The CAS audit

By Eric Turner
Illustration: Blair Kelly

Engineering is usually required to create cultured pearls; similarly intervention is needed to achieve a PEARL system

The suite of 36 new Canadian auditing standards (CASs) reflects the requirements of the international standards on auditing and becomes effective in Canada for financial statement periods ending on or after December 14, 2010. The CASs apply to all audits of financial statements, whether for public or private entities, large or small, profit oriented or not. They can be used to audit financial statements prepared in accordance with any acceptable financial reporting framework, not just international financial reporting standards.

What can management of audited entities and audit committees expect in terms of how the audit is conducted and the communications that take place with their auditors? This article deals with this question in relation to the premise of an audit, potential differences in a CAS audit from prior years, the audit committee communications framework and changes to the auditor’s report.

The premise of an audit
The audited financial statements are those of the entity, prepared by management with oversight from the audit committee. The CASs do not impose responsibilities on management or the audit committee nor do they override laws and regulations that govern their responsibilities. However, an audit in accordance with the CASs is conducted on the premise that management and, where appropriate, the audit committee acknowledges certain fundamental responsibilities to:

prepare financial statements in accordance with the applicable financial reporting framework;
have such internal control as management determines is necessary for the preparation of the financial statements; and
provide the auditor with access to all information relevant to the preparation of the financial statements and unrestricted access to persons within the entity from whom the auditor determines it is necessary to obtain audit evidence.

The audit of the financial statements does not relieve management or the audit committee of their responsibilities. This premise is not new but is more explicit in the CASs and is reflected in a few key areas concerning communications between the auditor and management and the audit committee, including the form of the auditor’s report. For example, in accepting the audit engagement, the auditor will request the agreement of management and, where appropriate, the audit committee to the premise of the audit.

The auditor must not accept an engagement if this agreement is not obtained. The auditor must also inform the audit committee of the nature of written representations the auditor is requesting from management and in some cases the audit committee itself. These include overall representations indicating that management and, where appropriate, the audit committee have fulfilled their responsibilities under the premise of the audit.

Differences in CAS audit from prior years
The nature and extent of differences that management and the audit committee might identify from prior-year audits will depend on the circumstances of the entity. The CASs contain several new or significantly changed auditing standards that may have implications for management and the audit committee to the extent they are relevant to the audit of that entity, for example:

CAS 550 (related parties) is more explicit in how the auditor deals with related parties. The level of communication with the audit committee is beyond what is required by current standards. For example, the auditor is required to communicate with the audit committee nondisclosure by management to the auditor of related parties or significant related-party transactions. The auditor is also required to obtain written representations from management, and where appropriate, the audit committee, with respect to related-party relationships and transactions and their accounting and disclosure in the financial statements.
CAS 600 (group audits) has broader application than current standards and contains more extensive requirements. There are specific requirements for the group auditor to communicate with the group audit committee and management regarding such things as deficiencies in internal control that are group wide or specific to components of the entity, and fraud.
CAS 570 (going concern) requires the auditor to evaluate management’s assessment of the entity’s ability to continue as a going concern and perform specific procedures if events or conditions have been identified that may cast significant doubt about the entity’s ability to continue as a going concern, including evaluating management’s plans for future actions and communicating with the audit committee.

It is important to understand how the new CASs will change the audit in an entity’s specific circumstances, as this will affect the assistance the auditor requires from management in conducting an efficient audit. It will also affect the nature and extent of communication between the auditor and the audit committee relating to specific aspects of the audit.

Driving effective communications with the audit committee
Communications with audit committees are founded on CAS 260 (communications with those charged with governance). This CAS provides an overarching communications framework that emphasizes the importance of effective two-way communication between the auditor and those charged with governance (a subgroup of which is the audit committee) during all phases of the audit. The requirements and guidance in this CAS are more extensive and detailed than under current generally accepted auditing standards (GAAS).

There are four key areas of communication. The auditor must:

inform the audit committee of the auditor’s responsibilities on the audit;
discuss with the audit committee the timing and scope of the audit;
obtain from the audit committee information relevant to the audit; and
inform the audit committee on a timely basis of matters arising from the audit that are likely to be of interest to the committee.

A key CAS requirement is for the auditor to evaluate whether communications with the audit committee have been adequate for the purpose of the audit: that is whether the objectives of such communications have been achieved. Inadequate communications may have significant consequences for the auditor. For example, inadequate communication may indicate an unsatisfactory control environment and influence the auditor’s assessment of the risks of material misstatements, such that the auditor may need to perform additional audit procedures in forming the audit opinion. It is therefore important for auditors and audit committees to continually improve their communications.

Improving communications through the new auditor’s report
Will the form and content of the auditor’s report change under the CASs? Yes. One obvious change is that the auditor’s report will be twice as long — six paragraphs rather than three — to more fully describe the responsibilities of management and the auditor. The description of management’s responsibility is expanded to indicate that it includes responsibility for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The description of the audit is expanded to explain, amongst other things, that the auditor’s consideration of internal control during the audit is not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

Another change under the CASs will be the date of the auditor’s report. Under current GAAS, the auditor can date the report when he or she has identified and sought all the audit evidence required to support the opinion and has obtained and examined substantially all such evidence. However, the auditor will often be awaiting the final financial statements and specific corroborating evidence or documentation before signing and releasing the report. The CASs require the auditor to have obtained (not just sought) sufficient appropriate audit evidence to support the opinion before dating the report. Sufficient appropriate audit evidence includes, for example, approval of the final financial statements by the board of directors. As a result, the auditor’s report will often now be dated somewhat later and nearer the issuance of the financial statements. To address the shorter time frame between completion of the audit and issuance of the financial statements, closer coordination will be needed of the timing
of audit committee and board meetings and, for example, of audit communications with the entity’s legal counsel.

The new audit reporting model also contains new standards dealing with additional paragraphs that the auditor may add to the auditor’s report — “emphasis of matter” and “other matter” paragraphs. An “emphasis of matter” paragraph is used if the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. The paragraph is included immediately after the opinion paragraph and indicates that the auditor’s opinion is not modified in respect of the matter emphasized. Current GAAS does not permit the auditor to include such paragraphs in the auditor’s report.

An “other matter” paragraph is used if the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report. This paragraph is included immediately after the opinion paragraph and any emphasis of matter paragraph. The auditor is required to communicate with the audit committee when he or she expects to include such a paragraph and its proposed wording.

Conclusions
The requirements in the CASs place explicit recognition on the premise of an audit and change communications with audit committees and the form of the auditor’s report. They should improve the audit and the quality and timing of communications between the auditor, management and the audit committee. Early discussion of the new requirements by all involved will facilitate a smooth transition to the CAS audit.

Eric Turner, CA, is a principal in the CICA’s Assurance Standards department

Technical editor: Ron Salole, VP, Standards, CICA