibility, and
retrievability of engagement documentation
o
a requirement for a firm to establish policies and procedures requiring the
retention of engagement documentation for a period sufficient to meet the needs
of the firm or as required by law or regulation

The proposed standards would apply to engagements in both the private and public
sectors.

The amount and quality of audit documentation will be likely be higher as a result of
these proposals.
75

For instance, practitioners would now be required to document inconsistent or
contradictory evidence as part of documenting final conclusions.

An exposure draft was issued in July 2005 with comments due August 31, 2005.

Barring the need for re-exposure, it is expected that the new and revised material will
be issued by the end of the first quarter of 2006.
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CICA Handbook  Assurance  Part I  Canadian Auditing
Standards (CSAs)
The Clarity Project
(revised Feb. 2010)



In 2005, the IAASB announced its Clarity Project, whereby it intends to improve the
clarity of ISAs through the following measures:
o
using the word “shall” to clearly identify the requirements that a professional
accountant is expected to follow in the vast majority of engagements
o
eliminating possible ambiguity about the requirements a professional accountant
needs to meet arising from the use of the present tense in current ISAs, including
elevating some present tense sentences to requirements
o
setting an objective in each ISA
o
making structural improvements to enhance the overall readability and
understandability of the standards
The IAASB plans to begin by revising the following ISAs:
o
ISA 240, The Auditor’s Responsibility to Consider Fraud in an Audit of Financial
Statements
o
ISA 300, Planning an Audit of Financial Statements
o
ISA 315, Understanding the Entity and its Environment and Assessing the Risks
of Material Misstatement
o
ISA 330, The Auditor’s Procedures in Response to Assessed Risks.
The AASB began its move in January 2006 when it issued an exposure draft with the
title of Improving the Clarity of Canadian Auditing Standards
— Phase One.
76

The goal of the exposure draft was to conform the appropriate Handbook sections to
comparable ISAs in terms of format.

Specifically, the AASB planned to incorporate IAASB content and style revisions into
these Handbook sections:
o
Section 5135, The Auditor’s Responsibility to Consider Fraud;
o
Section 5141, Understanding the Entity and its Environment and Assessing the
Risks of Material Misstatement;
o
Section 5143, The Auditor’s Procedures in Response to Assessed Risks; and
o
Section 5150, Planning.

Adopting the IAASB’s Clarity approach meant Handbook sections would contain five
principal sections: Introduction, Objectives, Definitions, Requirements, and
Application Material.

Although the separation of Handbook Requirements from Application Material was
a significant structural change, there was expected to be no significant changes to
content.

Information posted to the AASB website as of June 2007 indicated that the final
Handbook revisions to the content of the standards had been drafted, but not yet
released.

Subsequently, the projects were marked as “Completed” but no updates were ever
issued.
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Adopting International Standards on Auditing (ISAs)
(major changes Feb. 2010)

In February 2007, the AASB announced that, following the completion of the IAASB’s
Clarity project, Canada would adopt International Auditing Standards issued by the
International Auditing and Assurance Standards Board.

The resulting standards would be called Canadian Auditing Standards (CASs) and
be numbered identically.

As noted at the outset of the presentation, these standards were released June 2009.

The adoption of CASs impacted more than just the structure of the Handbook.
77

ISAs deal only with the audit of historical financial information, including financial
statements.

The Handbook sections dealt with all assurance engagements.

Accordingly, CASs dealing with the audit of historical financial information, including
financial statements, have been separated from standards dealing with other
assurance and related services.

For example, section 5050, Using the Work of Internal Audit, covers all types of audit
engagements, not just audits of historical financial information.

To the extent considered appropriate, matters regarding other assurance services currently
addressed in section 5050 would be addressed in a separate CAS.

Similarly, even though Canada has adopted the International Standard on Quality Control (ISQC
1) as the Canadian Standard on Quality Control (CSQC 1), CSQC 1 will not apply to related
services.

Furthermore, there will be no CAS for which there is no corresponding ISA, and vice
versa.

The titles and subject matters covered by CASs will be exactly the same as those for
ISAs.

CASs will be organized by category:
o 100-199: Introductory Matters
o 200-299: General Principles and Responsibilities
o 300-499: Risk Assessment and Response to Assessed Risks
o 500-599: Audit Evidence
o 600-699: Using the Work of Others
o 700-799: Audit Conclusions and Reporting
o 800-899: Specialized Areas

The scope of certain Canadian assurance standards will change to deal separately with financial
statement audits and audits of other subject matter.

Guidelines in the current Handbook will be called Practice Statements to adopt IFAC
HB terminology.
78

There are only a few International Auditing Practice Statements (IAPSs) in the IFAC
HB.

This is in contrast to the nearly 30 Assurance Guidelines in the Handbook
o
Canadian Auditing Practice Statements (CAPSs)
o
Canadian Review Engagement Practice Statements (CREPSs)
o
Canadian Assurance Engagement Practice Statements (CAEPSs)
o
Canadian Related Services Practice Statements (CRSPSs)
o
Canadian Practice Statements on Securities Regulations (CPSSRs)

Sections for which there is no international equivalent will disappear.

For example, section 5365, Communications with Actuaries, will not be carried
forward since there is no ISA equivalent.

However, its Appendix is carried forward as CAS 500.

Likewise, material for which there is no IAASB equivalent will be identified by a “-C”
following its number.

There are very few instances of this happening — one of the few instances was cited
earlier in the presentation.

There will be significant changes to Canadian audit practice with respect to:
o the standard auditor’s report on financial statements and reports with
modifications on financial statements; and
o the standards for audit situations such as group audits, estimates, related party
transactions, confirmations, use of experts, and going concern.

Furthermore, Canadian GAAS is changing with respect to:
o communicating deficiencies in internal control (CAS 265);
o materiality and evaluation of misstatements identified during an audit (CASs 320
and 450);
o audit considerations relating to an entity using a third party service organization
(CAS 402);
o external confirmations (CAS 505);
79
o auditing accounting estimates, including fair value accounting estimates and
related disclosures (CAS 540);
o related parties (CAS 550);
o written representations (CAS 580);
o special considerations – audits of group financial statements (CAS 600);
o using the work of an auditor’s expert (CAS 620); and
o the form and content of the auditor’s reports (CASs 700, 705, 706, 800, 805).

However, there will be no changes to:
o Compliance with professional ethics and auditor responsibilities;
o Legal liability and corporate governance issues;
o Understanding business entities and business risk;
o Audit planning; and
o Internal control evaluation and testing.
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CAS 200 Overall Objective of the Independent Auditor,
and the Conduct of an Audit in Accordance with Canadian
Auditing Standards
(added Feb. 2010)

CAS 200, Overall Objective of the Independent Auditor, and the Conduct of an Audit
in Accordance with Canadian Auditing Standards, has no single, direct equivalent in
the existing Handbook.

CAS 200 replaces material contained in section 5090, Audit of Financial Statements,
section 5095, Reasonable Assurance and Audit Risk and section 5100, Generally
Accepted Auditing Standards.

Section 5090 requires the auditor to perform an audit with an attitude of professional
skepticism.

Paragraph 15 of CAS 200 imposes a similar requirement.

The general standard of section 5100 is replaced with a requirement in CAS 200 to
comply with relevant ethical requirements.
80

The part of the examination standard requiring the auditor to reduce audit risk to an
acceptably low level is dealt with in paragraph 17 of CAS 200.

The part of the examination standard requiring the auditor to obtain sufficient
appropriate audit evidence is more or less the same as the requirements of paragraph
17 of CAS 200.

Direction and supervision of engagement team members is “split” between CAS 220
and CAS 300.

However, the part of the examination standard requiring the auditor to obtain an
understanding of the entity and its environment is not part of CAS 200.

Instead, it has been “moved” to CAS 315

CAS 200 does not contain the overall reporting requirements currently part of section
5100.

Instead, auditors must turn to CAS 700 and CAS 800 as well as other CASs in the 700
and 800 series to find the reporting requirements.

As noted earlier, CASs apply only to audits of financial statements and other historical
financial information.

This particularly affects section 5021 in the existing Handbook, which applies to all
assurance engagements.

Consequently, in the new Handbook, section 5021 describes the authority of
standards and guidance other than the CASs.

Notwithstanding, paragraphs 22 and 23 of CAS 200 are comparable to old paragraph
5021.04, which dealt with compliance with what were the Recommendations in the
Handbook.

Canadian Auditing Standards reflect the IAASB focus on the concepts of frameworks:
o applicable financial reporting frameworks;
o fair presentation frameworks; and
o compliance frameworks.

These concepts are introduced in CAS 200 and pervade all the CASs.

Moreover, they affect the form and content of the report on the relevant financial
statements, as addressed in the 700 and 800 series of CASs dealing with auditor’s
reports.
81

The auditor must have an understanding of the entire text of a CAS, including its
application and other material, to understand its requirements.

While this notion is implicit in the old section 5021, it is explicit in CAS 200.

Each CAS contains an objective or objectives that provide the context in which the
requirements of the CASs are set — something not part of current Canadian GAAS.

These objectives support the overall objective of the auditor, which is to obtain
reasonable assurance about whether the financial statements as a whole are free
from material misstatement whether due to fraud or error, and to report on the
financial statements in accordance with the auditor’s findings.

CAS 200 requires the auditor to use the objectives in planning and performing the
audit, having regard to the interrelationships among the CASs.

Note that this is not really different from what is currently required, except that it is
explicit.

CAS 200 also requires the auditor, having complied with the requirements of the
CASs, to:
o determine whether any audit procedures in addition to those required by the CASs
are necessary in pursuance of the objectives stated in the CASs; and
o
evaluate whether sufficient appropriate audit evidence has been obtained in the
context of the overall objective of the auditor.

Therefore, the auditor’s report cannot assert that the audit was performed in
conformity with Canadian generally accepted auditing standards unless the auditor
has complied with CAS 200 and all other CASs relevant to the audit.

When and/or where an individual objective has not been, or cannot be achieved, the
auditor must consider whether this prevents attainment of the overall objective,
namely to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement.

If so, the auditor must document a failure to achieve an objective.
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82
CAS 210 Agreeing the Terms of Audit Engagements
(added Feb. 2010)

CAS 210, Agreeing the Terms of Audit Engagements, replaces Handbook section
5110.

CAS 210 does not introduce any new concepts, but it does make one small change in
scope.

Furthermore, there are changes in the requirements.

CAS 210 uses the Definitions section to explain that references to “management”
should be read as “management and, where appropriate, those charged with
governance” in the remainder of the CAS.

This is a change in scope.

CAS 210 sets out the preconditions for an audit.

These preconditions must be met if the auditor is to accept the engagement.

If these preconditions are not met, the auditor must discuss the matter with
management — something section 5110 does not do.

CAS 210 specifies that the auditor not accept an audit engagement, unless required
by law or regulation, if:
o the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable, unless specific
requirements are met;
o
management has not provided an agreement that it acknowledges and
understands its responsibility; or
o management or those charged with governance impose a scope limitation that the
auditor believes would result in a disclaimer of opinion.

If the auditor determines that, except for the fact that it is prescribed by law or
regulation, the applicable financial reporting framework would not be acceptable, the
auditor may accept the engagement only if the following conditions are met:
o Management agrees to provide additional disclosures in the financial statements
required to avoid the financial statement being misleading; and
o The terms of the engagement specify that the auditor’s report will incorporate an
Emphasis of Matter paragraph drawing users’ attention to the additional
83
disclosures and, unless required by law or regulation, will not include the phrases
“present fairly, in all material respects,” or “give a true and fair view.”

The terms of the engagement specify that the auditor’s report will incorporate an
Emphasis of Matter paragraph drawing users’ attention to the additional disclosures
and, unless required by law or regulation, will not include the phrases “present fairly,
in all material respects,” or “give a true and fair view.”

The terms of the audit engagement must be agreed with management or those
charged with governance.

Section 5110 requires the auditor to establish an understanding of the terms of
engagement with both parties (not just one of the parties).

The engagement letter must identify the applicable reporting framework for the
preparation of the financial statements.

Section 5110 does not contain such a requirement as it assumes the use of Canadian
GAAP for general-purpose financial statements.

The engagement letter must refer to the expected form and content of any reports to
be issued, and a warning that the report may differ from its expected form and
content

Section 5110 does not contain such a requirement.

Section 5110 requires that the written agreement describe the limitation of the
engagement as well as management’s responsibility for providing written confirmation
of significant representations.

CAS 210 does not contain these requirements although it provides similar application
and explanatory material.

Section 5110 requires that the written agreement describe the specific information
management is responsible to provide to the auditor.

CAS 210 does not contain such an explicit requirement

Section 5110 requires that the written agreement describe specific auditor
responsibilities.

CAS 210 does not contain such an explicit requirement although it provides similar
application and explanatory material.

On recurring audits, the auditor must assess whether circumstances require the terms
of the audit engagement to be revised and whether there is a need to remind the
client of existing terms of the existing audit engagement.
84

Section 5110 does not contain such a requirement but provides similar application
and explanatory material.

CAS 210 prohibits the auditor from agreeing to a change in the terms of an audit
engagement where there is no reasonable justification for doing so.

Section 5110 does not contain such a requirement.

CAS 210 contains requirements dealing with circumstances when the financial
reporting standards are supplemented by law or regulation.

Section 5110 does not deal with these circumstances.

CAS 210 contains requirements that deal with circumstances when law or regulation
prescribes the layout or wording of the auditor’s report in a form or in terms that are
significantly different from the requirement of the CASs.

Section 5110 does not deal with this scenario.
CAS 220 Quality Control for an Audit of Financial
Statements
(added Feb. 2010)

CAS 220, Quality Control for an Audit of Financial Statements, replaces Handbook
section 5030.

There are changes to the scope of the standard and a number of new concepts and
requirements are introduced in CAS 220.

CAS 220 links with CSQC-1 the same way section 5030 linked with the GSF-QC
material in the old Handbook.

CAS 220 applies only to audits of financial statements (adapted as necessary for
audits of other historical financial information).

Section 5030 applied to all assurance engagements.

CAS 220 requires the completion of the engagement quality control review and
resolution of any differences of opinion on or before the date of the auditor’s report
(we’ll cover that under CASs 560 and 700).

This represents a significant change from section 5030 which required that the
engagement quality control review be completed before the date of issuance of the
engagement report.

Currently, the date of substantial completion of examination is used as the date of the
auditor’s report.
85

For many firms, the date of the engagement report was (significantly) earlier than the
date of issuance of that report.

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that
the auditor’s report be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion
on the financial statements.

Consequently, the implementation of CAS 220 (and CSQC 1) will likely represent a
significant change in practice.

CAS 220 also modifies the scope of certain requirements.

Specifically, CAS 220 (like CSQC 1) uses the term “listed entity” rather than the
existing Canadian term “public enterprise”.

In addition, CAS 220 includes additional or more stringent requirements regarding:
o specific engagement quality control review procedures regarding discussion of
significant matters and review of financial statements and the proposed auditor’s
report;
o
engagement partner’s consideration of the results of the firm’s monitoring process;
and
o
engagement quality control review procedures specific to audits of financial
statements of listed entities;
o documentation of the work performed by the auditor and the engagement quality
control reviewer.
CAS 230 Audit Documentation
(major revision Feb. 2010)

CAS 230, Audit Documentation, replaces Handbook section 5145.

There is no change in the scope, nor are any new concepts introduced in CAS 230.

There are, however, changes in the requirements.

Section 5145 requires the auditor to assemble a complete and final audit file no more
than 45 days after one of three trigger points.

CAS 230 simply states that assembly of the final audit file must be performed on a
timely basis after the date of the auditor’s report.
86

However, CAS 230 goes on to state that the final audit file would normally be
assembled as at a date no more than 60 days after the date of the auditor’s report.

One new requirement relates to the rare situations where the auditor judges it
necessary to depart from a basic principle or an essential procedure that is relevant in
the circumstances of the audit.

If this happens, CAS 230 requires the auditor to document how the alternative audit
procedures performed achieved the objective of the audit, and, unless otherwise
clear, the reasons for the departure.

Section 5145 does not have a similar requirement.
CAS 240 The Auditor’s Responsibilities Relating to Fraud
in an Audit of Financial Statements
(added Feb. 2010)

CAS 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements, replaces Handbook section 5135.

There is no change in the scope, nor are any new concepts introduced in CAS 240.

There are, however, changes in the requirements.

Under section 5135, the auditor’s communication to “those charged with governance”
should include fraud (whether caused by management or other employees) that
results, or may result, in a non-trivial misstatement of the financial statements.

Under CAS 240, this communication is limited to material misstatements

Also, section 5135 required the auditor to communicate to those charged with
governance questions regarding the honesty and integrity of management and
matters that may cause future financial statements to be materially misstated.

These matters are not specifically addressed in CAS 240.

Finally, section 5135 required the auditor to communicate with a successor auditor
when fraud or suspected fraud was a factor in the existing auditor’s withdrawal from
the engagement.

This matter is not addressed in CAS 240.
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87
CAS 250 The Auditor’s Responsibilities Relating to Laws
and Regulations in an Audit of Financial Statements
(major revision Feb. 2010)

CAS 250, The Auditor’s Responsibilities Relating to Laws and Regulations in an Audit
of Financial Statements, replaces Handbook section 5136.

There is no change in the scope, but a key new concept is introduced in CAS 250.

Specifically, CAS 250 distinguishes between two categories of laws and regulations:
o laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements;
and
o other laws and regulations that do not have a direct effect on the determination of
the amounts and disclosures in the financial statements, but compliance with
which is necessary.

The requirements of CAS 250 also differ from those of section 5136.

Section 5136 required the auditor to obtain knowledge of relevant acts and
regulations, as well as obtain representations from management regarding illegal or
possibly illegal acts, and communicate these matters to those charged with
governance.

CAS 250 covers much the same matters, but is much more specific regarding these
matters than was section 5136.

In addition, CAS 250 is much more detailed regarding actions the auditor should take
when non-compliance is identified or suspected.

For example, CAS 250 requires the auditor to obtain sufficient appropriate audit
evidence regarding compliance with the provisions of laws and regulations generally
recognized to have an effect on the determination of material amounts and
disclosures in the financial statements.

If the auditor suspects there may be non-compliance, this must be discussed with
management and where appropriate, those charged with governance.

Furthermore, the auditor should consider the need to obtain legal advice regarding a
suspected instance of non-compliance.

If sufficient information about suspected non-compliance cannot be obtained, the
auditor must evaluate the lack of sufficient appropriate audit evidence and the impact
on the auditor’s report.
88

Furthermore, if the auditor has identified or suspects non-compliance with laws and
regulations, determine whether there is a responsibility to report the identified or
suspected non-compliance to parties outside the entity.

Finally, CAS 250 requires the auditor to document instances of identified or suspected
non-compliance and any related discussions with management, those charged with
governance, or parties outside the entity.
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CAS 260 Communications with those Charged with
Governance
(added Feb. 2010)

CAS 260, Communications with those Charged with Governance, replaces Handbook
section 5751.

There are changes to the scope and requirements relative to section 5751, as well as
a number of new concepts.

The biggest change is the narrowing of scope regarding matters to be communicated
to those charged with governance.

CAS 260 limits some requirements to listed entities, whereas section 5751 referred to
entities with public accountability — which may or may not have been listed entities.

Under section 5751, auditors were required to communicate matters related to their
independence, irrespective of the nature of the client.

Under CAS 260, this communication is required only of auditors of listed entities.

For matters other than independence, auditors of entities without public
accountability were only required to consider communicating in accordance with the
Recommendations in section 5751.

All auditors must follow all of the requirements in CAS 260.

Under section 5751, auditors of entities with public accountability were required to
communicate fees charged during the last year, distinguishing between audit and
non-audit services.

This sort of communication is now only required of listed entities.

Under section 5751, the auditor was to communicate with the audit committee or
equivalent.
89

CAS 260 is much more demanding, requiring the auditor to determine to whom the
communication should be addressed.

Furthermore, CAS 260 requires the auditor to consider whether communications with
those with management responsibility adequately informs all those charged with
governance with whom the auditor would ordinarily communicate when all of those
charged with governance are involved in managing the entity.

CAS 260 requires the auditor to communicate the form, timing and expected general
content of communications to those charged with governance.

This requirement was not part of section 5751.

CAS 260 requires the auditor to communicate with those charged with governance on
a timely basis.

Section 5751 limits its directive to making the audit committee aware of material
weaknesses in the design, implementation or operating effectiveness of internal
control as soon as practicable.

CAS 260 requires the auditor to evaluate whether the communication between the
auditor and those charged with governance was adequate for the purpose of the
audit, and if not, consider the effect on the auditor’s assessment of the risks of
material misstatements.

These requirements were not part of section 5751.

CAS 260 requires the auditor, if communicating orally, to document how and to whom
matters required to be communicated have been communicated.

These requirements were not part of section 5751.
CAS 265 Communicating Deficiencies in Internal Control
(added Feb. 2010)

CAS 265, Communicating Deficiencies in Internal Control, is not a direct replacement
for an existing Handbook section, although sections 5141 and 5220 deal with overall
concepts that are similar to the matters covered by CAS 265.

Notwithstanding, there are no new concepts introduced in CAS 265, although there
are changes in terminology.

Specifically, CAS 265 refers to “deficiencies in internal control” and “significant
deficiencies.”

The definition of a “significant deficiency” is aligned with the definitions in section
5925 and the PCAOB’s Auditing Standard 5.
90

Furthermore, a significant deficiency is the type of deficiency in internal control that
the auditor should report to those charged with governance.

The term “significant deficiency” is used in all CASs rather than “material weakness.”

Moreover, the Handbook used “material weakness” and “significant deficiency”
synonymously.

Furthermore, unlike CAS 265, section 5925 required the auditor to categorize
significant deficiencies in the audit of internal control over financial reporting that are
more severe as “material weaknesses.”

CAS 265 requires that specific matters be included in the written communication of
significant deficiencies to those charged with governance and management.

Currently, the auditor is required to communicate weaknesses in internal control
identified during the course of the financial statement audit.

However, there are no specific requirements regarding the timing or content of such
communication or even if it needs to be in writing.
CAS 300 Planning an Audit of Financial Statements
(added Feb. 2010)

CAS 300, Planning an Audit of Financial Statements, replaces Handbook section 5150.

There is no change in the scope, nor are any new concepts introduced in CAS 300.

Neither are there changes in the requirements, although there are a few small
matters.

CAS 300 uses the example of a brief memorandum as a basis for planning a small
audit engagement.

This example had not been part of section 5150.

Also, CAS 300 contains application and other explanatory material that refers to
reviewing the previous auditor’s working papers in the case of an initial engagement.

Section 5150 only referred to discussions with the predecessor auditor since, in
Canada, it wasn’t always (ever?) the case that the auditor would be able to review
the predecessor auditor’s working papers.
91
CAS 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its
Environment
(added Feb. 2010)

CAS 315, Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment, replaces Handbook section 5141.

There is no change in the scope, nor are any new concepts introduced in CAS 315.

However, there are changes in the requirements.

CAS 315 requires the auditor to consider whether information obtained from the client
acceptance or continuance process is relevant to identifying risks of material
misstatement.

Section 5141 had similar wording, but it was not a recommendation.

Section 5141 required that the auditor obtain written representation from
management acknowledging its responsibility for the design and implementation of
internal control to prevent and detect error.

This matter is not addressed in CAS 315.

When the entity has an internal audit function, CAS 315 requires the auditor to take
steps and perform tests to determine whether the internal audit function is likely to
be relevant to the audit.

This requirement was not part of section 5141.

Finally, section 5141 dealt with the communication of material weaknesses in internal
control that came to the auditor’s attention.

These matters are addressed in CAS 265.
CAS 320 Materiality in Planning and Performing an Audit
and CAS 450 Evaluation of Misstatements Identified
During the Audit
(major revision Feb. 2010)

CAS 320, Materiality in Planning and Performing an Audit, is teamed with CAS 450,
and together they replace Handbook section 5142 and Guideline AuG-41.

There are no changes in the scope, nor are any new concepts introduced in either of
the CASs
92


However, there are changes in the requirements.
CAS 320 contains explicit requirements on determining materiality at three separate
levels:
o materiality for the financial statements as a whole;
o where applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures; and
o performance materiality.

Furthermore, CAS 320 requires that the audit documentation include:
o materiality for the financial statements as a whole;
o here applicable, the materiality level or levels for particular classes of transactions,
account balances or disclosures;
o
performance materiality; and
o
any revisions of these factors as the audit progresses.
o

CAS 330, The Auditor’s Responses to Assessed Risks, replaces Handbook section
5143.

There is no change in the scope, nor are any new concepts introduced in CAS 330.

Furthermore, there is only one small difference between section 5143 and CAS 330

CAS 330 considers whether external confirmation procedures are to be performed as
substantive procedures.

This requirement was not part of section 5143.
CAS 450 Evaluation of Misstatements Identified during
the Audit
(added Feb. 2010)

CAS 450, Evaluation of Misstatements Identified during the Audit, is teamed with CAS
320, and together they replace Handbook section 5142 and Guideline AuG-41.

There are no changes in the scope, nor are any new concepts introduced in either of
the CASs.

However, as with CAS 320, there are changes in the requirements.
93

In particular, the material relating to the evaluation of misstatements is quite
different.

For example, section 5142 required the auditor to aggregate:
o misstatements identified as a result of performing specific procedures on other
than representative samples;
o projections of misstatements; and
o disagreements with accounting estimates.

On the other hand, CAS 450 does not require the aggregation of misstatements by
these distinct types, although the standard does provide application and explanatory
material regarding this matter.

Another difference relates to misstatements accumulated during the audit.

CAS 450 requires the auditor to request of management that they correct all
misstatements accumulated during the audit in all cases, regardless of whether the
financial statements are materially misstated.

On the other hand, section 5142 only required the auditor to make sure that
management addressed material misstatements, although it did suggest that the
auditor encourage management to correct all non-trivial misstatements.

Furthermore, there are a number of requirements that are either not part of section
5142, are covered in a very broad sense or are (not) addressed (in whole or in part)
by AuG-41.

Following are some of the key differences:
o If management refuses to correct some or all of the misstatements communicated
by the auditor, the auditor must obtain an understanding of management’s
reasons for not making the corrections and take that understanding into account
when evaluating whether the financial statements as a whole are free from
material misstatements.
o Prior to evaluating the effect of uncorrected misstatements, CAS 450 requires the
auditor to reassess materiality determined in accordance with CAS 320 to confirm
whether it remains appropriate in the context of the entity’s actual financial
results.
o CAS 450 requires the auditor to consider the size and nature of any misstatements
and the particular circumstances of their occurrence and determine whether
uncorrected misstatements are material, individually or in aggregate.
94
o CAS 450 requires the auditor to first, communicate the effect of uncorrected
misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and the financial statements as a whole, to those
charged with governance, and second, request that uncorrected misstatements be
corrected.
o CAS 450 requires that the audit documentation include:

the amount below which misstatements would be regarded as clearly trivial;

all misstatements accumulated during the audit and whether they have been
corrected; and

the auditor’s conclusion as to whether uncorrected misstatements are material,
individually or in aggregate, and the basis for that conclusion.
o Finally, there are requirements specified in CAS 450 that were part of other
Handbook sections.
o For example, the requirement to communicate uncorrected misstatements to those
charged with governance was previously part of section 5751.
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CAS 402 Audit Considerations Relating to an Entity Using
a Service Organization
(added Feb. 2010)

CAS 402, Audit Considerations Relating to an Entity Using a Service Organization,
replaces Handbook section 5310.

There are no changes in the scope, nor are any new concepts introduced in CAS 402.

In addition, differences between CAS 402 and section 5330 are more a case of being
a recommendation in one and explanatory material or guidance (as the case may be)
in the other, and vice-versa, rather than unique new or different requirements.

CAS 402 requires the auditor to obtain an understanding of the services provided by a
service organization such that the auditor has a basis for the identification and
assessment of material misstatement.

CAS 402 requires the auditor, in responding to assessed risks, to determine whether
sufficient appropriate audit evidence is available from the records held at the user
entity and if not, to obtain such evidence from the service organization.
95

CAS 402 requires the user auditor to inquire of management of the user entity whether the
service organization has reported any fraud, non-compliance with laws and regulations and
uncorrected misstatements that affect the user entity and if so, determine the effect on the audit
procedures.

CAS 402 requires that when a user auditor includes reference to the work of a service
auditor to support a modified opinion, the user auditor’s report will also indicate that
such reference does not diminish the user auditor’s responsibility for that opinion.

With respect to a type 2 report, CAS 402 treats the following section 5310
recommendations as Application And Other Explanatory Material:
o Determination of specific tests of controls and results in the service auditor’s report
that are relevant;
o Evaluation of the results of tests of those specific controls to support the auditor’s
assessed level of control risk;
o Evaluation of the adequacy of the time period covered by the tests of controls and
the time elapsed since the performance of the tests of controls; and
o User auditor’s assessment of a service auditor’s report that contains a reservation
of opinion.

Lastly, CAS 402 permits the user auditor to use service auditor’s reports issued under
standards developed in other jurisdictions, provided the user auditor is satisfied that
the report provides sufficient and appropriate audit evidence.
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CAS 500 Audit Evidence
(major revision Feb. 2010)

CAS 500, Audit Evidence, replaces Handbook section 5300.

There is no change in the scope, nor are any new concepts introduced in CAS 500.

However, there are changes in the requirements.

CAS 500 is much more specific than section 5300 in that material which was
previously application and explanatory material is now part of the requirements.

This is not as big a deal as it sounds since the Recommendations of section 5300
included the application and explanatory material.
96

Furthermore, CAS 500 requires the auditor to specifically:
o design and perform audit procedures that are appropriate in the circumstances for
the purposes of obtaining sufficient appropriate audit evidence; and
o consider the relevance and reliability of information to be used as audit evidence.

CAS 500 requires the auditor to determine an approach to selecting items for testing
that is effective in meeting the purpose of the audit procedure when designing tests
of controls and tests of details.

When there is an inconsistency in audit evidence obtained from different sources or
when there are doubts about the reliability of information to be used as audit
evidence, the auditor must determine what modifications or additions to audit
procedures are necessary to resolve the matter.

Furthermore, in the circumstances described on the previous slide, the auditor must
consider the effect of the matter, if any, on other aspects of the audit.

Another area where there is a difference relates to where section 5300 required the
auditor to use assertions underlying aspects of the financial statements to:
o assess material misstatements and
o design and perform further audit procedures.

CAS 500 does not have similar requirements.

Instead, CAS 315 and CAS 330 deal with use of assertions.

Finally, the requirements regarding use of the work of an expert — which were part of
Handbook section 5049 — are generally covered in CAS 620 rather than in CAS 500.

However, CAS 500 does contain specific demands of the auditor insofar as using the
work of an expert as evidence is concerned — especially when the “expert” is
management’s.
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CAS 501 Audit Evidence Regarding Specific Financial
Statement Account Balances and Disclosures
(added Feb. 2010)

CAS 501, Audit Evidence Regarding Specific Financial Statement Account Balances
and Disclosures, replaces Handbook sections 6030 and 6560.

There is no change in the scope, nor are any new concepts introduced in CAS 501.
97

However, there are changes in the requirements.

For example, CAS 501 calls for auditor to obtain sufficient appropriate evidence
regarding the existence and physical condition of inventories.

This differs from section 6030 which not only deals with the existence, ownership and
condition of inventories but also requires the auditor to obtain evidence regarding the
valuation of inventory.

On the other hand, both section 6030 and CAS 501 require an auditor to attend the
physical inventory count unless it is impracticable to do so.

Note that under CAS 501, general inconvenience to the auditor is not sufficient to
support a decision that attendance is impracticable.

CAS 501 provides more explicit requirements than section 6030 regarding the
auditor’s responsibilities when the:
o
physical count has been conducted at a date other than the date of the financial
statements;
o
auditor is unable to attend the count due to unforeseen circumstances; and
o
inventory is under the custody and control of a third party.

CAS 501 specifically requires the auditor to perform procedures to become aware of
litigation and claims.

Section 6560 deals with such procedures in the Appendix to the standard.

CAS 501 specifies actions when management refuses to give the auditor permission
to communicate or meet with the entity’s legal counsel, or when the entity’s legal
counsel refuses to respond to the letter of inquiry.

These circumstances are not dealt with by section 6560.

Section 6560 requires the auditor to consider the effect of disagreements between an
entity and legal counsel on the evaluation of legal claims on the content of the
auditor’s report.

CAS 501 does not contain such a requirement.

Section 6560 also specifies steps to be taken when, at a conference to discuss the
entity’s legal counsel’s disagreement with the client’s evaluation, the disagreement is
resolved.

CAS 501 does not address this scenario.
98

CAS 501 contains one requirement on segment information, and application and other
material is provided relating to the requirement.

The guidance in AuG-26 is more extensive than that provided by CAS 501.
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CAS 505 External Confirmations
(added Feb. 2010)

CAS 505, External Confirmations, replaces Handbook section 5303.

There is no change in the scope, but new concepts are introduced in CAS 505, as well
as new and/or different requirements.

CAS 505 includes various definitions that do not exist, or may differ from those in
section 5303.

For example, CAS 505 defines “external confirmation” to be audit evidence obtained
as a direct written response to the auditor from a third party, in paper form, or by
electronic or other medium.

Section 5303 defines “confirmation” as a process of obtaining and evaluating a direct
communication from a third party in response to a request for information.

Further, when management refuses to allow the auditor to send a confirmation
request, CAS 505 requires the auditor to take the steps outlined below:
o Inquire as to management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness;
o Evaluate the implications of management’s refusal on the auditor’s assessment of
the relevant risks of material misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures; and
o Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.

Section 5303 does not contain any specific requirements with respect to management
requests not to confirm but provides some guidance.

The auditor must communicate with those charged with governance and determine
the implications for the audit and the auditor’s opinion in accordance with CAS 705
under the circumstances described on the next slide.
99

The auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable, or

The auditor is unable to obtain relevant and reliable audit evidence from alternative
audit procedures.

CAS 505 requires the auditor to perform alternative audit procedures for nonresponses to obtain relevant and reliable audit evidence.

Further, the auditor must investigate exceptions to determine whether or not they
represent misstatements.

Section 5303 does not contain a specific requirement to investigate exceptions.

Because negative confirmations provide less persuasive audit evidence than positive
confirmations, the auditor should not use negative confirmation requests as the sole
substantive audit procedure to address an assessed risk of material misstatement at
the assertion level unless certain conditions are present.

Section 5303 does not contain any specific requirements concerning negative
confirmations but indicates that negative confirmation requests would be used only
when the auditor has no reason to believe that recipients would disregard these
requests.
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CAS 510 Initial Audit Engagements — Opening Balances
(added Feb. 2010)

CAS 510, Initial Audit Engagements — Opening Balances, has no equivalent
Handbook section, although sections 5150 and 5510, along with AuG-8, contain
limited application and explanatory material regarding opening balances.

Accordingly, all the requirements are new.

Notwithstanding, there are no new concepts in CAS 510.

The requirements of CAS 510, which were not explicitly addressed by the old
Handbook, are described below.

Opening Balances:
o The auditor is required to read the most recent financial statements, if any, and
the predecessor auditor’s report thereon, if any, for information relevant to
opening balances, including disclosures.
100

o
The auditor is required to obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect the
current period’s financial statements.
o
If the auditor concludes that the opening balances contain misstatements that
could materially affect the current period’s financial statements, such additional
audit procedures as are appropriate in the circumstances must be performed to
determine the effect on the current period’s financial statements.
o
If the auditor concludes that such misstatements exist in the current period’s
financial statements, the auditor is required to communicate the misstatements
with the appropriate level of management and those charged with governance in
accordance with CAS 450.
o
Furthermore, if the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor is required to express either a
qualified opinion or a disclaimer of opinion (as appropriate) in accordance with CAS
705.
o
Likewise, if the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements, and
the effect of the misstatement is not properly accounted for or not adequately
presented or disclosed, either a qualified opinion or a disclaimer of opinion (as
appropriate) must be expressed in accordance with CAS 705.
Consistency of Accounting Policies:
o
The auditor is required to obtain sufficient appropriate audit evidence about
whether the accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements.
o
Likewise, the auditor is required to obtain sufficient appropriate audit evidence
about whether changes in accounting policies have been properly accounted for
and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
o
If the auditor concludes that the current period’s accounting policies are not
consistently applied in relation to opening balances in accordance with the
applicable financial reporting framework, the auditor is required to express either a
qualified opinion or an adverse opinion (as appropriate) in accordance with CAS
705.
o Likewise, if the auditor concludes that a change in accounting policies was not
properly accounted for or not adequately presented or disclosed in accordance
with the applicable financial reporting framework, either a qualified opinion or an
adverse opinion (as appropriate) must be expressed in accordance with CAS 705.
101

If the prior period’s financial statements were audited by a predecessor auditor and
there was a modification to the opinion, the auditor is required to evaluate the effect
of the matter giving rise to the modification in assessing the risks of material
misstatement in the current period’s financial statements in accordance with CAS
315.

Furthermore, if the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification that remains relevant and material to the current
period’s financial statements, the opinion on the current period’s financial statements
will also have to be modified in accordance with CAS 705 and CAS 710.
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CAS 520 Analytical Procedures
(added Feb. 2010)

CAS 520, Analytical Procedures, replaces Handbook section 5301.

There are no new concepts introduced in CAS 520, but there is a change in the scope
and in the requirements.

Section 5301 dealt with the use of analysis as either risk assessment procedures,
substantive procedures, or as part of the auditor’s overall review of the financial
statements at or near the end of the audit.

CAS 520 does not include requirements or guidance addressing the use of analysis as
risk assessment procedures — this is addressed in CAS 315 and not repeated in CAS
520.

CAS 520 requires that when analytical procedures performed in accordance with the
CAS identify fluctuations or relationships that are inconsistent with other relevant
information, or that differ from expected value by a significant amount, the auditor
has to investigate the difference.

Specifically, the auditor must:
o inquire of management and obtain appropriate audit evidence relevant to
management’s responses, and
o perform other audit procedures as necessary in the circumstances.

Section 5301 required that the auditor obtain adequate explanations in investigating
results of analytical procedures but did not specifically require the auditor to “inquire
of management.”
102

Moreover, section 5301 did not require the auditor to perform other audit procedures
“as necessary in the circumstances, although it did provide application and
explanatory material.
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CAS 530 Audit Sampling
(added Feb. 2010)

CAS 530, Audit Sampling, has no equivalent Handbook section, although brief
guidance on sampling and other means of selecting items for testing was addressed
in paragraphs 5300.14-.17.

Accordingly, all the requirements are new.

Interestingly, CAS 530 does not require the use of audit sampling.

Rather, it states that it “complements CAS 500, Audit Evidence.”

Audit sampling is listed as one of the means available to the auditor to obtain
sufficient appropriate audit evidence.

Accordingly, when the auditor chooses to use audit sampling in performing audit
procedures, CAS 530 provides relevant requirements, and application and other
explanatory material.

It addresses:
o designing an audit sample, determining a sample size, and selecting items for the
sample;
o performing audit procedures on the items selected;
o investigating the nature and cause of deviations and misstatements;
o projecting misstatements found in the sample to the population; and
o evaluating the results of the sample and whether the use of audit sampling has
provided a reasonable basis for conclusion about the population that has been
tested.
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103
CAS 540 Auditing Accounting Estimates, Including Fair
Value Accounting Estimates, and Related Disclosures
(major revision Feb. 2010)

CAS 540, Auditing Accounting Estimates, including Fair Value Accounting Estimates,
and Related Disclosures, replaces Handbook section 5305.

There is no change in the scope, nor are any new concepts introduced in CAS 540.

However, there are changes in the requirements.

CAS 540 introduces risk assessment procedures that are not contained in section
5305.

CAS 540 also requires the auditor to review the outcome of accounting estimates
made in the prior period financial statements.

This is consistent with section 5135 but was not a requirement of Section 5305.

CAS 540 defines estimation uncertainty as “the susceptibility of an accounting
estimate and related disclosures to an inherent lack of precision in its measurement”.

This definition was not included in section 5305.

CAS 540 focuses the auditor’s work effort on accounting estimates that have a risk of
material misstatement and on those that have high estimation uncertainty.

The goal is to determine which accounting estimates have high estimation uncertainty
and therefore may be significant risks that require special audit consideration.

Where an accounting estimate gives rise to a significant risk, the auditor must
evaluate whether the significant assumptions made by management provide a
reasonable basis for the accounting estimate, whether and how management has
considered alternative assumptions or outcomes, and why they have rejected them.

If management has not adequately addressed the effects of estimation uncertainty on
the accounting estimates that give rise to significant risk, the auditor must, if it is
considered necessary, develop a reasonable range of outcomes with which to
evaluate the reasonableness of management’s estimate.

For accounting estimates that give rise to significant risks, the auditor must evaluate
the adequacy of management’s disclosure in the financial statements in the context of
the requirements of the applicable financial reporting framework relevant to the
accounting estimate.
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CAS 550 Related Parties
(major revision Feb. 2010)

CAS 550, Related Parties, replaces Handbook section 6010.

There is no change in the scope, but new concepts and requirements are introduced
in CAS 550.

The basic objective is to evaluate whether related party relationships and transactions
could cause the financial statements to fail to achieve fair presentation.

The auditor must obtain sufficient appropriate audit evidence to support any assertion
by management that related party transactions were conducted on terms equivalent
to arm’s length, or under normal market conditions.

CAS 550 requires an auditor to consider the impact of related parties and the
potential effect on the financial statements and report under any acceptable financial
reporting framework, not just Canadian GAAP.

Furthermore, the auditor must obtain an understanding of related party relationships
and transactions sufficient to be able to conclude whether the financial statements
are affected — whether or not the applicable financial reporting framework
establishes related party requirements.

The notion of “affected” depends on the type of framework:
o for fair presentation frameworks, it means to achieve fair presentation;
o for compliance frameworks, it means that the statements are not misleading.

Section 6010 required the auditor to obtain sufficient appropriate audit evidence to
determine whether any identified related party transactions had been measured in
accordance with Canadian GAAP.

Because CAS 550 is not tied to any particular financial reporting framework, including
Canadian GAAP, it does not contain equivalent requirements.

Notwithstanding, CAS 550 is consistent with the overall thrust of section 6010, but is
more explicit in what is required of the auditor.

In addition, CAS imposes a number of requirements beyond what was in section
6010.

For example, the auditor must include the names of identified related parties, and
nature of the related party relationships, in the audit documentation.
105

Even more, the auditor must treat identified significant related party transactions
outside the entity’s normal course of business as giving rise to significant risks.

CAS 550 also deals with additional requirements regarding responses to the risks of
material misstatement associated with related party relationships and transactions.

These requirements “kick in” when the auditor identifies related parties or significant
related party transactions that management has not previously identified or disclosed.

In such instances, the auditor would want to determine why the entity’s controls over
related party relationships and transactions failed to enable the identification or
disclosure of the related party relationships or transactions, in addition to other
procedures.

The overall objective would be to evaluate the implications for the audit if the nondisclosure by management appears intentional — and therefore indicative of a risk of
material misstatement due to fraud.
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CAS 560 Subsequent Events
(added Feb. 2010)

CAS 560, Subsequent Events, replaces Handbook sections 5405 and 6550.

There is no change in the scope, but new concepts and requirements are introduced
in CAS 560.

Like section 6550, CAS 560 requires that subsequent event audit procedures cover
the period from the date of the financial statements up to the date of the auditor’s
report, or as near as practicable thereto.

The problem is, CAS 560 is affected by changes that impact another standard — CAS
700.

The ripple from the interrelationship between 560 and 700 affects what is considered
the “subsequent period.”

Section 5405 required the date of substantial completion of examination to be used
as the date of the auditor’s report.

Consequently, the auditor’s report would often (usually?) be dated before the date on
which those with recognized authority approved the financial statements.

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that
the auditor’s report be dated no earlier than the date on which the auditor has
106
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion
on the financial statements.

In particular, CAS 700 requires that:
o all the statements that comprise the financial statements, including the related
notes, have been prepared; and
o those with the recognized authority have asserted that they have taken
responsibility for those financial statements.

The upshot is that the period in which subsequent events occur has been narrowed
(even eliminated) in most cases. Why?

The auditor’s report is dated when the Board accepts responsibility — which means
there often is no “subsequent” period.

Section 6550 dealt with events occurring between the date of the financial statements
and the date of the auditor’s report.

Under CAS 560, there is no such intervening period.

Audited financial statements cannot be issued without an auditor’s report, CAS 560
points out that the date that the audited financial statements are issued must not
only be at or later than the date of the auditor’s report, but must also be at or later
than the date the auditor’s report is provided to the entity.

Section 5405 dealt with the period between the auditor’s report date and the date the
auditor’s report was released.

The auditor’s report was deemed “released” when the auditor granted permission to
use the auditor’s report in connection with the issuance of the client’s financial
statements.

Under CAS 560, this interval is again virtually eliminated.

It is the last category — facts which become known to the auditor after the financial
statements have been issued — where CAS 560 and section 6550 overlap.

If a fact becomes known to the auditor after the date of the report, the auditor shall:
o discuss the matter with management and, where appropriate, those charged with
governance;
o determine whether the financial statements need amendment and, if so;
o inquire how management intends to address the matter in the financial
statements.
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
It is this last requirement that is new to Canadian GAAS.

When management does not amend the financial statements in circumstances where
the auditor believes they need to be amended, the auditor must modify the opinion as
required by CAS 705, Modifications to the Opinion in the Independent Auditor’s
Report — assuming, of course, that the statements have not yet been issued.

If the auditor’s report has already been provided to the entity, the auditor must notify
management and those charged with governance not to issue the financial
statements to third parties before the necessary amendments have been made.

This sort of situation would not arise under current Canadian GAAS as Section 5405 is
based on the assumption that management and the auditor are in agreement as to
how the misstatement should be dealt with.

CAS 560 provides the auditor with an option to dual date the auditor’s report —
something not possible under section 5405.

CAS 560 also allows the report to be single dated with a statement included in an
Emphasis of Matter paragraph or Other Matter(s) paragraph that conveys that the
auditor’s procedures on subsequent events are restricted solely to the amendment of
the financial statements as described in the relevant note to the financial statements.
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CAS 570 Going Concern
(major revision Feb. 2010)

CAS 570, Going Concern, has no Handbook equivalent section, although paragraphs
5510.51 to 5510.53 contained application and explanatory material on matters
related to going concern.

Accordingly, all the requirements are new.

CAS 570 provides guidance on matters such as:
o the auditor’s risk assessment procedures, including consideration of whether there
are events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern;
o the auditor’s responses to risk assessment procedures, including evaluating
management’s assessment of the entity’s ability to continue as a going concern;
o inquiring of management if they are aware of any matters beyond the assessment
period that may cast doubt on the entity’s ability to continue as a going concern;
108
o when events or conditions have been identified that cast significant doubt on the
entity’s ability to continue as a going concern, performing audit procedures to
obtain sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists;
o based on the audit evidence obtained, concluding (and reporting appropriately)
whether a material uncertainty exists related to events or conditions that casts
significant doubt on the entity’s ability to continue as a going concern; and
o communicating events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern to those charged with governance, unless all
those charged with governance are involved in managing the entity.
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CAS 580 Written Representations
(major revision Feb. 2010)

CAS 580, Written Representations, replaces Handbook section 5370.

There are no new concepts introduced in CAS 580, but there are changes in the scope
and in the requirements.

Section 5370 applies to all representations provided by management, whether
written or oral, explicit or implied, solicited or unsolicited.

CAS 580 applies only to written representations that have been provided in
response to the auditor’s request.

CAS 580 requires that the auditor request written representations from management
with appropriate responsibilities for the financial statements and knowledge of the
matters concerned.

Section 5370 did not contain such a requirement although it did provide similar
guidance.

CAS 580 requires that the auditor request from management written representation it
has fulfilled its responsibility for the preparation of the financial statements in
accordance with the applicable financial reporting framework as agreed in the terms
of the audit engagement.

Section 5370 required that the representation letter include management’s
acknowledgement of its responsibility for the fair presentation of the financial
statements and its belief that the financial statements are presented fairly.

Close, but not quite the same.
109

CAS 580 requires that management’s responsibility be described in the written
representation in the same manner as described in the terms of the audit
engagement.

Section 5370 does not contain such a requirement.

If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, or about its commitment, to or enforcement of these, CAS
580 requires the auditor to determine the effect that such concerns may have on the
reliability of representations and audit evidence in general.

Section 5370 does not contain such a requirement, although section 5090 does
address such concerns.

If the reliability of written representations is in doubt due to inconsistency with other
audit evidence and the matter cannot be resolved, CAS 580 requires the auditor
to reconsider the assessment of the competence, integrity, etc., and the effect this
may have on the reliability of representations and audit evidence in general.

If the auditor concludes that any other written representations are unreliable, CAS
580 requires the auditor to take appropriate action, including determining the
possible effect on the opinion in the auditor’s report.

Section 5370 does not contain such a requirement.

If management does not provide the written representations requested by the
auditor, CAS 580 requires the auditor to discuss the matter with management, and
reevaluate the integrity of management and evaluate the effect that this may have on
the reliability of representations and audit evidence in general.

Furthermore, if management does not provide the written representations requested
required about the fulfillment of its responsibilities, CAS 580 requires the auditor to
disclaim an opinion on the financial statements.

This action contrasts with section 5370, which requires the auditor to issue a qualified
opinion or a disclaimer, but does not specify the circumstances when a disclaimer
would be required.

Section 5370 requires the auditor to obtain written representations for matters that
are material to the financial statements, matters that are significant to the
engagement, and matters relevant to management’s judgments and estimates that
are material to the financial statements.

CAS 580 does not require the auditor to obtain written representations from
management regarding specific assertions embedded in the financial statements.
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110
CAS 600 Special Considerations — Audits of Group
Financial Statements (Including the Work of Component
Auditors)
(added Feb. 2010)

CAS 600, Special Considerations — Audits of Group Financial Statements (Including
the Work of Component Auditors), replaces Handbook section 6930.

There are no changes in the scope, but there are changes in the concepts and in the
requirements of CAS 600.

CAS 600 introduces the concept that a component may be an entity or a business
activity.

Both section 6930 and CAS 600 define the “primary auditor” but CAS 600 notes that
the “primary auditor” may be the partner or the engagement team.

CAS 600 distinguishes between the group engagement partner and group
engagement team and specifies that certain requirements are to be performed by the
group engagement partner as opposed to the group engagement team.

Group engagement partner: the partner or other person in the firm who is
responsible for the group audit engagement and its performance, and for the
auditor’s report on the group financial statements that is issued on behalf of the firm.

Group engagement team: partners, including the group engagement partner, and
staff who establish the overall group audit strategy, communicate with component
auditors, perform work on the consolidation process, and evaluate the conclusions
drawn from the audit evidence as the basis for forming an opinion on the group
financial statements.

The group engagement partner cannot accept an engagement, or must resign from
the engagement, if it will not be possible for the group engagement team to obtain
sufficient appropriate audit evidence due to restrictions imposed by group
management AND the possible effects of this inability will result in a disclaimer of
opinion on the group financial statements.

CAS 600 contains requirements for the auditor to determine four levels of materiality:
o materiality level for the group financial statements as a whole when establishing
the overall group audit strategy;
o if applicable, materiality level for particular classes of transactions, account
balances or disclosures in the group financial statements;
o component materiality; and
111
o the threshold above which misstatements cannot be regarded as clearly trivial.

CAS 600 contains more extensive and specific requirements than section 6930
regarding the nature, timing and extent of procedures to be performed in the context
of the group audit.

CAS 600 does not permit the auditor’s report on the group financial statements to
refer to a component auditor unless required by law or regulation.
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CAS 610 The Auditor’s Consideration of the Internal Audit
Function
(major revision Feb. 2010)

CAS 610, Using the Work of Internal Auditors, replaces part of Handbook section
5050.

There are no new concepts introduced in CAS 610, but there are changes in the scope
and in the requirements.

CAS 610 applies only to audits of financial statements (adapted as necessary for
audits of other historical financial information).

Section 5050 applied to all assurance engagements and so it had a broader scope.

In addition, section 5050 addressed the practitioner’s use of internal audit staff to
provide direct assistance under the practitioner’s supervision.

This consideration is not within the scope of CAS 610.

As discussed under CAS 315, if the entity has an internal audit function, the auditor
must take steps and perform tests to determine whether the internal audit function is
likely to be relevant to the audit — if so, CAS 610 applies.

Section 5050 did not contain such a requirement.

CAS 610 suggests that internal audit will “likely be relevant to the audit” if:
o the nature of the internal audit function’s responsibilities and activities are related
to the entity’s financial reporting; and
o the auditor expects to use the work of the internal auditors to modify the nature or
timing, or reduce the extent, of audit procedures to be performed.

Section 5050 uses similar terminology, namely “relevant to the engagement”, but
does not provide a definition.
112

If the internal audit function is likely to be adequate for the audit, the auditor must
evaluate:
o the objectivity of the internal audit function;
o the technical competence of the internal auditors;
o whether the work of the internal auditors is likely to be carried out with due
professional care; and
o whether there is likely to be effective communication between the internal auditors
and the external auditors.

Section 5050 did not impose these requirements, although it did suggest similar
guidance.

If the internal audit function is likely to be adequate for the audit, the auditor must
then determine the planned effect of the work of the internal auditors on the nature,
timing or extent of the external auditor’s procedures.

Section 5050 did not impose this requirement, although it did suggest similar
guidance.

Furthermore, when determining the planned effect of the work of the internal auditors
on the nature, timing or extent of the external auditor’s procedures, the auditor has
to consider the three factors cited on the next two slides.
o The nature and scope of specific work performed, or to be performed, by the
internal auditors;
o The assessed risks of material misstatement at the assertion level for particular
classes of transactions, account balances, and disclosures; and
o The degree of subjectivity involved in the evaluation of the audit evidence
gathered by the internal auditors in support of the relevant assertions.

Section 5050 did not contain any requirements or guidance on these considerations.

Under CAS 610, when considering the adequacy of specific work performed by the
internal auditors, the auditor must consider the following five factors:
o The work was performed by internal auditors having adequate technical training
and proficiency;
o The work was properly supervised, reviewed and documented;
o Adequate audit evidence has been obtained to enable the internal auditors to draw
reasonable conclusions;
113
o Conclusions reached are appropriate in the circumstances and any reports
prepared by the internal auditors are consistent with the results of the work
performed; and
o Any exceptions or unusual matters disclosed by the internal auditors are properly
resolved.

Section 5050 did not impose this requirement, although it did suggest similar
guidance for the first four factors.

The last factor was not addressed in section 5050.

CAS 610 requires the auditor to document conclusions regarding the evaluation of the
adequacy of the work of the internal auditors, and the audit procedures performed by
the external auditor on that work.

Section 5050 did not impose this requirement, although it did suggest similar
guidance.

Finally, section 5050 requires that the auditor’s report not refer to the use of internal
audit work.

CAS 610 is silent on this issue.
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CAS 620 Using the Work of an Auditor’s Expert
(added Feb. 2010)

CAS 620, Using the Work of an Auditor’s Expert, replaces part of Handbook section
5049.

There are no new concepts introduced in CAS 620, but there are changes in the scope
and in the requirements.

Like CAS 610, CAS 620 applies only to audits of financial statements (adapted as
necessary for audits of other historical financial information).

Section 5049 applied to all assurance engagements.

CAS 620 deals only with the use of the work of the auditor’s expert.

Issues related to the auditor’s consideration of the work performed by management’s
experts in helping management to prepare the entity’s financial statements are
addressed in CAS 500.
114

Section 5049 dealt with both the use of the work of auditor’s experts and the
auditor’s use of work performed by management’s experts (i.e., specialists employed
or engaged by an accountable party).

CAS 620 defines an auditor’s expert as an individual or organization possessing
expertise in a field other than accounting or auditing …

Section 5049 does not exclude expertise particular to accounting or auditing matters
from its scope.

The requirement in CAS 620 dealing with determining the need for an auditor’s expert
is more explicit than the related requirement in section 5049.

Likewise, the requirements in CAS 620 dealing with obtaining an understanding of the
field of expertise of the auditor’s expert, providing direction to, and communicating
with that expert are more explicit than related requirements in section 5049.

CAS 620 requires the agreement with the auditor’s expert to be in writing when
appropriate.

There is no requirement in section 5049 requiring an agreement between the auditor
and the expert be in writing.

CAS 620 requires the auditor to evaluate the competence, capabilities, and objectivity
of the expert.

When an auditor’s external expert is used, there is an additional requirement to
ensure that there is no threat to that expert’s objectivity.

Both CAS 620 and section 5049 state that the auditor’s standard report should not
refer to the work of the expert.

However, CAS 620 contains the caveat that such reference would not be made unless
required by law or regulation.

Both CAS 620 and section 5049 permit reference to the work of the expert when the
opinion is modified.

However, CAS 620 stipulates that when such a reference is made, the auditor’s report
must clearly indicate that the reference does not diminish the auditor’s responsibility
for the report.
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115
CAS 700 Forming an Opinion and Reporting on Financial
Statements
(added Feb. 2010)

CAS 700, Forming an Opinion and Reporting on Financial Statements, replaces
Handbook section 5400 as well as Auditing Guidelines AuG-21, AuG-40 and AuG-45.

There is no change in the scope, but there are changes to the concepts and in the
requirements.

The primary difference is that under CAS 700, the auditor may report on financial
statements prepared using a financial reporting framework that is a fair presentation
framework or a compliance framework.

In other words, GAAP is no longer the only basis for reporting.

CAS 200 defines a “fair presentation framework” as a financial reporting framework
that requires compliance with the requirements of the framework.

The definition also imposes two additional conditions set out below.

A fair presentation framework acknowledges:
o either explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond
those specifically required by the framework; or
o for management to depart from a requirement of the framework to achieve fair
presentation of the financial statements.

A compliance is a financial reporting framework that requires compliance with the
requirements of the framework, but does not contain the acknowledgements set out
above.

CAS 700 also impacts the date of the auditor’s report.

As noted when covering CAS 560, the auditor’s report is dated no earlier than the
date on which the auditor has obtained sufficient appropriate audit evidence on which
to base the opinion on the financial statements.

In particular, CAS 700 requires that:
o all the statements that comprise the financial statements, including the related
notes, have been prepared; and
o those with the recognized authority have asserted that they have taken
responsibility for those financial statements.
116

Previously, section 5405 required the date of substantial completion of examination to
be used as the date of the auditor’s report.

Consequently, the auditor’s report would often (usually?) be dated before the date on
which those with recognized authority approved the financial statements.

Another difference between CAS 700 and section 5400 is temporary.

CAS 700 does not specifically address financial statements using differential reporting
(section 1300).

CAS 700 is designed to enable the auditor to report on financial statements prepared
in accordance with any acceptable financial reporting framework.

Differential reporting is an acceptable reporting framework.

Therefore, this change does not pose a problem.

Paragraphs 20 to 41 of CAS 700 set out the structure and form of the auditor’s report
— a report that is different from the one presently defined in section 5400.

Conceptually, it is similar to the current report, but it is much more specific.

This is not the forum to describe these differences.

Refer to the aforementioned paragraphs.

One key point to take away is that unlike current GAAS, CAS 700 permits the “true
and fair view” notion as part of the opinion.

Unless otherwise required by law or regulation, the audit opinion must use one of the
following phrases:
o the financial statements present fairly, in all material respects, … in accordance
with the applicable financial reporting framework [whatever it might be]; or
o the financial statements give a true and fair view of … in accordance with the
applicable financial reporting framework [whatever it might be].

When expressing an unmodified opinion on financial statements prepared in
accordance with a compliance framework, the notion of “presents fairly” (or a true
and fair view) is not considered.

Instead, the auditor’s opinion must be that “the financial statements are prepared, in
all material respects, in accordance with the applicable financial reporting framework
[whatever that may be].
117

If the auditor is engaged to report on other matters (such as ICFR under section
5925), these other reporting responsibilities must be addressed in a separate section
in the auditor’s report that is titled “Report on Other Legal and Regulatory
Requirements.”

Alternatively, the entire report can be broke down into sections such as “Report on
the Financial Statements” and “Report on Other Legal and Regulatory Requirements.”

Notwithstanding, the “Report on the Financial Statements” must always be first.

Unlike section 5400, CAS 700 includes requirements when the auditor’s report is
prescribed by law or regulation.

If such laws or regulations mandate a specific layout or wording of the auditor’s
report, reference to Canadian generally accepted auditing standards is permitted only
if the auditor’s report includes, at a minimum, the elements listed in paragraph 43.

Similarly, unlike section 5400, CAS 700 includes requirements when the auditor
conducts the audit in accordance with the auditing standards of both a specific
jurisdiction and the CASs.

The auditor’s report may refer to Canadian generally accepted auditing standards in
addition to the national auditing standards, but the auditor shall do so only if the
conditions on the next three slides are met.

There is no conflict between the requirements in the national auditing standards and
those in CASs that would lead the auditor either to form a different opinion, or not to
include an Emphasis of Matter paragraph that, in the particular circumstances, is
required by CASs.

The auditor’s report includes, as a minimum, each of the elements set out in CAS 700
when the auditor uses the layout or wording specified by the national auditing
standards.

Furthermore, when the auditor’s report refers to both national auditing standards and
Canadian generally accepted auditing standards, the auditor’s report must identify the
jurisdiction of origin of the national auditing standards.
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118
CAS 705 Modifications to the Opinion in the Independent
Auditor’s Report
(added Feb. 2010)

CAS 705, Modifications to the Opinion in the Independent Auditor’s Report, replaces
Handbook section 5510.

There is no change in the scope, nor are any new concepts introduced in CAS 705.

However, there are many changes in the requirements.

For example, CAS 705 provides more detailed requirements with respect to the
consequences when management imposes a limitation after the auditor has accepted
the engagement.

Similarly, CAS 705 requires that if the auditor is unable to obtain sufficient
appropriate audit evidence, the auditor must consider the implications and act
accordingly

Actions can range from a qualified opinion to a denial of opinion to an outright
resignation from the engagement.

CAS 705 requires the use of headings (e.g., Basis for Adverse Opinion) when the
auditor includes a paragraph in the report that provides a description of the matter
giving rise to the modification.

When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor’s report must use the phrase “except for the possible effects of
the matter(s) ...” for the modified opinion.

This is the opposite of section 5501 which proscribes such actions.

Section 5510 disallows wording that bases the qualification on the limitation itself
(e.g., …, except for the above-mentioned limitation on the scope of my examination).

On the other hand, section 5510 and CAS 705 are consistent in some of the
requirements related to an adverse opinion and a disclaimer of opinion — e.g., the
financial statements do not present fairly … or the auditor does not express an
opinion on the financial statements.

However, unlike section 5510, when the auditor expresses a qualified or adverse
opinion, CAS 705 requires a statement that the auditor believes the audit evidence
obtained is sufficient and appropriate to provide a basis for the auditor’s modified
audit opinion.
119

Likewise, when there is a disclaimer of opinion, the auditor must amend the
introductory paragraph, the description of the auditor’s responsibility and the
description of the scope of the audit.

When the auditor expects to modify the opinion, this decision, as well as the
circumstances that led to the expected modification and the proposed wording of the
modification must be communicated to those charged with governance.
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CAS 706 Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Reports
(added Feb. 2010)

CAS 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Reports, replaces part of Handbook section 5701.

There is no change in the scope, but there are changes to the concepts and in the
requirements.

CAS 706 provides guidance on the use of Emphasis of Matters and Other Matter
paragraphs in the auditor’s report.

Section 5701 does not separately distinguish between these two types of paragraphs.

An Emphasis of Matter paragraph in the auditor’s report is used to draw the
attention of users to a matter presented or disclosed in the financial statements
that, in the judgment of the auditor, is of such importance that it is fundamental to
users’ understanding of the financial statements.

An Emphasis of Matter paragraph should only be used when the auditor has obtained
sufficient appropriate audit evidence that the matter is not materially misstated in the
financial statements.

Most importantly, the auditor’s opinion is not modified with respect to the matter
emphasized — and that fact must be made clear in any reference to the matter being
emphasized.

An Other Matter paragraph in the auditor’s report is used to communicate
information relating to a matter other than one that is 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.

The Other Matter should come immediately after the Opinion paragraph and any
Emphasis of Matter paragraph, unless the content of the Other Matter paragraph is
120
relevant to the Other Reporting Responsibilities section, in which case it can be placed
accordingly.

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph
in the report, this decision and the proposed wording must be communicated to those
charged with governance.
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CAS 710 Comparative Information — Corresponding
Figures and Comparative Financial Statements
(added Feb. 2010)

CAS 710, Comparative Information — Corresponding Figures and Comparative
Financial Statements, replaces part of Handbook section 5701 and Auditing Guideline
AuG-8.

There are no new concepts, but there are changes to the scope and the requirements.

CAS 710 does not deal with an auditor’s responsibility on the auditing of opening
balances in an initial engagement.

CAS 510 addresses such matters

CAS 710 addresses two different approaches to comparative information in financial
reporting frameworks: corresponding figures and comparative financial
statements.

The distinction between the two approaches affects the reporting requirements.

Under the corresponding figures approach the auditor’s report refers only to the
financial statements of the current period.

This is the typical approach of the auditor’s report on financial statements of nonlisted entities.

Under the comparative financial statements approach, the auditor’s report refers
to each period for which the financial statements are presented.

This approach is most often applicable to a report on annual financial statements filed
with securities regulators.

Consequently, there are significantly more requirements about the auditor’s
responsibilities for:
o corresponding figures or comparative financial statements under each approach,
and
121
o when the prior period financial statements were audited by another auditor or were
not audited.

For example, if the matter(s) that gave rise to a reservation in the auditor’s report in
the prior period continue to affect the corresponding figures, the auditor’s report on
the current period’s financial statements must be modified.

Another example would be if the prior period financial statements were not audited.

Here, the auditor must always state in the report that the prior period financial
statements were not audited.

A third example would be where another auditor has reported on the prior period
financial statements.

Here, the auditor must provide the date of the predecessor auditor’s report, the type
of opinion expressed, and if that opinion was modified, the reasons in an Other Matter
paragraph.
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CAS 720 The Auditor’s Responsibility in Relation to Other
Information in Documents Containing Audited Financial
Statements
(added Feb. 2010)

CAS 720, The Auditor’s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements, replaces Handbook section 7500 to the
extent that section 7500 covers aspects of the audit of financial statements.

This narrows the scope of CAS 720.

For example, section 7500 states that information “in”, “included in” or “contained in”
a document includes information “incorporated by reference” in the document.

CAS 720 does not discuss the concept of incorporated by reference.

For CAS 720, documents containing audited financial statements refers to annual
reports (or similar documents), that are issued to owners (or similar stakeholders),
containing audited financial statements and the auditor's report thereon.

Material dealing with the auditor’s responsibilities for other information in documents
containing summary financial statements is included in CAS 810 and not in CAS 720.

The narrowing of scope means that some of the requirements of section 7500 were
not carried forward.
122

For example, the auditor does not have to determine whether the financial
statements and, when applicable, the report of the auditor thereon, are accurately
reproduced or appropriately summarized in a designated public document.

Another example relates to other information.

Section 7500 prohibited the auditor from expressing any assurance on “other
information” in any public document (unless the auditor had audited or reviewed the
information in accordance with assurance standards) or on the document as a whole.

CAS 720 simply states that the auditor’s opinion does not cover other information.

Lastly, CAS 720 does not have any requirements dealing with the auditor’s
responsibilities for translated material.

Current requirements have been carried forward to section 5020.
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CAS 800 Special Considerations — Audits of Financial
Statements Prepared in Accordance with Special Purpose
Frameworks
(added Feb. 2010)

CAS 800, Special Considerations—Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks, replaces Handbook section 5600.

There is no Canadian auditing standard that addresses the auditor’s report on special
purpose financial statements.

Accordingly, the scope, concepts and requirements are “new”.

However, “new” is a relative term.

Basically, an auditor can accept an engagement to report on special purpose financial
statements if the auditor has determined that the applicable financial reporting
framework is acceptable in the circumstances of the engagement, using the criteria
set out in CAS 210.

Because “special purpose reports” are based on acceptable financial reporting
frameworks, the auditor must apply the standards and guidance in CAS 700 — and
any other applicable CAS.

To make sure nobody confuses the basis of the statements with GAAP, the auditor’s
report must describe the purpose for which the financial statements are prepared
123
and, if necessary, the intended users, or refer to a note in the special purpose
financial statements that contains that information.

Additionally, the auditor’s report must contain an Emphasis of Matter paragraph
alerting users of the auditor’s report that the financial statements are prepared in
accordance with a special purpose framework and that, as a result, the financial
statements may not be suitable for another purpose.

If management has a choice of financial reporting frameworks in the preparation of
the financial statements, the explanation of management’s responsibility for the
financial statements must also make reference to its responsibility for determining
that the applicable financial reporting framework is acceptable in the circumstances.

However, where section 5600 required the auditor to modify the report to state that
the financial statements had not been prepared and were not intended to be prepared
in accordance with GAAP, this is not required with CAS 800 since other acceptable
frameworks are permitted.
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CAS 805 Special Considerations — Audits of Single
Financial Statements and Specific Elements, Accounts, or
Items of a Financial Statement
(added Feb. 2010)

CAS 805, Special Considerations—Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement, replaces Handbook section
5805.

There are no new concepts although the scope and requirements are different.

Section 5805 provided guidance to an auditor engaged to express an opinion on
financial information other than financial statements.

CAS 805 deals with matters relevant to the audit of a single financial statement
and/or a specific element, account or item of a financial statement.

When the auditor is not also engaged to audit the entity’s financial statements, the
auditor must determine whether an audit of the element in accordance with CASs is
practicable.

This consideration was not addressed in section 5805.

Conversely, when the auditor undertakes an engagement to report on an element in
conjunction with an engagement to audit the entity’s financial statements, the auditor
must express a separate opinion for each engagement.
124

This was not a requirement in section 5805.

Section 5805 required the auditor to disclose in the auditor’s report (any) significant
interpretations of an agreement, statute or regulation made by management of the
entity.

CAS 805 does not contain this requirement.

CAS 210 requires that the agreed terms of an audit engagement include the expected
form of any reports to be issued by the auditor.

In the case of an audit of an element, the auditor must also consider whether the
expected form of opinion is appropriate in the circumstances.

When an audited single financial statement or an audited specific element of a
financial statement is published together with the entity’s audited complete set of
financial statements, the presentation of the element must differentiate it sufficiently
from the complete set of financial statements.

Therefore, the auditor cannot issue a report containing an opinion on a single financial
statement or on a specific element of a financial statement until satisfied that the
single financial statement or the specific element is sufficiently differentiated from the
complete set of financial statements.

Finally, CAS 805 contains specific requirements relating to circumstances when the
auditor’s report on the entity’s complete set of financial statements contains a
modified opinion, Emphasis of Matter paragraph or Other Matter paragraph.

Refer to paragraphs A17 and A18.
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CAS 810 Engagements to Report on Summary Financial
Statements
(added Feb. 2010)

CAS 810, Engagements to Report on Summary Financial Statements, replaces
Auditing Guideline AuG-25.

CAS 810 introduces new concepts, and the scope and requirements are different from
that of AuG-25.

CAS 810 deals with an auditor’s report on summary financial statements prepared
from either general purpose financial statements or from special purpose financial
statements.
125

AuG-25 deals only with the first alternative.

the auditor concludes that the criteria applicable to the engagement are
unacceptable, or the auditor is unable to obtain the agreement of management as to
its responsibilities, CAS 810 allows the auditor to refuse the engagement.

Under AuG-25 the auditor could accept the engagement.

When an auditor concludes that an unqualified opinion on summary financial
statements is appropriate, unless otherwise required by law or regulation, CAS 810
limits the wording to be used to one of two choices.

AuG-25 required the auditor to express an opinion on whether the summarized
financial statements, in all material respects, fairly summarized the related complete
financial statements in accordance with the criteria.

Under CAS 810, the auditor’s report on the summary financial statements may be
dated later than the date of the auditor’s report on the audited financial statements.

Accordingly, the auditor’s report must state that the summary financial statements
and audited financial statements do not reflect the effects of subsequent events,
which may require adjustment of, or disclosure in, the audited financial statements.

CAS 810 requires the auditor to date the report on the summary financial statements
no earlier than the date on which the auditor obtained sufficient appropriate evidence
on which to base the opinion and the date of the auditor’s report on the audited
financial statements.

Sufficient appropriate evidence includes evidence that the summary financial
statements have been prepared and that management has takes responsibility for
them.

This may be different from current practice under AuG-25.

When the auditor becomes aware of facts that existed at the date of the auditor’s
report on the audited financial statements — facts of which the auditor was previously
unaware — CAS 560, Subsequent Events, kicks in.

The auditor cannot issue the report on the summary financial statements until the
subsequent event has been dealt with in accordance with CAS 560.

AuG-25 did not address this situation.

Under AuG-25, the auditor’s report cautioned readers that the summary financial
statements might not be appropriate for their purposes, and that the summary
financial statements fairly summarized, in all material respects, the related complete
financial statements.
126

CAS 810 does not contain such a caution.

When the auditor’s report on the audited financial statements contains an Emphasis
of Matter paragraph, or an Other Matter paragraph, the auditor’s report on the
summary financial statements must refer to these paragraphs as appropriate.

Under AuG-25 the auditor’s opinion referred only to the audited financial statements.

When the auditor’s report on the audited financial statements contains an adverse
opinion or a disclaimer of opinion, CAS 810 requires the auditor to it indicate that it
would be inappropriate to express an opinion on the summary financial statements.

AuG-25 does not prevent an auditor from issuing an opinion on the summary financial
statements when the auditor’s report on the audited financial statements contains an
adverse opinion or a disclaimer of opinion.

If the summary financial statements are not consistent, in all material respects with,
or are not a fair summary of the audited financial statements, and management does
not agree to make the necessary changes, the auditor must express an adverse
opinion on the summary financial statements.

Under AuG-25, the auditor would have to withdraw from the engagement to report on
the summarized financial statements and could not agree to be associated with the
summarized financial statements.

CAS 810 contains requirements on topics not addressed in AuG-25:
o auditor association;
o unaudited supplementary information presented with summary financial
statements; and
o other information in documents containing summary financial statements.
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127
CICA Handbook  Assurance  Part I  Other Canadian
Standards  General Assurance and Auditing (5000-5970)
Section 5021 Authority of Auditing and Assurance and
Other Guidance for Engagements
(no changes Feb. 2010)
Background

In July 2005, the AASB issued new Handbook section 5021 setting out a Canadian
GAAS hierarchy.

Section 5021 is based on the AICPA Statement on Auditing Standards No. 95,
Generally Accepted Auditing Standards.

Section 5021 provides guidance on the authority of recommendations, explanatory
material, interpretive publications, and other auditing and assurance publications that
a practitioner may refer to when performing an assurance engagement, or when
providing related services.

However, plans to update the Introduction to Assurance and Related Services
Recommendations to clarify the relative authority of italicized and non-italicized
wording were put on hold.

At issue are potential problems resulting from changing the drafting conventions used
in standards on a “go-forward” basis.

Doing so may result in terminology in older standards having different meanings than
in newer standards.

Similarly, changing the terminology in older standards to be consistent with new
drafting conventions may change the meaning of the older standards.

The U.S. and international standards on which Canadian standards are based often
have different structures and/or use different terminology.

Accordingly, the AASB will wait for the IAASBs Clarity Project — which deals with
matters such as drafting conventions used in standards as well as issues surrounding
their length, complexity, and structure — to finish.
Summary of Requirements

Section 5021 categorizes GAAS into four classifications:
o
recommendations
o
explanatory material
128
o
interpretive publications
o
other auditing and assurance publications

Recommendations constitute the professional standards issued by the Auditing and
Assurance Standards Board (AASB) with which a practitioner must comply when
performing an assurance engagement.

They are contained in the CICA Handbook – Assurance, together with related
guidance in the form of explanatory material.

Explanatory material in the Handbook, including examples and appendices, provides
explanation and guidance on the recommendations.

This material provides additional information for a practitioner to consider in
exercising professional judgment when performing the engagement.

Interpretive publications are auditing and assurance guidance on the application of
recommendations issued under the authority of the AASB. These publications are not
standards for assurance engagements.

Interpretive publications include Assurance and Related Services Guidelines issued
under the authority of the AASB.

Other auditing and assurance publications include documents that have not been
issued under the authority of the AASB, such as:

o
auditing and assurance publications of the CICA not referred to above
o
auditing and assurance articles in CA Magazine and other professional journals
o
continuing education programs and other materials, textbooks, guide books,
audit programs, and checklists;
o
auditing and assurance publications of other auditing and assurance standard
setters
o
other auditing and assurance publications from organizations.
As of June 30, 2007, section 5021 lists the following as being “other auditing and
assurance publications”:
o
Risk Alert




Implementing audit risk and quality control standards, May 2007.
Auditor involvement with management's internal control certifications,
January 2007.
Responding to the special needs of regulators or funding bodies, March 2006.
Written consent to use of the audit report, January 2006.
129
o
Practice Advice

Annual bulletin, October 2006.

Section 5021 requires that a practitioner identify, understand, and comply with the
recommendations in the Handbook that are applicable to assurance engagements.

Departures are prohibited unless there are clear and compelling reasons.

The reason(s) for any departure, and how the alternative was sufficient to achieve the
objectives of the recommendations, must be documented.

Section 5021 also requires that a practitioner be aware of and consider interpretive
publications applicable to the assurance engagement.

If a practitioner ignores an applicable interpretive publication, the practitioner must
document how compliance with the recommendations addressed by such auditing and
assurance guidance was achieved.
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Section 5030 Quality Control Procedures for Assurance
Engagements Other Than Audits of Financial Statements
(no changes Feb. 2010)
Background

Unlike GSF-QC, section 5030, Quality Control Procedures For Assurance
Engagements, is part of GAAS.

Section 5030 establishes standards and provides guidance on the specific quality
control procedures to be performed by a practitioner and other members of the
assurance team in an assurance engagement.
Effective Date

The recommendations were effective for assurance engagements concerning financial
statements and financial reports for periods commencing on or after December 1,
2005.

However, as with the general standard, the effective date of section 5030 for a firm
registered with CPAB was January 1, 2005.
Summary of Changes

Section 5030 sets out specific responsibilities relating to the performance of each
assurance engagement for which a practitioner is responsible.
130

Specifically, section 5030 addresses:
o
the quality of the work performed and the promotion of a quality-oriented
culture;
o
determining that the assurance team, collectively, has the competencies,
resources and time necessary to complete the engagement;
o
the compliance of the assurance team with applicable ethical requirements,
including independence requirements, directed to practitioners and other
members of the assurance team when performing assurance engagements; and
o
various aspects of engagement performance such as planning, supervision and
review, consultation, resolving differences of opinion, and ensuring that an
engagement quality control review is performed when required.
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Section 5925 An Audit of Internal Control over Financial
Reporting That Is Integrated With An Audit Of Financial
Statements
(Material added Feb. 2009; no changes Feb. 2010)
Background

In January 2008, the AASB issued section 5295, establishing standards and providing
guidance regarding the auditor’s responsibilities when engaged to perform an audit of
internal control over financial reporting that is integrated with an audit of financial
statements.

Section 5295 provides requirements related to:
o management’s written assessment about the effectiveness of internal control over
financial reporting;
o integrating the audit of internal control over financial reporting with the audit of
financial statements;
o the use of suitable criteria;
o planning and performing the audit, using a risk-based approach;
o identifying and selecting controls to test, using a top-down approach;
o testing controls selected;
o evaluating identified deficiencies;
131
o forming an opinion;
o communicating certain matters; and
o reporting on internal control over financial reporting.

Section 5295 requires the use of a top-down approach to select controls to test.

A top-down approach begins at the financial statement level and with the auditor’s
understanding of the overall risks to internal control over financial reporting.

The auditor then focuses on entity-level controls and works down to significant
accounts and disclosures and their relevant assertions.

This approach directs the auditor’s attention to accounts, disclosures, and assertions
that present a reasonable possibility of material misstatement to the financial
statements and related disclosures.

The auditor then verifies this understanding of the risks in the entity’s processes and
selects for testing those controls that sufficiently address the assessed risk of
misstatement to each relevant assertion.

Section 5295 is intrinsically linked with CSA MLI 52-109.

The definitions and requirements of the Handbook section are intended to ensure that
an entity required to comply with MLI 52-109 is able to do so.

Anyone affected by MLI 52-109 will need to be aware of section 5295’s requirements.

Section 5295 differs from many other Handbook sections in that virtually all of the
section is italicized.
Effective Date

The section is effective for audits of internal control over financial reporting that are
integrated with audits of financial statements for periods beginning on or after
January 1, 2008.
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Section 5970 Auditor’s Report on Controls at a Service
Organization
(replaced section 5900)
Background
132

In 2004, the AASB began a project to update and expand auditing and assurance
standards and guidance for engagements to provide assurance on controls at a
service organization, and for the use of assurance reports as evidence in a financial
statement audit as well as in assurance engagements to report on internal control
over financial reporting.

The project was initiated due to the following:
o
Existing Handbook material was over 15 years old.
o
There had been an increase in outsourcing activity, especially for IT-related
services.
o
There had been an increase in the cross-border flow of outsourced services,
which puts additional pressures on organizations to comply with legislation such
as the Sarbanes-Oxley Act.
o
There had been an increased focus on reporting on internal controls (for
example, various regulatory requirements for internal control reporting).
o
There had been increased focus on measuring and adhering to compliance
requirements in service level agreements between service organizations and their
clients.
Effective Date

In July 2005, the AASB issued new Handbook section 5970, Auditor’s Report on
Controls at a Service Organization, to replace section 5900, Opinions on Control
Procedures at a Service Organization.

The section is effective for financial statements and financial reports for periods
beginning on or after January 1, 2006.

Section 5970 conforms terminology with section 5025, SAS 70, and the revised auditrisk framework.

More precisely, it is harmonized with SAS 70 for the specific regulatory issues related
to the Sarbanes-Oxley Act and the Ontario Securities Commission Investor
Confidence Rules and for auditor-to-auditor communications in financial statement
audits.

Section 5970 includes requirements for service auditors related to matters such as
the following:
o
the service auditor’s procedures
o
use of the work of others
133

o
changes in the service organization’s controls
o
complementary user organization’s controls
o
subsequent events
o
consideration of significant deficiencies in the design and/or operation of controls
o
reports on controls placed in operation and tests of the operating effectiveness of
controls
o
communications of matters such as illegal acts, fraud and uncorrected errors
o
distribution of reports and reporting on substantive procedures
Section 5970 provides guidance for service auditors who issue reports on controls at
a service organization when those reports are intended only for the use of user
organizations and their auditors.
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CICA Handbook  Assurance  Part I  Other Canadian
Standards  Specialized Areas (7050-7600)
Section 7200 Auditor Assistance to Underwriters and
Others
(no changes Feb. 2010)
Background

Section 7200 was the first stage in a project to revise and expand section 7100, The
auditor’s involvement with prospectuses and other offering documents.

Section 7200 represents a codification of the best practices already in effect in
Canada and the United States.
Summary of Changes
Terms

The term “auditor” is used in section 7200 to refer to any public accountant engaged
by, or on behalf of, an issuer of securities to provide assistance to an underwriter or
other party requesting a comfort letter, regardless of whether the public accountant is
the auditor or the issuer.
Communication Issues
134

Section 7200 does not deal with communications issued in connection with the
purchase or sale of a business through securities transactions other than through an
offering document (for example, a report on a purchase investigation).
Due Diligence Meetings

Paragraphs 7100.55-.62 dealing with letters to underwriters were withdrawn and the
material was incorporated into section 7200.

Recommendations dealing with an auditor’s participation in “due diligence” meetings
with underwriters were added.
Four Principles

The recommendations are based on four underlying principles:
o
Only the underwriter can determine what is necessary for a reasonable
investigation.
o
A statement made by a professional accountant or auditor, written or oral, will be
taken to add credibility to the subject matter of the statement.
o
In order to make a statement that would be appropriately supported, an auditor:
o

needs to possess adequate knowledge of the subject matter;

act with due care and an objective state of mind.
An auditor should not provide assurance, positive or negative, unless there are
suitable criteria that can be applied in reaching the conclusion expressed.
International Offerings

When all or part of a securities offering is made in other countries, the auditor needs
to consider whether procedures need to be extended or otherwise modified in
response to foreign regulatory requirements or the request of the underwriters.

When asked to carry out an audit under foreign standards, a Canadian auditor may
use the standards of the country in which the offering is made, provided that the
auditor meets the general and examination standards set out in section 5100 and
adheres to the applicable rules of professional conduct.

Reporting in accordance with the reporting standards of another country would
require knowledge of, and adherence to, all of the auditing standards of that country.

In a cross-border offering, if the audit has been conducted in accordance with
Canadian GAAS, the auditor may draw attention to that fact in the comfort letter and
135
point out that there may be differences between Canadian auditing standards and
those of the foreign country or countries in which the offering is made.
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CICA Handbook  Assurance  Part I  Other Canadian
Standards  Review Engagements (8100-8600)
Section 8200 Public Accountant’s Review of Financial
Statements
(no changes Feb. 2010)
Background

Before completing the engagement, the public accountant should obtain the same
“satisfaction” that is required for the audit report.

The public accountant should obtain the same written representation from
management that is required for the audit.

In August 2005, the AASB issued new Handbook section 5370 dealing with
management representations.

Section 5370 requires an auditor to obtain written representations from management
as part of the evidence obtained to support the conclusion in a report providing
assurance on financial statements.

Management’s written representations will need to be obtained for both an audit and
a review engagement.
Summary of Changes

Section 8200 has been amended to require such representations, although the level
of detail is considerably less.

Section 8200 calls for the practitioner to obtain management’s written
representations on matters that are important to support the content of the report.

Paragraph 8200.31 provides an indication of the sort of representations required, but
they are nowhere near as extensive as those of section 5370.

However, section 8200 follows section 5370 when management refuses to provide
written representation.
136

Section 8200 requires the practitioner to express negative assurance with a
qualification or a denial of assurance in the review engagement report if management
refuses to provide the written representation required.

As with an audit, this constitutes a scope limitation.
The Review Engagement Report
To (person engaging the public accountant)
I have reviewed the balance sheet of Client Limited as at (Date) and the statements of
income, retained earnings and cash flows for the year then ended. My review was made
in accordance with Canadian generally accepted standards for review engagements and,
accordingly, consisted primarily of enquiry, analytical procedures and discussion related
to information supplied to me by the company.
A review does not constitute an audit and, consequently, I do not express an audit
opinion on these financial statements.
Based on my review, nothing has come to my attention that causes me to believe that
these financial statements are not, in all material respects, in accordance with Canadian
generally accepted accounting principles.
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CICA Handbook  Assurance  Part I  Other Canadian
Standards  Related Services (9100-9200)
Section 9110 Agreed-upon Procedures Regarding Internal
Control over Financial Reporting
(no changes Feb. 2010)
Background

Section 404 of the Sarbanes-Oxley Act (SOX) requires the auditor to provide an
opinion on management’s assessment of internal control over financial reporting
(ICFR).

Section 404 of SOX also requires the auditor to provide his own opinion on the
entity’s system of internal control over financial reporting.

In March 2003, the AASB approved a project to develop general standards for
reporting on ICFR and to revise Section 5220 as required.
137

In December 2003, the AASB began work to develop a generic Canadian standard
that would be harmonized with both the PCAOB standard for public companies and
with the AICPA standard for other entities.

In October 2004, the AASB issued an exposure draft that reflected the US standard
approved by the PCAOB in March 2004 and by the US SEC in June 2004.

In February 2005, the AASB approved, subject to written ballot, a new standard, An
Audit of Internal Control over Financial Reporting Performed in Conjunction with an
Audit of Financial Statements.

In February 2005, the CSA issued for comment its proposed MLI 52-111 to deal with
the fact that MLI 52-109 did not require certification regarding ICFR.

The MLI was supposed to be effective for fiscal periods ending on or after June 30,
2006, subject to certain exemptions, including the market capitalization of issuer.

In July 2005, the CSA announced a one-year delay in the effective date of the
proposed MLI, ostensibly to allow time to study the impact of SOX 404 in the US.

On March 10, 2006, the CSA announced that it would not proceed with MLI 52-111.
Instead, MLI 52-109 would be expanded to require certain disclosures intended for
52-111.

Unlike section 404, an issuer would not be required to obtain from its auditor an audit
opinion concerning management’s assessment of the effectiveness of ICFR, nor would
the auditor be required to provide an opinion on ICFR.

In February 2007, the PCAOB proposed revisions to Auditing Standard No. 2.

In March 2007, the CSA proposed revisions to MLI 52-109 to require the certification
of the operating effectiveness of internal control over financial reporting.

Accordingly, the AASB decided that a Canadian standard regarding the audit of ICFR
should be developed based on the PCAOBs proposed revisions to Auditing Standard
No. 2. The standard would be “generic” in that it may be applied in any case when an
entity is required or opts to have an audit of internal control over financial reporting.
As noted, the CSA amended MLI 52-109 to require that management provide specific
certifications related to ICFR.

Worried that practitioners would not be able to function on their own, the AASB
concluded that a standard was needed to assist public accountants in providing
services to their clients in relation to their regulatory certifications. The outcome was
section 9110, Agreed-upon Procedures Regarding Internal Control over Financial
Reporting.
138
Effective Date

Section 9110 is effective for agreed-upon procedures engagements regarding ICFR
entered into on or after May 1, 2007.
Summary of Requirements

Section 9110 specifies that that the public accountant is not engaged to provide
assurance or an opinion on internal control, but to report findings from performing
the agreed-upon procedures engagement so that the engaging party may use the
public accountant’s report and other available information to form their own opinion
on internal control over financial reporting.

Section 9110 also specifies that responsibility for the sufficiency and appropriateness
of the agreed-upon procedures remains with the engaging party, although the public
accountant may discuss the procedures to be performed and come to agree on the
procedures.

The key is that it is the engaging party who is responsible for specifying the
procedures to be performed. Moreover, it is the engaging party who is responsible
for determining that the agreed-upon procedures are sufficient and appropriate for
their purposes.

Section 9110 also provides guidance on the form and content of the report that the
public accountant issues in connection with such an engagement.
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Section 9200 Compilation Engagements
(no changes Feb. 2010)
Background

In 2005, the AASB proposed to converge section 9200 with International Standard on
Related Services 4410, Engagements to Compile Financial Statements (ISRS 4410),
taking into consideration Canadian specific circumstances.

In March 2006, the AASB decided to reduce the scope of the project until such time
as the Accounting Standards Board (AcSB) completed its research into reporting
models for non-publicly accountable enterprises.

At the same time, pressure to amend section 9200 came from those who argued that
the enactment of the Independence Standards placed an unreasonable burden on
practitioners who prepared compilation reports.
139

They noted that section 9200 focused on what the practitioner didn’t do (has not
audited, reviewed or otherwise attempted to verify the accuracy or completeness of
the information …), rather than what was done (book-keeping services), and they
suggested that this was inconsistent with the Independence Standards.

In June 2006, the AASB issued an exposure draft proposing changes to section 9200.

In April 2007, the AASB released Handbook update 28 with revisions to section 9200.
Effective Date

The amendments are effective for compilation engagements and Notice to Reader
communications issued on or after July 1, 2007.
Summary of Changes

The two most critical changes relate to the scope of the section and the wording of
the Notice to Reader communication attached to compilation engagements.

The change in scope relates to tax-based engagements.

Section 9200 does not apply to financial information presented solely in, or
incorporated by reference in, government-prescribed tax or other forms such as
corporate, trust or personal income tax return forms.

Financial information excluded from section 9200 must be accompanied by a
disclaimer from the public accountant stating “prepared solely for income tax
purposes without audit or review from information provided by the taxpayer.”

The troublesome aspect of this exclusion is that it should only take place “when it
does not purport to convey the financial position and the results of operations of the
enterprise” — a full set of statements for tax purposes does purport …

The other change relates to the Notice to Reader communication itself:
o
Previously, the report [paragraph 9200.23(b)] included the disclaimer that the
public accountant has not audited, reviewed or otherwise attempted to verify the
accuracy or completeness of such information. The highlighted material is now
gone.
o
The report [paragraph 9200.25(b)] now states that the public accountant has not
performed an audit or a review engagement on such information.
o
There is no comment regarding the accuracy or completeness of the information.
o
Readers, you’re on your own.
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140
CICA Handbook  Assurance  Part II  Assurance
Recommendations  General Assurance and Auditing
(5000-5970)
Section 5095 Reasonable Assurance and Audit Risk
(no changes Feb. 2010)
Background

In May 2005, the AASB issued a series of new and revised Handbook sections
dealing with the audit risk model.

The new and revised standards:

o
call for an understanding of the entity and its environment, including internal
control;
o
define the concepts of reasonable assurance and audit risk;
o
require the auditor to assess the risks of material misstatement; and
o
specify that the auditor must design audit procedures that are responsive to
assessed risks and for audit evidence.
The standards apply to all audits in Canada, for both small and large entities.
Effective Date

The new requirements are all to be applied at the same time and are effective with
respect to financial statements and financial reports for periods beginning on or after
January 1, 2006.
Summary of Changes

Section 5095, Reasonable assurance and audit risk, is a new section that:
o
defines the concept of reasonable assurance;
o
notes that the auditor cannot obtain absolute assurance that the financial
statements are free from material misstatement because of various factors;
o
defines the concept of audit risk; and
o
permits the auditor to make separate or combined assessments of inherent and
control risk.
141
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Section 5110 Terms of the Engagement
(no changes Feb. 2010)

In July 2005, the AASB issued new Handbook section 5110 establishing standards
and providing guidance on agreeing to terms of an engagement relating to an audit of
financial statements.

Likewise, section 8200 was revised to incorporate guidance on agreeing to the terms
of an engagement relating to a review of financial statements.

Section 5110 is based on AICPA Audit Section 310, Appointment of the Independent
Auditor, and IAASB International Standard on Auditing 210, Terms of Audit
Engagements.

Section 8200 revisions are based on AICPA SSAR AR100, Compilation and Review of
Financial Statements, and IAASB ISA 910, Engagements to Review Financial
Statements.

Although there are specific sections in the Handbook that suggest obtaining a letter
relating to the terms of the engagement prior to section 5110, there was nothing that
required a signed engagement letter in order to carry out an audit engagement.

One could say that the AASB is finally doing what CGAs have been doing for years:
requiring a written engagement letter for all engagements.

A review of section 5110 shows that much of the guidance currently found in the
CGA-Canada Public Practice Manual is reflected in the Handbook.

The section specifies the expectations and responsibilities of the parties to the
engagement letter, namely the auditor and management.

Section 5110 identifies the responsibilities of both the auditor and management, and
stipulates that they be explicitly covered in the engagement letter.

The section provides an illustrative engagement letter that covers just about
everything but the kitchen sink (or maybe it is there in the fine print).

Section 5110 requires the auditor to:
o establish an understanding of the terms of the engagement with the entity and to
document this in a written agreement;
o include in the written agreement:

the objective, scope, and limitations of the engagement;
142

the responsibilities of the auditor;

the responsibilities of the entity’s management; and

other relevant and important matters.

Likewise, section 8200 specifies the expectations and responsibilities of the parties to
the engagement letter, namely the practitioner and management.

Like section 5110, section 8200 identifies the responsibilities of both the practitioner
and management, and stipulates that they be explicitly covered in the engagement
letter.

However, because the level of assurance provided by a review engagement is less
than an audit, the extent of the responsibilities is not nearly as extensive as for an
audit

Notwithstanding, for those areas of the engagement that are similar to an audit, the
responsibilities are similar.

Where they are less, the expectations are less.

Like section 5110, Appendix A to section 8200 is an illustration of an engagement
letter.

It is less substantial than for an audit, but no less thorough.
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Section 5141 Understanding the Entity and Its
Environment and Assessing the Risks of Material
Misstatement
(no changes Feb. 2010)

This new section 5141, requires the auditor to do the following:
o
understand the entity’s business risks to the extent they are relevant to the
financial statements
o
understand each component of the entity’s internal controls as defined in the
Treadway Report
o
obtain an understanding of the design and implementation of controls on all
audits
o
understand an entity’s risk assessment process and its monitoring of controls
143
o

specifically address significant risks
In addition, section 5141 places more emphasis on the following:
o
using various sources to obtain a broader understanding of the entity and its
environment, including its internal control
o
supporting the assessment of the risks of material misstatement at the financial
statement level and at the assertion level
o
adhering to more rigorous documentation requirements
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Section 5142 Materiality
(no changes Feb. 2010)

The scope of section 5130, which previously dealt with materiality and audit risk, has
been narrowed in section 5142 to address only materiality.

Audit risk is addressed in section 5095.

The AASB intends to revise Handbook section 5142 to converge with ISA 320 and a
new ISA dealing with the evaluation of misstatements identified during the audit.

The revisions are closely linked with the planned revisions to Handbook section 5305
dealing with accounting estimates and Handbook section 6930 dealing with the audit
of group financial statements.

As with the accounting estimates project, the actual release date of a Canadian
exposure draft depends on when the IAASB finishes its Clarity Project.

It is expected that the IAASB will expose revisions to ISA 320 and its project on
identified misstatements in quarter 3 of 2006, and the AASB will issue its exposure
draft (based on the IAASB exposure draft) soon after.

The Canadian exposure draft will focus on section 5142 and AuG-41.

The following are key aspects of the revisions:
o
The definition of materiality is clarified — Materiality depends on the size and
nature of an item judged in the surrounding circumstances.
o
However, if the applicable financial reporting framework used to prepare the
financial statements provides a different definition of materiality, the auditor is to
use that definition for the purpose of the audit.
144

o
There will be guidance on the use of percentages as benchmarks for the initial
determination of materiality when establishing the overall audit strategy.
o
Notwithstanding, the auditor must consider whether misstatements less than the
materiality level determined for the financial statements as a whole could
reasonably be expected to influence economic decisions of users taken on the
basis of the financial statements.
o
Materiality is to reflect the auditor’s judgment of the needs of users in relation to
the information in the financial statements and the possible effect of any
misstatements.
o
However, in an audit of general purpose financial statements, the auditor’s
judgment as to matters that are material to users of the financial statements is
based on consideration of the needs of users as a group.
o
The auditor must communicate to management all known and likely
misstatements identified during the audit, other than those that the auditor
believes are clearly trivial, and request that management correct all known
misstatements.
o
Evaluation of uncorrected misstatements — determining materiality levels does
not mean that identified misstatements below the threshold are always
considered to be immaterial.
o
There may be circumstances related to some misstatements that can lead the
auditor to evaluate them as material even if they are of a lower level than that
the auditor had determined to be material when establishing the overall audit
strategy.
o
When evaluating whether the financial statements are free of material
misstatement, the auditor must consider both uncorrected misstatements and
the qualitative aspects of an entity’s accounting practices.
o
The cumulative effect of a lack of neutrality, together with uncorrected
misstatements that have been identified during the audit, may cause the financial
statements as a whole to be materially misstated.
It is anticipated that the AASB will issue an exposure draft by the end of 2006, with
the revisions to section 5142 and AuG-41 being approved in mid-2007.
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145
Section 5143 The Auditor’s Procedures in Response to
Assessed Risks
(no changes Feb. 2010)


This new section 5143 establishes standards and provides guidance on:
o
determining overall responses to assessed risks
o
designing and performing further audit procedures to respond to the assessed
risks of material misstatement at the financial statement and assertion levels
Section 5143 contains requirements for specifically addressing significant risks and
places more emphasis on:
o
directly linking assessed risks to audit procedures that are responsive to those
risks;
o
performing tests of controls when the auditor has determined that evidence
obtained from substantive procedures alone will not reduce risk to an acceptably
low level;
o
assessing whether, in certain circumstances, reliance can be placed on evidence
from prior periods;
o
obtaining evidence about disclosures; and
o
like section 5141, adhering to more rigorous documentation requirements.
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Section 5145 Documentation
(no changes Feb. 2010)

An exposure draft was issued in July 2005 with comments due August 31, 2005.

Although not part of the material related to the audit-risk model, the revised section
5145 is effective for financial statements and financial reports for periods
commencing on or after January 1, 2006.

This project revised section 5145, Documentation, to harmonize it with the revised
International Standard on Auditing 230, Documentation, and AICPA SAS No. 96, Audit
Documentation.

The revised section contains principles, procedures, and guidance on audit
documentation for the following:
146
o
audit of financial statements
o
audit of internal control over financial reporting
o
auditor’s review of interim financial statements

In addition, the project also added to General Standards Of Quality Control For Firms
Performing Assurance Engagements, GSF-QC, to incorporate guidance on policies and
procedures designed to maintain the confidentiality, safe custody, and retention of
engagement documentation.

The main features of the revised section 5145 follow:

o
establishing the overarching requirement for sufficient audit documentation
o
documentation of significant issues and findings in an engagement completion
document
o
guidance on making changes to audit documentation between the audit report
date and the date the auditor’s report is issued
o
documentation of audit evidence that the auditor has identified as being
contradictory or inconsistent with the final conclusions, and how the auditor
addressed the contradiction or inconsistency
o
assembly and completion of the final audit file within 45 days after the date the
auditor’s report is issued, after which nothing can be deleted from the file and
any additions or modifications must be explained and currently dated
o
the use of an experienced auditor as a point of reference for assessing the
adequacy of documentation
o
documentation of the identifying characteristics of the specific items tested
during the audit
o
identification of the preparer and reviewer the of audit documentation
The main features of the additions to GSF-QC are as follows:
o
introduction of a new element to the firm’s system of quality control, namely
engagement documentation
o
a requirement for a firm to establish policies and procedures designed to maintain
the confidentiality, safe custody, integrity, accessibility, and retrievability of
engagement documentation
147
o
a requirement for a firm to establish policies and procedures requiring the
retention of engagement documentation for a period sufficient to meet the needs
of the firm or as required by law or regulation

The revised standards apply to engagements in both the private and public sectors.

The amount and quality of audit documentation will likely be higher as a result of
these proposals.

For instance, practitioners would now be required to document inconsistent or
contradictory evidence as part of documenting final conclusions.
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Section 5300 Audit Evidence
(no changes Feb. 2010)

New section 5300 revises and replaces the existing section 5300 to incorporate ISA
500, Audit Evidence, into the Handbook with as few changes as possible to conform
to existing Handbook references and terminology.

There are no substantive changes from the material in the previous version of section
5300.
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Section 5301 Analysis
(no changes Feb. 2010)

In August 2005, the AASB issued a revised Handbook section 5301 dealing with
analytical procedures.

The most visible change was to terminology.

Here, and in many other Handbook sections, the term analysis has been replaced
with analytical procedures.

The revised section 5301 incorporates concepts related to the new audit-risk model:
o
There is increased emphasis on the use of analysis and analytical procedures as
risk assessment procedures to obtain an understanding of the entity and its
environment, including its internal controls.
o
There is additional guidance provided when analytical procedures are used as
substantive procedures, showing how their use can be more effective or efficient
148
than tests of details in reducing the risk of material misstatement at the assertion
level to an acceptably low level.
o

There is additional guidance provided related to the use of analytical procedures
as an overall review of the financial statements at or near the end of the audit.
As with the rest of the material related to the audit risk model, the revised section
5301 is effective for financial statements and financial reports for periods
commencing on or after January 1, 2006.
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Section 5305 Audit of Accounting Estimates
(no changes Feb. 2010)

The AASB intends to revise Handbook section 5305 to converge with ISA 540.

The revisions are closely linked with planned revisions to the Handbook section 5142
on materiality.

While there are no plans to deal with fair-value measurements and disclosures in
section 5305, that aspect is lurking in the background.

The actual release date of a Canadian exposure draft depends on when the IAASB
finishes its Clarity Project.

It is expected that the IAASB will expose revisions to ISA 540 in quarter 3 of 2006,
and the AASB will issue its exposure draft (based on the IAASB exposure draft) soon
after.

Section 5305 will now contain requirements for greater rigour and skepticism in the
audit of estimates, excluding those related to fair-value measurements and
disclosures.

These requirements will focus on the auditor’s determination and documentation of
misstatements and indicators of possible management bias relating to individual
accounting estimates.

Key aspects of the revisions include the following:
o Risk assessment procedures — the auditor will have to obtain an understanding of
the processes, including relevant internal controls, used by management to make
accounting estimates.
o The auditor will also need to review the outcome of accounting estimates made in
the prior period financial statements.
149
o Estimation uncertainty is defined as the susceptibility of a financial statement item
to a lack of precision in its measurement because the outcome of future events is
not known.
o Therefore, the auditor must use the information gathered from the riskassessment procedures to determine which accounting estimates have high
estimation uncertainty and therefore require special audit consideration.

Misstatements — The difference between management’s judgment and the auditor’s
judgment concerning the reasonableness of accounting estimates will be considered a
“known misstatement involving subjective decisions.”

Therefore, the auditor must determine whether such a misstatement in fact exists.

Where an accounting estimate falls within a reasonable range of outcomes that is
greater than materiality, the auditor must determine whether the applicable financialreporting framework requires disclosure of the estimation uncertainty and, if so, to
evaluate the adequacy of such disclosure.

Where the auditor has determined that an accounting estimate gives rise to a
significant risk, the auditor must consider how management has assessed the effect
of estimation uncertainty:
o The auditor must evaluate whether the significant assumptions made by
management provide a reasonable basis for the accounting estimate.
o The auditor must evaluate whether and how management has considered
alternative assumptions or outcomes, and why they have rejected them.

It is anticipated that the AASB will issue an exposure draft by the end of 2006, with
the revised section 5305 being approved in mid-2007.
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Section 5310 Audit Evidence Considerations When an
Entity Uses a Service Organization
(no changes Feb. 2010)
Background

In July 2005, the AASB issued a revised Handbook section 5310, Audit Evidence
Considerations When An Entity Uses A Service Organization.
150
Effective Date

Like section 5970, the revisions in section 5310 are effective for financial statements
and financial reports for periods beginning on or after January 1, 2006.
Summary of Changes


Section 5310 has been revised and expanded to set out requirements for the auditor
of an entity’s financial statements who uses a service auditor’s report when:
o
planning the audit;
o
assessing control risk at the entity;
o
using audit evidence obtained from substantive procedures performed by service
auditors; and
o
evaluating audit evidence.
Section 5310 also deals with the communication of internal control weaknesses and
the content of the auditor’s report when a service auditor's report is used.
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Section 5370 Management Representations
(no changes Feb. 2010)
Effective Date

In August 2005, the AASB issued new Handbook section 5370 dealing with
management representations.
Summary of Requirements

Section 5370 requires an auditor to obtain written representations from management
as part of the evidence obtained to support the conclusion in a report providing
assurance on financial statements

Section 5370 aligns Canadian standards with U.S. and international standards on
management representations.

Management’s written representations will need to be obtained for both an audit and
a review engagement.

Section 8200 was also been amended to require such representations, although the
level of detail is considerably less.
151

Section 5370 makes it clear that management representations are a complement to,
but not a substitute for, other audit procedures that the auditor must perform to
obtain sufficient appropriate evidence in order to be able to draw reasonable
conclusions on which to base the audit opinion.

In many ways, the section codifies practice that had been in place.

For example, the section states that if a representation from management is refuted,
the auditor should determine whether reliance on management’s other
representations is appropriate and justified.

This perspective had been part of the audit program for some time now.

Likewise, the requirement to obtain written representation is something that many
auditors already did as a matter of practice.

Section 5370 provides a “laundry” list of the representations required.

The goal is to confirm in writing any verbal statements made by management.

Written representations should address:
o
the financial statements;
o
completeness of information;
o
fraud and error; and
o
recognition, measurement and disclosure.

Specific representations are listed in paragraphs 5370.17 and .18.

Written representations must be signed by members of management with overall
responsibility for financial and operating matters whom the auditor believes are
responsible for and are knowledgeable, directly or through others in the organization,
about the matters covered by the representations.

Current management with overall responsibility must sign the rep letter even if they
were not “management” during part of the period covered by the auditor’s report.

If current management refuses to sign the rep letter because they were not
management for the whole period, then the auditor is faced with a scope limitation.

A refusal by management to provide written representations required by the auditor
is a limitation imposed by the entity and constitutes a scope limitation, regardless of
whether the auditor is able to obtain the necessary evidence by performing
alternative procedures.
152

In such circumstances, the auditor should express a qualified opinion or even deny an
opinion.
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Section 5400 The Auditor’s Standard Report
(no changes Feb. 2010)
Background

Section 5400 was amended to deal with differential reporting under section 1300.

It clarifies the responsibilities of management and the auditor regarding the ability of
the enterprise to use, and the necessary documentation for, differential reporting.
Summary of Changes
Auditor’s Duty


Before completing the engagement, the auditor should:
o
be satisfied that the enterprise is a non-publicly accountable enterprise as
defined in paragraph 1300.02;
o
be satisfied that the enterprise meets the disclosure requirements of paragraph
1300.21; and
o
obtain evidence that each owner has consented to the application of differential
reporting options in accordance with paragraph 1300.13.
The auditor should obtain written representation from management confirming that:
o
the enterprise is a non-publicly accountable enterprise as defined in paragraph
1300.02;
o
management provided appropriate information to the owners regarding the
differential reporting options; and
o
management has obtained in writing the unanimous consent of the owners to the
application of each differential reporting option to the financial statements, which
are the subject of the audit, and this consent has not been withdrawn.
The Auditor’s Standard Report
I have audited the balance sheet of ......... as at .........., 20..., and the statements of
income, retained earnings and cash flows for the year then ended. These financial
statements have been prepared in accordance with Canadian generally accepted
153
accounting principles using differential reporting options available to non-publicly
accountable enterprises, as described in Note X to the financial statements.
The Auditor’s Report

The AASB intends to revise Handbook section 5400 along with a number of other
related sections in two phases.

The first phase will see section 5400 converge with ISA 700.

The second phase will specifically revise sections 5090, 5095, 5110, 5405, and 6550,
along with the examples to audit reports scattered throughout the Handbook.

The IAASB issued revised International Standard on Auditing 700, The Independent
Auditor’s Report on a Complete Set of General Purpose Financial Statements, in
December 2004.

ISA 700 expanded and updated the wording of the auditor’s report in order to
enhance readers’ understanding of the auditor’s role and the auditor’s report.

Key aspects of the revised ISA 700 are as follows:

o
better explanations of the respective responsibilities of management and the
auditor
o
an updated description of the audit process to reflect the new audit-risk
standards
o
clarification of the scope of the auditor’s responsibilities with respect to internal
control
Phase II will deal with a much more complicated issue:
o There is a requirement for the auditor to “stand back” and assess whether the
financial statements are fairly presented.
o While such a requirement is implicit in that the auditor must not be associated with
false or misleading information, GAAS does not currently explicitly require such a
perspective.

ISA 700 applies to the auditor’s report when the financial statements meet two
criteria: 1) that the financial statements are general purpose financial statements;
and 2) the financial reporting framework used is designed to achieve a fair
presentation.

Unfortunately, ISA 700 does not define the second criterion.
154

If it is not met, the auditor is required to report under ISA 800,The Auditor's Report
on Special Purpose Audit Engagements, which means that the auditor does not qualify
the opinion but gives a “properly prepared in accordance with the framework” form of
opinion.

The problem is that Canadian GAAS is based only on the first criterion.

The auditor’s opinion on general purpose financial statements is always based on the
“fairly presents” form and on the assumption that the framework is designed for such
a presentation.

If the statements do not conform to the framework, then a qualified opinion must be
issued.
Effective Date

It is anticipated that the AASB will issue the Phase I exposure draft by the end of
2006, with the revised section 5400 being approved in mid-2007.

The Phase II exposure draft will likely follow the completion of Phase I, with a final
Handbook release expected quarter 1 in 2008.
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CICA Handbook  Assurance  Part II  Assurance
Recommendations  Specific Items  Audit of Financial
Statements (6010-6930)
Section 6550 Subsequent Events
(no changes Feb. 2010)
Background

An exposure draft was released in June 2005, with comments due for August 10.

This project complements the accounting project intended to revised Handbook
section 3820.
Summary of Changes

Based on ISA 560, Subsequent events, these revisions focus on procedures designed
to determine whether management has identified subsequent events.

The principal change is to revise paragraph 6550.04 to add several matters to the list
of procedures performed by the auditor when auditing subsequent events.
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
Specifically, the revisions require auditor to do the following:
o
make enquiries to obtain an understanding of the procedures management has
established to ensure that subsequent events are identified
o
expand the list of specific matters that might require adjustment to and/or
disclosure in the financial statements

Note that the auditor is not expected to perform a continuing review of all matters to
which previously applied procedures have provided satisfactory conclusions.

The revised section 6550 is effective for financial statements and financial reports for
periods commencing on or after January 1, 2006.
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Section 6930 Reliance on Another Auditor
(no changes Feb. 2010)
Background

The AASB intends to revise Handbook section 6930 to converge with ISA 600.

Section 6930 applies where there is reliance by one auditor (the primary auditor) on
the report and work of another auditor (the secondary auditor) when reporting on
financial statements that include financial information from the financial statements
reported on by the secondary auditor.
Summary of Proposed Changes

Key aspects of the revisions follow:
o
the definition of “related auditor”
o
the group auditor’s procedures in relation to both significant components and to
the work of other (related and unrelated) auditors — including the meaning of
the term “involvement”
o
access to information and the effect that a restriction may have on the group
auditor’s report
o
materiality
o
the structure of the revisions — in particular, whether they reflect a risk-based
approach
o
the use of percentages to determine financial significant components
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o
the elimination of the division of responsibility — in particular, whether the
revisions should explicitly require sole responsibility and prohibit reference to
another auditor in the group auditor’s report.
Effective Date

Although the AASB issued an exposure draft in March 2006, it is not expected that
the revised section 6930 will be approved before the end of 2006.

The AASB intends to wait until the IAASB completes its review of the topic, especially
in light of any changes that might be required because of the Clarity Project.
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