Annual Audit Manual

COPYRIGHT NOTICE — This document is intended for internal use. It cannot be distributed to or reproduced by third parties without prior written permission from the Copyright Coordinator for the Office of the Auditor General of Canada. This includes email, fax, mail and hand delivery, or use of any other method of distribution or reproduction. CPA Canada Handbook sections and excerpts are reproduced herein for your non-commercial use with the permission of The Chartered Professional Accountants of Canada (“CPA Canada”). These may not be modified, copied or distributed in any form as this would infringe CPA Canada’s copyright. Reproduced, with permission, from the CPA Canada Handbook, The Chartered Professional Accountants of Canada, Toronto, Canada.

3051 Initial audit engagements
Apr-2018

In This Section

Definitions

Communication with predecessor auditor

New audit engagement considerations

CAS Objective

In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether (CAS 510.3):

(a) Opening balances contain misstatements that materially affect the current period’s financial statements; and

(b) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are appropriately accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Definitions

CAS Requirement

For the purposes of the CASs, the following terms have the meanings attributed below (CAS 510.4):

  • (a)   Initial audit engagement – An engagement in which either:

    • (i)   The financial statements for the prior period were not audited; or
    • (ii)   The financial statements for the prior period were audited by a predecessor auditor.

  • (b)   Opening balances – Those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments.

  • (c)   Predecessor auditor – The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and who has been replaced by the current auditor.

Communication with predecessor auditor

CAS Requirement

The auditor shall undertake the following activities prior to starting an initial audit: communicating with the predecessor auditor, where there has been a change of auditors, in compliance with relevant ethical requirements (CAS 300.13(b)).

CAS Guidance

The purpose and objective of planning the audit are the same whether the audit is an initial or recurring engagement. However, for an initial audit, the auditor may need to expand the planning activities because the auditor does not ordinarily have the previous experience with the entity that is considered when planning recurring engagements. For an initial audit engagement, additional matters the auditor may consider in establishing the overall audit strategy and audit plan include the following (CAS 300.A24):

  • Unless prohibited by law or regulation, arrangements to be made with the predecessor auditor, for example, to review the predecessor auditor’s working papers.

  • Any major issues (including the application of accounting principles or of auditing and reporting standards) discussed with management in connection with the initial selection as auditor, the communication of these matters to those charged with governance and how these matters affect the overall audit strategy and audit plan.

  • The audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances.

  • Other responses designed and implemented by the firm for initial audit engagements (e.g., the firm’s system of quality management may include responses that require another partner or individual with appropriate authority to review the overall audit strategy prior to commencing significant audit procedures or to review reports prior to their issuance).

OAG Guidance

Understand the reason for the change in auditor and determine the impact on our client acceptance assessment, audit strategy, and audit plan. Obtain such an understanding by communicating with the predecessor auditor, holding discussions with management, and reviewing the predecessor auditor’s opinion for any modifications. Refer to OAG Audit 3011 for details on client acceptance policy and for client acceptance implementation.

See OAG Audit 1031 for guidance on relationship checking and conflicts of interest, OAG Audit 3043 for guidance on engagement letters and OAG Audit 3081 for required consultations relevant to initial audit engagements.

New audit engagement considerations

OAG Guidance

The process for gaining an understanding of the entity, making audit risk assessments, and developing the audit strategy and plan is naturally more involved for new audit engagements. The client acceptance process and the proposal process (where applicable) are integral to the development of an appropriate information base for a new client. Build on that information base, reflect in the audit strategy, and plan an appropriate risk assessment and an adequate understanding of:

  • the entity’s business and industry;
  • the entity’s business objectives and related risks;
  • the relevant accounting, reporting, and regulatory matters;
  • the control environment and monitoring of controls; and
  • the information systems.

Audit Tip—New audit engagements provide us with our first interactions with the client and its personnel. Develop rapport early in the relationship by initiating discussions with key members of the management team. Make every member of the client team feel like a valued customer through everyday interactions.