Auditing Chapter 2 Notes – The Public Accounting Profession and Audit Quality

1) Provincial Securities Commissions

- Securities regulation in Canada is a PROVINCIAL matter

- Companies that issue securities in Canada must abide by rules promulgated by the
provincial securities commissions
- The Canadian Securities Administration (national umbrella organization) sets policies to
which member commissions agree to adhere
- The provincial securities commissions are responsible for administering the purchase
and sale of securities within their jurisdiction

Provincial Securities Commissions: provincial organizations with quasi-legal status and

administer securities regulations within their jurisdictions

- Actions of the securities commissions have important implications for public company
auditors
o Example: the CSA was responsible for the requirement that listed companies’
auditors must register with and be inspected by the CPAB
- Similarly, when the Canadian audit profession proposed that auditors issue audit opinions
on internal controls, as the requirement in the US, the BC Securities Commissions
stopped this proposal on the basis of unnecessary costs for the reporting issuers (the
majority of whom are small)

- Provincial securities commissions also have the ability to prosecute PAs and the
companies they audit
o Example: just recently, the Ontario Securities Commission (OSC) fined the CEO
and board chair of Zungui Haixi Corp. for several breaches of Ontario securities
law
 Which included imposing limitations on the scope of the audit procedures
of Zungui’s auditor during its audit
 OSC rarely makes allegations against auditors, it did in this case  this
was the 4th time such allegations have been levelled against an auditor by
the OSC over the past 23 years
- Canadian auditors are under greater scrutiny than in the past

2) Securities and Exchange Commission (SEC)

- Large Canadian companies that are listed on the American stock exchange must MEET
the requirements of the Securities and Exchange Commission (SEC)

SEC: a US federal agency that oversees the orderly conduct of the securities market
o The SEC assists in providing investors in public corps. With reliable info. upon
which to make investment decisions

- SEC believes the PCAOB should set accounting principles and auditing standards
- SEC still has great influence in setting generally accepted accounting principles and
disclosure requirements for F/S

- For Canadian regulators, the SEC plays an important role for PAs who audit public
companies
- SEC has the power to:
o 1. Establish rules; and
o 2. Prosecute PAs and the companies they audit for violating SEC regulations
- Majority of enforcement actions are against American auditors
- SEC has the authority to prosecute ANY auditor, irrespective of location, in connection
with an audit of a company listed on the US stock exchange
o Example: SEC has brought enforcement actions against two Canadian audit
partners that violated the SEC’s auditor independence rules
 Two UK audit partners for deficient audits of British subsidiary that had
committed accounting fraud
 Twelve Brazil partners for issuing materially false audit reports and
altering working papers to conceal audit deficiencies
 Four Chinese Big Four affiliate firms for refusing to produce audit work
papers and other documents related to China-based companies under
investigation by the SEC

3) Legal Liability

- The ability of individuals and clients to sue public accounting firms exerts considerable
influence on the way in which PAs conduct themselves and audits
- It can be a costly process!

4) An Overview of CPA Canada Assurance Standards

- The CPA Canada Handbook – Assurance REPRESENTS the authoritative requirements

underlying:
o 1. The F/S audits
o 2. Other types of assurance engagements; and
o 3. Related service
- GAAS are part of the “Assurance Handbook” in the CPA Canada Handbook
o They are the standards for the F/S audit
- Canadian Auditing Standards (CAS) are based on ISAs developed internationally

- Table 2-3 provides an overview of how the handbook is organized

5) Canadian Auditing Standards

- The Canadian Auditing Standards (CAS)  standards for F/S audit; based upon ISAs
(International Standards on Auditing)
o ISAs  originally developed and released by the IAASB of the International
Federation of Accountants (IFAC)
- The CASs are organized as shown in Table 2-4
- These standards are organized around the following principles:
o (1) Purpose of an audit  Purpose
o (2) Personal responsibilities of the auditor  Responsibilities
o (3) Auditor actions in performing the audit  Performance
o (4) Reporting  Reporting
- Summarized in Figure 2-1

- These principles are NOT specific enough to provide any meaningful guide to
practitioners
- HOWEVER, they provide a FRAMEWORK that defines the purpose of:
o (a) The F/S audit; and
o (b) The auditor’s ethical and professional responsibilities
- This framework helps auditors fulfill the following objectives of F/S audit (CAS 200.11):
o 1. Providing reasonable assurance that F/S are NOT materially misstated
o 2. Considering both potential fraud and error
o 3. Communicating whether the F/S comply with an applicable financial reporting
framework using the expression of an opinion
o 4. Reporting on the F/S; and
o 5. Communicating auditor findings in accordance with the CASs

6) Purpose of the Financial Statement Audit

- Purpose  to provide F/S users with an opinion issued by the auditor on whether the F/S
are presented fairly, in all material respects, in accordance with the applicable financial
reporting framework
o Enhances the users’ confidence in the info. presented in the F/S
- F/S preparation is the responsibility of MANAGEMENT

- Audit is conducted based on the premise that mgmt. is responsible for the preparation of
the F/S in accordance with application financial reporting framework selected by mgmt.
o And that mgmt. has:
 Designed
 Implemented; and
 Maintained
o … internal controls relevant to the preparation and presentation of F/S that are
FREE of material misstatements
o In other words  design, implementation, and maintenance of internal controls is
the RESPONSIBILITY of mgmt.

- Auditor presumes mgmt. will provide access to ALL info. relevant to the preparation
and presentation of F/S, including unrestricted access to persons within the entity from
whom the auditor may obtain audit evidence
- CAS states  auditor can conduct the audit ONLY IF:
o 1. Management agrees to provide this supporting evidence; and
o 2. Both acknowledges and understands its responsibilities

7) Auditor’s Personal Responsibilities

- Principles related to the auditor’s responsibilities in the audit STRESS important

qualities an auditor should possess:
o 1. Professional Competence and Due Care
o 2. Compliance with Ethical and Independence Requirements
o 3. Professional Skepticism and Professional Judgement

8) Exercise Professional Competence and Due Care

- Auditors are responsible for having appropriate competence and capabilities to perform
the audit
- This means the auditor is required to have:
o (a) Formal education in auditing and accounting
o (b) Adequate practical experience for the work being performed
o (c) Continuing professional education
- Auditors should be technically qualified and experienced in the industries which their
clients are engaged
- If the PA or PA’s assistants are NOT qualified to perform the work, a professional
OBLIGATION exists to:
o (i) Acquire the requisite knowledge and skills
o (ii) Suggest someone else who is qualified to perform the work; or
o (iii) Decline the engagement

9) Comply with Ethical and Independence Requirements

- CAS 200 states that audits must COMPLY with ethical requirements and independence
- The relevant independence and ethical requirements include:
o Integrity
o Objectivity
o Confidentiality
o Professional Behavior
- … all of which are outlined in the rules of professional conduct applicable to the
practice of public accounting and issued by various professional accounting bodies
- The provincial CPA HARMONIZED their rules, so the SAME set of rules APPLIES to
all PAs in Canada
- INDEPENDENCE in an audit engagement is of key importance
o Accounting firms are required to follow practices to INCREASE independence
likelihood on audit engagements for all personnel
o Example: there are established procedures on larger audits when there is a
dispute btw. mgmt. and the auditors
 Chapter 3  specific methods to ensure that auditors maintain their
independence and comply with other relevant ethical requirements