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Canada (162,367)
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ACC 521 (14)
Chapter 2

CHAPTER 2.docx

11 Pages
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Department
Accounting
Course Code
ACC 521
Professor
Kathryn Bewley

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CHAPTER 2: AUDITORS’ PROFESSIONAL ROLES AND RESPONSIBILITIES The current environment of auditing Self-regulations: situation where a professional group is given the power to monitor and discipline its members by the government The Sarbanes-Oxley Act Public company accounting oversight board (PCAOB): 5 member boards created through the Sarbanes- Oxley act (SOX) to oversee the auditors of public companies in the US Key features of SOX include: 1) Increased oversight of auditors, including audit standards setting by PCAOB 2) Increased penalties for corporate wrongdoers 3) More timely and extensive financial disclosures 4) More timely and extensive disclosures on the way the firm is governed 5) New options of recourse for aggrieved shareholders, including increased legal liability for auditors • Canadian companies listed on the American stock exchange are subject to SOX rules Canadian public accountability board (CPAB): The board organized to monitor the auditors of public companies in Canada Canadian Coalition for good governance: a group of largest pension and mutual funds, whose purpose is to monitor executives and boards of directors to comply with good corporate governance and financial reporting practices • The public accountant council of Ontario (PAC) allows only licensed Pas to practice public accounting in Ontario Through SOX in the US, the accounting profession is regulated in many ways under the PCAOB, which includes: 1) Conducting an inspection of the big four accounting firms 2) Creating a registry system for PA firms 3) Conducting a review of existing audit standards 4) Taking on the task of setting future audit standards in the US American institute of certified public accountants (AICPA): The professional organization of independent external auditors in the US o ACIPA still sets audit standards for nonpublic companies whose shares are not traded on the stock markets. Following are the impact of SOX on auditors: 1) Management certification of all its publicly issued financial statements 2) Evaluation of internal controls in the statements made by the management 3) Closer regulations of the profession, including regular monitoring of its activities 4) Greater responsibilities assigned to client audit committees 5) Increased importance of the role of the internal auditor Internal Control: The system of policies and procedures needed to maintain adherence to the company’s objectives; especially the accuracy of recordkeeping and safeguarding of assets Audit committees: Monitor management’s financial reporting responsibilities, including meetings with external auditors and dealing with various audits and accounting matters may arise. • The PCAOB has final authority on auditing, ethical, and independence standards, and quality control; criteria that will be used to monitor the profession. • The CPAB is directly funded by audit firms, leading to the questions about its independence from the profession itself. Corporate governance: the ways in which the suppliers of capital to corporations assure themselves of getting a return on their investments more generally, under the corporate social responsibility view, corporate governance is the system set up to hold a corporation accountable to employees, communities, the environment, and similar broader social concerns in addition to being accountable to the capital providers. • Canadian regulation have been influenced by SOX requirements o Now greater emphasis on more timely disclosures of material information and more disclosures of corporate governance practices. o Management is now required to disclose its conclusion about the effectiveness of internal control in the management discussion and analysis section of the annual report • Toronto stock exchange companies do not need to follow best corporate governance practices, but failure to do so by the largest companies must be disclosed. Regulation of Pas • CGAs, CMAs, CAs are allowed to practice Public accounting throughout Canada. o The goal is to increase accessibility to reasonably prices public accounting services which maintaining standards • Several factors that affect the accounting profession include, legal system the profession operates in, and the impact of regulators on practicing auditors o Regulators include, the superintendent of financial institutions (federal), whose responsibility is regulating the financial service industry under the jurisdiction of the federal bank act. o Securities commission (provincial) whose responsibility is for investor protection and for ensuring the fairness and efficiency of the province’s capital markets. THREE principal activities of the Ontario securities commission (OSC) include: 1) Registering issuers, dealers, and advisers trading in securities and commodity future contracts 2) Monitoring the full extent of reporting requirements, including those related to prospectuses, takeovers, and continuous disclosure of material information 3) Enforcing the provisions of the securities act and the commodity futures act. Prospectus: Set of financial statements and disclosures distributed to all purchasers in an offering registered under the securities law • The office of the chief accountant is responsible for formulating financial reporting policy and for monitoring the application of accounting principles and auditing standards by report issuers and their auditors. • The OSC also monitors auditing and accounting standards setting of the CICA and provides input on emerging issues as well as commentary on proposed standards. Securities and Exchange Commission (SEC): Main US government agency regulating then securities markets in the US Initial public offering (IPO): First time offering of corporation’s shares to the public. • The creation of the CPAB was an important development in Canadian accounting profession o Board monitors audit practice and conducts annual inspection of accounting firms to assess their ability to protect the public interest o It has the power to sanction any auditor that fails to protect the public interest, and is viewed as the first in a series of major structural reforms to protect the integrity of Canada’s financial accounting system  CPOAB does not create audit standards. Practice standards Practice standards are general guides for the quality for professional work, and the accounting and auditing profession has many sets of standards to choose from. FOUR sets of standards include: 1) Generally accepted auditing standards (GAAS) 2) Assurance standards 3) CICA’s general standards of quality control for firms performing assurance engagements 4) Quality control standards as reflected in firm peer reviews and provincial institutes’ practice inspection manuals Generally accepted auditing standards (GAAS) Generally accepted auditing standards: auditing recommendations that have been established in a particular jurisdiction by formal recognition by a standard-setting body, or by authoritative support or precedent such as the auditing and assurance recommendations of the CICA handbook • CAS 200 establishes auditor’s overall responsibilities when conducting an audit in accordance with CAS standards • The importance of GAAS is that they identify the objectives and key principles of the financial statement audit • Every CAS is written so that it identifies the subject and objectives of the standard, provides new definitions wherever applicable, states the requirements for meeting the objectives, and provides further explanation for carrying out those requirements • The goal is to have a more logically organized set of standards and to communicate the reasoning behind these to the auditor Auditing Guidelines (AuGs): The part of the CICA handbook that provides procedural guidance on implementing GAAS Auditing standards (ASs): The subset of assurance standards dealing with “high or “reasonable” levels of assurance in assurance engagements GAAS: Objectives of the Audit of financial statements • The overall objectives of the financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material respects, in conformity with the applicable framework. • Statements are prepared and an auditor expresses an opinion on whether the statement confirms to an applicable framework. o GAAP is the appropriate framework GAAS: Ethical requirements relating to an audit of financial statements • GAAS relates to the personal integrity and professional qualifications of the auditors Competence • The rules of the professional ethics require competence- adequate technical training and proficiency- in auditors. o The competence begins with an education in accounting, since auditors hold themselves out as experts in accounting standards and financial reporting. o Continues with on the job training in developing and applying professional judgment in the real world audit situation The stages provide practice in performing the assurance function, in which auditors will learn: 1) To recognize the underlying assertion being made by management in each account in financial statements 2) Decide which evidence is relevant for supporting or refuting the assertions 3) Select and perform procedures for obtaining the evidence 4) Evaluate the evidence and decide whether management assertions correspond to reality and GAAP Objectivity and independence • Ethics rules require auditors to have an objective state of mind, which means intellectual honesty, and impartiality • Auditors must be unbiased with respect to the financial statements and other information they audit • Auditors are expected to be fair not only to companies and executives who issue financial information, but also to the outside persons who used it Due professional Care • The exercise of due professional care require observance of professional ethics and GAAS • Auditors must be competent and independent, exercising proper care in planning and supervising the audit, in understanding the auditee’s control structure, and in obtaining sufficient appropriate evidence o Their training should include computer auditing techniques because of the importance and pervasiveness of computers in the business world. The qualities of a “prudent auditor” might be used to demonstrate the concept of due care in an audit: A prudent auditor is assumed to have knowledge of the philosophy and practice of auditing, to have the degree of training, experience, and skill common to the average independent auditor, to have the ability to recognize indications of irregularities. • Due care is a matter of what auditors do and how well they do it. GAAS Examination Standards • These standards set quality criteria for conducting an audit and also relate to the sufficiency and appropriateness of evidence gathered to support the audit opinion Conduct of an Audit of Financial Statements • To meet the overall objectives of the audit of financial statements, the auditor in Canada must comply with the CAS and the Canadian Audit Practice Statements (CAPS) Scope of an Audit of Financial Statements • This principle refers to exercising professional judgment when deciding on the type and extent of the audit procedures to perform in a particular circumstance. Reasonable Assurance • The evidence gathered during the audit procedures should allow the auditor to have reasonable assurance that the financial statements as a
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