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Introduction to Audit Related Services
Audit firms are often asked to provide services to clients which do not involve the expression of an opinion on the truth and fairness of the financial statements. For example, the firm might be asked to give assurance that interim financial statements are correctly prepared in a business or they might be asked to prepare the financial statements for a private entity audit client.
Differences between an audit assignment and a non-audit assignment
An audit is a statutory requirement for the majority of entities whereas non audit assignments are usually voluntary.
During an audit, the auditor has an obligation to form an opinion on the truth and fairness of the financial statements and their compliance with local legislation and international financial reporting standards. This will involve the auditor in the following activities:
an assessment of the risks attaching to the business
an assessment of the adequacy of the internal controls
obtaining evidence to confirm the assertions embodied in the financial statements
designing procedures so that there is a reasonable expectation of detecting material errors arising from fraud, and
considering whether the entity is a going concern.
A non audit assignment will not involve these activities. The scope of the work is not laid down in statute so it will be agreed between the entity and the audit firm. Therefore, it is important to agree a detailed engagement letter with the client prior to the commencement of any work.
Objective of a Review Engagement
the objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework (negative assurance).
the auditor should plan and perform the review with an attitude of professional scepticism recognising that circumstances may exist which cause the financial statements to be materially misstated.
for the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient appropriate evidence primarily through enquiry and analytical procedures to be able to draw conclusions.
Scope of a Review
The term “scope of a review” refers to the review procedures deemed necessary in the circumstances to achieve the objective of the review.
The procedures required to conduct a review of financial statements should be determined by the auditor having regard to the requirements of the ISA, relevant professional bodies, legislation, regulation and, where appropriate, the terms of the review engagement and reporting requirements.
a review engagement provides a moderate level of assurance that the information subject to review is free of material misstatement. This is expressed in the form of negative assurance.
Terms of Engagement
the auditor and the client should agree on the terms of the engagement.
the agreed terms would be recorded in an engagement letter or other suitable form such as a contract.
an engagement letter will be of assistance in planning the review work.
it is in the interests of both the auditor and the client that the auditor send an engagement letter documenting the key terms of the appointment.
an engagement letter confirms the auditor’s acceptance of the appointment and helps avoid misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the auditor’s responsibilities and the form of reports to be issued.
matters that would be included in the engagement letter include:
the objective of the service being performed.
management’s responsibility for the financial statements.
the scope of the review, including reference to this international standard on auditing (or relevant national standards or practices).
unrestricted access to whatever records, documentation and other information requested in connection with the review.
a sample of the report expected to be rendered.
the fact that the engagement cannot be relied upon to disclose errors, illegal acts or other irregularities, for example fraud or defalcations, that may exist.
a statement that an audit is not being performed and that an audit opinion will not be expressed. To emphasise this point and to avoid confusion, the auditor may also consider pointing out that a review engagement will not satisfy any statutory or third party requirements for an audit.
the auditor should plan the work so that an effective engagement will be performed.
in planning a review of financial statements, the auditor should obtain or update the knowledge of the business including consideration of the entity’s organisation, accounting systems, operating characteristics and the nature of its assets, liabilities, revenues and expenses.
the auditor needs to possess an understanding of such matters and other matters relevant to the financial statements, for example, a knowledge of the entity’s production and distribution methods, product lines, operating locations and related parties.
the auditor requires this understanding to be able to make relevant enquiries and to design appropriate procedures, as well as to assess the responses and other information obtained.
Work Performed by Others
when using work performed by another auditor or an expert, the auditor should be satisfied that such work is adequate for the purposes of the review.
the auditor should document matters which are important in providing evidence to support the review report, and evidence that the review was carried out in accordance with the ISA.
Procedures and Evidence
the auditor should apply judgement in determining the specific nature, timing and extent of review procedures. The auditor will be guided by such matters as:
any knowledge acquired by carrying out audits or reviews of the financial statements for prior periods.
the auditor’s knowledge of the business including knowledge of the accounting principles and practices of the industry in which the entity operates.
the entity’s accounting systems.
the extent to which a particular item is affected by management judgement.
the materiality of transactions and account balances.
the auditor should apply the same materiality considerations as would be applied if an audit opinion on the financial statements were being given. Although there is a greater risk that misstatements will not be detected in a review than in an audit, the judgement as to what is material is made by reference to the information on which the auditor is reporting and the needs of those relying on that information, not to the level of assurance provided.
Procedures for the review of financial statements will ordinarily include:
obtaining an understanding of the entity’s business and the industry in which it operates.
enquiries concerning the entity’s accounting principles and practices.
enquiries concerning the entity’s procedures for recording, classifying and summarising transactions, accumulating information for disclosure in the financial statements and preparing financial statements.
enquiries concerning all material assertions in the financial statements.
analytical procedures designed to identify relationships and individual items that appear unusual. Such procedures would include:
comparison of the financial statements with statements for prior periods.
comparison of the financial statements with anticipated results and financial position.
study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern based on the entity’s experience or industry averages.
in applying these procedures, the auditor would consider the types of matters that required accounting adjustments in prior periods.
enquiries concerning actions taken at meetings of shareholders, the board of directors, committees of the board of directors and other meetings that may affect the financial statements.
reading the financial statements to consider, on the basis of information coming to the auditor’s attention, whether the financial statements appear to conform with the basis of accounting indicated.
obtaining reports from other auditors, if any and if considered necessary, who have been engaged to audit or review the financial statements of components of the entity.
enquiries of persons having responsibility for financial and accounting matters concerning, for example:
whether all transactions have been recorded.
whether the financial statements have been prepared in accordance with the basis of accounting indicated.
changes in the entity’s business activities and accounting principles and practices.
matters which have arisen in the course of applying the foregoing procedures.
obtaining written representations from management when considered appropriate.
the auditor should enquire about events subsequent to the date of the financial statements that may require adjustment of, or disclosure in, the financial statements.
the auditor does not have any responsibility to perform procedures to identify events occurring after the date of the review report.
if the auditor has reason to believe that the information subject to review may be materially misstated, the auditor should carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to confirm that a modified report is required.
Conclusions and Reporting
the review report should contain a clear written expression of negative assurance.
the auditor should review and assess the conclusions drawn from the evidence obtained as the basis for the expression of negative assurance.
based on the work performed, the auditor should assess whether any information obtained during the review indicates that the financial statements do not give a true and fair view in accordance with the identified financial reporting framework.
the report on a review of financial statements describes the scope of the engagement to enable the reader to understand the nature of the work performed and make it clear that an audit was not performed and, therefore, that an audit opinion is not expressed.
The review report should contain:
opening or introductory paragraph including:
identification of the financial statements on which the review has been performed; and
a statement of the responsibility of the entity’s management and the responsibility of the auditor;
scope paragraph, describing the nature of a review, including:
a reference to the International Standard on Auditing applicable to review engagements, or to relevant national standards or practices;
a statement that a review is limited primarily to enquiries and analytical procedures; and
a statement that an audit has not been performed, that the procedures undertaken provide less assurance than an audit and that an audit opinion is not expressed;
statement of negative assurance;
date of the report;
auditor’s address; and
The review report should:
state that nothing has come to the auditor’s attention based on the review that causes the auditor to believe the financial statements do not give a true and fair view in accordance with the identified financial reporting framework (negative assurance); or
if matters have come to the auditor’s attention, describe those matters that impair a true and fair view in accordance with the identified financial reporting framework including, unless impracticable, a quantification of the possible affect on the financial statements, and either:
express a qualification of the negative assurance provided; or
when the affect of the matter is so material and pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement that the financial statements do not give a true and fair view in accordance with the identified financial reporting framework; or
if there has been a material scope limitation, describe the limitation and either:
express a qualification of the negative assurance provided regarding the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed; or
when the possible effect of the limitation is so significant and pervasive that the auditor concludes that no level of assurance can be provided, not provide any assurance.
The auditor should date the review report as of the date the review is completed, which includes performing procedures relating to events occurring up to the date of the report. However, since the auditor’s responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the review report earlier than the date on which the financial statements were approved by management.
Objective of an Agreed-upon Procedures Engagement
The objective of an agreed-upon procedures engagement is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.
As the auditor simply provides a report on the factual findings of agreed-upon procedures, no assurance is expressed. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work.
The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.
Defining the Terms of the Engagement
The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive copies of the report of factual findings, that there is a clear understanding regarding the agreed-upon procedures and the conditions of the engagement. Matters to be agreed include the:
nature of the engagement including the fact that the procedures performed will not constitute an audit or a review and that accordingly no assurance will be expressed.
stated purpose for the engagement.
identification of the financial information to which the agreed-upon procedures will be applied:
nature, timing and extent of the specific procedures to be applied.
anticipated form of the report of factual findings.
limitations on distribution of the report of factual findings. When such limitation would be in conflict with the legal requirements, if any, the auditor would not accept the engagement.
It is in the interests of both the client and the auditor that the auditor send an engagement letter documenting the key terms of the appointment. An engagement letter confirms the auditor’s acceptance of the appointment and helps avoid misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the auditor’s responsibilities and the form of report to be issued.
Matters that would be included in the engagement letter include:
a listing of the procedures to be performed as agreed between the parties.
a statement that the distribution of the report of factual findings would be restricted to the specified parties who have agreed to the procedures to be performed.
In addition, the auditor may consider attaching to the engagement letter a draft of the type of report of factual findings that will be issued.
The auditor should plan the work so that an effective engagement will be performed.
The auditor should document matters which are important in providing evidence to support the report of factual findings, and evidence that the engagement was carried out in accordance with the ISA and the terms of the engagement.
Procedures and Evidence
The auditor should carry out the procedures agreed upon and use the evidence obtained as the basis for the report of factual findings.
The procedures applied in an engagement to perform agreed-upon procedures may include:
Enquiry and analysis
Re-computation, comparison and other clerical accuracy checks
The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed.
The report of factual findings should contain:
addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures);
identification of specific financial or non-financial information to which the agreed-upon procedures have been applied;
a statement that the procedures performed were those agreed with the recipient;
a statement that the engagement was performed in accordance with the International Standard on Auditing applicable to agreed-upon procedures engagements;
when relevant, a statement that the auditor is not independent of the entity;
identification of the purpose for which the agreed-upon procedures were performed;
a listing of the specific procedures performed;
a description of the auditor’s factual findings including sufficient details of errors and exceptions found;
statement that the procedures performed do not constitute either an audit or a review and, as such, no assurance is expressed;
a statement that, had the auditor performed additional procedures, an audit or a review, other matters might have come to light that would have been reported;
a statement that the report is restricted to those parties that have agreed to the procedures to be performed;
a statement (when applicable) that the report relates only to the elements, financial statements, items or financial and non-financial information specified and that it does not extend to the entity’s financial statements taken as a whole;
date of the report;
reporting accountant’s address; and
reporting accountant’s signature.
Engagements to compile financial information
Objective of a Compilation Engagement
The objective of a compilation engagement is for the accountant to use accounting expertise, as opposed to auditing expertise to collect, classify and summarise financial information. This ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information. The procedures employed are not designed, and do not enable the accountant, to express any assurance on the financial information. However, users of the compiled financial information derive some benefit as a result of the accountant’s involvement because the service has been performed with professional competence and due care.
A compilation engagement would ordinarily include the preparation of financial information (which may or may not be a complete set of financial statements) but may also include the collection, classification and summarisation of other financial information.
In all circumstances, when an accountant’s name is associated with financial information compiled by the accountant, the accountant should issue a report.
5.2.1 Assignment of auditors for conduct of the audit
Normally, no fewer than three auditors, selected by the Executive Director of the Quality Council, conduct an institutional audit. These auditors will be at arm’s length from the institution undergoing the audit. The Executive Director and a member of the Secretariat normally accompany the auditors on their site visit.
5.2.2 Selection of the sample of programs for audit
Auditors independently select programs for audit, typically four undergraduate and four graduate cyclical program reviews. At least one of the undergraduate programs and one of the graduate programs will be a New Program or Major Modifications to an Existing Program approved within the period since the previous audit. The Executive Director authorizes the proposed selection, assuring, for example, a reasonable program mix.
Specific programs may be added to the sample when an immediately previous audit has documented causes for concern, and when so directed in accordance with Framework Section 5.2.5 (b). When the institution itself so requests, specific programs may also be audited.
The auditors may consider, in addition to the required documentation, any additional elements and related documentation stipulated by the institution in its IQAP.
5.2.3 Desk audit of the institutional quality assurance practices
Once every eight years, and in preparation for a scheduled on-site visit, the auditors participate in a desk audit of the institution’s quality assurance practices. Using the institution’s records of the sampled cyclical program reviews, together with associated documents, this audit tests whether the institution’s practice conforms to its own IQAP, as ratified by the Quality Council.
It is essential that the auditors have access to all relevant documents and information to ensure they have a clear understanding of the institution’s practices. The desk audit serves to raise specific issues and questions to be pursued during the on-site visit and to facilitate the conduct of an effective and efficient on-site visit.
The documentation to be submitted for the programs selected for audit will include:
a) All the documents and other information associated with each step of the institution’s IQAP, as ratified by the Quality Council.
b) The record of any revisions of the institution’s IQAP, as ratified by the Quality Council.
Institutions may provide any additional documents at their discretion.
During the desk audit, the auditors will also determine whether or not the institution’s web-based publication of the Executive Summaries, and subsequent reports on the implementation of the review recommendations for the programs included in the current audit, meet the requirements of Framework Section 4.2.6.
The auditors undertake to preserve the confidentiality required for all documentation and communications and meet all applicable requirements of the Freedom of Information and Protection of Privacy Act (FIPPA).
5.2.4 On-site interaction with the institution
After the desk audit, auditors normally visit the institution over two or three days. The principal purpose of the on-site visit is to answer questions and address information gaps that arose during the desk audit. Ultimately, the purpose of the on-site visit is for the auditors to get a sufficiently complete and accurate understanding of the institution’s application of its IQAP so that they can meet their audit responsibilities.
In the course of the site visit, the auditors will speak with those identified by the IQAP as participants and in particular those accountable for various steps, responsibilities, and obligations in the process. The institution, in consultation with the auditors, will establish the program and schedule for these interviews prior to the site visit.
5.2.5 Audit report
a) Following the conduct of an institutional audit, the auditors prepare a report, which:
- Describes the audit methodology and the verification steps used;
- Provides a status report on the program reviews carried out by the institution;
- On the basis of the programs audited, describes the institution’s compliance with its IQAP as ratified by the Quality Council;
- Identifies and records any notably effective policies or practices revealed in the course of the audit of the sampled programs; and
- Where appropriate, makes suggestions and recommendations and identifies causes for concern.
Suggestions will be forward-looking, and are made by auditors when they identify opportunities for the institution to strengthen its quality assurance practices. Suggestions do not convey any mandatory obligations and sometimes are the means for conveying the auditors’ province-wide experience in identifying good, and even on occasion, best practices. Institutions are under no obligation to implement or otherwise respond to the auditors’ suggestions, though they are encouraged to do so.
Recommendations are recorded in the auditors’ report when they have identified failures to comply with the IQAP and/or there is misalignment between the IQAP and the Quality Assurance Framework. The institution must address these recommendations.
Causes for concern In some cases the auditors may identify that there is cause for concern. These may be potential structural weaknesses in quality assurance practices (for example, when, in two or more instances, the auditors identify inadequate follow-up monitoring (as called for in Framework Section 4.2.5[c]); a failure to make the relevant implementation reports to the appropriate statutory authorities (as called for in Framework Section 4.2.6), or the absence of the Manual (as called for in Framework Section 4.2.8).
b) When the auditors have identified, with supporting reason and evidence, cause for concern, it will be reported to the Audit Committee and the institution. Following deliberation, including possible discussion with the institution, the Committee may then recommend that the Quality Council investigate by taking one of the following steps:
- Directing specific attention by the auditors to the issue within the subsequent audit as provided for in Framework Section 5.2.2;
- Scheduling a larger selection of programs for the institution’s next audit; and/or
- Requiring an immediate and expanded institutional audit (further sample) of the respective process(es).
The decision of the Quality Council will be reported to the institution by the Executive Director.
5.2.6 Disposition of the audit report and summary
The auditors prepare a draft report, together with a summary of the principal findings suitable for subsequent publication. The Secretariat provides a copy of these to the institution’s “authoritative contact” identified in Framework Section 4.2.1(b), for comment. This consultation is intended to ensure that the report and associated summary do not contain errors or omissions of fact.
That authority submits a response to the draft report and summary within sixty days. This response becomes part of the official record, and the auditors may use it to revise their report and/or associated summary prior to their submission to the Audit Committee.
The Executive Director submits the final audit report and associated summary, together with the institutional response, to the Audit Committee for consideration and, when necessary, for consultation with the auditors. When satisfied that the auditors followed the required audit procedures correctly and that the university had an appropriate opportunity to respond, the Audit Committee recommends to the Quality Council approval of the report and associated summary. When a report or associated summary is rejected, the Council determines the actions to be taken.
5.2.7 Submission of the audit report to the institution
The Secretariat sends the approved report and associated summary to the institution and to the Ontario Council of Academic Vice-Presidents (OCAV), the Council of Ontario Universities (COU) and the Ministry of Advanced Education and Skills Development (MAESD, formerly the Ministry of Training, Colleges and Universities) for information.
5.2.8 Publication of main audit findings
The Secretariat publishes the approved summary of the overall findings, together with a record of the recommendations on the Quality Council’s website, and sends a copy of both to the institution for publication on its website.
5.2.9 Institutional one-year follow-up
Within a year of the publication of the final audit report, the institution will inform the auditors, through the Secretariat, of the steps it has taken to address the recommendations. The auditors will draft an accompanying commentary on the scope and adequacy of the institution’s response, together with a draft summary of their commentary, suitable for publication. The auditors’ response and summary are then submitted to the Audit Committee for consideration. The Audit Committee will submit a recommendation to the Quality Council on whether or not to accept the institutional one-year follow-up response. When the Audit Committee is not satisfied with the reported institutional response, it recommends to the Quality Council the course of action to be taken.
5.2.10 Web publication of one-year follow-up report
The Secretariat publishes the auditors’ summary of the scope and adequacy of the institution’s response on the Quality Council website and sends a copy to the institution for publication on its website and to OCAV, COU and MAESD for information.
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