Are you ready for ISA?

ByJeff Buckstein
Illustration: Michelle Thompson

With all the publicity surrounding international financial reporting standards(IFRS), it is easy to think it is the only major item of change on the agenda for the accounting profession. Such a view would be far from correct. International standards on auditing (ISAs), quietly in the works for years, are about to take a position front and centre on the Canadian accounting stage.Ken Krauss, chair of the Auditing and Assurance Standards Board (AASB) and a Toronto-based partner in the national office of Deloitte, explains why adopting ISAs in Canada is timely: “As our world becomes more and more globally interconnected, having one set of high-quality, globally accepted auditing standards helps to make everyone’s life easier.”ISAs improve communications to report users, he continues,because they remove “any potential inconsistencies or con-fusion that might result when there are different auditing standards being applied to a set of financial statements.” More than 100 countries are either using the ISAs adopted as written by the International Auditing and Assurance Standards Board (IAASB) or locally adapted through national standards setters. In Canada, the AASB is adopting 36 ISAs, plus an additional standard on quality control, scheduled to take effect for audits of financial statements for fiscal periods ending on or after December 14, 2010. When adopting the ISAs, the AASB had to make a key de-cision about what to call the standards. It determined that simply referring to the standards as ISAs would not be appropriate, since the adoption of these standards is not automatic. The AASB thus settled on Canadian auditing standards (CASs). The AASB retains the right to amend or not adopt a given ISA, or even develop an auditing standard that is unique to Canada in the unlikely event that such an action is needed. While amendments to wording in the ISAs are rare, they exist and so currently, the ISAs and CASs are not identical. The AASB also looked to the approach taken by other standard-setters who have adopted ISAs for use nationally. For example, in the UK, the term ISAs-UK is used. Australia uses the term Australian standards on auditing (ASAs). The AASB decided that an approach similar to the latter would work well, and so CASs came into being. The ISAs, all of which have recently been redrafted by the IAASB in a much clearer format, are being adopted as new CASs with very few modifications and will become part of Canadian generally accepted auditing standards (GAAS). “I think it’s really important from a Canadian perspective that we adopt the international standards on auditing. People will understand the best practices model of auditing has been adopted,” says Phil Cowperthwaite, the IAASB member nominated by the CICA and a full-time practitioner with Cowperthwaite Mehta, a CA firm in Toronto.

WHERE TO TURN FOR HELP

There are various sources of information that auditors can turn to for assistance in their preparation for the new CASs/ISAs.

The CICA website provides links to information that explains key aspects of the adoption of international standards and shows how the Handbook is going to change.Furthermore, in all the AASB exposure drafts, “we highlighted the changes in requirements that would come about as a result of adopting the clarified ISAs as part of the CASs,” says Greg Shields, CICA director of auditing and assurance standards.

The AASB plans to have the new CASs posted to the CICA Standards and Guidance Collection in English and French by early summer 2009. Moreover, “our continuing education is leading the charge and coming up with a program of various types of guidance and training,” involving both personal attendance and web-based training, says Shields.

Another major information tool for auditors is the Professional Engagement Manual (PEM), developed by the CICA. PEM documentation, including questionnaires, is currently being developed to help practitioners deal with these new standards. The intention is to have this documentation available by the autumn of 2009.

The IAASB has also tried to greatly simplify things by redrafting its ISAs using a new clarity format, a process that Canada has assisted with. These spell out each standard in five parts: an introduction to explain its purpose and scope; objectives, to define the context of the standard’s requirements; definitions of specific terms and their meanings; requirements the auditor must comply with; and application and other explanatory material, to provide further explanations and guidance.

Practitioners at various stages of readiness
The mood and state of readiness for ISAs appears to be varied among auditing practitioners. Michelle Balmer, vice-president of assurance services for Meyers Norris Penny LLP, a Calgary-based accounting firm, notes that the firm has been preparing for the transition to ISAs for about six months. Her group is responsible for the company’s audit programs, and it has assigned a team to go through all the individual ISAs to compare them with existing Canadian standards, and to identify all the differences and make sure those differences are in some sort of an orderly fashion. They expect to have a new ISA template ready for issue in the fall of 2010.“We want to make sure we do that in time to get people trained prior to the actual change-over date,” she says. Balmer expects there to be a bit more work in the first year given the natural increase in time and effort that enacting new standards tends to entail. But she says, “I don’t think it will take more than a year for people to get very comfortable with the new standards, because it’s not going to be dramatically different from what we’re doing now.” Nor does she expect considerable increases in audit fees as a result of the new standards. Gerald Peterson, a partner with PPW Chartered Accountants LLP in Winnipeg, says PPW has not done a lot at this stage with respect to ISAs other than to monitor the ongoing process. “We haven’t actually looked at the new standards in relation to our files to determine our audit plan. We’re waiting to get closer to the implementation date and expect probably this summer would be an ideal time to look at where we’re at. Ideally, we want to get ourselves up to speed with respect to the new standards as close to the implementation requirements as possible.” As a large international firm that has already performed au-dits in accordance with ISAs, KPMG offices “already have materials in place that help our people understand the difference between Canadian GAAS and the ISAs,” says Mark Davies, national partner in charge of audit for KPMG LLP in Toronto, who notes that KPMG currently uses a global audit methodology based upon ISAs. When all the clarified ISAs are implemented, the firm will integrate them into its global audit manual and adjust the Canadian version for any modifications incorporated in the new CASs. Davies acknowledges the new CASs will create some changes in KPMG’s audit methodologies, technology and training procedures. “We’re going to have to adapt the way we do things. Our templates and reporting frameworks are going to require modification.” The new CASs will also impact clients, says Davies. “We may be asking for things that we haven’t asked for before.” He cites the new emphasis on the going concern principle as an example where auditors would need to evaluate management’s process with respect to determining whether the client company remains a going concern. Yves Nadeau, partner in assurance and risk management consulting services at RSM Richter Chamberland LLP in Montreal, says members of his firm have read through all the documentation about ISAs on their internal network, as well as having received guidance and feedback based on the audit experiences of many of RSM’s affiliated members in 70 countries. They are also using ISA resources on the CICA website to study differences between Canadian GAAS and the new ISAs. “We’re getting ready. We have already identified the major differences, which are not huge. Our firm is not too concerned about the transition given that our audit methodology at this point is very close to the new international standard approach, so we’re going to have very little to adjust,” Nadeau adds.

WHY SELECT ISAs?

Why were new Canadian auditing standards (CASs), based on international standards on auditing (ISAs), chosen to eventually replace Canadian generally accepted auditing standards (GAAS) for audits of financial statements?

The decision was made in 2006 when some Auditing and Assurance Standards Board (AASB) stakeholders questioned whether uniquely Canadian audit standards remained the best route to go. “They said we’re really just duplicating the effort made by other auditing standards-setters so it didn’t seem to be a very efficient approach,” recalls Greg Shields, CICA director of auditing and assurance standards and a nonvoting member of the AASB who provides the board with technical and operational support.

The central question then became whether the best course of action was to adopt international or US auditing standards. The latter were considered for possible adoption in Canada because the two countries’ economies are closely intertwined.

However, AASB stakeholders were concerned about the complicated post-Enron environment. The standards- setting approach for US public company audits came under the Public Company Accounting Oversight Board, an arm of the Securities and Exchange Commission, whereas auditing standards for other entities such as private companies still came under the auspices of the American Institute of Certified Public Accountants.

There were other reasons why Canada favoured hitching its star to international auditing standards. For example, both the AASB and International Auditing and Assurance Standards Board (IAASB) take a principles-based approach to standards setting, allowing for more professional judgment, compared to the US, which is more rules-based.

Furthermore, one set of international standards can be used to audit all types of entities. They can, for example, be used to audit a big public company or small private entity using a flexible approach to meet the needs of the organization being audited, similar to the philosophy under Canadian GAAS, “so we’re very comfortable with that,” says Shields.

Furthermore, the process is rigorous and transparent. “Anyone can get all of the materials that are being debated by the IAASB. Their proposed standards are put out for exposure with the comments analyzed and carefully considered,” he explains.

Given those reasons, and backed by strong stakeholder support, the AASB decided to adopt ISAs. Since then, “we’ve been devoting our efforts to developing the new set of standards that are going to come into effect for periods ending on or after December 14, 2010,” Shields says.

Auditors need to start preparing now
Because many auditors won’t need to put this knowledge into practice until they audit 2010 statements in early 2011, auditors have time to become familiar with the new ISAs and their corresponding CASs. But there are still worries some practitioners might end up totally unprepared. “Even though we have messages on our website and AASB representatives have made presentations at conferences of various types, including conferences targeted at small practitioners, there is still a lack of awareness out there,” says Greg Shields, director of auditing and assurance standards at the CICA in Toronto and a nonvoting member of AASB who provides the board with technical and operational support. “Many don’t seem to understand what is coming, and coming pretty quickly. That’s of great concern to us as standard-setters. The message I’m getting is that most small practitioners won’t even start looking at this stuff until probably late in 2009 or even 2010 when the rubber’s hitting the road.” Shields stresses that practitioners have to start planning early for December 2010 or they will end up realizing they have all these new standards to learn, and then will wonder how they’re ever going to cope. The amount of work each auditor needs to do to get ready for ISAs will vary, depending on his or her client base, current audit methodology and other factors. Experts note that current Canadian GAAS and ISAs already have much in common. Cowperthwaite cites similarities in quality-control standards, risk assessment and fraud standards as key reasons why existing Canadian standards are already “90% of the way there.” Still, some key areas of change under ISAs will require a lot of focus and preparation. Here are a few of them.

Reporting suite
There are significant structural and wording changes contained in CAS 700: Forming an Opinion and Reporting on Financial Statements, adopted from ISA 700. This new standard will provide a much better description of the respective responsibilities of management and the auditor regarding the financial statements, Shields explains. There is also a substantive change in the date required on the auditor’s report. Under current GAAS, the auditor’s report can be dated when substantial completion of the audit has occurred. But under the new CAS provisions, the audit report must be dated no earlier than when those responsible for the preparation of the financial statements have approved them. This constitutes a big change because in some cases the date of the audit report will be significantly later than it is now, and auditors will have to audit subsequent events between the effective date of the financial statements and the date of the audit report, which could entail much additional work, notes Shields. This could, in turn, drag out the close-off procedures in the audit, resulting in more time spent and fees collected — perhaps anywhere from 1% to 3% of the cost of the file under normal conditions, to maybe as high as 8% to 10% extra in some unusual cases, says Alden Aumann, partner at the Vancouver office of CA firm Manning Elliott LLP. Another change is that, unlike current Canadian GAAS, which focuses on financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP), under the new CASs “you can give a clean audit opinion on financial statements prepared using any acceptable financial reporting framework,” says Shields. “Frameworks such as Canadian GAAP, US GAAP or IFRS are clearly acceptable, but the auditor will be required to use professional judgment in deciding whether other frameworks are acceptable.” Davies notes that under current Canadian GAAS, the types of audit reports that can be provided on financial statements include a Section 5400 report on a general purpose set of financial statements; and Section 5600 involving a special purpose set of financial statements that allows auditors to offer an opinion on statements with differences from GAAP. But these reports can only be provided in restricted circumstances involving legal, regulatory or contractual obligations. In contrast, the relevant new reporting CASs, covered in CAS 700 and CAS 800: Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, are much more flexible. They provide a broad set of reporting options involving both general purpose and special purpose financial statements, says Davies. The idea is that auditors and their clients are being given “the flexibility to develop an approach that’s appropriate in the circumstances to best meet the needs of the users,” he adds.

Going concern
CAS 570 (ISA 570): Going Concern will provide auditors in Canada with a lot more robust requirements and guidance on how to deal with consideration of matters related to an entity’s ability to continue as a going concern, says Shields. This is particularly important during the current economic downturn because many companies will be facing issues so serious there may be doubts about whether they will be able to continue business. Under current Canadian GAAS, there are references to the going concern assumption being applied when there are doubts about a client’s ability to survive, but not a special section dealing exclusively with that issue. In contrast, ISAs deal explicitly with going concern issues. They require the auditor to carry out specific procedures, including an assessment of management’s evaluation of the going concern assumption, notes Davies.

Auditing group financial statements
Another big change that might affect auditors is the new CAS 600 (ISA 600): Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors), which deals with the audit of financial statements belonging to groups of companies. It explains what is required more explicitly than the current Handbook section 6930: Reliance on Another Auditor. Under CAS 600, for example, auditors must establish an overall group audit strategy and develop a group audit plan; the engagement team must understand all the components of the group and the environments in which they operate. It also requires the engagement team to understand whether it will be able to obtain sufficient appropriate audit evidence when involved in the work of the component auditor. The new standard dictates that different work efforts are undertaken depending on whether the component being audited is deemed significant or insignificant; there are also explicit requirements that cover the consolidation process and subsequent events. And more extensive communications with the component auditor must be undertaken; for example, the group engagement team must communicate relevant ethical requirements about issues such as independence. “That standard has a lot more requirements and robust guidance than our current standard on reliance on another auditor. I think it much better reflects current practice and will be very useful to auditors,” says Shields. Under the new CASs/ISAs rules, auditors will also have to make sure that the component auditors comply with relevant ethical requirements applicable to the audit — in particular that they are independent.

Risk assessment response
Like Canadian GAAS, risk assessment and appropriate responses to that risk constitute important elements of the new CASs/ISAs, adopted without modification under 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. “We have had those rules in Canada about three years now, and the clarified rules are really no different, so I don’t think there’s going to be a significant change there,” says Shields, particularly for auditors who already embrace the AASB’s audit risk standards. “We suspect that for many auditors, there won’t be very much change, because their audits would have already reflected what’s now in the requirements,” he says. But for practitioners who haven’t embraced audit risk standards, getting up to speed will be a big transition. “If they took a minimalist approach a lot of the new requirements will be a change for them,” Shields says. One of the fundamental precepts of the IAASB is that an audit is an audit, regardless of the size of the organization, notes Cowperthwaite. “The difference is in the way the standards are interpreted and executed. In a large multinational organization with extensive hedging of currency and other risks, for example, the audit procedures will likely be more extensive than they would be in a small company with cash in the bank. But the audit standards themselves would remain the same,” he adds.

Standards overload?
If practitioners have to become familiar with yet another set of standards around the time of the IFRS conversion in 2011, will there be standards fatigue? It’s not just preparation for IFRS and ISAs that is filling practitioners’ plates. “We’ve also been hit with a lot of new Canadian and US standards over the past several years,” says Aumann. “We can get our people up to speed relatively quickly because we’re used to doing professional development and training, and we’re a large enough firm that we’ve got the resources to do that. I think the ones who are feeling the pinch here are really the small firms; the sole practitioners; the two- and three-partner firms that really don’t have the resources to get up to speed on this quickly. They might be more likely to complain about standards overload.” Shields emphasizes that the CICA is there to assist. “We want to create awareness and get the message out that this isn’t an insurmountable task. For many of the standards the change is not likely to be all that great. And for all those areas where there is change, we will provide help,” he says.

Jeff Buckstein is an Ottawa-based journalist.