Auditng notes.docx

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 3363A/B
Professor
Michelle Loveland
Semester
Fall

Description
CHAPTER 1: THE AUDITING PROFESSION Auditing: a formal examination of an organization’s or individual’s accounts or financial information Evidence: any information used by auditor to determine whether the information being audited is stated in accordance with the established criteria  Auditor must be independent, competent and non-biased  Internal auditors report directly to the audit committee to maintain independence from operations Auditor’s Report: inform readers of the degree of correspondence between information and established criteria Distinction between Auditing and Accounting: Accounting: recording, classifying and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making Auditing: determine whether recorded information properly reflects the economic events that occurred during the accounting period  Planning methods and risks  Strategies and economic niches  Whether accounting information is properly recorded Auditors must obtain expertise in the accumulation and interpretation of audit evidence. Economic Demand for Auditing:  Publicly accountable organizations and large not-for-profit organizations are legally required to have an annual financial statement audit  Auditing has a significant effect on information risk: information upon which the business decision was made was inaccurate  Reasons for increased likelihood of unreliable information: remoteness of information, bias and motives of provider, voluminous data, and the existence of complex exchange transactions Three ways to reduce information risk:  User may go to the business premises to examine records and obtain information about the reliability of the statements  Management is responsible for providing reliable information to users  Independent audit is performed Assurance and Non-Assurance Services: Assurance Engagements (services): independent professional services that improve the quality of information for decision makers  Auditor issues a report about the reliability of an assertion prepared by another party  Individuals seek assurance service to help improve the reliability and relevance of the information  Valued due to its independence and perceived unbiased with respect to the information examined  Attestation service: particular form of assurance service in which the auditor issues a repot about the reliability of any information provided by one party to another o Audit of historical financial statements:  Management asserts statements are fairly stated in accordance with GAAP  Client makes various assertions in the form of published financial statements  Public companies voluntarily contract for audits to provide assurance to investors and to facilitate access to capital  Privately held companies have audits to obtain financing from banks and other institutions  Governments and not-for-profit entities have audits to meet the requirements of lenders or funding sources o Review of historical financial statements  Much lower degree of assurance than an audit  Conducted due to the limited budget of smaller non-public companies o Attestation on internal control over financial reporting  Integrated with the audit of the financial statements  Section 404 of the Sarbanes-Oxley act in the US requires publicly listed companies to report management’s assessment of the effectiveness of internal control  effective internal controls reduce the likelihood of future misstatements in the financial statements o Attestation services on information technology  Assurance about the privacy and reliability of processes generating information in a real-time format o Other: auditor provides a opinion on financial information other than financial statements or on compliance with an agreement or regulations Chapter 2: ORGANIZATION OF PUBLIC ACCOUNTING FIRMS Public Accounting Firms: International Firms: Deloitte & Touche LLP, KPMG, PricewaterhouseCoopers, Ernst & Young, Grant Thornton, and BDO Dunway  Audit most of the 1000 largest companies in Canada  Capable to serve all major international markets  Revenue: $340 million - $1.4 billion National Firms: Collins Barrow, PKF Canadian and BHD Association  Offices in most major cities perform the same services as international firms and compete directly with them for clients  Has an international capability  Revenue: $66 – 132 million Large Local and Regional Firms:  Range in size  Affiliated with associations of public accounting firms to share resources for technical information and continual education  Revenue: up to $40 million Small Local Firms:  Fewer than 25 professionals in a single office  Primarily perform audits for smaller businesses and not-for-profit entities Structure of Public Accounting Firms:  3 main factors influence the organizational structure of all firms: 1) The need for independence from clients 2) The importance of a structure to encourage competence 3) The increased litigation-related cost faced by auditors  Typical organizational form of public accounting firm is a sole proprietorship or partnership  Organizational hierarchy: partners  managers  supervisors  seniors/in-charge auditors  assistants RESPONDING TO THE PUBLIC CALL FOR HIGH-QUALITY AUDITS: Professional Accounting Organizations: Research and Publications:  each association: has some form of month (or bi-monthly) newsletter or national magazine (CAmagazine, Financial Reporting in Canada), administers exams, provides professional guidance and continuing education Continuing Education: active in continuing professional education. Sponsoring seminars, and developing and providing material for use by their membership Established Standard and Rules: CICA sets the accounting and auditing standards that must be followed by public accountants doing audits of companies chartered under the Canada Business Corporations Act or the various provincial incorporating acts  the acts state that the financial statements should be prepared in accordance with the standards set out in the CICA Handbook Regulatory Influences on the Financial Statement Audit Process:  Canadian auditing regulations is largely influenced by the Sarbanes-Oxley Act of USA  International Standards on Auditing (ISAs) and proposed CAS: o Require auditor to conduct the audit only if the management agrees to provide the appropriate evidence to support the numbers and other information in the financial statements o Audit conducted using a risk assessment approach  Identify potential risks of material misstatement in the financial statement  Provide a risk response including the design and execution of evidence-gathering process to assess the likelihood of these material misstatements actually occurring  Write the audit report: an opinion, not a guarantee that provides reasonable assurance that the financial statements are free of material misstatement  CICA Assurance Recommendations i o issued by the Auditing and Assurance Standards Board (AASB) o the rules underlying the audits, assurance engagements and related services activities o italicized portions of Sections 5000-9200 and Section PS 5000 – PS 6420 of the CICA Handbook o Section preceded by “PS” – authoritative rules that specifies audits of public sector companies Ways Public Accountants are Encouraged to Perform Effectively: codes of professional conduct developed by various accounting bodies have significant influence on member and are meant to provide a standard of conduct for members in public practice Generally Accepted Auditing Standards (GAAS: General - Qualifications and Conduct: stresses the important qualities the auditor should possess  Competence: Technical competence through formal education, practical experience and continuing professional education  Due care in the performance of all aspects of auditing: o Completeness of the working papers o Sufficiency of the audit evidence o Appropriateness of the auditor’s report o Not be guilty of negligence or bad faith  Free of bias, independent and adherence to ethical standards: o CGAAC, Canada Business Corporations Act (CBCA) o Audit committee are utilized whenever there is a dispute between management and the auditors  Internal and external auditors report to audit committees  a subcommittee of the board of directors of a company  Committee members must be independent and composed of directors not belonging to management Examination - Performance of the Engagement: require auditor conduct the audit using a risk-based approach taking into account the potential for material misstatement in the financial statements  Supervision of the engagement is essential  A strategic and risk-based approach: the client must be assessed in the context of the business environment and the corporate governance process  Professional judgement is required to determine what quality of evidence to accumulate for a given set of circumstances  CBCA Section 161 specifies auditor’s qualifications and give them rights: o to attend shareholder meetings o to access records, information and explanations necessary to conduct the audit Reporting - Results:  auditor’s responsibilities  management’s responsibilities  financial statements audited  scope of the engagement  auditor’s opinion Auditing Requirements:  requirements in the CICA Handbook is identified by using the word “shall”  PAs are required to follow the recommendations of the CICA Handbook  Recommendations are framework built upon GAAS  GAAS and the Assurance and Related Services Recommendations provide less direction to auditors  Highly specific requirements is not given for auditors because it turns auditing into mechanistic evidence gathering devoid of professional judgement  When the CICA Handbook is silent on an issue, the auditor must to other authoritative resources: o Statement of Auditing Standards (SASs) issued by AICPA o ISAs issued by the Intenrational Federation of Accountants o Textbooks, journals, technical publications International Auditing Standards: a body that seeks to harmonize auditing standards on a world wide basis  CICA, CGAAC, and the SMAC are members of the International Federation of Accountants (IFAC)  IFAC through the International Auditing and Assurance Standards Board (IAASB) issues the International Standards on Auditing and International Auditing Practice Statements (IAPSs)  ISAs are standards and are authoritative – standards Canada adopted  IAPSs provide guidance and are not authoritative  The adopted statements by Canada are called Canadian auditing practice statements (CAPS)  Canadian auditor must conduct an audit of a Candian or foreign company in accordance with Canadian GAAS and possibly international GAAS  Auditor should follow Canadian reporting standards when difference arises between Canadian GAAS and the ISAs or foreign GAAS  The handbook take precedence over ISAs when there is a conflict  International Organization of Securities Commissions (IOSCO): concerned with securities that are issued by a company in one country and sold in second country o Provincial securities commissions are members of IOSCO o Concerned about International Auditing and Assurance Standards QUALITY CONTROL: Quality Control: methods used by a public accounting firm to make sure that the firm meets its professional responsibilities  Methods include: o Organizational structure of the public accounting firm o Procedures the firm sets up  Established for the entire public accounting firm and all the activities in which the firm is involved  GAAS require standards are applied to each engagement on an individual basis Elements of Quality Control:  CICA Handbook Section CSQC-2 describes general standards of quality control that are applied to firms performing assurance engagements  Standards clarify the minimum policies and procedures that firms should have in place  Quality control standards complement the independence rules in response to increased demands for public accountability  Canadian Public Accountability Board (CPAB) was created to help improve the public`s confidence in independent auditing o Promotes high quality audits o Developed an oversight program that involves regular inspections of those PA firms that audit “reporting issuers”  Require these PA firms to register with CPAB  “Reporting Issuers”: entities that have raised capital from the public, listed on a Canadian stock exchange and required to file annual audited financial statements with their listing exchange o Key difference between Canadian and American Board: absence in development of auditing standards – leaving it up to CICA Practice Inspection: ensure the existence of, and adherence to quality control standards  Inspections are conducted by professional associations, provincial institutes, order or the CPAB  A practice inspection is mandatory for CAs in public practice: o inspection of each practice unit is completed every 3 years o could be yearly if found unable to maintain the standards o set forth by the provincial practice inspection committee  can impose sanctions: reinspection the following year,  referral to the Professional Conduct committee: can require members to take courses, removing practice unit’s right to rain students, expelling the member for the professional institute, forfeiting the member’s right to use the appellation CA or CGA  CPAB practice inspections may be conducted by a provincial accounting obdy with the CPAB providing direction and reviewing of the results o Conducted annually for auditing firms that have 50 or more reporting issuers o Conducted every 3 years with firms less than 50 o Publish an annual report summarizing its findings Provincial Securities Commissions: responsible for administering the purchase and sale of securities within their jurisdictions  companies that issue securities in Canada must abide by rules of the provincial securities commission  Canadian Securities Administrators (CSA) is the national umbrella that sets policies to which the member commission agree to adhere Securities and Exchange Commission: an agency of the U.S. federal government assisting in providing investors with reliable information upon which to make investment decisions  Securities Act of 1933 require most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval  Securities Exchange Act of 1934 provides additional protection by requiring the same companies and others to file detailed annual reports with the commission  Both acts require financial statements, accompanied by the opinion of an independent certified PA as part of a registration statement  Holds considerable influence in setting GAAP and disclosure requirements for financial statements \  It’s opinion is considered in any major change proposed by the Auditing Standards Board CHAPTER 3 – PROFESSIONAL RELATIONSHIPS: THE ROLE OF ETHICS AND INDEPENDENCE Ethics: a set of moral principles or values Need for Ethics:  Necessary for society to function in an orderly manner  The following list of ethical principles incorporates characteristics and values that many people and organizations associate with ethical behaviour: o Trustworthiness o Respect o Responsibility o Fairness o Caring o Citizenship Why People Act Unethically:  Unethical behaviour: conduct that differs from what society believe would have been appropriate given the circumstances  Two primary reasons why people act unethically: o Person’s Ethical Standards Differ from General Society’s: conflict of ethical values that is likely to be resolved o Person Chooses to Act Selfishly:  Person violates his or her own ethical standards  Ethical Dilemma: a situation in which a decision must be made about the appropriate behaviour Rationalizing Ethical Behaviour:  Everybody does it  If it’s legal, it’s ethical  Likelihood of discovery and consequences Resolving ethical Dilemmas: 1) Obtain the relevant facts 2) Identify the ethical issues from the facts 3) Determine who is affected by the outcome of the dilemma and how each person or group is affected o Evaluate both short and long-term effects 4) Identify the alternatives available to the person who must resolve the dilemma 5) Identify the likely consequence of each alternative 6) Decide on the appropriate action PROFESSIONAL ETHICS AND PRINCIPLES OF CONDUCT: Special Need for ethical Conduct in Professions:  a professional is expected to conduct himself or herself at a higher level than most other members of society  the term carries a responsibility for conduct that extends beyond satisfying the person’s responsibilities to himself or herself and beyond the requirements of our society’s laws and regulations – extends to the public  underlying reason: need for public confidence in the quality of service by the profession  not practical for users to evaluate the performance of professional services because of their complexity Difference between Public Firms and Other Professionals:  PA firms are paid by the company issuing the financial statements  But the primary beneficiaries of the audit are statement users  essential for users to regard PA firms are competent and unbiased Ways Professional Accountants in Public Practice Are Encouraged to Conduct Themselves Professionally:  Factors influencing conduct of public accounting firm personnel: o GAAS and CICA Handbooks o Continuing education o Legal liability o Practice inspections o Code of professional conduct o Provincial securities commissions o CPAB and quality control o Professional examinations o Ability of individuals to sue PA firms Code of Professional Conduct:  Consist of a general statement of ideal conduct and specific rules that define unacceptable behaviour o general sta
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