3/17/15

1

Instructor Michael Brownlee B.Comm(Hons),CGACourse AU1

Lectures – Wednesday eve. 7-9pm

All classes in the CGA Building on Donald

Review class – Saturday 2 – 5pm May 30

Exam 3 hours Wednesday eve 6-9pm

June 10, 2014 – check your schedule

Quizzes & Assignments

� The assessments in this course consist of the following:

� Five quizzes, one each in Modules 2, 4, 6, 8, and 10: These are in the form of multiple-choice questions that you complete online.

� An assignment in Module 5, Module 7, and a final assignment in Module 9. You prepare your assignment response in Word and submit it to your marker via your AU1 Assignment Submission/Group Work area.

3/17/15

2

� Course examination: As with other foundation level CGA courses, the final examination is three hours long and is a comprehensive exam.

� Your final course mark will be the combined quiz/assignment mark and examination mark (30 for the quiz/assignment mark and 70 for the examination). The five quizzes will be worth a combined maximum score of 10 (each quiz has a maximum score of 2). Assignment 1 and Assignment 3 will be worth a maximum score of 5 each. Assignment 2 will be worth a maximum score of 10. Your final examination will be graded out of 100, and your raw examination mark will be scaled into a mark out of 70. Your quiz/assignment mark (with a maximum score of 30) will then be added to the scaled examination mark.

Assignments & QuizzesDue dates� Quiz 1 Module 2 March 18-Apr 1

� Quiz 2 Module 4 Apr 1-15

� Quiz 3 Module 6 April 15- 29

� Quiz 4 Module 8 April 29 - May 13

� Quiz 5 Module 10 May 13-27

� Assignment 1 Module 5 Due Tues April 21st

� Assignment 2 Module 7 Due Tues May 5th

� Assignment 3 Module 9 Due Tues May 19th

� All assignments & quizzes due by Noon Manitoba time on applicable date

AU1 – Course overview

� Module 1: Introduction to external auditing

� Module 2: Professional standards,

ethics, and legal liabilities

� Module 3: Audit objectives, evidence, procedures, and documentation

3/17/15

3

AU1 – Course overview

� Module 4: Planning, materiality, and risk

� Module 5: Internal control

� Module 6: Audit sampling

� Module 7: Computer auditing

� Module 8: Revenue and collection

cycle, and acquisition and expenditure cycle

AU1 – Course overview

� Module 9: Inventory and property, plant, and equipment balances,

production and payroll cycles, and finance and investment cycle

� Module 10: Investments, long-term

debt, shareholders’ equity balances, and completion of the audit

� Assignment reminder: Assignment #1 (see Module 5) is due at the end of Week 5 (see Course Schedule). You may wish to take a look at it now in order to familiarize yourself with the requirements and to prepare for any necessary work in advance

3/17/15

4

Module 1 Intro to External Auditing

� 1.1 Overview of auditing

� Explain the objective and purpose of an audit of financial statements, and outline the two key components of the audit process. (Level 1)

Textbook definition of auditing –Page 8

� “Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users.”

� Assertions - a confident and forceful statement of fact or belief; a positive statement or declaration, often without support or reason; An assertion is a declaration that's made emphatically, especially as part of an argument or as if it's to be understood as a statement of fact. To assert is to state with force. So if someone makes an assertion, they're not just trying out an idea — they really mean it

3/17/15

5

� Financial statements and other management disclosures make up managements assertions about economic actions and events

� The auditor then gathers evidence to support or refute managements assertions

� Audit objective is to issue an opinion on information.

� The auditor’s report contains the opinion in a financial statement audit.

Audit Process

� An audit is about gathering evidence

� Risk assessment – determine the nature, extent and timing of evidence.

� Nature – what evidence

� Extent – how much evidence

� Timing – when to collect the evidence

� ***Key terminology***

Audit Process – cont’d

� Risk response – obtain and evaluate evidence efficiently and effectively.

� Effectiveness – reach the right conclusion

� Efficiency – cost of audit

� ***Key terminology***

� Communicate findings through auditor’s report.

3/17/15

6

� 1.2 Information risk Explain how information risk arises and how audits can help reduce information risk. (Level 1)

Why are audits performed?

� Audits are generally performed due to statutory requirements. (NPO –government funders typically require independent financial audit as part of funding agreement)

� Another reason for audits is to reduce information risk

Information Risk

� Is the risk that the financial statements may not appropriately reflect the actual results of business activities including risks and uncertainties.

� Lots of examples in recent history where companies have been caught with financial statements that do not reflect the actual results – Enron, Livent., etc –(lecture note - see pdf list)

3/17/15

7

Sources of information risk:

� Asymmetry of information – management and insiders have better access to knowledge than do investors and other potential users of the financial statements

� Weak accounting system – poor management or controls or employees

� Management and/or board deceptive accounting and reporting practices – make decisions that benefit the few or one instead of the many (Nortel – prosecutors claimed they engineered a financial loss in one year and profit in the next year triggering $70 million in “Return to Profit” bonuses for executives)

� Users of financial statements rely on information and disclosure in statements to make informed decisions.

� For auditor, information risk relates to the risk that the financial statements prepared by a company will be materially false or misleading.

� Two major categories of information risk for auditors:

� Audit risk & accounting risk

� Audit risk – risk of insufficient evidence being gathered.

� Accounting risk – risk of errors in numbers or disclosures are misleading.

3/17/15

8

Reducing information risk

� Auditors reduce information risk:

� Independence counters management bias

� Accounting expertise ensures complex transactions recorded and reported accurately and adequately

Reducing information risk –cont’d

� Ethical standards – Professional judgment – very important concept in auditing

Professional judgment

� Exercise due care

� Maintain professional skepticism

� Professional standards and regulations

� Identify viable alternatives recognize/consider effects of economy, environment, industry, risk factors....

� Reach a balanced decision

3/17/15

9

� The audit gives a level of assurance to potential users of the financial statements that the f/s are free from material misstatement. Thus the users can rely on the information contained in the f/s prepared by management.

� 1.3 Public accounting Describe the principal activities of a public accounting firm. (Level 1)

� Audit engagements - assurance

� Review engagements – narrower scope, moderate assurance

� Compilation (notice-to-reader) engagements – no assurance

� Tax

� Consulting

3/17/15

10

� 1.4 The role of the staff accountantDescribe the role of the staff accountant on a typical audit engagement, and how continuous training on audit engagements prepares staff for future opportunities in the organization. (Level 2)

� Staff accountants typically start at the bottom doing the legwork – gathering evidence, performing audit procedures and creating working papers

� All professional accountants are required to continuously train (PD) and it is especially important for auditors to keep up with changes

� Training and experience allow staff accountants to progress to areas requiring more professional judgment

3/17/15

11

� 1.5 External and internal auditingCompare external auditing to internal auditing. (Level 2)

� External auditing – Independent third party typically contracted to conduct financial statement audit however, external auditors can conduct other audits such as operational. External auditors report to wider audience (board, investors, government, creditors, etc)

� Internal auditing typically focuses on operational efficiency however, can also perform financial audits

� Internal auditors report to management

3/17/15

12

SimilaritiesExternal vs. Internal auditors

� Independence

� Evidence gathering

� Qualifications

� Objectivity

� External auditors can utilize work or evidence of the company’s internal auditors since they perform similar procedures

DifferencesExternal vs. Internal auditors

� Nature of Reporting

� Audit focus

� Internal control

� Type of Audit

� 1.6 Assurance engagements Describe the concept of an assurance engagement, explain audit engagements in terms of the general framework of assurance engagements, and explain the difference between an attest engagement and a direct reporting engagement. (Level 1)

3/17/15

13

� CAS – assurance engagements for financial statements and other historical financial info

� CICA Handbook section 5025 – standards for assurance engagements other than financial statements and other historical financial info

� Accountability relationship between two or more parties, the auditor is the third party engaged to give a written opinion on the accountable party’s information.

� Attest engagement is on written assertion

� Direct reporting engagement is on implied assertion.(auditing effectiveness of a public sector department – no written assertion on the effectiveness it is implied)

� Accountable party is typically management.

� Assertion – what the accountable party is reporting

� Asserter – the party making the assertion (accountable party)

� Assurer – auditor – provides credibility or assurance on the assertions for the benefit of the users of the information

3/17/15

14

� 1.7 Audit, review, and compilation engagements Distinguish between audit, review, and compilation engagements. (Level 1)

� Audit – assurance engagement, wide scope

� Review engagement – moderate assurance, narrower scope

� Compilation – no assurance

� Review Exhibit 1.7-1 in Module notes

3/17/15

15

� 1.8 Reporting Draft a standard auditor’s report and describe its components. (Level 1)

� THIS IS SUPER IMPORTANT. YOU MUST KNOW THE FORMAT OF A STANDARD AUDITORS REPORT!!!

� Auditor’s reporting responsibilities set out in CAS 700

� Review Exhibit 1.8-1 from Module notes

3/17/15

16

Components and format of the auditor’s report

� Introductory Paragraph – audit has been performed and identifies the financial statements and the time period audited

� Management’s responsibility paragraph – management is responsible for the preparation of the financial statements in conformance with suitable framework (ie– ASPE, ASNPO).

� Auditor’s responsibility paragraph –Auditor will provide an opinion on the financial statements and audit was conducted in accordance with GAAS.

� Auditor’s opinion – Auditor expresses opinion as to whether the F/S present fairly, in all material respects, the financial position of the company, its financial performance and its cash flows for the year then ended in accordance with either IFRS or Canadian ASPE (or some other disclosed basis of accounting).

3/17/15

17

� Other important features:

� Must label jurisdiction (ie Winnipeg, Manitoba)

� If the auditor belongs to a firm, it is the firm’s name that gets signed to the Audit report.

� Date – when accepted by management

� 1.9 Modification of opinion Evaluate when an auditor would issue an audit report containing an unmodified opinion, a modified opinion, an adverse opinion, or a disclaimer of opinion. (Level 1)

***Key information***

� Auditor can issue one of four different opinions:

� Unmodified – no material reservations regarding the f/s as a whole

3/17/15

18

� Modified opinion – no reservations regarding the f/s as a whole exceptcertain part(s) – either not fairly presented due to departure from reporting framework or opinion cannot be formed due to scope limitation(cannot collect sufficient, appropriate evidence; access limitation)

� Adverse opinion – enough evidence that f/s as a whole are not free from material misstatement and that these misstatements are material and pervasive.

� Disclaimer of opinion – unable to form opinion on the f/s as a whole due to scope limitation whereby undetected misstatements could be both material and pervasive.

� Materiality – there is no one amount that is material. Materiality is determined by many factors but it comes down to this –how much of a misstatement would affect the decisions made by user’s of the financial statements.

� When total assets are $40,000 a 10,000 misstatement is material. When total assets are 40 billion would 10,000 be material?

3/17/15

19

� Three different levels of materiality:

� Immaterial – would not influence decisions by users of f/s

� Material – users decisions are affected but only in respect to one area but the f/s as a whole are not misleading

� Pervasively material – magnitude of a single misstatement or the quantity of misstatements – f/s as a whole are deemed misleading

� How does materiality affect the audit opinion:

� Handy exhibit from module notes:

� Note – although the lesson notes make mention of the fact that CAS uses the terms unmodified and modified instead of the older terminology of unqualified and qualified and that the lesson notes adhere to the CAS terminology, they didn’t quite succeed in updating the terminology

3/17/15

20

New with CAS

� Emphasis of Matter Paragraph (EMP)

� CAS 706 paragraph 6 – good reading...

� Important – must communicate with those charged with governance – both that there will be an EMP and the wording

� EMP limited to matters that are presented or disclosed in the financial statements

� Other Matter Paragraph – similar to EMP except that the subject of the OMP is not required to be presented or disclosed in the financial statements.

3/17/15

21

� Again – for AU1 you must know a standard auditor’s report and know how and when the report should be issued with a modification of opinion.

Remember every week

� Utilize all of your resources:

� Textbook

� Module notes

� Blackboard online tutor forums

� If you still need help or clarification after exhausting the above resources...

� Email me:

� mike@thorntonandco.com

3/17/15

22

� I strongly recommend reading the material in advance of class when humanly possible. In my experience you will retain more when you already have a base understanding and utilize the class as reinforcement of ideas.

�Have a great week!