Sunteți pe pagina 1din 32




1. Define an assurance engagement
2. Explain why there is a demand for audit and assurance
3. Differentiate between types of assurance services
4. Explain the different levels of assurance
5. Outline different audit opinions
6. Differentiate between the roles of the preparer and the
auditor, and discuss the different firms that provide
assurance services
7. Identify the different regulators, legislation, and
regulations surrounding the assurance process
8. Describe the audit expectation gap
Copyright John Wiley & Sons Canada, Ltd.

Auditing and Assurance Defined

An assurance engagement is defined as
an engagement where a practitioner issues
a written report and concludes on a subject
matter for which the accountable party is
Requires the existence of an
accountability relationship where one
party is answerable to another for the
subject matter
Copyright John Wiley & Sons Canada, Ltd.

Key Auditing &

Assurance Terms
Applicable financial reporting
framework The financial framework
selected by management to prepare the
company's financial statements (example:
Assertions Statements made by
management regarding the recognition,
measurement, presentation, and disclosure
of items in the financial statements
Audit Risk the risk the auditor may
express the wrong opinion
Copyright John Wiley & Sons Canada, Ltd.

Key Auditing &

Assurance Terms contd
Internal Control the processes implemented
and maintained by management to help entities
achieve its objectives
Material amount or disclosure that is significant
enough to make a difference to a user
Materiality maximum amount of misstatement
(or omission) the auditor can tolerate and still issue
a clean opinion
Sufficient and Appropriate Evidence relates
to the quantity and quality of the evidence
collected by the auditor
Copyright John Wiley & Sons Canada, Ltd.

Demand for Audit and Assurance

The users of the financial statements
are not limited to the shareholders or
owners of the business
Other users can include:
Investors: can include current or potential
investors. Decisions include to buy, hold or
sell stake in the organization
Suppliers: may want to assess whether
the entity can pay them back for goods
Customers: may look into going concern if
it is to rely on the entity for goods
Copyright John Wiley & Sons Canada, Ltd.

Demand for Audit and Assurance

Services contd
Lenders: to assess whether loan repayments
can be made as and when they fall due
Employees: to assess whether they can pay
entitlements, and stability may be assessed
for job security
Governments: whether the entity is
complying with regulations and paying
appropriate taxes
General public: whether they should
associate with the entity (future employee,
customer or supplier,) what it does and plans
to do in future
Copyright John Wiley & Sons Canada, Ltd.

Sources of Demand for Audit &

Assurance Services
Reasons why users demand financial
statements include:
Remoteness: users do not have access to
information themselves
Complexity: users do not have knowledge
to be able to make disclosure choices
Competing incentives: users may find it
difficult to identify when management is
presenting biased information
Reliability: as decisions are being made
based on information presented, it is
important that it be reliable
Copyright John Wiley & Sons Canada, Ltd.

Theoretical Frameworks
The demand for audit can be explained by
the following three theories:
Agency theory: Due to the remoteness of
the owners from the entity, the owners have
an incentive to hire an auditor to assess
information provided by management
Information hypothesis: Due to the need
for reliable information, users will demand
that information be audited to aid in decision
Insurance hypothesis: Investors demand
audited financial statements to insure against
potential losses
Copyright John Wiley & Sons Canada, Ltd.

Demand in a Voluntary Setting

It is becoming more common to voluntarily
disclose CSR information in various forms
This is as stakeholders are demanding
information regarding the entitys impact on
the environment and actions taken to reduce
their impact
Entities are not required to have CSR
disclosures assured
These services are provided to meet user
demands for high-quality, reliable
information and to demonstrate a high level
of corporate social responsibility
Copyright John Wiley & Sons Canada, Ltd.

Different Assurance Services

The most common assurance services
1. Financial Statement audits
An engagement designed to express an
opinion about whether the financial
statements are prepared in all material
respects in accordance with a financial
reporting framework (CAS 200, para. 11)

Copyright John Wiley & Sons Canada, Ltd.


Different Assurance
Services contd
Note the Canadian Securities
Administrators (CSA) requires that
listed entities (entity listed on a
stock exchange) publish audited
financial statements annually

Copyright John Wiley & Sons Canada, Ltd.


Different Assurance
Services contd
Limitations of an audit:
There is no guarantee that the financial
statements are free from error or fraud
Judgment is required in the process of
preparation of the financial statements
The nature of financial reporting, the nature
of audit procedures, and the need for the
audit to be performed within a reasonable
period and at a reasonable cost (CAS 200)

Copyright John Wiley & Sons Canada, Ltd.


Different Assurance
Services contd
2. Compliance audit
Involves gathering evidence to ascertain
whether rules, policies, procedures, laws
and regulations have been followed
A tax audit is an example of a compliance audit

3. Operational audit
Refers to the economy, efficiency and
effectiveness of an organizations activities
Usually done by internal auditors or can be
outsourced to external auditors
Copyright John Wiley & Sons Canada, Ltd.


Different Assurance
Services contd
4. Comprehensive audit
Combines elements of financial
statements audit, compliance audit, and
operational audit
Often occurs in the public sector

5. Internal audit
Provides assurance about various
aspects of an organizations activities
Often contain elements of operational audits,
compliance audits, internal control
assessments and reviews
Copyright John Wiley & Sons Canada, Ltd.


Different Assurance
Services contd
6. Corporate Social Responsibility (CSR)

Includes voluntary reporting about environmental,
employee and social subject matter
Incorporates both financial and non-financial
Auditor must consider the impact of
environmental issues on their clients financial
statements when conducting a financial
statement audit
Copyright John Wiley & Sons Canada, Ltd.


Different Levels of Assurance

Auditors can provide varying levels of
assurance when conducting assurance
1.Reasonable assurance gathering
sufficient evidence to form a positive
expression of opinion regarding whether
the information being assured is presented
Provides high but not absolute assurance
Refer to Figure 1.2 for an example audit report
Copyright John Wiley & Sons Canada, Ltd.


Different Levels of Assurance

2.Moderate assurance gathering sufficient
evidence to form a negative expression of
opinion regarding the reliability of the
information being assured
A negative expression of opinion states that there
is nothing that has come to the attention of the
auditor to lead them to believe the information
being assured is not worthy of belief
Is a lower level of assurance as being told it is
not wrong is not as assuring as being told it is
A review of a companys financial statements
(referred to as a review engagement) is an
example of a review report. Refer to Figure 1.3 for
an example report
Copyright John Wiley & Sons Canada, Ltd.


Different Levels of Assurance

3.No assurance auditor reports on factual
findings and does not express any opinion
An example includes a compilation
engagement here an auditor compiles the
financial information as provided by the client
ensuring mathematical accuracy
The Auditor attached a report to this set of
financial statements called a Notice to Reader
Refer to Figure 1.4 for example report
Which level of assurance should Cloud 9
Copyright John Wiley & Sons Canada, Ltd.


Different Audit Opinions

Audit opinions are contained in audit
reports provided by the auditor
Most common is an unmodified audit
report and contains an unmodified or
clean opinion. Refer Figure 1.2
All other reports are modified opinions
A report can be an unqualified modified
report when an emphasis of matter is
An emphasis of matter is used so that the
reader can pay appropriate attention to
the issue raised, but does not change the
auditors opinion (CAS 706)
Copyright John Wiley & Sons Canada, Ltd.


Different Audit Opinions contd

Other modified reports are qualified (Table 1.2)
A qualified opinion is given when the auditor
concludes that the financial statements
contain a material misstatement
Can include a qualified or except for opinion.
This is when issue(s) are material but not
Adverse opinion would arise when a financial
statement is misstated and the misstatement
is material and pervasive
Disclaimer of opinion would arise when there is
an inability to obtain sufficient appropriate
audit evidence and is material and pervasive
Copyright John Wiley & Sons Canada, Ltd.


Preparers and Auditors

It is the responsibility of those charged with
governance to prepare the financial
statements. The information should include
the following attributes:

Relevant: has an impact on the decisions made by

users regarding the performance of the entity
Reliable: Information is free from material
misstatements (errors or fraud)
Comparable: Information needs to be comparable
through time. Comparable against the same entity
over time and against other entities
Understandable: Users need to be able to
interpret the information presented in order to
make decisions
Fair Presentation: requires the consistent and
faithful application of accounting standards or an
applicable framework when preparing the
Copyright John Wiley & Sons Canada, Ltd.


Preparers and Auditors contd

Auditor also has responsibilities relating to
the audit
Professional scepticism: maintaining
independence of the entity and having a
questioning mind to thoroughly investigate all
evidence presented
Professional judgement: use of judgement
based on level of expertise, knowledge and
training obtained by the auditor
Due care: being diligent, applying technical
and statue-backed standards, and
documenting each stage of the audit process
Copyright John Wiley & Sons Canada, Ltd.


Preparers and Auditors contd

Assurance services are provided by
accounting and consulting firms
There are three tiers of assurance
providers in Canada
First tier the Big 4, which includes Deloitte,
Ernst & Young, KPMG and
Next tier National Accounting Firms comprised
of firms with significant presence nationally
and most have international affiliations
Next tier made up of regional and local
accounting firms
Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators

and Regulations
There are a number of regulators that
impact the audit process. They include:
Auditing and Assurance Standards
Board (AASB)
Responsible for the formulation of high
quality auditing and assurance standards
AASB successfully adopted the
International Standards on Auditing (ISA)
issued by the International Auditing and
Assurance Standards Board (IAASB)
Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators and

Regulations contd
Auditing and Assurance Standards
Board (AASB) contd
A redraft of these standards including a
clarity format are now referred to as
Canadian Auditing Standards (CAS)
Responsible for issuing CAS plus others
for assurance engagements (CSAEs),
review engagements, and compilation
engagement standards

Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators and

Regulations contd
Canadian Securities Administrator (CSA)
Joint effort of provinces and territories security
Regulates listed entity disclosure requirements
Requires annual filing of auditing financial
statements in accordance with Canadian GAAP
CEOs and CFOs required to certify that the
annual statements are fairly presented

Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators and

Regulations contd
Canadian Public Accountability Board
Objective is to promote high quality audits
Auditors required by CSA to be a member in
good standing and pass CPAB inspection

Toronto Stock Exchange (TSX)

Largest stock exchange in Canada
Requires those listed to follow Securities Act
of Ontario, the relevant provincial securities
acts, and the CSA
Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators and

Regulations contd
Chartered Professional Accountants of
Canada (CPA Canada)
New body representing a merger of the
Canadian Institute of Chartered Accountants,
the Certified General Accountants Association
of Canada, and the Society of Management
Accountants of Canada
Includes professionals in public practice,
industry, academia and government
Requires further rigorous study and minimum
work experience periods to join as members
Copyright John Wiley & Sons Canada, Ltd.


The Role of Regulators and

Regulations contd
Canadian Business Corporation Act (CBCA)
For federally incorporated companies, CBCA
requires audited financial statements for those
companies listed on Canadian stock exchanges
Requires the use of Canadian generally
accepted accounting principles, and audits
must be conducted in accordance with
Canadian generally accepted auditing
standards as defined by the CPA handbook

Copyright John Wiley & Sons Canada, Ltd.


Audit Expectation Gap

Is the difference between the expectations of
assurance providers and financial statement or
other users
Can be caused by unrealistic expectations including :

The auditor providing absolute assurance

The auditor guaranteeing future viability of entity
An unqualified opinion denotes complete accuracy
The auditor will find all frauds

We know these cannot be met by the auditor as the

auditor provides reasonable assurance not a

Copyright John Wiley & Sons Canada, Ltd.


Audit Expectation Gap contd

The expectation gap can be reduced by:
Auditors performing their duties appropriately,
complying with standards and meeting the
minimum standards of performance
Undertaking peer reviews of work performed
Reviewing and updating auditing standards
Educating the public
Enhanced reporting explaining audit processes
and levels of opinion auditors provide to the
Providers reporting accurately the level of
assurance being provided
Copyright John Wiley & Sons Canada, Ltd.


Copyright 2015 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond that
permitted by Access Copyright (The Canadian Copyright
Licensing Agency) is unlawful. Requests for further information
should be addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make back-up
copies for his or her own use only and not for distribution or
resale. The author and the publisher assume no responsibility
for errors, omissions, or damages caused by the use of these
programs or from the use of the information contained herein.