AA2 - Regulatory Framework for Assurance

Athabasca University, Athabasca **We aren't endorsed by this school
ACCT 460
Oct 17, 2023
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Chp 2 - Regulatory Framework for Assurance Standard Setting Standard Setting Process - The accounting profession and regulatory bodies go to great lengths to ensure the credibility of audit work. - In Canada, the Auditing and Assurance Standards Board (AASB) is an independent board responsible for setting auditing and assurance standards. - The AASB has set the Canadian Auditing Standards (CASs), which were adapted from the International Standards on Auditing (ISAs) developed by the International Auditing and Assurance Standards Board (IAASB), and constitute Canadian generally accepted auditing standards (GAAS) - These standards form an accepted set of standards that apply to all audits of historical financial information where audit assurance is provided. - The standards help to ensure that an auditor's actions and reports are accurate, consistent, and verifiable. - By following the standards, it also helps to maintain the professions reputation of providing high-quality services. - In addition, other regulatory bodies contribute to assurance through legislation and regulations. - Canada has adopted the use of the ISAs. - When a new exposure draft for an ISA is issued, it is reviewed by the AASB to see if any changes are needed to apply this standard in the Canadian context. - This standard is then posted as an exposure draft by the AASB. - A similar process is followed for setting a new CAS. - For standards that are specific to a Canadian context, the AASB obtains stakeholder input to identify possible areas for standards. - Stakeholders include public accountants, financial statement preparers, members of the public, investors, analysts, bond rating agencies, and creditors, boards and audit committees, governments, regulators. - The AASB then identifies which areas need proposals, develops proposals, and creates a statement of principles for each project. - Statements of principles are released for public comment. - The AASB then prepares an exposure draft after considering feedback received on each statement of principles. - Once approved by the AASB, the exposure draft is released for public comment and comments received are reviewed. - As long as the exposure draft obtains sufficient support, it will be approved as a final standard. - If it does not receive sufficient stakeholder support, it will be revised, and a re-exposure draft will be issued. - Approval of a final standard or practice statement will typically be accompanied by a document that explains the basis of conclusions reached. Audit and Assurance Regulatory Framework in Canada
Canadian Securities Administrators and the Canadian Public Accountability Board - In Canada, provinces and territories are responsible for securities regulations. - The provinces and territories created the Canadian Securities Administrators (CSA) to develop a way to harmonize securities regulation across Canada, including regulations for disclosure requirements of reporting issuers. - A reporting issuer is a company that must file financial statements with one or more provincial securities commissions (for example, a public company) - The CSA also requires reporting issuers to file annual audited financial statements in accordance with Canadian Generally Accepted Accounting Principles, which is IFRS for reporting issuers. - The CSA requires that auditors of reporting issuers be a registered member and be in good standing with the Canadian Public Accountability Board (CPAB) - The CPAB is the national body responsible for the regulation of public accounting firms that audit Canadian reporting issuers. - Through effective regulation and by promoting high-quality, independent auditing, the CPAB contributes to public confidence in the integrity of financial reporting by Canadian public companies. - The CPAB inspects auditors of reporting issuers. - The inspection frequency varies depending on how many reporting issuer clients the accounting firm has and can range from annual inspections (for firms with 100 or more reporting issuer clients) to every two years (for firms with between 50 and 99 reporting issuer clients) to every three years (for firms with fewer than 50 reporting issuer clients). - CPAB reviews many areas of the firm during these inspections, include: o Policies and procedures o Independence and ethics o Human resources and professional development o Quality monitoring o Audit file documentation Issues discovered during a CPAB inspection. - If the CPAB inspection uncovers any issues, the firm must provide a written response to the inspection findings. - Typically, when there is an issue, the CPAB will require the firm to perform more audit work in the current year, to ensure that the financial statements are not materially misstated. - The firm will be required to provide the CPAB with the evidence and results of the additional audit work. - Any recommendations made by CPAB from the inspections must be implemented by the audit firm; otherwise, there may be disciplinary action. - The CPAB can impose three types of disciplinary measures: a requirement, a restriction, or a sanction (with each measure escalating in severity). o Requirement: The information and disciplinary action remain private between the CPAB and the audit firm.
o Restriction: Where the firm's reporting issuers are registered, the audit firm must notify the Canadian securities regulators of the disciplinary action. o Sanction: The audit firm must also notify all of its reporting issuers' audit committees of the disciplinary action. - Common types of disciplinary measures may include prohibiting the firm from taking on any new reporting issuer audits, requiring the firm to engage an external monitor to review its audit work prior to releasing an opinion, or requiring partners and staff to take training in areas where the CPAB has deemed them to be deficient. Auditing and Assurance Standards Oversight Council - AASOC was developed to provide independent input and focus to the AASB, which is responsible for setting the auditing and assurance standards for Canadian financial reporters. - The AASOC oversees the activities of the AASB, provides input into the creation of standards, and offers a user's perspective on these standards. - Has no less than 13 and no more than 17 voting members who are chosen mainly from outside the auditing profession. - Aside from financial statement auditors, members consist of users and preparers of financial information. - The AASOC is funded by CPA Canada as it provides oversight of the auditing and assurance standards it issues through the AASB. - The AASB's performance is regularly monitored and evaluated by the AASOC to ensure that it adheres to its objectives and that standards are being created that meet the priorities and goals established for improving the quality of public financial reporting. Implications of Increased Regulation for Assurance Engagements - This high level of regulation is intended to create a more consistent platform from which sound investment decisions can be made, but no amount of market regulation can completely remove the possibility of loss. - Issues outside of a company's financial performance, such as new competition in a company's industry, will always exist and create a risk when someone invests in a company. - The audit itself cannot always identify risks associated with environmental or economic factors. - It should, however, be able to identify risks arising from the possibility that a company may not be a going concern or from the possibility that a company's key management may be committing illegal acts. - In the end, standards, rules, and regulations narrow the expectation gap but do not eliminate it completely, so auditors must always be aware of its existence. - Increased regulation also comes with an increased cost. - Audit firms must recoup these costs through their fees, which ultimately are passed on to shareholders, resulting in lower returns on the shareholders' investment. - Like any economic decision, there comes a point of diminishing gains on additional regulation costs. - It is possible that the audit function could be over-regulated and that the additional costs to reduce information risk are not warranted.
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