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
• The public accountant council of Ontario (PAC) allows only licensed Pas to practice public accounting
Through SOX in the US, the accounting profession is regulated in many ways under the PCAOB, which
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
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
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
• 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
• 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
CPOAB does not create audit 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
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
• The importance of GAAS is that they identify the objectives and key principles of the financial statement
• 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
• Statements are prepared and an auditor expresses an opinion on whether the statement confirms to an
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
• The rules of the professional ethics require competence- adequate technical training and proficiency- in
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
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
• 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.
• The evidence gathered during the audit procedures should allow the auditor to have reasonable
assurance that the financial statements as a