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      August 2008
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No rest for the auditor

By Linda Stroude
Illustration: Jason Schnieder

What’s in store for Canadian auditors when ISA is adopted in two years? Take a look at the new CAS

Does it ever stop? In 2005, the Canadian Institute of Chartered Accountants introduced the Canadian Standards on Quality Control; in 2006, Canadian auditors had to implement the new Audit Risk Model. In 2007, practitioners needed to adopt the Documentation Standard, which requires a complete and final set of audit documentation be assembled no later than 45 days after the report release date. Recently, the Auditing and Assurance Standards Board announced it is adopting international standards on auditing (ISA) issued by the International Auditing and Assurance Standards Board. After the adoption of ISA, Canadian generally accepted auditing standards will be comprised of Canadian auditing standards (CAS), which will be effective for audits of financial statements for periods beginning on or after December 15, 2009.

The hardest hit by all these changes are the small and medium-sized auditing firms, not to say anything about sole practitioners. The introduction of the quality control standards made some smaller firms and sole practitioners question whether they should continue to perform assurance engagements, particularly if it was not a significant part of their practice. Some practitioners had to divest themselves of assurance clients, turn an assurance engagement into a compilation engagement or in some cases, incur additional costs to meet the new standards. Then with the implementation of the new Audit Risk Model, practitioners faced more time-consuming audits, increased fees, frustrated clients and lower profit margins.

While everyone is for high-quality standards, one needs to ask if these new standards put in place to address the big audit failures of the past decade are necessary for the audit of private entities. The CICA determined recently, with the release of the exposure draft entitled “Framework for Owner-Managed Enterprises,” that one generally accepted accounting principles solution does not fit all. What about generally accepted auditing standards? Can there be a big GAAS and a little GAAS? No, an audit is an audit, no matter the size of the entity being audited or the number of users of the financial statements.

So what is in store for Canadian auditors when ISA is adopted in 2010? Even higher fees? More frustrated clients? To better understand, it is best to examine what the new CAS will look like.

Each section in the new world of CAS will be broken down into five components:

Introduction
Includes a description of the subject matter of the standard, its purpose and scope, how the standard fits within the context of the others, specific expectations of the auditor and others and its effective date.

Objectives
The CAS are objective-based standards and, as such, each standard will outline the auditors’ obligation in relation to its objectives. The overall objective of the auditor is paramount: obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.

In order to ensure appropriate and consistent performance by auditors, it was necessary and appropriate to create a specific objective for each standard that is supported by its requirements. The objectives reflect the outcome that the standard is directing the auditor to achieve. The purpose of this change was to focus the auditor on the desired outcome rather than on the means of achieving it. In most cases, the failure to achieve an objective in an individual auditing standard will prevent the achievement of the overall objective of the auditor.

Definitions (as applicable)
Although the new Handbook will also include a glossary of terms that contains a complete listing of terms defined in the CAS, a section may also include definitions or explanations of the meaning of certain terms. These are provided to assist in the consistent application and interpretation of the CAS. The intent of the use of definitions within a section is to:

Requirements
Currently, all required professional standards are labeled as recommendations. These recommendations are identified in italicized text. Under the new CAS there will be no more recommendations in italics; they will now simply be under the caption Requirements. The requirements contained in a specific standard are necessary to achieve the stated objective. The recommendations are expected to be applicable in virtually all engagements to which the standard is relevant.

Recommendations used to be expressed using “the auditor should.” In the future, requirements will be expressed using, “the auditor shall.”
Application and other explanatory material
Previously, guidance on the application of recommendations was included in nonitalicized paragraphs immediately after the relevant recommendation paragraph. From now on, this guidance will be included under the heading Application and Other Explanatory Material.

Application and other explanatory material is an integral part of a section, as it provides further explanation of, and guidance for carrying out, the Requirements of a section. It may include examples of procedures, some of which the auditor may judge to be appropriate in the circumstances. However, such guidance is not intended to impose a requirement on the auditor. The separation between the Requirements and the Application and other explanatory material ensures clarity between what is required and what should solely be regarded as guidance.

Application and other explanatory material will be clearly cross-referenced to the requirements to which they relate and vice versa.

Whenever applicable, sections will be more specific about how requirements, including documentation requirements, might be applied in the audit of a small or medium-sized enterprise. Under the Application and other explanatory material section of a CAS, one can find a subsection “Consideration specific to smaller entities.” When relevant, this subsection will contain additional paragraphs that describe the characteristics of small or medium-sized enterprises that may differ from other entities and its impact on the application of the requirements or the relevant considerations or types of procedures that may be appropriate in such circumstances.

After reading the redrafted CAS 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, CAS 300, Planning an Audit of Financial Statements, CAS 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment and CAS 330, The Auditor’s Responses to Assessed Risks, I can tell you they are easier to read than our current Canadian standards and pro-vide useful guidance for the audits of smaller entities.

OK, it’s easier to read, but will the adoption of ISA be as big a change as the adoption of the new Audit Risk Model was? The answer is no. The material covered in almost every CAS is already included to some extent by an existing Canadian GAAS Handbook section.

However there are some differences. For example the new CAS 550, Related Parties includes a series of requirements not included in our current auditing standards: CAS 550 is consistent with the overall objective of Section 6010, Audit of Related Party Transactions but is more explicit in what is required of the auditor. For example CAS 550 requires the auditor to perform specific procedures to verify the completeness of related-party information provided by the entity whereas Section 6010 takes a risk-based approach, although it suggests similar procedures that are not required.

So stay tuned for auditing under the international auditing standards — or should one say CAS.

Linda Stroude, CA, is senior manager, professional practice and risk management group with RSM Richter in Montreal

Technical editor: Yves Nadeau, partner, RSM Richter in Montreal