Technical Bulletin - Part 2 - July 2014

Continued from Part 1

2. ASSURANCE

Pronouncement effective for assurance reports covering periods ending on or after September 30, 2013

CSAE 3410 – Assurance Engagements on Greenhouse Gas Statements

This new standard deals with assurance engagements to report on an entity’s greenhouse gas statement, and was adopted from the ISAE 3410 issued by the IAASB.

Pronouncements effective for audits of financial statements for periods ending on or after December 15, 2013

CAS 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

This standard replaces the existing CAS 315 and incorporates changes resulting from revisions to CAS 610.  Changes include more guidance on when to apply CAS 610 and matters that the auditor needs to consider when making inquiries and obtaining understanding of internal audit function.

CAS 610 - Using the Work of Internal Auditors

This standard replaces the existing CAS 610.  It establishes a strengthened judgment-based framework for use by the external auditor in deciding whether and, if so, to what extent, to use the work of the internal audit function. In February 2013, the AASB approved changes to CAS 610. These changes deal with the auditor’s use of direct assistance from internal auditors and mirror the changes made by the IAASB in finalizing ISA 610, and are effective for periods ending on or after December 15, 2014.

Pronouncement effective for reports dated on or after April 1, 2016

CSRS 4460 - Reports on Supplementary Matters Arising from an Audit or a Review Engagement

The development of CSRS 4460 was undertaken by the AASB to address an increasing trend by various third parties, including regulators, to place responsibility on the practitioner to report on matters beyond the scope of the audit or review of an entity’s financial statements. Such matters are relevant to the third party, and may have come to the attention of the practitioner when performing the audit or review. These matters are referred to as “supplementary matters”.

This new Canadian Standard on Related Services deals with engagements to report on supplementary matters to a third party and sets out requirements related to:

•           accepting the engagement, including circumstances when acceptance is prohibited;

•           performing the engagement; and

•           reporting, including the content of the practitioner's report.

Revisions to Independence Standards

The revisions are based on the final report of the Independence Task Force (ITF) of CPA Canada’s Public Trust Committee. A number of changes have been made in order that the Rules be no less stringent than the requirements of the Code of Ethics for Professional Accountants (Code) issued by the International Ethics Standards Board for Accountants, unless it is determined that a particular provision is either not in the public interest or it is prohibited by law or regulation.

Certain changes were made to improve the clarity and enforceability of the current Rule and Council Interpretations (CIs). For example:

• Rule 204.2 Compliance with Rule 204.1 has been added to clarify that, in addition to complying with Rule 204.3 Identification of threats and safeguards, any Member or Firm required to be independent pursuant to Rule 204.1 Assurance and Specified Auditing Procedures Engagements shall comply with the specific provisions of Rule 204.4 that deal with specific prohibitions for these engagements;
• Rule 204.3 Documentation has been moved to a new Rule 204.5 (after Rule 204.4 Specific prohibitions) to make it clearer that inadequate documentation of an independence matter would not, in itself, be a threat requiring safeguards or a prohibition that prevents the Member or Firm from undertaking the engagement, but it would be a violation of the Rules.
• A number of changes were made in respect of financial interest prohibitions in Rule 204.4, such as:
  • Some provisions that provide relief from the prohibitions (“relieving provisions”) were clarified, such as in the case where a financial interest held by an immediate family member of a partner or managerial employee has been received as a result of employment (see Rule 204.4(4) and Rule 204.4(5)).
  • Some sections have been eliminated, such as the references to professional employees and the 0.1% ownership test.
  • The existing Rule permits a member of the engagement team (or an immediate or close family member) to hold qualifying shares in certain social clubs or organizations under specified conditions. These relieving provisions have been extended to co-operatives and credit unions or caisses populaires. [Rule 204.4(2.1)]

The revised standard extends certain prohibitions that currently apply in respect of providing audit services to reporting issuer clients to all audit or review engagement clients when other non-assurance services are being provided, such as the following:

• certain valuation services [Rule 204.4(25)];
• various internal audit services, unless certain conditions are met [Rule 204.4(27)(a), CI to Rules 204.1 to 204.7 paragraphs 154 through 162];
• information technology system services, such as financial information systems design or implementation services, where the information being generated is significant to the accounting records or financial statements, unless certain conditions are met [Rule 204.4(28)(a), CI to Rules 204.1 to 204.7 paragraphs 163 to 171];
• litigation support services for the purpose of advancing an audit or review client’s interest in certain proceedings or investigations, if the amounts are material [Rule 204.4(29)(a)]; and
• where corporate finance and similar services have been provided, and "(i) the effectiveness of the advice depends upon a particular accounting treatment or presentation in the financial statements; (ii) the outcome or consequences of the advice has or will have a material effect …; and (iii) the engagement team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation….” [Rule 204.4(33)(b)]

Guidance has been added to cover situations where a Firm has provided non-assurance services as outlined in Rules 204.4(22) to (34) prior to commencing an engagement to provide audit or review services. [(Rule 204.4(35)(a)]

A number of changes, which impact all engagements affected by this Rule, were made to conform to the Code. These include:

• Some definitions have been revised as noted below (see the Definitions section of the Rule). The most significant are the revisions to "network Firm" and "related entity", which broaden the scope of application of the Rule:
  • “Member of a Firm” or “Member of the Firm” - Wording has been added to clarify that external experts in a field other than accounting or auditing are not subject to the independence provisions that apply to the engagement team;
  • “Network Firms” - A more prescriptive definition of a network Firm has been adopted, which refers to a “larger structure of co-operating entities that shares” significant professional resources. The previous definition referred to “common control, ownership or management”. Additional guidance has been provided on the application of this definition. [CI to Rule 204.1 to 204.7 paragraphs 25 and 26]
  • “Related entity” - This definition has been extended from relationships where there is control, or common control, to include relationships where there is significant influence.
• One of the most significant revisions to the Rule is the addition of several prohibitions related to the provision of taxation services to audit or review clients. These include the provision of tax planning or other advisory services, where, "(i) the effectiveness of the advice depends upon a particular accounting treatment or presentation in the financial statements; (ii) the outcome or consequences of the advice has or will have a material effect …; and (iii) the engagement team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation… “. [Rule 204.4 (34)(a)]. Note that relief has been provided to allow a Firm to assist reporting issuers and listed entity clients in certain emergency situations, as outlined in the next section.
• A new Rule (Rule 204.4(40)) and a related CI (Section R to the CI to Rules 204.1 to 204.7, paragraphs 200 to 200G), were added to address independence issues arising from merger and acquisition activities of audit and review clients. The new Rule and CI discuss whether steps can be taken to be able to continue with the engagements, as well as which provisions need to be met.
• The prohibition in respect of performing assurance engagements, where the Member or Firm has been involved in making management decisions or performing management functions for the assurance client, has been limited to situations where the decisions or functions are “related to the subject matter of the assurance engagement”. [Rule 204.4(22)(a)]
• A provision has been added to allow the temporary loan of staff to an audit or review client of the Firm, as long as certain conditions are met. [Rule 204.4(17)(b)].

Changes made in respect of reporting issuer or listed entities clients, as outlined below:

• A new definition, "listed entity", has been adopted, which includes those “that are not reporting issuers in Canada but are listed elsewhere”. [Definitions]
• Partner rotation requirements have been modified to focus on the familiarity threat instead of an arbitrary bright-line test. The revised Rule applies to anyone who is a “key audit partner” (defined as the lead engagement partner, the engagement quality control reviewer, or other partners who make key decisions or judgments with respect to the audit) to rotate, instead of the existing Rule, which encompassed the lead engagement partner, the engagement quality control reviewer, the subsidiary entity engagement partners, and any partners providing more than 10 hours of assurance services. [Rule 204.4(20) and Definitions]
• The existing Rule precludes an audit partner on the engagement team from being compensated based on selling non-assurance services to his or her reporting issuer audit client. These requirements have been extended in a number of areas, so as to preclude “key audit partners” from being evaluated or compensated based on selling such services to a client or related entity during the period that they were a key audit partner. [Rule 204.4 (38)]
• The current CIs consider that an independence threat may exist when a significant portion of a Firm’s total fees come from an assurance client. The Code contains more specific provisions for reporting issuer or listed entity audit clients. In circumstances when total revenue from a listed entity or reporting issuer audit client represents more than 15 per cent of the Firm’s total revenue for two consecutive fiscal years, the Firm shall not perform the audit unless certain provisions are met. [Rule 204.4 (37)(a)]
• Emergency provisions have been added to allow the Firm to perform the audit in certain circumstances where they have prepared tax calculations of current and future tax liabilities or assets for the purpose of preparing accounting entries that are material, or they have performed accounting and bookkeeping services for a reporting issuer or listed entity. These taxation, accounting, and bookkeeping services can only have been provided in emergency situations. Certain conditions, as well as documentation requirements, must be met in order to be able to conduct the audit in these circumstances. [Rule 204.4(34)(b) and Rule 204.4(24)(b) respectively.]
• If a former Chief Executive Officer (CEO) of the Firm takes on various roles (officer, director, or financial reporting oversight) with a reporting issuer or listed entity audit client, the Firm shall not perform an audit engagement for that entity unless one year has elapsed from the date that individual was the CEO. [Rule 204.4(16)(b)].
• Guidance has been added to address situations where a Firm has provided non-assurance services, as outlined in Rules 204.4(22) to (34), to an entity that has become a reporting issuer or listed entity. [204.4(35)(b)]

The ED proposed elimination of the threshold exemption to the more restrictive independence requirements applied to the audits of reporting issuers with either market capitalization or total assets in excess of $10 million. The ITF ultimately concluded that maintaining the threshold was in the public interest. They believed that the removal of the threshold would have a significant negative impact on small reporting issuers in Canada, as well as on small Firms which were unable to accommodate the partner rotation requirements, which would result in a reduction of the number of audit Firms available to smaller reporting issuers.

The changes generally take effect for assurance engagements in respect of reporting periods commencing after December 15, 2014.

A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality

The IAASB has issued the final Framework, following last year’s consultation process.

The objectives of the Framework for Audit Quality include:

• Raising awareness of the key elements of audit quality
• Encouraging key stakeholders to explore ways to improve audit quality
• Facilitating greater dialogue between key stakeholders on the topic

The IAASB expects that the Framework will generate discussion, and positive actions to achieve a continuous improvement to audit quality.

Auditors are required to comply with relevant auditing standards and standards of quality control within audit firms, as well as ethics and other regulatory requirements. The Framework is not a substitute for such standards, nor does it establish additional standards or provide requirements for the performance of audit engagements.

Click here to access the full document.

Recently Issued Documents for Comment

The Auditor’s Responsibilities Relating to Other Information

This re-exposure draft, issued by the IAASB in April 2014, proposes revisions to ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements.  The AASB approved a related Canadian re-exposure draft, which was issued in May 2014.

Proposed ISA 720 (Revised) deals with the auditor’s responsibilities relating to other information included in an entity’s annual report, as defined in the standard. The scope is expanded to include a combination of documents that accompany the audited financial statements, as opposed to being limited to a document that contains the audited financial statements.   However, the scope is narrowed to limit it to a document, or combination of documents, that meets the definition of an annual report.

Changes proposed to the objectives for this standard would result in increased emphasis on considering whether there is a material inconsistency between the other information and the financial statements, and the auditor’s knowledge obtained during the course of the audit. There is a clarification, however, indicating that the auditor is not required to obtain audit evidence beyond that required to form an opinion on the financial statements. In addition, the auditor’s report would contain a statement addressing whether the auditor has identified a material misstatement in the other information and, if so, a description of the misstatement.

The revised standard also clarifies that the auditor’s responsibilities relating to other information, other than the reporting responsibilities, apply regardless of whether the other information is obtained by the auditor prior to, or after, the date of the auditor’s report.

The AASB is proposing to include a Canadian-only application and other explanatory paragraph to assist Canadian stakeholders in understanding how CAS 720 (Revised) would apply to common documents particular to the Canadian environment.  Specifically, CAS 720 (Revised) would state that in Canada, the Management Discussion and Analysis (MD&A) issued under the provisions of Canadian securities legislation would normally be considered to be within the scope of CAS 720 as the MD&A is meant to complement and supplement the financial statements. If an entity issues an annual report, the annual report would also be within the scope of CAS 720 if it meets the definition set out in the standard.

The IAASB is proposing that the effective date for ISA 720 (Revised) be aligned with the effective date of the revisions arising from the auditor reporting project. ISA 720 (Revised) is expected to be effective approximately 12 to 15 months after the issuance of ISA 720 (Revised) and the new and revised ISAs resulting from the auditor reporting project as final standards. CAS 720 (Revised) would have the same effective date as ISA 720 (Revised).

Comment period closed on July 4, 2014 relating to the AASB’s re-exposure draft and on July 18, 2014 relating to the IAASB’s re-exposure draft.

Addressing Disclosures in the Audit of Financial Statements

This exposure draft was issued by the IAASB in May 2014, aiming to clarify expectations of auditors when auditing financial statement disclosures.  The proposals include new guidance on considerations relevant to disclosures—from when the auditor plans the audit and assesses the risks of material misstatement, to when the auditor evaluates misstatements and forms an opinion on the financial statements.

The proposed changes are as follows:

• To clarify that the definition of financial statements in the ISAs includes all disclosures.
• To highlight that it is beneficial for auditors to agree with management on their responsibilities relating to the preparation of disclosures, as well as providing access to information necessary for audit purposes.
• To add emphasis for auditors to consider disclosures when assessing the risk of misstatement arising from fraud.
• To encourage auditors to discuss matters relating to disclosures and the financial statements early in the audit process.
• To focus auditors on the planning considerations related to disclosures earlier in the audit process.
• To assist auditors with more effectively and consistently identifying and assessing the risks of material misstatement in disclosures.
• To clarify that the nature of potential misstatements in disclosures is also relevant to the design of audit procedures to address the risks of material misstatement.
• To assist auditors with more effectively responding to the risks of material misstatement in disclosures.
• To clarify that misstatements in disclosures are accumulated, and the effect of uncorrected misstatement, both individually and in aggregate, considered in light of the financial statements as a whole.
• To provide guidance for the audit procedures when evaluating the presentation of the financial statements, including whether fair presentation has been achieved (if applicable).

The AASB issued a related Canadian exposure draft in June 2014 and proposes no Canadian amendments to the proposed revised ISAs.

The IAASB is proposing that the effective date for the revised ISAs be aligned with the effective date for the revisions arising from the auditor reporting project and the project to revise ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements. The revised ISAs are expected to be effective approximately 12 to 15 months after the issuance of the revised ISAs, the new and revised ISAs resulting from the auditor reporting and ISA 720 projects as final standards. The revised CASs would have the same effective date as the revised ISAs.

Comment period ends on August 15, 2014 relating to the AASB’s ED and on September 11, 2014 relating to the IAASB’s ED.

Attestation and Direct Engagements

This ED was issued by the AASB in June 2014.  AASB proposes to adopt International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, as Canadian Standard on Assurance Engagements (CSAE) 3000, Attestation Engagements Other than Audits or Reviews of Historical Financial Information and issue a new CSAE 3001, Direct Engagements.

These standards will replace:

• Standards for assurance engagements other than audits of financial statements and other historical financial information, Section 5025;
• Quality control procedures for assurance engagements other than audits of financial statements and other historical financial information, Section 5030;
• Use of specialists in assurance engagements other than audits of financial statements and other historical financial information, Section 5049;
• Using the work of internal audit in assurance engagements other than audits of financial statements and other historical financial information, Section 5050; and
• General review standards, Section 8100.

Key differences between the extant umbrella standards in the Handbook and CSAE 3000 and CSAE 3001 relate to the following:

• number and format of the standards;
• relationships among assurance standards;
• terminology and definitions;
• specifications regarding those assurance providers who can claim compliance with the assurance standards;
• requirements in extant umbrella standards not reflected as requirements in CSAE 3000 and CSAE 3001;
• additional requirements; and
• limited assurance engagements.

Comment period ends on November 3, 2014.

Current Status of Documents Previously Issued for Comment

This ED was issued by the IAASB in July 2013, with a goal of improving the auditor’s report on audited financial statements.  This ED is the culmination of the IAASB’s deliberations on the topic of auditor reporting, which were informed by international research, public consultation (including the responses to the IAASB’s June 2012 Invitation to Comment: Improving the Auditor’s Report), and stakeholder outreach.

Key enhancements are identified as follows:

• Prominent placement of the auditor’s opinion and other entity-specific information in the auditor’s report.
• Auditor reporting on “Key Audit Matters”, required for audits of financial statements of listed entities. Key audit matters are those matters that, in the auditor’s judgment, were of most significance in the audit of the current period financial statements.
• Auditor reporting on going concern, including a conclusion on the appropriateness of management’s use of the going concern basis of accounting in preparing the financial statements and a statement as to whether a material uncertainty that may cast significant doubt on the entity’s ability to continue as a going concern has been identified.
• Auditor reporting on other information (to be finalized as part of the separate project to revise ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements).
• An explicit statement that the auditor is independent of the entity and has fulfilled the auditor’s other relevant ethical responsibilities, with disclosure of the source(s) of those requirements.
• Disclosure of the name of the engagement partner, required for audits of financial statements of listed entities, unless, in rare circumstances, such disclosure is reasonably expected to lead to a significant security threat to the individual.
• Improved description of the responsibilities of the auditor and key features of the audit (together with provision for certain components of this description to be relocated to an appendix to the auditor’s report, or for reference to be made to such description on the website of an appropriate authority).

An illustration of the proposed auditor’s report for a listed entity is included in the ‘At a Glance’ summary of the ED.

Comment period for this ED closed on November 22, 2013.  Proposed standards are expected to be finalized in 2014.

This ED was issued by the AASB in June 2013, with the objective of issuing a new Canadian Standard on Review Engagements (CSRE) 2400, Engagements to Review Historical Financial Statements, which will replace Sections 8200 and 8500, as well as Assurance and Related Services Guidelines AuG-20 and AuG-47. 

The ED proposed CSRE 2400 would be effective for reviews of historical financial statements for periods ending on or after December 14, 2015.

Comment period closed on December 11, 2013.    The AASB at its March 2014 meeting decided that the effective date will be deferred while it continues to deliberate on this matter.

This ED was issued by the AASB in November 2013 to replace Section 7050, Auditor Review of Interim Financial Statements, with Section 7060.

Main features of the ED:

• Consistent with Section 7050, the focus of the auditor in conducting an interim review under Section 7060 is to assist the audit committee in discharging its responsibilities with respect to interim financial statements that are to be issued under the provisions of securities legislation. Accordingly, the auditor’s interim review report is a special purpose report provided only to the audit committee.  The AASB is of the view that the focus on assisting the audit committee promotes high quality interim financial statements in a practical way.
• Since the auditor is providing comments to the audit committee and not to the general public, the AASB is of the view that oral communication of the interim review report is sufficient, except in certain circumstances.
• The following items, previously in guidance in Section 7050, are included as requirements in Section 7060:

(a) written agreement of terms of engagement with both management and the audit committee;

(b) inquiries relating to fraud, illegal acts, and non-compliance with provisions of laws and regulations;

(c) procedures relating to going concern;

(d) accumulation and evaluation of misstatements;

(e) responses to discovery of a material misstatement subsequent to the issuance of the auditor’s interim review report; and

(f) content and extent of documentation.

• Additional new requirements were developed to improve the clarity of former Section 7050, as follows:

(a) determination of materiality;

(b) identification of the risks of material misstatement, and design and performance of procedures to address the identified risks (as opposed to obtaining an understanding of the entity and its environment sufficient to identify types of potential material misstatements);

(c) the auditor’s response when he or she becomes aware of a misrepresentation (as opposed to an untrue statement of a material fact) in the interim management discussion and analysis;

(d) the date of management representation; and

(e) communication of the effect of accumulated misstatements to management and the audit committee in misstatements.

• The AASB proposes to clarify that the auditor is required to express a modified conclusion if he or she concludes that any material modification is necessary for the interim financial statements to be in accordance with the applicable financial reporting framework

The proposed Section 7060 would be effective for reviews of interim financial statements for interim periods of fiscal years beginning on or after December 15, 2014.  Comment period closed on January 15, 2014.  Currently in deliberations.  AASB expects to issue the final standard in Q3 of 2014.

Enhancing Audit Quality (EAQ)

Three publications have recently been issued by CPA Canada to help audit committees enhance their oversight of external auditors:

• Oversight of the External Auditor – Guidance for Audit Committees

Provides an overview of activities that audit committees perform to assist them in overseeing and assessing the effectiveness of the external auditor.

• Annual Assessment of the External Auditor – Tool for Audit Committees

This companion publication and annual assessment tool is intended to be used in years when the audit committee is not conducting a comprehensive review of the external auditor and identifies three key factors of audit quality for the audit committee to consider and assess including: independence, objectivity and professional skepticism; quality of the engagement team; and quality of communications and interactions with the external auditor.

• Periodic Comprehensive Review of the External Auditor – Tool for Audit Committees

As recommended by the EAQ initiative, audit committees should periodically (at least every five years) conduct a comprehensive review. This comprehensive review publication and tool provides a deeper and broader assessment than its annual counterpart and includes guidance on the preparation and content of the audit committees’ public report on the review.

An infographic highlighting the latest resources aimed at assisting audit committees with evaluating external auditors has been published on the Collins Barrow website.

To access the infographic, click here.

To access the CPA Canada guidance, click here.

Reporting Implications of New Auditing and Accounting Standards

This guide is published by CPA Canada, and has been developed by the Task Force on Audit Reporting Implications of the New Canadian Auditing Standards.  The purpose of this guide is to promote consistency in the form and content of practitioners’ reports by providing guidance with respect to commonly occurring circumstances.   Issue No. 12 was issued in April 2014.  Click here to access the guide.

Auditing and Assurance Standards Practice Notes

Auditing and assurance practice notes issued by the AASB may include:

• Canadian Auditing Practice Notes (CAPNs);
• Canadian Review Engagement Practice Notes (CREPNs);
• Canadian Assurance Engagement Practice Notes (CAEPNs); and
• Canadian Related Services Practice Notes (CRSPNs).

Practice Notes are non-authoritative material. They are not part of the Canadian Standards on Quality Control, Canadian Auditing Standards, or Other Canadian Standards issued by the Auditing and Assurance Standards Board in the CICA Handbook – Assurance. Practice Notes do not impose additional requirements on practitioners beyond those included in the standards, nor do they change the practitioner's responsibility to comply with all standards relevant to an audit, assurance or related services engagement.

Practice Notes provide practical assistance to practitioners, and may be of use to firms in developing their training programs and internal guidance.

To access practice notes, click here.

ACRONYMS USED

AASB – Auditing and Assurance Standards Board

AcSB – Accounting Standards Board

GAAP – Generally Accepted Accounting Standards

IAASB – International Auditing and Assurance Standards Board

IASB – International Accounting Standards Board

IFRIC – International Financial Reporting Interpretations Committee

CICA – Canadian Institute of Chartered Accountants

CMA – Certified Management Accountants

CPA – Chartered Professional Accountants

CPAB – Canadian Public Accountability Board

CSA – Canadian Securities Administrators

PSAB – Public Sector Accounting Board