Public Practice Bulletin
December 2010
Focus on Practice Review
By Rachel Miller CA, ICAA Director, Practice Review
Introduction
The objective of practice review is to protect the public through assessing firm’s compliance
with professional standards and by taking appropriate follow-up or remedial action in
instances of non-compliance. The public is further protected by practice review providing an
educational experience to firms. This objective has been adopted by all of the provincial
institutes of chartered accountants across Canada.
This article outlines the common findings from reviews conducted during the 2009/2010
review year and provides direction for addressing deficiencies. It also summarizes
significant new accounting and assurance standards and details sources of guidance to
assist practitioners in implementing the new standards.
Public Practice Bulletin is produced jointly by the Institute of Chartered Accountants of Alberta and the Institute of
Chartered Accountants of Saskatchewan and distributed as part of the electronic monthly mailing package. Opinions
expressed in this bulletin are those of the author and do not reflect the official position of ICAA or ICAS. Any queries
regarding this material should be directed to Sean Johnson CA, ICAA Director of Professional Services at
s.johnson@icaa.ab.ca, or Al Budlong FCA, ICAA and ICAS Senior Practice Advisor at a.budlong@icaa.ab.ca. This
bulletin has been posted to the ICAA and ICAS websites. For additional copies of this advisory, please access
http://www.albertacas.ca/Resources/TechnicalPublications/PublicPracticeBulletin.aspx or contact Chris Pilger, Director,
Member Relations and Communications at c.pilger@icaa.ab.ca or
1-800-232-9406 or (780) 420-2363. In Saskatchewan, please contact Sue James at s.james@icas.sk.ca or (306) 7914142.
Financial Statement Presentation
Revisions to Canadian Generally Accepted Accounting Principles
The Canadian Accounting Standards Board (AcSB) has approved significant revisions to the CICA Handbook Accounting to reflect changes in Canadian GAAP. The revised Handbook will include the following sections:
Part I – International Financial Reporting Standards
Part II – Accounting Standards for Private Enterprises
Part III – Accounting Standards for Not-for-Profit organizations (available in December 2010)
Part IV – Accounting Standards for Pension Plans
Part V – Pre-change-over accounting standards
Financial Reporting for Private Enterprises
New accounting standards for private enterprises (ASPE) were issued in 2009. These new standards give
Canadian private businesses the ability to choose to adopt new “made in Canada” standards or International
Financial Reporting Standards (IFRSs). Private enterprises must decide which set of standards best meet their
needs and must adopt one of these financial reporting frameworks for annual financial statements related
to fiscal years beginning on or after January 1, 2011; however, early adoption is permitted.
The most notable changes from the current standards are the simplification of recognition, measurement and
presentation in areas that were identified as being overly complex, such as the accounting for financial
instruments. The new standards also significantly reduce disclosure requirements.
Resources
• CICA Handbook – Accounting Part II
• Canadian Standards in Transition Website (www.cica.ca/transition) – the Private Enterprises section
of the website includes various resources, such as:
o CICA’s Guide to Accounting Standards for Private Enterprises in Canada
o FAQs
o Webinars
- Getting Familiar with New Accounting Standards for Private Enterprises (January 2010)
- Transitioning to Private Enterprise Standards (November 2010)
o Articles
- CA Magazine – What’s changed? (June 2010)
• Provincial Institute Professional Development – practitioners interested in learning the details of the
new standards should plan to attend one or more of the ICAA PD courses on this topic, which are being
offered in the fall/winter program
• Model Financial Statements – Private Enterprises Part II of the CICA Handbook - Accounting –
available through Knotia
Accounting Standards for Private Enterprises (ASPE)
First-time Adoption of ASPE (Part II, Section 1500)
An entity applies Section 1500, First time-adoption to its first financial statements prepared in accordance with
the accounting standards for private enterprises. Highlights include:
1. Opening Balance Sheet
An opening balance sheet is prepared and presented at the date of transition, which means a third
balance sheet is presented. The date of transition to ASPE is the beginning of the earliest period for which
an entity presents full comparative information under the new standards. For example, if an entity wishes
to early adopt in order to present the December 31, 2010 financial statements in accordance with Part II of
the CICA Handbook, the date of transition would be January 1, 2009. The balance sheet would show
comparative balances for December 31, 2009 and January 1, 2009.
2. Accounting Policies – Retrospective Application
The same accounting policies must be applied to the opening balance sheet and throughout all periods
presented in the first financial statements prepared using ASPE. The standards are to be adopted
retroactively where no specific elective exemption is available or where retrospective application is not
permitted.
Elective Exemptions from Retrospective Adoption
o Business combinations
o Property, plant and equipment
o Employee future benefits
o Cumulative translation differences
o Financial instruments
o Asset retirement obligations
o Related party transactions
o Stock based compensation
Prohibitions from Retrospective Application
o De-recognition of financial instruments
o Hedge accounting
o Estimates
o Non-controlling interest
3. Other Disclosure
In the year of adoption, the financial statements must disclose:
• A reconciliation of net income reported in the most recently issued statements to net income under
ASPE for the same period
• Amount and explanation for each charge to retained earnings at the date of transition
• The exemptions the entity elected to use in the preparation of the financial statements
4. Reference to Accounting Framework
The notes must disclose that the financial statements were prepared in accordance with “Canadian
accounting standards for private enterprises” and the same wording would be used in the audit or review
engagement report. As ASPE is part of Canadian GAAP, no separate reference to Canadian GAAP is
necessary. If a separate reference is included, it would follow the reference to ASPE and would state
“Canadian accounting standards for private enterprises are part of Canadian Generally Accepted
Accounting Principles”.
Other Considerations - ASPE
Aside from first-time adoption requirements, other new or significantly different requirements under ASPE
include:
Financial Instruments (Part II, Section 3856)
Fair value measurement is required for investments in equity instruments traded in active markets and
freestanding derivatives. However, an entity may elect to measure any financial instrument at fair value on
initial recognition. Fair value disclosure is not required for financial instruments that are not measured at fair
value.
Transaction costs for financial instruments measured at amortized cost are capitalized, while those measured
at fair value are expensed.
Redeemable preferred shares issued under a qualified tax planning arrangement are recognized as equity,
must be presented as a separate line item in equity and described as being redeemable at the option of the
holder.
Internally Generated Intangible Assets (Part II, Section 3064)
A choice of accounting policy for recognition of internally generated assets is permitted—either capitalize or
expense. The policy chosen must be applied to all such assets and must be disclosed.
Current Liabilities (Part II, Section 1510)
There are two important points to note with respect to current liabilities:
• Callable debt must be classified as a current liability (no change from Part V – pre-changeover
accounting standards).
• Disclosure of government remittances payable (other than income taxes) is required (eg.,sales tax,
payroll taxes, health taxes, and worker’s safety premiums).
Stock-based Compensation (Part II, Section 3870)
The calculated value method must be used which eliminates the ability to ignore volatility.
Employee Future Benefits (Part II, Section 3461)
A choice of accounting policy for recognition of defined benefit plans is permitted—either the immediate
recognition approach (recognize all gains and losses immediately in income) or the deferral and amortization
approach (existing approach in Section 3461). The policy chosen must be applied to all defined benefit plans
and must be disclosed.
Income Taxes (Part II, Section 3465)
A choice of accounting policy is permitted—either the taxes payable or future income taxes method may be
used and the choice must be disclosed in the notes. f the taxes payable method is used, a reconciliation of
actual taxes to taxes that would result from application of the statutory rate is required, consistent with the
disclosure requirements under differential reporting.
Common Findings - Private Enterprises
Practitioners need to consider which reporting framework is applied to the financial statements prepared to
ensure they meet the applicable standards. Several of the deficiencies noted throughout 2009/2010 are
specific to private enterprise financial statements prepared using Part V – pre-changeover accounting
standards, and will not be applicable when the financial statements are prepared under Part II upon transition
to the new Accounting Standards for Private Enterprises . Still others will be applicable under all private
enterprise standards.
The following deficiencies noted for 2009/2010 with respect to financial statement presentation and disclosure
will apply regardless of whether the financial statements are prepared under Part V or Part II of the Handbook:
1. Many instances were noted where demand loans and related party loans with no fixed terms of repayment
were classified as long-term when file documentation supported a current liability classification. Callable
debt with term provisions for repayment, where the lender has legally waived the right to demand
payment, should be classified as current as required by Part V - EIC 122 (Part II – Section 1510).
2. Lack of disclosure of the revenue recognition policy, which is required for all profit-oriented entities in
accordance with Part V - Section 1505.09 and EIC-141 (Part II – Section 3400.31), was noted. When there
is more than one revenue stream, the policy for each material stream should be disclosed.
3. Inadequate disclosure of the description of relationship and measurement basis for related party
transactions in accordance with Section 3840 (Part V and Part II) were noted. Terms such as “affiliate”,
“associate” and “related company” are inadequate descriptions. Additional explanation is required for the
user of the statements to understand the effect of the relationship. Terms such as “controlled investee”,
“significantly influenced investee”, “jointly controlled enterprise”, “common control enterprise”,
“management”, “shareholder”, “director”, or “member of the immediate family of the shareholder or
management” are more appropriate and descriptive. Disclosure of the basis used to measure related party
transactions, such as carrying amount or exchange amount, assist the user in understanding and
evaluating the effect of the transactions on the enterprise.
The following deficiencies for 2009/2010 with respect to financial statement presentation and disclosure will
only apply to financial statements prepared under Part V – pre-changeover accounting standards of the
Handbook:
1. Financial Instruments
Private-entities are not required to implement Sections 3861 and 3855; however, Section 3860, included in
the XFI Accounting Handbook (see Part V), will still apply for these enterprises until they adopt the new
standards for private enterprises. Several deficiencies in measurement and disclosure were noted with
respect to financial instruments. When Part II is adopted, practitioners should review the requirements for
Financial Instruments (Section 3856) in detail as there are significant differences in the requirements.
Sections 3862 and 3863 were effective for fiscal years beginning on or after October 1, 2007 for publicly
accountable enterprises other than NPOs, co-operative business enterprises excluding regulated financial
institutions, and rate-regulated enterprises.
2. Retractable redeemable preferred shares should not be classified as equity when they are redeemable at
the option of the holder and the differential reporting option that would allow equity presentation has not
been implemented. In these cases they should be classified as a liability and, if due on demand, as a
current liability. Under Part II, an entity that issues preferred shares in a tax planning arrangement shall
present the shares in the equity section of the balance sheet, indicating that they are redeemable at the
option of the holder. When redemption is demanded, the issuer shall reclassify the shares as liabilities and
measure them at the redemption amount. Any adjustment shall be recognized in retained earnings.
3. Private enterprises have the option of using differential reporting under Part V. Various disclosure
deficiencies were noted in the financial statements of entities that applied differential reporting options
under Section 1300. There is no corresponding section under Part II.
4. Cash Flow Statements – disclosure of interest and income taxes paid is required.
Financial Reporting for Not-for-Profit Organizations
The AcSB has recently approved accounting standards for not-for-profit organizations, which will be available
as of December 1, 2010 as Part III of the CICA Handbook – Accounting. The standards will be effective for
periods beginning on or after January 1, 2012, but early adoption will be permitted. Not-for-profit
organizations will also have the option of choosing IFRSs for a January 1, 2012 changeover.
The standards are based on the accounting standards for private enterprises and are fundamentally those
outlined in the March 2010 Exposure Draft, Accounting Standards for Not-for-Profit Organizations, which
incorporates the 4400 series of standards relating to situations unique to not-for-profit organizations. Some
amendments were made with respect to the standards on capital assets. The amendments clarify that the
provisions in Section 3064, Goodwill and Intangible Assets apply to not-for-profit organizations’ intangible
assets.
Until transitioning to the new financial reporting framework, not-for-profit organizations should continue to
follow the existing accounting standards in the CICA Handbook – Accounting Part V.
Resources
• CICA Handbook – Accounting Part III (commencing December 2010)
• Canadian Standards in Transition Website – the Not-for-Profit Organizations section of the website
includes updates on the status of the project and additional resources are expected now that the
standards have been approved.
• Provincial Institute Professional Development – practitioners interested in an update on financial
statement presentation and disclosure requirements should attend one or more of the ICAA PD courses
which are being offered in the fall/winter program.
Common Findings – Not for Profit Organizations (NPOs)
The following areas had deficiencies noted for 2009/2010 with respect to financial statement presentation and
disclosure for NPOs:
1. Financial Instruments – Sections 3855 and 3861 were effective for fiscal years beginning on or after
October 1, 2006 for not-for-profit organizations; however, some NPOs still had not implemented these
sections. Under the new requirements, not-for-profit organizations will follow similar standards in this area
as private enterprises under Part II.
2. Revenue recognition policy – the accounting policies for both contributions (such as grants: deferral or
restricted fund method) and revenue other than contributions (such as dues) should be disclosed.
3. Cash Flow Statements – Section 1540, Cash Flow Statements is now applicable to not-for-profit
organizations and a statement of cash flow should be prepared in accordance with that section.
4. Allocation of general expenses – new Section 4470, Disclosures of Allocated Expenses by Not-for-Profit
Organizations, effective for fiscal years beginning on or after January 1, 2009, requires not-for-profit
entities that make allocations of general support and fundraising costs to other functions to disclose the
policies adopted for allocation of expenses among functions, the nature of the expenses being allocated,
the basis on which the allocations have been made and the functions to which they have been allocated.
Transitioning to International Financial Reporting Standards (IFRSs)
Part V of the Handbook for Publicly Accountable Enterprises (PAEs) will be replaced with IFRSs for fiscal
years beginning on or after January 1, 2011. A publicly accountable enterprise is an entity, other than a notfor-profit organization, or a government or other entity in the public sector, that 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, or holds
assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
There are many similarities between IFRSs and Canadian GAAP, but there are also significant differences.
Generally, Canadian GAAP and IFRSs are very similar in terms of the style and form of the individual
standards, and both sets of standards are based on a similar conceptual framework. However, in addition to
some pervasive differences, there are many subtle differences in the details, the significance of which will vary
by industry and individual organization.
Resources
• CICA Handbook – Accounting Part I
• Canadian Standards in Transition Website – the IFRS section of the website contains comprehensive
information and learning resources on the transition to IFRS, such as on-line courses, presentations,
articles, guidance on standard and industry specific issues, as well as sample financial statements. It also
includes a separate webpage that provides a selection of transition resources for small and mid-sized
companies. This webpage also includes a CICA presentation, Get to the Point, which provides transition
steps and an IFRS transition work plan.
• Provincial Institute Professional Development – ICAA is offering several general and standard-specific
IFRS courses as part of the fall/winter PD program.
Quality Control Policies and Procedures
CSQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other
Assurance Engagements, replaced the GSF-QC standards in the Handbook effective December 15, 2009.
Therefore, firms should have ensured that their quality control policies and procedures were in compliance
with the new standard on December 15, 2009.
Transitional Issues
CSQC 1 does not override current auditing standards, which are still in effect until the Canadian Auditing
Standards are implemented. It should be noted that Canadian Auditing Standard (CAS) 220, Quality Control
for an Audit of Financial Statements applies only to audit engagements, while CICA Handbook Section 5030,
Quality Control Procedures for Assurance Engagements applies to all assurance engagements. For audits of
financial statements with fiscal years ending before December 14, 2010, the standards in Section 5030 must
still be met. There are three main areas where CSQC 1 and Section 5030 are inconsistent, as follows:
• The date of completion of the engagement quality control review is earlier under CSQC 1, as it must
be completed and differences of opinion resolved before the engagement report date. Firms can early
adopt this as they would still meet the requirements of Section 5030. Firms may continue to use the
later date required under Section 5030 for audits of financial statements with years ending before
December 14, 2010.
• New engagement quality control procedures may be adopted early as they are above what is required
in 5030 and include:
• Team’s evaluation of firm’s independence
• Consultation on matters involving differences of opinion
• Review of documentation
• File lock down is later under CSQC 1, as it is not more than 60 days after the audit report date. Firms
cannot early adopt this standard as Section 5145 Documentation requires files to be locked down
within 45 days of issuance, which may be earlier than that required by CSQC 1. Firms must continue
to meet the requirements of Section 5145 for audits of financial statements with years ending before
December 14, 2010.
Resources
• CICA Handbook – Assurance Part 1
• CICA Newsletters
o Risk Alert (September 2009) – CSQC1 Transition Issues
o Risk Alert (March 2009) – New Quality Control Standard for Firms
o CA Practice Advantage (July 2009) – The New Quality Control Standard Your Firm’s Top Five “To-Do”
List
• Provincial Institute Professional Development – ICAA is offering an update course on this topic as part
of the fall/winter PD program.
• Quality Assurance Manual (QAM)
Common Findings – Quality Control
The following deficiencies were noted for 2009/2010 with respect to Quality Control:
1. Documentation of Quality Control Policies and Procedures and Monitoring
Firms are reminded of the requirement to review their established quality control policies and procedures to
determine whether they remain appropriate given changes in standards and changes in the firm, and to
evaluate the system to ensure it is operating effectively and being complied with in practice.
The main area of concern with respect to the implementation of quality control policies and procedures relates
to the monitoring process. The monitoring process shall include an annual consideration and evaluation of
the firm’s system of quality control including, on a cyclical basis, inspection of at least one completed
engagement for each engagement partner. A monitoring is not being done in many offices or, if it has been
done, documentation of the monitoring and the communication of the results to engagement partners and
other appropriate individuals within the firm is not being retained. Where a monitoring has been completed,
firms should ensure that they retain documentation of the monitoring and the communication of the results to
engagement partners and other appropriate individuals within the firm.
With respect to the monitoring requirements, there is one significant difference between the GSF-QC and
CSQC 1. This difference relates to who can perform the cyclical inspection of completed engagements—
CSQC 1 requires that those performing the engagement or the engagement quality control review not be
involved in the cyclical inspection of the completed files as part of the monitoring function. As a result, smaller
firms may need to look for an external monitor to do the inspection of individual engagements on a cyclical
basis. Practitioners are reminded that the Practice Review is not a substitute for the requirement that the firm
conduct its own cyclical inspections of completed assurance engagements.
2. Assessment of Independence and Client Continuance or Acceptance
Section 5030, Quality Control Procedures for Assurance Engagements requires practitioners to perform
appropriate procedures regarding the acceptance or continuance of client relationships and independence
matters for audit and review engagements. The working papers for audit and review engagements should
include documentation to evidence the assessment of independence and client continuance or acceptance.
In contrast to existing standards, CAS 260, Communication with Those Charged with Governance requires
communication of independence only for listed entities. However, currently Rules of Professional Conduct and
Related Guidelines – Guidelines to Rule 204.1 – 204.6 paragraph 49 requires communication of
independence for all audit engagements. Practitioners should continue to communicate in accordance with the
current Guidelines. Currently the CICA Handbook Review Engagement Section 8200.69 and 5731.35 require
communication of independence for review engagements as well as audits.
Resources
If practitioners are unsure as to whether certain activities are prohibited or constitute threats to their
independence, they can access the Rules of Professional Conduct and Related Guidelines as well as the
interactive GUIDE to Canadian Independence Standard (2009 Update) on the ICAA website
(www.albertacas.ca/Libraries/Member_Advisories_2009/Guide_to_New_Independence_2009.pdf). Rules
204.1 to 204.8 contain the independence standards, and the related guidance provide additional information
and guidance.
In addition, the Professional Engagement Manual (PEM) and the Quality Assurance Manual (QAM) both
provide checklists that can be used to document independence and client continuance and acceptance
considerations. Both resources are available through the CICA Knotia website (www.knotia.ca).
Review Engagements
Future of Review Engagement Standards
The Auditing and Assurance Standards Board is currently in the process of revising Sections 8100, General
Review Standard; Section 8200, Public Accountant’s Review of Financial Statements; and Section 8500,
Reviews of Financial Information Other than Financial Statements. As part of this project, the AASB has
sought input from stakeholders on how the existing review standards are being used in practice and what
improvements they would like to see.
The International Auditing and Assurance Standards Board (IAASB) is also working through a project to revise
the International Standard on Review Engagements 2400. To date, the AASB has reviewed the IAASB’s
agenda papers but any decision to adopt this standard would be subject to input received from Canadian
Stakeholders.
Additional information on this project can be accessed on the AASB website at
(www.aasbcanada.ca/projects/current-projects/item29999.aspx).
New Guideline on Dating of the Review Engagement Report
In March 2010, an exposure draft for a proposed new Assurance and Related Services Guideline, “Dating of
the Review Engagement Report,” was issued. The guideline provides guidance on how the concept of
substantial completion is applied and clarifies that the review engagement report is dated as of the date of
substantial completion of the review. This guideline was determined to be necessary as the only standard that
addresses substantial completion, Section 5405, Date of the Auditor’s Report, will no longer exist in the CICA
Handbook when the CASs come into effect.
Describing the Financial Reporting Framework in the Practitioner’s Report
With the restructuring of the CICA Handbook - Accounting to include various different financial reporting
frameworks in Canadian GAAP, the use of Canadian Generally Accepted Accounting Principles in the
practitioner’s report is no longer descriptive enough. Both the financial statements and the practitioner’s report
will need to reference the exact financial reporting framework that is being applied.
As a result of the complexities relating to the changes to accounting and auditing standards, the CICA has
published a guide, Audit Reporting Implications of New Auditing and Accounting Standards, to promote
consistency in the form and content of audit and review reports by providing guidance with respect to
commonly occurring circumstances. The guide addresses frequently asked questions and provides illustrative
audit and review engagement reports under various circumstances. This guide provides valuable information
for practitioners on the audit and review engagement reporting issues and considerations when new
accounting standards are adopted. The guide is located on the Canadian Standards in Transition website at
www.cica.ca/transition.
For more information on the above topics, members can refer to the October 2010 Practice Advice publication
at www.aasbcanada.ca/reference-material-for-practitioners/non-authoritative/item43346.pdf.
Common Findings – Review Engagements
Notwithstanding the upcoming changes affecting review engagements, the following matters have been
identified for consideration in review engagements based on the experience of the practice review program in
the 2009/2010 year.
1. Inter-relationship/comparison of revenues, expenses, gross margin, operating ratios and balance
sheet items
The lack of documentation of an analytical review of the financial statements is considered to be a serious
deficiency. The practitioner should focus on key financial statement items or aspects of the client’s business,
and ensure that checklists, where used, are supplemented by further appropriate documentation. Even if there
are no unusual amounts, variances or trends, a comment on the plausibility of key items should be included on
the checklist or referenced to a specific working paper as evidence that the practitioner gave such items due
consideration.
2. Cut-off procedures
Checklist questions usually suggest that additional documentation be included in either the working papers
(cross-referenced to the checklist) or the comments column of the checklist. Typically, documentation would
include a description of procedures followed by the client to ensure proper cut-off, a conclusion on the
adequacy of the procedures and, if deemed necessary, details of any additional review procedures required to
assess plausibility of the statements. Documentation of discussions with clients would include the name of the
individual(s) with whom the matters were discussed and the date of the discussions. Completion of only a
checklist without additional comments is not considered to be sufficient documentation of enquiry, analytical
procedures and discussion.
3. Inventory – client’s count procedures and valuation
As noted above with respect to cut-off procedures, completion of checklists without additional documentation
is not considered sufficient. A description of inventory count procedures should include more than just the date
of the inventory count; matters such as count instructions, use of count tags, supervision, segregation of
obsolete and slow-moving inventory and inventory on consignment should be noted. The client’s basis of
valuation, including how “cost” (FIFO, specific item, etc.) is determined, should be documented.
Resources
• CICA Handbook – Assurance Part II
• CICA Assurance and Related Services Guideline AuG-20, Performance of a Review of Financial
Statements in Accordance with Sections 8100 and 8200 – provides specific guidance and direction with
respect to various aspects of review engagement documentation.
•
•
CICA Newsletter – Practice Advice (October 2010) - http://www.aasbcanada.ca/reference-material-forpractitioners/non-authoritative/item43346.pdf
Provincial Institute Professional Development – ICAA is offering is offering a seminar on review
engagements as part of the fall/winter PD program.
Audit Engagements
Introduction to Canadian Auditing Standards
The AASB has approved the issue of Canadian Auditing Standards (CAS) 200 through 810, which apply to all
audits of financial statements for fiscal years ending on or after December 14, 2010, and which will replace
existing auditing standards currently applied in Canada. The new CASs are substantially harmonized with
International Standards on Auditing.
The new CASs can be found in Part I of the revised CICA Assurance Handbook. Early adoption is not
permitted; however, where new CASs are in addition to the current requirements or represent current best
practices early adoption would be allowed as long as the current standards are still met. Audits of financial
statements for periods ending before December 14, 2010 must follow the existing standards, which
can be found in Part II of the CICA Handbook - Assurance.
The new CASs will bring changes to required procedures, documentation, reporting and client
communications, and practitioners are encouraged to review their impact as soon as possible. However, the
difference in approach may depend on the firm’s current programs as many of the new requirements have
been implemented by firms as best practice. It is worth noting that any interim audit work performed for audits
of financial statements for fiscal years ending on or after December 14, 2010 must meet the new CASs
requirements regardless of when the work is being performed.
Resources
• CICA Handbook – Assurance Part I
• Canadian Standards in Transition Website – the Canadian Auditing Standards section of the website
includes various resources, such as:
o CICAs Guide to new CASs in Canada
o CAS Support Tool (CICA website)
o Webinars
- Audit of a Micro Entity – Making the New Canadian Auditing Standards Work for You and Your
Clients (October 2010)
- Implementing the new Canadian Auditing Standards: After the busy season – What You Need to
Know (May 2010)
o Articles
- CA Magazine (November 2009) – Staying out of the rough
- CA Magazine (March 2010) – How much is enough?
- CA Magazine (April 2010) – The CAS audit
o Memorandum – Reporting on Financial Statements under CAS
o Audit Reporting Implications of New Auditing and Accounting Standards
• Provincial Institute Professional Development – ICAA is offering various seminars that may be useful
to practitioners in transitioning to CASs
• C.PEM - The first edition of the Canadian Professional Engagement Manual (C.PEM) is available in
searchable Folios, Internet and print formats. The C.PEM has been prepared in response to Canada’s
adoption of the CASs. The original Professional Engagement Manual (PEM) included numerous forms to
assist practitioners in the implementation of the audit standards. The new C.PEM continues to assist
practitioners with revised content and expanded guidance
Areas for Consideration in Transitioning to CAS Audits
Communications (CAS 260/265/450)
Practitioners will see an increase in the required form, timing and general content for communications with
management and those charged with governance. Specifically, significant audit deficiencies identified during
the engagement must be communicated in writing. Furthermore, there is a requirement that any oral
communications be documented, along with the name(s) of the individual(s) with whom the discussions were
held.
To assist practitioners with the increased communication requirements, updated engagement and
representation letter templates are available in the CICA Handbook – Assurance Part I and in C.PEM.
Requirement to Communicate Independence (CAS 260)
In contrast to existing standards, CAS 260 requires communication of independence only for listed entities.
However, currently Rules of Professional Conduct and Related Guidelines – Guidelines to Rule 204.1 – 204.6
paragraph 49 requires communication of independence for all audit engagements. Practitioners should
continue to communicate in accordance with the current Guidelines.
Going Concern (CAS 570)
There is no equivalent standard in existing GAAS and practitioners should note that this requirement applies to
all clients, even if it is evident that the entity is a going concern. CAS 570 requires a preliminary assessment of
management’s assumption of going concern as part of the preliminary risk assessment procedures. The
auditor is required to discuss with management how they assessed the entity as a going concern and
documentation of this discussion should be evident in the file. When conditions or events are identified that
would give rise to significant doubt of the going concern assumption, this should be communicated with those
charged with governance. In such circumstances, specific procedures should be performed, including
evaluating management’s plans for future actions. The auditor also shall request written representation from
management and, where appropriate, those charged with governance, regarding their plans for future action
and the feasibility of these plans.
Materiality (CAS 320/450)
The CASs require the assessment of materiality at three levels: overall materiality for the financial statements
as a whole; materiality at the class of transactions, account balances or disclosures level, if applicable; and
performance materiality. Performance materiality is the level of materiality that will be used in the
determination of the nature, extent and timing of audit procedures. Factors to be considered in the
determination of materiality are included in the CASs and require the re-assessment and revision of materiality
as the audit progresses, if necessary.
Related Parties (CAS 550)
As part of the risk assessment procedures and related activities, the auditor shall perform specific audit
procedures and related activities to obtain information relevant to identifying the risks of material
misstatements associated with related party relationships and transactions. The auditor is also required to
inquire of management and others to obtain an understanding of controls, if any, that are established to
identify, account for and disclose related party relationships and transactions in accordance with the applicable
financial reporting framework. CAS 550 indicates that any related party transactions outside the normal course
of business should be deemed “significant risks” and treated as such in planning the audit approach.
Group Audits (CAS 600)
CAS 600 has a broad scope and practitioners are encouraged to familiarize themselves with the standard as it
may apply in more cases than the previous standard 6930 Reliance on Another Auditor. CAS 600 applies to
the audit of consolidated financial statements of a parent and its subsidiaries when other auditors are involved
in auditing one or more of the components, but it can also apply when the audit does not include subsidiaries
or the work of other auditors. The standards can apply when the audit is performed by different auditors within
the same firm or office. The key driver for CAS 600 is whether the components are significant to the
preparation of the entity’s financial statements.
The concept of reliance on another auditor in Section 6930 does not exist in CAS 600. The standard clearly
emphasizes and provides specific requirements and guidance on the overall responsibilities of the group
engagement team.
Audit Sampling (CAS 530)
There is no current equivalent to CAS 530. Section 5030.14 to .17, Audit Evidence provides brief guidance on
sampling and other means of selecting items for testing, but it does not provide the level of detail and
guidance found in CAS 530. Specifically emphasized in CAS 530 are the documentation requirements related
to sample design, calculation of sample, selection of items for testing and audit procedures performed. Further
guidance is given on the documentation of investigating the nature and causes of deviations, and evaluating
the results and concluding on the results of the testing with respect to the population being tested.
Audit Report Model (CAS 700/705/706)
The audit reporting model has probably seen the most significant change as a result of the implementation of
the CASs. Determination of the appropriate audit reporting model will be impacted by the purpose of the
financial statements. The appropriate audit reporting model should be considered at the pre-planning stage
and may impact the decision on the acceptability of the engagement.
In addition to these pre-acceptance and planning considerations, the format and wording of the auditor’s report
has been expanded. The concepts of Emphasis of Matter and Other Matters paragraphs have been added,
which allow the auditor to highlight certain items directly in the audit report. Practitioners are cautioned that,
while the Emphasis of Matters paragraph should be used to highlight matters fundamental to the users’
understandability of the financial statements, careful consideration should be used when deciding which
matters to include so as not to diminish the effectiveness of the Emphasis of Matter paragraphs.
As a result of the complexities relating to the changes to accounting and auditing standards, the CICA has
published a guide, Audit Reporting Implications of New Auditing and Accounting Standards, to promote
consistency in the form and content of audit reports by providing guidance with respect to commonly occurring
circumstances. The guide addresses frequently asked questions and provides illustrative audit and review
engagement reports under various circumstances. This guide provides valuable information for practitioners
on the audit (and review engagement) reporting issues and considerations when new accounting standards
are adopted. The guide is located on the Canadian Standards in Transition website at www.cica.ca/transition.
Dating of the Audit Report (CAS 700)
CAS 700 is a significant change from the existing Section 5405, Date of the Audit Report which requires the
audit report to be dated when the engagement is substantially completed. CAS 700 requires the audit report to
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, including evidence that all the statements that
comprise the financial statements, including related notes, have been prepared and that those with the
recognized authority have asserted that they have taken responsibility for those financial statements. This will
generally be no earlier than date of approval of financial statements by the board or other similar body (not the
audit committee or equivalent)
The change in audit report date has generated some concern over the impact in year end procedures such as
the legal letter and subsequent event testing. Recognizing the challenges this creates related to obtaining
legal letters from the client’s legal counsel, AuG 46, Communications with Law Firms under new Accounting
and Auditing Standards has been issued to provide guidance on communications with lawyers.
Common Findings – Audit Engagements
While the audit risk approach was effective for fiscal years beginning on or after January 1, 2006, audit files
inspected in 2009/2010 continued to show deficiencies. The audit risk approach is applicable to all audit
engagements regardless of the size and/or nature of the entity. It should also be noted that the risk-based
audit approach underlies the requirements under the new CASs so deficiencies noted in these areas should
be addressed as members implement the CASs on upcoming engagements.
If you are completing an audit engagement on financial statements for periods ending before December 14,
2010, current Canadian GAAS continues to apply. The following common audit findings for 2009/10 should be
taken into consideration and implemented in your audit files where applicable.
1. Understanding of the control environment and the entity’s risk assessment process (S.5141)
The effectiveness of specific control procedures depends directly on the internal control environment. The
control environment includes the governance and management functions and the attitudes, awareness and
actions of those charged with governance and management concerning the entity’s internal control and its
importance to the entity. The auditor should consider the following elements:
• communication and enforcement of integrity and ethical values;
• commitment to competence;
• participation by those charged with governance;
• management’s philosophy and operating style;
• organizational structure;
• assignment of authority and responsibility; and
• human resource policies and practices.
2. Understanding and assessing implementation of internal control (S.5141)
As part of the understanding of internal control, the auditor is required to obtain an understanding of the
information systems, including business processes, that are relevant to financial reporting. In addition, the
auditor should obtain an understanding of the major types of activities the entity uses to monitor internal
controls over financial reporting, including those related to control activities relevant to the audit, and how the
entity initiates corrective actions to its controls. The auditor designs procedures (i.e. walkthroughs) to evaluate
the design of internal controls and to determine whether the internal controls have been implemented.
Evaluating the design and assessing the implementation of internal controls are required regardless of
audit strategy and nature and size of entity.
The understanding of internal controls should be sufficient to allow the auditor to assess the risk of
misstatement at the assertion level and design further audit procedures in response to the assessed risks.
3. Assessment of the risk of material misstatement (S.5141)
The assessment of the risk of material misstatement should be conducted at the financial statement level and
at the assertion level for classes of transactions, account balances and disclosures. In assessing the risk of
misstatement, fraud risk factors and significant risks should be considered. The assessment of risk at the
financial statement level is affected by the auditor’s understanding of the control environment.
The auditor should develop an audit plan that addresses the above assessment of the risk of material
misstatement. In addressing risks at the financial statement level, the auditor determines overall responses,
such as staffing and timing of audit procedures.
To address risks at the assertion level, the audit plan should provide a clear linkage between the risk
assessment and the nature, timing and extent of the auditor's further audit procedures. It has been noted that
many firms are not considering the risks identified during the risk assessment process when developing the
detailed audit plan and, as a result, the nature and extent of audit work conducted to address the identified
risks is often either insufficient or excessive.
4. Consideration of the risk of material misstatements in the financial statements due to fraud
(S.5135)
The auditor is required to obtain an understanding of management’s assessment of the risk of material
misstatement due to fraud, the internal controls in place to address such risk and prevent fraud and
management’s awareness of any known or suspected fraud. The planning documentation should include
evidence that the audit team (or sole practitioner) has considered the susceptibility of the entity’s financial
statements to misstatement due to fraud. The documentation in the file should include evidence that the
auditor has made enquiries of management with respect to:
• the risk that the financial statements might be materially misstated due to fraud;
• processes for identifying and responding to risks of fraud in the entity;
• communications, if any, to the audit committee or equivalent regarding processes for identifying and
responding to risks identified;
• communications, if any, to employees of its views on business practices and ethical behaviour; and
• knowledge of any actual, suspected or alleged fraud.
In addition, the auditor should obtain an understanding of how those charged with governance exercise
oversight of management’s processes and internal controls for identifying and responding to the risk of fraud
and whether they have knowledge of any actual, suspected or alleged fraud.
5. Use of analytical procedures (S.5301)
The auditor should use preliminary analytical procedures as part of the risk assessment process to obtain an
understanding of the entity and its environment. Analytical procedures should be performed with respect to
revenue and consideration should be given to unusual or unexpected relationships that may indicate risks of
material misstatement due to fraud.
In addition, the auditor should apply analytical procedures at or near the end of the audit to form an overall
conclusion as to whether the financial statements as a whole are consistent with the auditor’s understanding of
the entity. If such analytical procedures identify fluctuations or relationships that are inconsistent with other
relevant information, the auditor should investigate and obtain adequate explanations and appropriate
corroborative audit evidence.
6. Documentation (S.5145)
Section 5145, Documentation requires that a complete and final audit file be completed within 45 days of the
report release date. Auditors are now required to document in their files the report release date and
documentation completion date.
Areas in which the documentation of substantive audit procedures were found to be weak included testing of
journal entries, management estimates, subsequent events review, revenue, expenses and payroll.
It is worth noting that Paragraph 45 of CSQC 1 requires firms to establish a timeframe to complete the
assembly of the final audit file. The application paragraph A54 of CSQC 1 states that in the case of an audit
such a time limit would ordinarily not be more than 60 days after the date of the auditor’s report.
7. Communication with those having oversight responsibility for the financial reporting process
(S. 5751)
Auditors are required to communicate in writing at least annually to the audit committee or equivalent
confirming their independence and disclosing all relationships between the auditor and the entity and its
related entities that may reasonably bear on the auditor’s independence. In addition, for entities with public
accountability—which include not-for-profit organizations—this communication should include disclosure
of the total fees charged for audit and non-audit services provided by the auditor to the entity and its related
entities. The communication should cover the period from the date of the last independence letter to at least
the report date.
Prior to completion of the audit, auditors of entities with public accountability are also required to communicate
to the audit committee or equivalent a summary of the audit approach, the level of responsibility assumed by
the auditor under Canadian generally accepted auditing standards, and the audit and non-audit services to be
provided to the entity and its related entities. As one of the purposes of this communication is to encourage the
audit committee to identify areas of concern for the audit, the communication should take place before the field
work for the audit begins. Verbal communications should be documented in a memo outlining details of the
discussion.
The auditor is also required to communicate in writing significant weaknesses in internal control to both the
audit committee or equivalent and management. This requirement applies equally to the audits of ownermanaged and smaller entities, and while there may be cost/benefit considerations as to whether the control
deficiencies will be addressed or not, these decisions should be made by management and not the auditor.
8. Assessment of independence and client acceptance/continuance (S. 5030)
The Rules of Professional Conduct 204.1 to 204.6 set the independence standards with respect to audit
engagements. The working papers for audit engagements should include documentation that there has been
an assessment with respect to the acceptance/continuance of the engagement and independence.
9. Written representation and engagement letters (S. 5370, 5110)
Section 5370 (management representations) and Section 5110 (terms of the engagement) have been in the
Handbook since 2005. Many firms inspected during 2009/2010 did not have written representation and
engagement letters that were fully in compliance with the recommendations. There are sample management
representation letters in the Appendix to Section 5370 and a sample engagement letter in Section 5110. In
addition, the CICA Professional Engagement Manual provides practitioners with both management
representation letter templates and an engagement letter template.
Compilation Engagements
Common Findings – Compilation Engagements
1. Assessment of Independence
Rule 204.8 applies to compilation engagements. The performance of a compilation does not require that the
accountant is independent; however, any activity, interest or relationship that may impair the accountant’s
independence should be disclosed in a separate paragraph in the notice to reader communication. It is worth
noting that in June 2009 the Rules and Related Guidelines were revised to state that for the purposes of Rule
204.8 the preparation of accounting records or journal entries in connection with a compilation engagement is
not an activity that requires disclosure in the Notice to Reader unless such preparation involves complex
transactions, as contemplated by paragraph 143 of the Guidelines to Rule 204.1 to 204.6.
Resources
Practitioners interested in obtaining an update on the standards relating to compilation engagements and
discussing best practices and areas of concern with colleagues are encouraged to attend the ICAA
professional development session “Compilation Engagements”.
Conclusion
Please keep in mind that this article outlines some common deficiencies found in reviews performed during
2009/2010 and highlights a selection of relevant new and revised standards. The findings and standards noted
are not exhaustive. Members are encouraged to refer to all resources noted, as well as CICA and ICAA update
services.
Please do not hesitate to contact the ICAA with any questions or concerns relating to this publication.
Questions or comments can be directed to Rachel Miller CA, ICAA Director, Practice Review, at
r.miller@icaa.ab.ca.