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C-PEM Introduction Webinar. Stuart Hartley FCA shartley@focusroi.com. Agenda. C-PEM challenges and solutions Tips for reducing the cost of audits Other changes in C-PEM . Introducing C-PEM Released in June 2010 Volume 1 Core concepts Audits, reviews and compilations

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c pem introduction webinar

C-PEM IntroductionWebinar

Stuart Hartley FCA

shartley@focusroi.com

agenda
Agenda..
  • C-PEM challenges and solutions
  • Tips for reducing the cost of audits
  • Other changes in C-PEM
slide3

Introducing C-PEM

    • Released in June 2010
  • Volume 1 Core concepts
    • Audits, reviews and compilations
  • Volume 2 Practical Guidance

Includes 2 integrated case studies

    • Part A Audits
    • Part B Reviews
    • Part C Compilations
    • Part D Practice Aids (forms, etc. on a CD)
c pem challenges solutions
C-PEM Challenges & Solutions ….
  • Auditing standards have been clarified/revised
      • Major changes
      • The C-PEM Solution
  • Multiple Financial Reporting frameworks
      • Major changes
      • The C-PEM Solution
  • Applying CASs to Micro Sized Entities
      • The C-PEM Solution
  • Reviews, compilations and other
challenge 1
Challenge #1
  • ALL Auditing standards have been clarified -- some revised (Re-written!)
clarified standards
“Clarified” Standards
  • Italics to specific “shalls”
  • New structure for auditing standards
    • Introduction
    • Objectives
    • Definitions
    • Requirements (the auditor shall…)
    • Application and Other Explanatory Material
impact of clarified standards
Impact of Clarified Standards
  • Plus
    • Structure makes them easier to read/use
    • Framework provides a consistent approach
    • “Shalls” make very clear what is required
  • Minus
    • “Shalls” make very clear what is required
    • Standards are more prescriptive
    • Change in practice is required
    • New terminology to learn
the cas structure

t

n

e

e

g

Evaluate the audit

s

m

n

Plan the audit

n

i

s

evidence obtained

t

o

s

r

p

e

o

s

s

p

e

s

e

R

A

R

k

k

Perform

Implement

Prepare the

s

s

i

i

responses

risk assessment

R

R

auditor’s report

to assessed RMM

procedures

The CAS Structure

1. 2. 3

cas 200 overall objectives
CAS 200 - Overall Objectives
  • 200.18
    • The auditor shall comply with all CASs relevant to the audit. A CAS is relevant to the audit when the CAS is in effect and the circumstances addressed by the CAS exist.
  • 200.19
    • The auditor shall have an understanding of the entire text of a CAS, including its application and other explanatory material, to understand its objectives and to apply its requirements properly.
  • 200.21
    • To achieve the overallobjectives of the auditor, the auditor shall use the objectives stated in relevant CASs in planning and performing the audit
tip 1
Tip 1…
  • Read & understand the CAS requirements
    • CICA Handbook Part 1
    • C-PEM Volumes 1 and 2
    • Use of C-PEM Forms and practical aides
    • Staff training courses
    • Webinars, etc.

Applying the new CASs effectively requires an investment to be made

cass with more than 5 new shalls

CAS

CAS Title

Italics

Shalls

New

Old HB

CAS 600

Audits of group financial statements

7

40

33

6930

CAS 700

Forming an opinion/reporting on F/S

12

38

26

5400

CAS 250

Consideration of laws and regulations

3

18

15

5136

CAS540

Estimates

1

16

15

5305

CAS 570

Going concern

0

15

15

N/A

CAS 550

Related Parties

5

18

13

6010

CAS 705

Modifications to the opinion

10

23

13

5510

CSQC1

CANADIAN STANDARD ON QUALITY CONTROL

35

47

12

GSF 1

CAS 210

Agreeing the terms of audit engagements

5

16

11

5110

CAS 710

Comparative information

2

13

11

5701

CAS 530

audit sampling

0

10

10

N/A

CAS 510

Initial audit engagements — opening balances

0

9

9

various

CAS 560

Subsequent events

3

12

9

6550

CAS 240

Fraud in an audit of financial statements

28

36

8

5135

CAS 450

Evaluation of misstatements identified

3

11

8

5142

CAS 260

Communication with those charged with governance

7

13

6

5751

CAS 505

External Confirmations

4

10

6

5303

CAS 330

The auditor's responses to assessed risks

21

26

5

5143

CAS 580

Written representations

7

12

5

5370

CASs with more than 5 new “shalls”
objective for estimates
Objective for Estimates

The objective of the auditor is to obtain sufficient appropriate audit evidence about whether:

(a) accounting estimates, including fair value accounting estimates, in the financial statements, whether recognized or disclosed, are reasonable; and

(b) related disclosures in the financial statements are adequate, in the context of the applicable financial reporting framework.

slide15

5305

Estimates

CAS540

Current

Subject matter

"Shalls"

Italics

Risk Assessment Procedures

2

Identifying and Assessing RMM

2

Responses to the Assessed Risks

3

Further Substantive Procedures

3

Evaluating Reasonableness of Estimates

1

Disclosures

2

Indicators of Possible Management Bias

1

Written Representations

1

1

Documentation

1

1

Totals

16

Estimates

slide17

6010

Related Parties

CAS 550

Current

Subject matter

"Shalls"

Italics

1

Risk Assessment Procedures

7

1

Identifying and Assessing RMM

2

1

Responses to the Assessed Risks

5

Evaluating Accounting/Disclosure of Related Parties

1

1

Written Representations

1

1

Communication with Those Charged with Governance

1

Documentation

1

5

Totals

18

Related Parties

use of external confirmations

5303

External Confirmations

CAS 505

Current

Subject matter

"Shalls"

Italics

Use of confirmations

1

Management's Refusal to allow confirm

2

2

Results of the External Confirmation Procedures

5

Negative Confirmations

1

1

Evaluating the Evidence Obtained

1

1

Confirming accounts recievable

4

Totals

10

Use of External Confirmations
sampling

Audit sampling

CAS 530

Current

Subject matter

"Shalls"

Italics

Sample Design, Size and Selection of Items for Testing

3

Performing Audit Procedures

3

Nature and Cause of Deviations and Misstatements

2

Projecting Misstatements

1

Evaluating Results of Audit Sampling

1

0

Totals

10

Sampling
subsequent events

6550

Subsequent events

CAS 560

Current

Subject matter

"Shalls"

Italics

1

Events between Date of F/S and Date of Auditor's Report

4

1

Facts after Date of Report but before Date F/S are Issued

4

1

Facts Known to Auditor after F/S Issued

4

3

Totals

12

Subsequent Events
going concern

Going concern

CAS 570

Current

Subject matter

"Shalls"

Italics

Risk Assessment Procedures

2

Evaluating Management's Assessment

4

Additional Audit Procedures when events identified

1

Audit Conclusions and Reporting

1

Material Uncertainty Exists

3

Going Concern Assumption Inappropriate

1

Management Unwilling to Extend Its Assessment

1

Communication with Those Charged with Governance

1

Significant Delay in Approval of Financial Statements

1

0

Totals

15

Going Concern
misstatements

5142

Evaluation of Misstatements Identified

CAS 450

Current

Subject matter

"Shalls"

Italics

1

Accumulation of Identified Misstatements

1

Consideration of Identified Misstatements

2

1

Communication and Correction of Misstatements

2

Evaluating the Effect of Uncorrected Misstatements

2

Communication with Those Charged with Governance

2

1

Written Representation

1

Documentation

1

3

Totals

11

Misstatements
challenge 2
Challenge #2
  • Multiple Appropriate Financial Reporting Frameworks (AFRFs)
multiple afrfs
Multiple AFRFs

IFRS and ASPE are Canadian GAAP

challenge 3
Challenge #3
  • Applying CASs to Micro Sized Entities

In Europe:

      • Less than 1 million euros in revenue
        • Equivalent to 1.3 million Canadian dollars
      • Less than 10 employees
reality of micro entity audits
Reality of Micro Entity Audits
  • Limited number of F/S users
    • Reduced risk
  • Unsophisticated business processes and accounting systems
    • Few employees
    • Ownership is concentrated
    • Nature/quality of audit evidence available is less than larger entity
  • Costof an audit
    • disproportionately high as compared to larger entities
how cass address sme audits
How CASs address SME audits…
  • “The auditor’s objectives are the same for audits of entities of different sizes and complexities.
    • This does not mean that every audit will be planned/performed in exactly the same way.
  • CASs recognize that specific audit procedures to be undertaken may vary considerably based on size of entity

“Applying ISAs Proportionately with the Size and Complexity of an Entity”

issued by IFAC in August 2009.

still required to understand internal control
Still Required to Understand Internal Control
  • Pervasive areoften called entity level controls
  • Specific are oftencalled business process or application controls
tip 2
Tip 2…

Do not ignore the ‘Control Environment’.

The active involvement of an owner-manager may serve to mitigate transactional risks (where segregation of duties not possible) in a small entity;

traditional audit phases
Traditional Audit Phases

BUT Where does the required risk assessment fit?

tip 3
Tip 3…

‘Risk assessment’ is NOT simply an ADD ON to rest of audit.

x

Risk assessment should enable the auditor to focus work on areas where the RMM is the highest and to reduce work on low risk areas.

This applies in any size audit.

the solution
The Solution
  • Applying C-PEM to smaller entities
c pem
C-PEM
  • A completely new version of PEM that:
    • Reflects the new clarified CASs
    • Additional guidance on reviews and compilations
    • Aims for an enlarged base of users
      • An attractive book (in full color) for partners/staff to read on the bus/train/gym workout or at home
    • More practical “how to” guidance
      • Integrated case studies and completed forms/memos
c pem forms
C-PEMForms

What C-PEM forms to use is always based on professional judgment

C-PEM Forms facilitate:

  • Compliance with CAS requirements
  • Ease of use with new objectives and instructions
  • Capture of relevant audit evidence in one place
  • Reuse (after updating) - for up to 3-4 years
  • Ease of file review

C-PEM Forms require some staff training on their use. Designed for use by a knowledgeable auditor

C-PEM “Worksheets” are ONLY to be used when applicable

tip 4 select appropriate forms to use
Tip 4… Select appropriate Forms to Use

Select what C-PEM forms to use BEFORE work begins

  • Standard forms
  • Condensed forms
  • Memo to file (using standard forms as a guide)

There is no reason why all three types of documentation cannot be used on the same audit.

If a matter is significant use the standard form, if straightforward use the condensed and if really simple use a memo.

Worksheets are only to be used when applicable

c pem forms structure
C-PEM forms structure

Form numbering

Financial Statements 100 series

Tax matters 200

File completion 300

Planning 400

Risk Assessment 500

Risk Response 600

Detailed audit plans A-ZZ

Income statement 700

Disclosure checklists 900

NOTE: Some form numbers have changed to better reflect their position in the audit process

tip 6 scope out low risk areas
Tip 6 … Scope out low risk areas

Scope out immaterial/low risk areas

or

Combine them and treat as one F/S area

Consider where work can be reduced EACH year

But consider whether an immaterial area is only small because of missing transactions

key c pem forms1

Risk Assessment (500 series)

Form #

Name

Year 1

Year 2

Year 3

Year 4

Year 5

Identifying risks through

510

understanding the entity

520/522

Risk assessment

525

Going concern

530/532

Entity Level control

545-560

Control design/implementation

424

Summary of Assessed Risks

New Form prepared

Form Updated

Key C-PEM Forms
identify assess risk
Identify & assess risk
  • Scope of required risk assessment CAS 315.11-12
  • Key PointIdentify sourcesof risks not just effects on the F/S

How: C-PEM 510, 510c or NFP 510

assess risks in one place
Assess Risks in One Place

Source of risk

Result of risk

Risk Assessment

nature of internal control
Nature of Internal Control

Objective = F/S free from material misstatement

Low Risk High risk

Risks of material misstatement (RMM)

IC to prevent/detect error

Residual RMM

control risk two approaches
Control Risk – Two Approaches

You only need to evaluate controls ‘relevant’ to the audit

consider using the matrices
Consider using the matrices…

Can you identify the control weaknesses, control strengths & key controls?

tip 8 focus on changes
Tip 8 … Focus on Changes
  • For risk assessment in year 2 focus only on changes
  • Identify any new risks and related controls
  • Evaluate whether the relevant controls already identified are still in operation (implementation)

If risk factors have not changed simply ensure the controls identified in year one are STILL in operation.

If no change, both control design and implementation have been addressed

tip 9 roll forward
Tip 9 … ROLL FORWARD
  • Plan for forms to be carried forward and updated
  • Most planning/risk assessment forms should ONLY be completed from scratch every 3-4 years (unless major changes have occurred)

Document evidence so that data collected can be reused.

Focus audit effort in year two onwards on what has changedand needs updating – not re-documenting existing data

tip 10 customize your risk response
Tip 10… Customize Your Risk Response

Base your response on the risk assessment ---

Ensure work is directed to high risk areas and away from low risk areas

key c pem forms2

Risk Response (600 series)

Form #

Name

Year 1

Year 2

Year 3

Year 4

Year 5

Applicable worksheets such as

overall responses, sampling,

6??

estimates, related parties etc.

Litigation, claims and non-

645

compliance

650

Subsequent events

670

Use of journal entries

A-UU

Detailed audit plans

7??

Income statement

900+

Financial reporting disclosures

New Form prepared

Form Updated

Key C-PEM Forms
file completion

Forming an Opinion (300 series)

Form #

Name

Year 1

Year 2

Year 3

Year 4

Year 5

310

Checklist — Audit completion

Notes on significant audit

320

decisions

Worksheet

— Summary of

335

identified misstatements

350

Written representations

360

Legal and other correspondence

Worksheet

— Matters for future

370

consideration

New Form prepared

Form Updated

File completion
review engagements
Review Engagements
  • C-PEM Material expanded
  • Road map
  • Forms basically unchanged
other material in c pem
Other Material in C-PEM
  • Compilations
    • Updated material
  • FOFI
    • No changes
  • Primer on fraud
  • Expanded sampling guidance
  • Tips for Client Interviews
c pem summary a must buy
C-PEM Summary – A must BUY
  • Comprehensive guide to all the new CASs
  • Two bound volumes
    • Illustrations in color
    • Integrated case studies
  • Ideal training tool
    • Extra copies available for staff members
    • User friendly forms
  • Practical and flexible practical aids