Chapter 2 The Public Accounting Profession and Audit

Chapter 2 The Public Accounting Profession and Audit Quality

Public Accounting Firms • There are more than 5, 000 public accounting firms in Canada. • These firms are usually broken into four categories: The Accounting Profession - 2

Structure of Public Accounting Firms • The structure of public accounting firms should foster • The organizational form used by many public accounting firms is that of • The organizational hierarchy in a typical public accounting firm includes The Accounting Profession - 3

Professional Accounting Firms: Staff Levels and Responsibilities Table 2 -2 Staff Levels and Responsibilities Staff Level Average Experience Typical Responsibilities Staff accountant 0– 2 years Performs most of the detailed audit work. Senior or in-charge auditor 2 -5 years Coordinates and is responsible for the audit field work, including supervising and reviewing staff work. Manager 5 -7 years Helps the in-charge plan and manage the audit, reviews the in-charge's work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time. Senior manager 7 -10 years Leads the engagement and reviews the team’s work. Works directly with the partner and assists in client relationship. Partner 10+ years Leads the engagement, reviews the overall audit work, and is involved in significant audit decisions. A partner has the ultimate responsibility for conducting the audit and maintaining client relations. The Accounting Profession - 4

Organizations Affecting the Canadian Public Accounting Profession (1 of 2) • CPA Canada – CPA Canada represents the CPA profession nationally and internationally – CPA Canada is the new umbrella organization for the CPA designation and provincial accounting bodies – CPA Canada standardizes uniform qualifications for admission of CPAs and developing the CPA Professional Education Program (CPA PEP) and the CPA Common Final Examination (CFE) • Provincial CPA Organizations – maintain individual CPA memberships of CPAs The Accounting Profession - 5

Organizations Affecting the Canadian Public Accounting Profession (2 of 2) • Auditing and Assurance Standards Board (AASB) • International Auditing and Assurance Standards Board • Canadian Public Accountability Board (CPAB) • Public Company Accounting Oversight Board (PCAOB) • Provincial Securities Commissions • Securities and Exchange Commission (SEC) The Accounting Profession - 6

Overview of Generally Accepted Auditing Standards • Generally Accepted Auditing Standards (GAAS) are part of the • Canadian Auditing Standards (CAS) are based on Table 2 -4 An Overview of Canadian Auditing Standards Sections Topic 200 -299 General Principles and Responsibilities 300 -499 Risk Assessment and Response 500 -599 Audit Evidence 600 -699 Using the Work of Others 700 -799 Audit Conclusions and Reporting 800 -899 Specialized Areas The Accounting Profession - 7

General Requirements of F/S Audit The Accounting Profession - 8

Purpose of the Financial Statement Audit • Purpose is to provide users with an opinion issued by auditor on • Financial statement preparation is the responsibility of • Design, implementation and maintenance of internal controls is responsibility of • CASs state auditor can conduct audit only if management acknowledges and understands their responsibilities and provides auditor unrestricted access. The Accounting Profession - 9

Auditors’ Personal Responsibilities • Professional Competence and Due Care • Compliance with Ethical and Independence Requirements: • Professional Skepticism and Professional Judgement The Accounting Profession - 10

Auditors’ Performance Responsibilities • Adequate Planning and • Determining and Applying • Identify and Assess Risks of • Obtaining Sufficient and Appropriate • Reporting The Accounting Profession - 11

Independent Auditor’s Report Explained The Accounting Profession - 12

Improving Audit Quality • The CPAB recommends that firms can improve audit quality by focusing on four key areas: – Build the right – Provide the right support – Conduct in-process reviews – Assign accountability for audit quality • Metrics should be developed to measure audit quality. The Accounting Profession - 13

Quality Control (1 of 3) • Quality control comprises the methods used to make sure that the firm meets its professional responsibilities to clients. • These methods include • Quality controls are used by the firm to make sure it meets The Accounting Profession - 14

Quality Control (2 of 3) • CPA Canada Handbook section CSQC-1 describes the general standards of quality control that are applied to firms performing assurance engagements. • These standards set out the • Refer to Table 2 -5 for a listing of quality control elements. See slide 20. The Accounting Profession - 15

Quality Control (3 of 3) • CASs are applicable to individual engagements; • CAS 220 deals with the specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements, and where applicable, the responsibilities of the engagement quality control reviewer. The Accounting Profession - 16

Elements of Quality Control (1 of 3) 1. Leadership responsibilities for quality within the firm: 2. General ethical requirements: 3. Independence: develop, communicate and monitor policies and procedures to ensure that The Accounting Profession - 17

Elements of Quality Control (2 of 3) 4. Client acceptance and continuance: document annual risk assessment processes. Includes, 5. General human resource policies: have adequate hiring policies that ensure The Accounting Profession - 18

Elements of Quality Control (3 of 3) 6. Engagement performance: have adequate policies and procedures to ensure that 7. Monitoring of policies and procedures. The Accounting Profession - 19

Elements of Quality Control (Table 2 -5) Element Summary of Requirements Examples of a Procedure Leadership responsibilities for quality within the firm (“tone at the top”) The firm should promote a culture that quality is essential in performing engagements and should establish policies and procedures that support that culture. The firm’s training programs emphasize the importance of quality work, and this is reinforced in performance evaluation and compensation decisions. Relevant ethical requirements All personnel on engagements should maintain independence in fact and in appearance, perform all professional responsibilities with integrity, and maintain objectivity in performing their professional responsibilities. Each partner and employee must answer an “independence questionnaire” annually, dealing with such things as stock ownership and membership on boards of directors. Acceptance and continuation of clients and engagements Policies and procedures should be established for deciding whether to accept or continue a client relationship. These policies and procedures should minimize the risk of associating with a client whose management lacks integrity. The firm should also undertake engagements that can be completed with professional competence. A client evaluation form, dealing with such matters as predecessor auditor comments and evaluation of management, must be prepared for every new client before acceptance. Human resources Policies and procedures should be established to provide the firm with reasonable assurance that: Each professional must be evaluated on every engagement using the firm’s individual engagement evaluation report. • All new personnel should be qualified to perform their work competently • Work is assigned to personnel who have adequate technical training and proficiency • All personnel should participate in continuing professional education and professional development activities that enable them to fulfill their assigned responsibilities. • Personnel selected for advancement have qualifications necessary for the fulfillment of their assigned responsibilities Engagement performance Policies and procedures should exist to ensure that the work performed by engagement personnel meets applicable professional standards, regulatory requirements, and the firm’s standards of quality. The firm’s director of accounting and auditing is available for consultation and must approve all engagements before their completion. Monitoring Policies and procedures should exist to ensure that the other quality control elements are being effectively applied. The quality control partner must test the quality control procedures at least annually to ensure that the firm is in compliance. The Accounting Profession - 20

External Inspection • Practice inspections done by provincial CPA organizations to ensure adherence to professional standards in the CPA Canada Handbook. • Normally completed every three years. • Beneficial both to profession (higher quality audits) and practitioner (improved firm practices). The Accounting Profession - 21

Problem 2 -26, 14 th edition Daiyu Chen, a recently qualified PA, has been assigned by her firm, Liu & Liu LLP, to serve as the senior auditor in charge of the fieldwork on a new audit engagement. The client is Demonte Credit Union (Demonte), a medium-sized credit union that is heavily involved as a mortgage lender in the real estate market. This is the first credit union that Liu & Liu will be auditing. Cheng has not previously been involved in audits of financial institutions. The credit union’s predecessor auditors resigned unexpectedly during the current fiscal year, and they have not responded to Liu & Liu’s request for information for over one month. Liu & Liu has agreed to perform the engagement since the financial statement audit needs to be completed and submitted to the credit union’s provincial regulator within ten days of the annual meeting. The regulator uses the financial statements to assess whether Demonte meets the conditions of its deposit insurance and to determine the annual deposit insurance premium for Demonte. The client has provided Liu & Liu with the predecessor audit firm’s unqualified audit report on last year’s financial statements. The engagement partner tells Cheng to concentrate her efforts on understanding Demonte’s business and internal control systems, but not to rely upon internal controls. The partner instructs Cheng to perform extensive tests on the key balance sheet asset and liability accounts, such as mortgage loans receivable. Cheng performs the audit as instructed and finds no material misstatements but is not always certain if she has collected sufficient evidence regarding mortgage loans receivable. She is glad that Demonte’s CFO was able to spend time with her and explain what all his schedules meant, especially since so many mortgage holders did not confirm the details of their mortgages. The engagement partner had several client deadlines and is unable to spend much time at Demonte, but spends a few hours reviewing Cheng’s work. Since Cheng is the firm’s best senior auditor and she did not find any material misstatements, the partner issues an unqualified opinion on the financial statements. When Demonte’s CFO meets with the partner, he expresses pleasure that Liu & Liu was able to meet the deadline for the annual meeting and that the audit had gone much better than past audits had. The previous audit firm always spent more time and had more staff assigned to the engagement. This year’s audit had been much less disruptive for Demonte’s accounting staff. REQUIRED Briefly describe each of the principles underlying Canadian Auditing Standards and indicate how the actions of Cheng and the partner results in failure to comply with each principle. (CGA Adapted) The Accounting Profession - 22