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Lecture #3 Sept 18 2013.docx

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University of Ottawa
Chris Liboiron

Lecture #3: Assurance Frameworks, Analytical Procedures Last class • What is right or wrong • What is required to become an audit professional • Midterm question o We do we need a code of conducts o Ranking of alternatives for an ethical dilemma What is an assurance engagement? • An assurance engagement is… o an engagement where, pursuant to an accountability relationship between two or more parties, a practitioner is engaged to issue a written communication expressing a conclusion concerning a subject matter for which the accountable party is responsible. • Not always F/S! Accountability Relationship • An accountability relationship …is a prerequisite for an assurance engagement. • exists when: o (the accountable party) is answerable to and/or is responsible to another party (the user) for a subject matter  Someone is accountable to someone else about something  You are responsible for someone about something What can you provide assurance on? • Environmental impact o Pollution – don’t go over a threshold • Grants and contribution (charity) o Use of funds – permissible use of the fund • Composition of products o Content – acceptable level of health content • Efficiently of operations o Assessment – seeing how efficient they are at their work Assurance Concepts • How does the practitioner form a conclusion? o Bench marks • Conditions that…. o Complex o Remoteness o Consequences USERS • There are three underlying conditions that affect demand by users for information. Identify and discuss these concerns. Levels of Assurance • Two distinct levels of assurance - a high level and a moderate level. o No way of having absolute assurance • What are some evidence for high assurance o Independent conformation o Inspection, observation o Inquiry and analysis What is a Review? • In a review engagement, practitioner = moderate level of assurance o Design test to give out a moderate assurance Moderate assurance – Reviews • When do you use a review? • Compilations • Level of Assurance? o No assurance o Directory note (not sure) True or False (midterm questions) • “Not all engagements performed by practitioners are assurance engagements…” o True o Accountability relationship needs to exist in all assurance engagement GENERAL STANDARDS • Before undertaking an assurance engagement, need to have reason to believe that that engagement can be completed in accordance with the relevant standards o Missing information o Unclear opening balance • Why is that? o You need to be able to reach a conclusion with high assurance Gen stds cont… • SM is or will be within the collective professional expertise of the practitioner and other persons performing the assurance engagement. Use of Specialists Limited procedure • Checks only certain accounts Engagement Letter • Reasons for it o What auditors are going to do and managements responsibilities o Helps flush out areas of mis-understandment and areas of confusion o Who as access to the records o Responsibility for internal controls o Auditor’s potential liabilities General Standard • Two responsibilities under the Gen Std o Due care  Imposing responsibility on everybody (including specialist) o Objective state of mind  Remain unbiased in carrying out resp in forming conclusion  Independence • The assurance engagement should be performed with due care and with an objective state of mind. Performance/Examination Stds • The practitioner should identify or develop criteria that are suitable for evaluating the subject matter. • What are criteria? Characteristics of Criteria • Suitable criteria for conclusions o Relevance  Contribute to the finds, o Reliability  Achieved consistent result o Neutrality  Free from bias that would case misuse of information o Understandability  What the subject matter signify o Completeness  All the information Criteria • Significance? o You can’t give assurance without criteria as guidelines • Sources? o Laws and regulations • Absence? o Consider the affect that it can have on your report Developing Criteria… 10 minutes • Lib-Inc. manufactures injection moulding equipment • 6 manufacturing centres, 1 distribution centre in Southern Ontario • Head office is Ottawa, responsible for plant layouts • Injection moulding machines, operators are key to business • Each shop employs 25-35 people • Key ingredient is plastic • Your firm has been engaged to perform an operational audit of the equipment layout in plants for a company. • Required: What are some specific criteria, stated in the form of questions that might be used to evaluate plant layouts? How would you develop your criteria? • Criteria o Capacity: Number of employees per machine o Is layout of the material facilitate production  Is it close to the machines o Is the equipment place so that waste is disposed easier o Is equipment operating at X% of level of X amount of year o Is safety of employee endangered by the layout of equipment o Traveling time from moving goods to one machine to another o What has Ottawa has done in terms of their contribution to the layout PERFORMANCE STANDARDS • Responsibilities: The work should be adequately planned and • The practitioner should ensure any other persons performing the assurance engagement are properly supervised. Performance Standards (midterm question) • Need a general strategy and a detailed approach to the execution of the engagement. • Factors including: • objective of the engagement; • criteria to be used in the engagement; • planned level of assurance; • possible sources of evidence; • preliminary judgments about materiality and • expertise required, including the nature and extent of specialist involvement. • Planning and supervision continue as the engagement progresses. • Nature, extent, timing vary ( exp and nature of engmt) • Plans may need to be changed as the engagement progresses. • I.e.: pharm in NB Sufficient, Appropriate audit evidence • Assurance is obtained through obtaining sufficient, appropriate audit evidence • The concepts of sufficiency and appropriateness of evidence are interrelated. • Sufficiency –measure quantity • Appropriateness – measure of quality REPORTING STANDARDS • Management provides assertions to auditors regarding the economic actions and events of the company. Explain what is meant by the term “assertions” and what they are. • The assertion evaluates, using suitable criteria, the subject matter for which the accountable party is responsible Assertions (F/S) • Management asserts financial statements are correct with regard to o existence or occurrence of assets, liabilities or transactions, o completeness of information in the financial statements, o rights and obligations at a point in time, o appropriate valuation or allocation,
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