, Solution manual For Auditing A Practical
Approach 4e Canadian Moroney
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Solutions Manual
to accompany
Auditing: A Practical
Approach
Fourth Canadian Edition
by
Robyn Moroney
Fiona Campbell
Jane Hamilton
Valerie Warren
CHAPTER 1
Introduction and Overview of Audit and Assurance
John Wiley & Sons Canada, Ltd.
2021
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-1
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Chapter 1
Introduction and Overview of Audit and Assurance
SOLUTIONS TO REVIEW QUESTIONS
REVIEW QUESTION 1.1
In the financial reporting context, “assurance” relates to the audit or review of an entity’s
financial statements.
An audit provides reasonable assurance about the fair presentation of the financial state-
ments, while a review provides limited assurance. The audit contains a positive expression
of opinion (e.g., ”in our opinion the accompanying financial statements present fairly, in all
material respects….”, while the review contains a negative expression of their conclusion
(e.g., “nothing has come to our attention that causes us to believe that the financial state-
ments do not present fairly….”.
The practitioner is an auditor working in public practice providing assurance on financial
statements of publicly listed companies, or other entities. Intended users are the people for
whom the provider prepares their report (e.g., the shareholders). The responsible or ac-
countable party is the person or organization (e.g., a company) responsible for the prepa-
ration of the subject matter (e.g., the financial statements).
An “assurer” must have the knowledge and expertise to assess the fairness of the informa-
tion being presented by the preparers. Auditors of financial statements need to be trained
accountants with detailed knowledge about the complex technical accounting and disclo-
sure issues required to assess the choices made by the financial statement preparers.
When undertaking an audit, the auditor should use professional scepticism, professional
judgement, and due care.
Auditors should be independent of the client. Independent auditors have no incentives to
aid the entity in presenting their results in the best possible light. They are concerned with
ensuring that the information contained in the financial statements is reliable and free from
any significant (material) misstatements (error or fraud). A user needs to believe that the
auditor is acting independently. This means that not only should auditors be independent
(i.e., not have any undue personal or financial incentive to protect the client), auditors should
avoid doing anything that would cause a reasonable person to doubt their independence.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-2
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
REVIEW QUESTION 1.2
The users of the financial statements issued by a large listed public company include share-
holders, customers, suppliers, employees, lenders, competitors, and government agencies.
They need information that will help them evaluate the following:
• Future financial performance of the company (including profitability, liquidity, and
solvency
• Whether the company has overseas operations and the nature of their activities in
those countries (e.g., to evaluate exposure to foreign exchange risk and the risk to
the company due to a change in local economic conditions)
• Possible lack of compliance with various laws and regulations, whether the com-
pany (and its industry) need government support.
• Investors are concerned with the value of their investment, employees with their job
security, customers with whether the company is likely to remain in business long
enough to honour warranties, suppliers with whether they will be paid, lenders with
the risk to their loans, competitors with the health of their rivals, and government
agencies will be interested in taxes, tariffs, industry support, and economic growth.
Users of a sporting team’s financial statements are likely to be interested in the following:
• Condition and performance of the team (its solvency)
• Whether it is investing in physical facilities, player payments, etc.
• Whether the sporting team supports local businesses and community groups.
Although sports teams are often companies limited by guarantee and have members, the
members are usually unable to trade their interest in the team. Therefore, users of a sport-
ing team’s financial statements are not concerned about profitability for its own sake, but
whether it helps the team pay its players and expand its facilities. Creditors and lenders will
be interested in the likelihood that they will be repaid. Government will be interested with
sporting and community concerns, and whether any applicable taxes are being paid.
REVIEW QUESTION 1.3
Audits are intended to provide the users of the audit report with a positive expression of
opinion regarding the financial statements. An audit is performed using a risk-based ap-
proach in order to perform procedures to obtain sufficient and appropriate audit evidence to
reduce the audit risk to an acceptably low level. However, an auditor cannot review 100%
of the transactions of an organization, and for that reason, while they can provide an opin-
ion, they cannot provide absolute assurance. Other limitations include the use of profes-
sional judgement, human error, or even fraudulent activities from responsible parties or in
some cases perhaps even the auditor.
REVIEW QUESTION 1.4
A performance audit (value for money audit, operational audit, or efficiency audit) is an as-
sessment of the economy, efficiency, and effectiveness of an organization’s operations. It
can be conducted internally (by internal audit) or externally (by an audit firm) and across the
entire organization or for part of an organization.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-3
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Management may request a performance audit (operational audit) of its own company (or
part thereof) in order to assess the economy, efficiency, and effectiveness of the organiza-
tion. Ideally, the audit would identify issues that need to be addressed in order to increase
the performance of the division or company. For example, the audit could examine a logis-
tics department. It would assess the cost of running the department, the number of deliv-
eries per input (such as labour hours or vehicle hours), and indicators of delivery on time to
the correct address.
A performance audit could be conducted on a government department or agency as part of
the process of accountability to the public. Stakeholders of government entities are usually
seen to be more interested in economy, efficiency, and effectiveness than in profit, or sur-
plus. Performance auditing can expose poor practices, or even corruption, in an organiza-
tion. Performance auditing can provide information on the implementation of government
policies. Regular performance auditing of government entities can help build trust between
the government and its citizens.
REVIEW QUESTION 1.5
Internal auditors are employees of the company, and therefore cannot be completely inde-
pendent of the company. However, it is possible to increase the independence of the inter-
nal audit department through means such as funding, terms of reference, and lines of re-
porting.
A well-funded internal audit department can investigate more issues and spend more time
on each investigation, potentially increasing the chance of discovering fraud and other prob-
lems. An internal audit department with a small budget is likely to have fewer and less qual-
ified staff (because they will be lower paid), and will have to make compromises on the is-
sues to be investigated.
An internal audit department with wide terms of reference has the freedom to pursue the
issues that the audit staff believe are most important or create the most risk for the orga-
nization. A department with narrow terms of reference could be limited to investigating only
certain matters, or must seek the approval of higher levels of management before com-
mencing any investigation.
If the internal audit department reports to the CFO, it is possible that the CFO will prevent
some issues from reaching other members of the management team, or the board of direc-
tors. Often, the problems will be within the CFO’s department, creating a conflict of interest
for the CFO when deciding whether to report the issue more widely. An internal audit de-
partment that reports directly to the audit committee is outside the normal lines of manage-
ment and reporting, thus being more independent. The audit committee is part of the board
of directors. Therefore, reporting to the audit committee increases the chance that the high-
est level of the organization is aware of the problems and will approve the investigation. The
audit committee also deals with the external auditor. If the internal auditor reports directly to
the audit committee, it can communicate the issues to the external auditor and ask them to
consider them, where relevant, as part of the financial statement audit.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-4
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Not all companies have an audit committee. Where the audit committee does not exist, the
internal auditor could report directly to the full board of directors.
REVIEW QUESTION 1.6
Reasonable assurance is provided when an auditor provides a positive opinion, after ob-
taining sufficient and appropriate audit evidence, that the subject matter is fairly presented.
Audits can be performed on a variety of subject matters; however, the most common is
financial information in the form of financial statements. Reasonable assurance provides a
high level of assurance on the reliability of the subject matter; however, because of its in-
herent limitations, it cannot provide absolute assurance. Those limitations include the use
of professional judgement used in order to bring the audit risk to an acceptably low level as
well as the fact that an auditor cannot review 100% of the subject matter. The assurance is
generally provided in the form of an opinion in an audit report. (See 1.5 Different Audit Opin-
ions for further details).
REVIEW QUESTION 1.7
As defined in CAS 706 para. 7, an emphasis of matter paragraph means “A paragraph included
in the auditor’s report that refers to a matter appropriately 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.”
An emphasis of matter paragraph draws the attention of the reader to an issue that the au-
ditor believes has been adequately and accurately explained in a note to the financial state-
ments. The purpose of the paragraph is to ensure that the reader pays appropriate attention
to the issue when reading the financial statements. The audit report remains unmodified
and the user of the financial statements can still rely on the information contained in the
financial statements.
The usual circumstance that would warrant an emphasis of matter paragraph in the audi-
tor’s report is the existence of a significant uncertainty, the resolution of which may mate-
rially affect the financial statements.
From CAS 706:
A4. Examples of circumstances where the auditor may consider it necessary to include an
emphasis of matter paragraph are:
• An uncertainty relating to the future outcome of exceptional litigation or regulatory
action.
• A significant subsequent event that occurs between the date of the financial state-
ments and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard (for example, a
new Canadian generally accepted accounting principle) that has a material effect on
the financial statements.
• A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-5
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
CAS 706 stresses that the inclusion of an emphasis of matter paragraph in the auditor’s
report does not affect the auditor’s opinion. An emphasis of matter can be included in an
unmodified auditor’s report or a qualified auditor’s report (see appendices 3 and 4 in CAS
706).
REVIEW QUESTION 1.8
As there are many users relying on the opinion in an audit report, an auditor has respon-
sibilities when providing such an opinion. The auditor’s responsibilities include professional
scepticism, professional judgement, and due care.
Professional scepticism is demonstrated when an auditor keeps a questioning mind. For
example, an auditor should not only rely on management assertions as there could be bias
present; therefore, the auditor should obtain other corroborative evidence in order to con-
clude that management representations are reasonable.
An auditor has the responsibility to exercise professional judgement. They should use their
expertise, knowledge, and training. Past experiences as well as instinct should not be ig-
nored. If they feel they lack the professional judgement required, an auditor should take
appropriate action such as finding the appropriate expertise or not accepting the engage-
ment.
Due care is exercised by an auditor by being diligent, applying technical and statute-backed
standards, and by thoroughly documenting the work performed.
REVIEW QUESTION 1.9
The audit expectation gap occurs when there is a difference between the expectations of
assurance providers and financial statement users. The gap occurs when user beliefs do
not align with what an auditor has actually done. In particular, the gap is caused by unre-
alistic user expectations, such as:
• The auditor is providing complete assurance
• The auditor is guaranteeing the future viability of the entity
• An unmodified (clean) audit opinion is an indicator of complete accuracy
• The auditor will definitely find any fraud
• The auditor has checked all transactions.
The reality is that:
• An auditor provides reasonable assurance
• The audit does not guarantee the future viability of the entity
• An unmodified opinion indicates that the auditor believes that there are no material
(significant) misstatements (errors or fraud) in the financial statements
• The auditor will assess the risk of fraud and conduct tests to try to uncover any fraud,
but there is no guarantee that they will find fraud, should it have occurred
• The auditor tests a sample of transactions.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-6
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
The audit expectation gap can be reduced by:
• Auditors performing their duties appropriately, complying with auditing standards,
and meeting the minimum standards of performance that should be expected of all
auditors
• Peer reviews of audits to ensure that auditing standards have been applied correctly
• Auditing standards being reviewed and updated on a regular basis to enhance the
work being done by auditors
• Education of the public
• Enhanced reporting to explain what processes have been followed in arriving at an
audit opinion (reasonable assurance) or a review opinion (limited assurance) (sig-
nificant improvements have been introduced by standard setters improving assur-
ance reporting)
• Assurance providers reporting accurately the level of assurance being provided
(reasonable, limited, or none).
The audit expectation gap is represented in figure 1.7.
REVIEW QUESTION 1.10
The two main bodies that regulate auditors are the Canadian Securities Administrators
(CSA) and the Canadian Public Accountability Board (CPAB).
CPAB registers auditors for public companies, processes annual statements from regis-
tered auditors, enforces independence requirements, and provides a whistleblowing facility
for the reporting of contraventions of the appropriate Corporations Acts. CPAB conducts an
audit inspection program to report on audit quality and make recommendations for contin-
ued improvement. CPAB visits a selection of firms annually to gain an understanding of their
policies and procedures in relation to their independence, audit quality, methodologies, and
training programs.
CPAB also responds to allegations that an auditor has breached the applicable Corpora-
tions Act or the standards set out by the Auditing and Assurance Standards Board (AASB).
The CPAB, and AASB will be involved when it is believed an auditor has not carried out their
duties properly, is not a fit and proper person, is subject to disqualification, or should not
remain registered for some other reason. In response, they may cancel or suspend the
individual’s registration, give the individual a warning, or ask them to make an undertaking
to improve their conduct.
The inspection process concentrates on an audit firm’s compliance with auditing standards,
and their independence and quality control systems. The process includes
• Reviewing and undertaking limited testing of the firm’s independence and quality
control systems
• Interviewing the leaders of the audit firm, human resources personnel, and se-
lected partners and staff
• Examining the firm’s audit methodology for compliance with auditing standards
• Reviewing the conduct of aspects of selected audit and review engagements
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-7
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
The program finishes with an exit meeting and CPAB sends the audit firm a confidential
report of their findings. CPAB publishes a public report summarizing all their findings.
CPAB – Practice Inspections
• In accordance with CPAB's mission, they have developed a program of quality in-
spections which covers all firms that audit reporting issuers who issue securities to
the public in Canada and are subject to the rules of provincial or territorial securi-
ties commissions.
• Registered firms that audit reporting issuers are subject to inspection by CPAB.
Their current practice inspection program selects firms for inspection on a cycle
ranging from one to three years according to certain criteria. Annually, CPAB moni-
tors the ongoing effectiveness of its practice inspection program and publishes a
report highlighting inspection findings from the current year as well as trends relat-
ing to audit quality.
• As part of their inspection process, CPAB has the right to take a disciplinary action
against firms or individuals that CPAB has determined did not perform audits in ac-
cordance with professional standards.
(see http://www.cpab-ccrc.ca/ for further information)
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-8
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Approach 4e Canadian Moroney
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Solutions Manual
to accompany
Auditing: A Practical
Approach
Fourth Canadian Edition
by
Robyn Moroney
Fiona Campbell
Jane Hamilton
Valerie Warren
CHAPTER 1
Introduction and Overview of Audit and Assurance
John Wiley & Sons Canada, Ltd.
2021
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-1
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Chapter 1
Introduction and Overview of Audit and Assurance
SOLUTIONS TO REVIEW QUESTIONS
REVIEW QUESTION 1.1
In the financial reporting context, “assurance” relates to the audit or review of an entity’s
financial statements.
An audit provides reasonable assurance about the fair presentation of the financial state-
ments, while a review provides limited assurance. The audit contains a positive expression
of opinion (e.g., ”in our opinion the accompanying financial statements present fairly, in all
material respects….”, while the review contains a negative expression of their conclusion
(e.g., “nothing has come to our attention that causes us to believe that the financial state-
ments do not present fairly….”.
The practitioner is an auditor working in public practice providing assurance on financial
statements of publicly listed companies, or other entities. Intended users are the people for
whom the provider prepares their report (e.g., the shareholders). The responsible or ac-
countable party is the person or organization (e.g., a company) responsible for the prepa-
ration of the subject matter (e.g., the financial statements).
An “assurer” must have the knowledge and expertise to assess the fairness of the informa-
tion being presented by the preparers. Auditors of financial statements need to be trained
accountants with detailed knowledge about the complex technical accounting and disclo-
sure issues required to assess the choices made by the financial statement preparers.
When undertaking an audit, the auditor should use professional scepticism, professional
judgement, and due care.
Auditors should be independent of the client. Independent auditors have no incentives to
aid the entity in presenting their results in the best possible light. They are concerned with
ensuring that the information contained in the financial statements is reliable and free from
any significant (material) misstatements (error or fraud). A user needs to believe that the
auditor is acting independently. This means that not only should auditors be independent
(i.e., not have any undue personal or financial incentive to protect the client), auditors should
avoid doing anything that would cause a reasonable person to doubt their independence.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-2
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
REVIEW QUESTION 1.2
The users of the financial statements issued by a large listed public company include share-
holders, customers, suppliers, employees, lenders, competitors, and government agencies.
They need information that will help them evaluate the following:
• Future financial performance of the company (including profitability, liquidity, and
solvency
• Whether the company has overseas operations and the nature of their activities in
those countries (e.g., to evaluate exposure to foreign exchange risk and the risk to
the company due to a change in local economic conditions)
• Possible lack of compliance with various laws and regulations, whether the com-
pany (and its industry) need government support.
• Investors are concerned with the value of their investment, employees with their job
security, customers with whether the company is likely to remain in business long
enough to honour warranties, suppliers with whether they will be paid, lenders with
the risk to their loans, competitors with the health of their rivals, and government
agencies will be interested in taxes, tariffs, industry support, and economic growth.
Users of a sporting team’s financial statements are likely to be interested in the following:
• Condition and performance of the team (its solvency)
• Whether it is investing in physical facilities, player payments, etc.
• Whether the sporting team supports local businesses and community groups.
Although sports teams are often companies limited by guarantee and have members, the
members are usually unable to trade their interest in the team. Therefore, users of a sport-
ing team’s financial statements are not concerned about profitability for its own sake, but
whether it helps the team pay its players and expand its facilities. Creditors and lenders will
be interested in the likelihood that they will be repaid. Government will be interested with
sporting and community concerns, and whether any applicable taxes are being paid.
REVIEW QUESTION 1.3
Audits are intended to provide the users of the audit report with a positive expression of
opinion regarding the financial statements. An audit is performed using a risk-based ap-
proach in order to perform procedures to obtain sufficient and appropriate audit evidence to
reduce the audit risk to an acceptably low level. However, an auditor cannot review 100%
of the transactions of an organization, and for that reason, while they can provide an opin-
ion, they cannot provide absolute assurance. Other limitations include the use of profes-
sional judgement, human error, or even fraudulent activities from responsible parties or in
some cases perhaps even the auditor.
REVIEW QUESTION 1.4
A performance audit (value for money audit, operational audit, or efficiency audit) is an as-
sessment of the economy, efficiency, and effectiveness of an organization’s operations. It
can be conducted internally (by internal audit) or externally (by an audit firm) and across the
entire organization or for part of an organization.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-3
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Management may request a performance audit (operational audit) of its own company (or
part thereof) in order to assess the economy, efficiency, and effectiveness of the organiza-
tion. Ideally, the audit would identify issues that need to be addressed in order to increase
the performance of the division or company. For example, the audit could examine a logis-
tics department. It would assess the cost of running the department, the number of deliv-
eries per input (such as labour hours or vehicle hours), and indicators of delivery on time to
the correct address.
A performance audit could be conducted on a government department or agency as part of
the process of accountability to the public. Stakeholders of government entities are usually
seen to be more interested in economy, efficiency, and effectiveness than in profit, or sur-
plus. Performance auditing can expose poor practices, or even corruption, in an organiza-
tion. Performance auditing can provide information on the implementation of government
policies. Regular performance auditing of government entities can help build trust between
the government and its citizens.
REVIEW QUESTION 1.5
Internal auditors are employees of the company, and therefore cannot be completely inde-
pendent of the company. However, it is possible to increase the independence of the inter-
nal audit department through means such as funding, terms of reference, and lines of re-
porting.
A well-funded internal audit department can investigate more issues and spend more time
on each investigation, potentially increasing the chance of discovering fraud and other prob-
lems. An internal audit department with a small budget is likely to have fewer and less qual-
ified staff (because they will be lower paid), and will have to make compromises on the is-
sues to be investigated.
An internal audit department with wide terms of reference has the freedom to pursue the
issues that the audit staff believe are most important or create the most risk for the orga-
nization. A department with narrow terms of reference could be limited to investigating only
certain matters, or must seek the approval of higher levels of management before com-
mencing any investigation.
If the internal audit department reports to the CFO, it is possible that the CFO will prevent
some issues from reaching other members of the management team, or the board of direc-
tors. Often, the problems will be within the CFO’s department, creating a conflict of interest
for the CFO when deciding whether to report the issue more widely. An internal audit de-
partment that reports directly to the audit committee is outside the normal lines of manage-
ment and reporting, thus being more independent. The audit committee is part of the board
of directors. Therefore, reporting to the audit committee increases the chance that the high-
est level of the organization is aware of the problems and will approve the investigation. The
audit committee also deals with the external auditor. If the internal auditor reports directly to
the audit committee, it can communicate the issues to the external auditor and ask them to
consider them, where relevant, as part of the financial statement audit.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-4
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
Not all companies have an audit committee. Where the audit committee does not exist, the
internal auditor could report directly to the full board of directors.
REVIEW QUESTION 1.6
Reasonable assurance is provided when an auditor provides a positive opinion, after ob-
taining sufficient and appropriate audit evidence, that the subject matter is fairly presented.
Audits can be performed on a variety of subject matters; however, the most common is
financial information in the form of financial statements. Reasonable assurance provides a
high level of assurance on the reliability of the subject matter; however, because of its in-
herent limitations, it cannot provide absolute assurance. Those limitations include the use
of professional judgement used in order to bring the audit risk to an acceptably low level as
well as the fact that an auditor cannot review 100% of the subject matter. The assurance is
generally provided in the form of an opinion in an audit report. (See 1.5 Different Audit Opin-
ions for further details).
REVIEW QUESTION 1.7
As defined in CAS 706 para. 7, an emphasis of matter paragraph means “A paragraph included
in the auditor’s report that refers to a matter appropriately 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.”
An emphasis of matter paragraph draws the attention of the reader to an issue that the au-
ditor believes has been adequately and accurately explained in a note to the financial state-
ments. The purpose of the paragraph is to ensure that the reader pays appropriate attention
to the issue when reading the financial statements. The audit report remains unmodified
and the user of the financial statements can still rely on the information contained in the
financial statements.
The usual circumstance that would warrant an emphasis of matter paragraph in the audi-
tor’s report is the existence of a significant uncertainty, the resolution of which may mate-
rially affect the financial statements.
From CAS 706:
A4. Examples of circumstances where the auditor may consider it necessary to include an
emphasis of matter paragraph are:
• An uncertainty relating to the future outcome of exceptional litigation or regulatory
action.
• A significant subsequent event that occurs between the date of the financial state-
ments and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard (for example, a
new Canadian generally accepted accounting principle) that has a material effect on
the financial statements.
• A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-5
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
CAS 706 stresses that the inclusion of an emphasis of matter paragraph in the auditor’s
report does not affect the auditor’s opinion. An emphasis of matter can be included in an
unmodified auditor’s report or a qualified auditor’s report (see appendices 3 and 4 in CAS
706).
REVIEW QUESTION 1.8
As there are many users relying on the opinion in an audit report, an auditor has respon-
sibilities when providing such an opinion. The auditor’s responsibilities include professional
scepticism, professional judgement, and due care.
Professional scepticism is demonstrated when an auditor keeps a questioning mind. For
example, an auditor should not only rely on management assertions as there could be bias
present; therefore, the auditor should obtain other corroborative evidence in order to con-
clude that management representations are reasonable.
An auditor has the responsibility to exercise professional judgement. They should use their
expertise, knowledge, and training. Past experiences as well as instinct should not be ig-
nored. If they feel they lack the professional judgement required, an auditor should take
appropriate action such as finding the appropriate expertise or not accepting the engage-
ment.
Due care is exercised by an auditor by being diligent, applying technical and statute-backed
standards, and by thoroughly documenting the work performed.
REVIEW QUESTION 1.9
The audit expectation gap occurs when there is a difference between the expectations of
assurance providers and financial statement users. The gap occurs when user beliefs do
not align with what an auditor has actually done. In particular, the gap is caused by unre-
alistic user expectations, such as:
• The auditor is providing complete assurance
• The auditor is guaranteeing the future viability of the entity
• An unmodified (clean) audit opinion is an indicator of complete accuracy
• The auditor will definitely find any fraud
• The auditor has checked all transactions.
The reality is that:
• An auditor provides reasonable assurance
• The audit does not guarantee the future viability of the entity
• An unmodified opinion indicates that the auditor believes that there are no material
(significant) misstatements (errors or fraud) in the financial statements
• The auditor will assess the risk of fraud and conduct tests to try to uncover any fraud,
but there is no guarantee that they will find fraud, should it have occurred
• The auditor tests a sample of transactions.
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-6
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
The audit expectation gap can be reduced by:
• Auditors performing their duties appropriately, complying with auditing standards,
and meeting the minimum standards of performance that should be expected of all
auditors
• Peer reviews of audits to ensure that auditing standards have been applied correctly
• Auditing standards being reviewed and updated on a regular basis to enhance the
work being done by auditors
• Education of the public
• Enhanced reporting to explain what processes have been followed in arriving at an
audit opinion (reasonable assurance) or a review opinion (limited assurance) (sig-
nificant improvements have been introduced by standard setters improving assur-
ance reporting)
• Assurance providers reporting accurately the level of assurance being provided
(reasonable, limited, or none).
The audit expectation gap is represented in figure 1.7.
REVIEW QUESTION 1.10
The two main bodies that regulate auditors are the Canadian Securities Administrators
(CSA) and the Canadian Public Accountability Board (CPAB).
CPAB registers auditors for public companies, processes annual statements from regis-
tered auditors, enforces independence requirements, and provides a whistleblowing facility
for the reporting of contraventions of the appropriate Corporations Acts. CPAB conducts an
audit inspection program to report on audit quality and make recommendations for contin-
ued improvement. CPAB visits a selection of firms annually to gain an understanding of their
policies and procedures in relation to their independence, audit quality, methodologies, and
training programs.
CPAB also responds to allegations that an auditor has breached the applicable Corpora-
tions Act or the standards set out by the Auditing and Assurance Standards Board (AASB).
The CPAB, and AASB will be involved when it is believed an auditor has not carried out their
duties properly, is not a fit and proper person, is subject to disqualification, or should not
remain registered for some other reason. In response, they may cancel or suspend the
individual’s registration, give the individual a warning, or ask them to make an undertaking
to improve their conduct.
The inspection process concentrates on an audit firm’s compliance with auditing standards,
and their independence and quality control systems. The process includes
• Reviewing and undertaking limited testing of the firm’s independence and quality
control systems
• Interviewing the leaders of the audit firm, human resources personnel, and se-
lected partners and staff
• Examining the firm’s audit methodology for compliance with auditing standards
• Reviewing the conduct of aspects of selected audit and review engagements
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-7
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
, Moroney, Campbell, Hamilton, Warren Auditing: A Practical Approach, Fourth Canadian Edition
The program finishes with an exit meeting and CPAB sends the audit firm a confidential
report of their findings. CPAB publishes a public report summarizing all their findings.
CPAB – Practice Inspections
• In accordance with CPAB's mission, they have developed a program of quality in-
spections which covers all firms that audit reporting issuers who issue securities to
the public in Canada and are subject to the rules of provincial or territorial securi-
ties commissions.
• Registered firms that audit reporting issuers are subject to inspection by CPAB.
Their current practice inspection program selects firms for inspection on a cycle
ranging from one to three years according to certain criteria. Annually, CPAB moni-
tors the ongoing effectiveness of its practice inspection program and publishes a
report highlighting inspection findings from the current year as well as trends relat-
ing to audit quality.
• As part of their inspection process, CPAB has the right to take a disciplinary action
against firms or individuals that CPAB has determined did not perform audits in ac-
cordance with professional standards.
(see http://www.cpab-ccrc.ca/ for further information)
Solutions Manual Chapter 1: Introduction and overview of audit assurance 1-8
Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
