1011 Canadian Auditing Standards and financial reporting considerations

Apr-2018

CAS Guidance

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with CASs and relevant ethical requirements enables the auditor to form that opinion (CAS 200.3).

Some financial reporting frameworks may refer to an entity's economic resources or obligations in other terms. For example, these may be referred to as the entity's assets and liabilities, and the residual difference between them may be referred to as equity or equity interests (CAS 200.A14).

Explanatory or descriptive information required to be included in the financial statements by the applicable financial reporting framework may be incorporated therein by cross-reference to information in another document, such as a management report or a risk report. "Incorporated therein by cross-reference" means cross-referenced from the financial statements to the other document, but not from the other document to the financial statements. Where the applicable financial reporting framework does not expressly prohibit the cross-referencing of where explanatory or descriptive information may be found, and the information has been appropriately cross-referenced, the information will form part of the financial statements (CAS 200.A15).

The auditor's opinion on the financial statements deals with whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Such an opinion is common to all audits of financial statements. The auditor's opinion therefore does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In some jurisdictions, however, applicable laws or regulations may require auditors to provide opinions on other specific matters, such as the effectiveness of internal control, or the consistency of a separate management report with the financial statements. While the CASs include requirements and guidance in relation to such matters to the extent that they are relevant to forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had additional responsibilities to provide such opinions (CAS 200.A1).

OAG Guidance

The Office of the Auditor General of Canada (OAG) audits government operations and provides objective information and advice to Parliament that can aid in holding the government to account.

The statutory duties of the Auditor General provide a broad mandate to conduct audits and examinations in order to report on the government’s management of its affairs. The Auditor General does not comment on policy choices, but does examine how those policies are implemented. Accordingly, legislative audits address varied subjects:

• the appropriateness of expenditures (in other words, whether they have been made in accordance with legislative authorities);

• the appropriateness of the government’s accounting policies;

• the fair presentation of the financial statements of various government entities;

• constraints to economical, efficient, and effective management of government resources;

• the quality of financial management and control within government;

• the appropriateness of procedures to manage the assessment, collection, and proper classification of government revenues;

• departmental sustainable development strategies and action plans; and

• instances where expenditures have been made without due regard to economy or efficiency.

The products of the OAG are reports to the House of Commons and to various others including ministers, legislative assemblies, boards of directors, and managers. These products include the auditors’ reports emanating from the annual audits we conduct.

Nature and scope of CASs

CAS Guidance

CASs are written in the context of an audit of financial statements by an auditor. They are to be adapted as necessary in the circumstances when applied to audits of other historical financial information. CASs do not address the responsibilities of the auditor that may exist in legislation, regulation or otherwise in connection with, for example, the offering of securities to the public. Such responsibilities may differ from those established in the CASs. Accordingly, while the auditor may find aspects of the CASs helpful in such circumstances, it is the responsibility of the auditor to ensure compliance with all relevant legal, regulatory or professional obligations (CAS 200.2).

CAS 200 defines the term “historical financial information” as information expressed in financial terms in relation to a particular entity, derived primarily from that entity's accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past (CAS 805.A1).

CAS 200 defines the term “financial statements” as a structured representation of historical financial information, including disclosures, intended to communicate an entity's economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The term "financial statements" ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but can also refer to a single financial statement. Disclosures comprise explanatory or descriptive information, set out as required, expressly permitted or otherwise allowed by the applicable financial reporting framework, on the face of a financial statement, or in the notes, or incorporated therein by cross-reference. As noted in paragraph 6(c), reference to a single financial statement or specific element of a financial statement includes the related disclosures (CAS 805.A2).

CASs are written in the context of an audit of financial statements; they are to be adapted as necessary in the circumstances when applied to an audit of other historical financial information, such as a single financial statement or a specific element of a financial statement. This CAS assists in this regard. (Appendix 1 lists examples of such other historical financial information.) (CAS 805.A3).

Examples of Specific Elements, Accounts or Items of a Financial Statement (CAS 805 Appendix 1):

• Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for “incurred but not reported” claims in an insurance portfolio, including related notes.

• A schedule of externally managed assets and income of a private pension plan, including related notes.

• A schedule of net tangible assets, including related notes.

• A schedule of disbursements in relation to a lease property, including explanatory notes.

• A schedule of profit participation or employee bonuses, including explanatory notes.

A reasonable assurance engagement other than an audit of historical financial information is performed in accordance with Canadian Standard on Assurance Engagements (CSAE 3000) (CAS 805.A4).

OAG Guidance

CASs and related OAG Audit guidance apply equally to audits of other historical financial information as they do for audits of financial statements. Other examples of other historical financial information include

• a stand alone balance sheet or income statement,
• extracts of financial results and/or disclosures, and
• specified account balances.

Related Guidance:

See OAG Audit 1021 for guidance on complying with CASs.

Overall objectives of the auditor

CAS Guidance

The CASs contain objectives, requirements and application and other explanatory material that are designed to support the auditor in obtaining reasonable assurance. The CASs require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit and, among other things (CAS 200.7):

• Identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, the applicable financial reporting framework and the entity's system of internal control (see OAG Audit 5043 for guidance on assessing risks of material misstatement).

• Obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks (see OAG Audit 1051 for guidance on determining sufficient appropriate audit evidence).

• Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained.

Related Guidance:

See OAG Audit 101 for guidance on the structure of the Annual Audit Manual and how this incorporates the various elements of the CAS material referred to above, as a means of understanding the text of CASs.

See OAG Audit 1021 for further guidance on understanding and complying with CASs.

See OAG Audit 8011 for guidance on forming an opinion.

Form of auditors opinion

CAS Guidance

The form of opinion expressed by the auditor will depend upon the applicable financial reporting framework and any applicable law or regulation (CAS 200.8).

The opinion expressed by the auditor is on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. The form of the auditor's opinion, however, will depend upon the applicable financial reporting framework and any applicable law or regulation. Most financial reporting frameworks include requirements relating to the presentation of the financial statements; for such frameworks, preparation of the financial statements in accordance with the applicable financial reporting framework includes presentation (CAS 200.A12).

Where the financial reporting framework is a fair presentation framework, as is generally the case for general purpose financial statements, the opinion required by the CASs is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view. Where the financial reporting framework is a compliance framework, the opinion required is on whether the financial statements are prepared, in all material respects, in accordance with the framework. Unless specifically stated otherwise, references in the CASs to the auditor's opinion cover both forms of opinion (CAS 200.A13).

Related Guidance:

See OAG Audit 8011 for guidance on Form of opinion.

Financial reporting frameworks

CAS Guidance

The financial statements may be prepared in accordance with a financial reporting framework designed to meet (CAS 200.A4):

• the common financial information needs of a wide range of users (i.e., “general purpose financial statements”); or
• the financial information needs of specific users (i.e., “special purpose financial statements”).

The applicable financial reporting framework often encompasses financial reporting standards established by an authorized or recognized standards setting organization, or legislative or regulatory requirements. In some cases, the financial reporting framework may encompass both financial reporting standards established by an authorized or recognized standards setting organization and legislative or regulatory requirements. Other sources may provide direction on the application of the applicable financial reporting framework. In some cases, the applicable financial reporting framework may encompass such other sources, or may even consist only of such sources. Such other sources may include (CAS 200.A5):

• the legal and ethical environment, including statutes, regulations, court decisions, and professional ethical obligations in relation to accounting matters;

• published accounting interpretations of varying authority issued by standards setting, professional or regulatory organizations;

• published views of varying authority on emerging accounting issues issued by standards setting, professional or regulatory organizations;

• general and industry practices widely recognized and prevalent; and

• accounting literature.

Where conflicts exist between the financial reporting framework and the sources from which direction on its application may be obtained, or among the sources that encompass the financial reporting framework, the source with the highest authority prevails.

The requirements of the applicable financial reporting framework determine the form and content of the financial statements. Although the framework may not specify how to account for or disclose all transactions or events, it ordinarily embodies sufficient broad principles that can serve as a basis for developing and applying accounting policies that are consistent with the concepts underlying the requirements of the framework (CAS 200.A6).

Some financial reporting frameworks are fair presentation frameworks, while others are compliance frameworks. Financial reporting frameworks that encompass primarily the financial reporting standards established by an organization that is authorized or recognized to promulgate standards to be used by entities for preparing general purpose financial statements are often designed to achieve fair presentation, for example, International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) (CAS 200.A7).

The requirements of the applicable financial reporting framework also determine what constitutes a complete set of financial statements. In the case of many frameworks, financial statements are intended to provide information about the financial position, financial performance and cash flows of an entity. For such frameworks, a complete set of financial statements would include a balance sheet; an income statement; a statement of changes in equity; a cash flow statement; and related notes. For some other financial reporting frameworks, a single financial statement and the related notes might constitute a complete set of financial statements (CAS 200.A8):

• For example, the International Public Sector Accounting Standard (IPSAS), “Financial Reporting Under the Cash Basis of Accounting” issued by the International Public Sector Accounting Standards Board states that the primary financial statement is a statement of cash receipts and payments when a public sector entity prepares its financial statements in accordance with that IPSAS.

• Other examples of a single financial statement, each of which would include related notes, are:

  • Balance sheet.
  • Statement of income or statement of operations.
  • Statement of retained earnings.
  • Statement of cash flows.
  • Statement of assets and liabilities that does not include owner's equity.
  • Statement of changes in owners' equity. Statement of revenue and expenses.
  • Statement of operations by product lines.

CAS 210 establishes requirements and provides guidance on determining the acceptability of the applicable financial reporting framework. CAS 800 deals with special considerations when financial statements are prepared in accordance with a special purpose framework (CAS 200.A9).

Related Guidance:

See OAG Audit 3042 for guidance on Financial reporting framework.

Management and oversight responsibilities in respect of financial reporting

CAS Guidance

The financial statements subject to audit are those of the entity, prepared by management of the entity with oversight from those charged with governance. CASs do not impose responsibilities on management or those charged with governance and do not override laws and regulations that govern their responsibilities. However, an audit in accordance with CASs is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged certain responsibilities that are fundamental to the conduct of the audit. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities (CAS 200.4).

Law or regulation may establish the responsibilities of management and, where appropriate, those charged with governance in relation to financial reporting. However, the extent of these responsibilities, or the way in which they are described, may differ across jurisdictions. Despite these differences, an audit in accordance with CASs is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged and understand that they have responsibility (CAS 200.A2):

(a)   for the preparation of the financial statements in accordance with the applicable financial reporting framework, including, where relevant, their fair presentation;

(b)   for such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

(c)   to provide the auditor with:

The preparation of the financial statements by management and, where appropriate, those charged with governance requires (CAS 200.A3):

• the identification of the applicable financial reporting framework, in the context of any relevant laws or regulations;
• the preparation of the financial statements in accordance with that framework; and
• the inclusion of an adequate description of that framework in the financial statements.

The preparation of the financial statements requires management to exercise judgment in making accounting estimates that are reasonable in the circumstances, as well as to select and apply appropriate accounting policies. These judgments are made in the context of the applicable financial reporting framework.

Because of the significance of the premise to the conduct of an audit, the auditor is required to obtain the agreement of management and, where appropriate, those charged with governance that they acknowledge and understand that they have the responsibilities set out in CAS 200.A2 as a precondition for accepting the audit engagement (CAS 200.A10).

OAG Guidance

Those charged with governance are responsible for corporate governance and for transparency in their public reporting. This means getting internal and external information right. Whilst retaining ultimate responsibility, those charged with governance delegate operational responsibility to management. Entity management teams should have all significant business activities, including financial reporting processes, under control.

Our audit methodology first looks toward a broad and deep understanding of an entity's performance, then to determining if the financial statements prepared by management convey a consistent picture of the entity's performance with clarity, in accordance with GAAP, as well as in compliance with legislative authorities in all significant respects.

Ultimately, the government must report fully on its performance by submitting financial information to the House of Commons. The information is intended to provide members of Parliament with the information needed to hold the government to account. The OAG audits government operations and provides objective information and advice to Parliament that can aid in holding the government to account.

Related Guidance:

See OAG Audit 3040 for guidance on engagement letters.

See OAG Audit 9050 for guidance on management representations.

Considerations for public sector entities

CAS Guidance

The mandates for audits of the financial statements of public sector entities may be broader than those of other entities. As a result, the premise, relating to management's responsibilities, on which an audit of the financial statements of a public sector entity is conducted may include additional responsibilities, such as the responsibility for the execution of transactions and events in accordance with law, regulation or other authority (CAS 200.A11).