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Smieliauskas/Bewley, 7e © McGraw-Hill Education, 2016

What You Really Need to Know 2-1

WHAT YOU R EALLY NEED TO K NOW

CHAPTER 2: AUDITORS’ PROFESSIONAL ROLES & RESPONSIBILITIES

LO1 Describe the current audit environment, including developments in regulatoryoversight and provincial regulation of public accountants in Canada.

• The Sarbanes-Oxley Act (SOX) was signed into U.S. legislation in July 2002. SOX

created the PCAOB (Public Company Accounting Oversight Board) which was given theauthority to tighten quality control of audit practices and to report on results of

inspections of audit firm practices.

• The CPAB (Canadian Public Accountability Board) was created in July 2002 in Canada

by the CPA Canada to oversee auditors of public companies. This board also tightens

quality control of audit practice and reports on inspections of audit firm practices.

• Internal control statements deal with the reliability of the system or process that createsthe financial statements.

•

Audit committees monitor management’s financial reporting responsibilities, includingmeeting with the external auditors and dealing with various audit and accounting mattersthat may arise.

• In Canada, regulation of public accounting is a provincial matter. Most provinces have

public accountancy acts that specify who is allowed to practice public accounting in the province. In recent years, the trend in provincial public accountancy legislation has been

to open public accounting to all CPAs (prior to amalgamation of the accounting bodies,the primary designations were the CGAs and CMAs, as well as CAs). The goal is to

increase accessibility to reasonably priced public accounting services while maintainingstandards.

• Overall, the profession of auditing is facing an increasingly complex regulatory

environment. Auditors must be aware of this environment in order to perform a properaudit.

LO2 List the various practice standards for independent audits of financial statements.

• Practice standards are general guides for the quality of professional work. The listincludes: (1) Generally Accepted Audit Standards (GAAS), (2) assurance standards, (3)CPA Canada’s General Standards of Quality Control for Firms Performing Assurance

Engagements (CSQC-1), and (4) other quality control standards as reflected in firm peerreviews and provincial institutes’ practice inspection manuals.

LO3 Outline the ethical, examination, and reporting standards that make up generally

accepted auditing standards (GAAS) as set out in the CPA Canada’s Canadian AuditingStandards (CASs).

• GAAS identifies the objectives and key principles of the financial statement audit. Auditstandards are quality recommendations that are the same for all audits.

• The general standard refers to competence, objectivity and independence, and due professional care. These are the key supporting rules of professional conduct.Competence is knowing what to do by having adequate technical training and proficiency

while objectivity and independence require auditors to have an objective state of mind.


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Auditors are expected to have intellectual honesty and impartiality. Due professional care is doing the work to the best of your ability while observing the rules of professional

ethics and GAAS.

• CAS concepts and principles include how to conduct an audit, the scope of the audit,

reasonable assurance, audit risk and materiality, planning and supervision, internal

control assessment and sufficient appropriate evidential matter.• The overall objective of a financial statement audit is to enable the auditor to express an

opinion as to whether the financial statements are prepared, in all material respects, inconformity with an applicable framework, usually GAAP. An auditor performs work

his/her to obtain reasonable assurance that the information prepared by management iscorrect, not absolute assurance.

• A written audit program of the procedures to be performed, and the timing of the work, isusually good evidence the audit has been planned in accordance with GAAS. Before thefinancial statement audit is planned , an auditor studies the organization and the industry

in which it operates to identify probable areas of concern or higher risk of misstatement.

• A standard audit opinion consists of several parts. The first line identifies the key user of

the audit opinion. For a public company, this would be the shareholders. Theintroductory paragraph identifies what was audited. Next are the paragraphs whichclearly identify that it is management’s responsibility to prepare the financial statements

and that it is the auditor’s responsibility to obtain evidence and express an opinion,followed by a section on key audit matters, that is, the most significant issues during the

audit. The opinion paragraph is the expression of an opinion with respect to the results ofthe audit. In this case, it would be that the financial statements are fairly presented in all

material respects and are in accordance with GAAP. The fifth, sixth, and seventh paragraphs of the report state management’s responsibilities to prepare the financial

statements, and corporate governance responsibilities to oversee financial reporting. Theeighth (and possibly additional) paragraph covers auditor responsibilities, which is

traditionally referred to as the scope of the audit.• An unmodified (clean) opinion implies that the accounting principles used in the

financial statements have general acceptance and are consistently applied. It also implies

that the statements fully disclose information that most users would consider necessary.Last, and most important, it that means the financial statements are accurate within

practical materiality limits.

• An adverse opinion is the opposite of an unmodifiedopinion by stating financialstatements are not in accordance with GAAP.

• A disclaimer of opinion is a statement that no opinion is given.

• Management is often evaluated and rewarded based on financial results. As a result, a

potential conflict of interest always exists between management and the auditors who are

verifying the results. Professional skepticism means that an auditor tends not to believemanagement without other evidence. However, neither should auditors blindly expect

that every manager will be dishonest. The vast majority are honest and skilled.

LO4 Explain the importance of general assurance standards, using examples of assurance

matters.

• An auditor needs to plan their audit. An auditor first decides what type of assurance

engagement to perform. Most engagements require auditing of the financial statements


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as a whole. An auditor needs to clearly understand the financial reporting framework,which is usually, but not always, GAAP.

• Assurance standards do not replace existing audit and review standards. They weredesigned to provide guidance for attest engagements other than traditional audits. An

attest engagement requires a public accountant’s conclusion on a written assertion

prepared by the accountable party. Attestation engagements include audits as well asreviews.

• Assurance standards are more general than GAAS. They refer to expertise in the subjectmatter as opposed to expertise in accounting, since the engagement may not be on

financial statements. The assurance standards also do not require a review of internalcontrols or the design of fraud detection procedures. Such matters are implicit in the

design of tests to obtain sufficient evidence.

LO5 Explain how requirements of quality control standards are monitored for public

accounting firms.

• Quality control can be defined as actions taken by a public accounting firm to evaluate

compliance with professional standards. Quality control policies and procedures should be implemented both at the level of the audit firm and on individual audits.

• Practice inspections, peer reviews, and quality inspections are “audits of the auditors.” A practice inspection is the system of reviewing and evaluating audit files and otherdocumentation by an independent external party. Peer reviews are a practice inspection,

usually done as a special engagement, by another audit firm hired for the task by the firm being reviewed. Quality inspections are an examination and evaluation of the quality of

the overall practice.

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