Auditing and Assurance Concepts

• Securimax Limited, an audit client of KFP Partners for 15 years, is based in Waterloo, Ontario, and manufactures high-tech armour-plated personnel carriers.
• Securimax often participates in competitive market tender processes for large government contracts.
• Its main product, the Terrain Master, is highly specialized.
• Securimax only deals with nations that have a recognized, democratically elected government due to its sensitive vehicle designs.
• Clarke Field has been the engagement partner on the Securimax audit for the past five years.
• Securimax's board is considering changing from an audit to a review engagement and has consulted Clarke about the implications.
• Securimax's financial year ends on December 31.

Review Engagement

• Provides limited assurance.
• The practitioner performs enough work to report whether anything came to their attention that would suggest the information being assured is not fairly presented.

Audit vs. Review

Assurance:

• An audit provides reasonable, high-level assurance on the reliability of the subject matter.
• A review provides limited assurance, based on evidence gathered that is at least sufficient for the practitioner to conclude.

Opinion/Conclusion:

• An audit results in a positive expression of an opinion on whether the information is fairly presented.
• A review results in a conclusion on whether the practitioner found anything to indicate the information is not prepared in accordance with the applicable framework.

Procedures:

• An audit includes a significant amount of procedures and detailed testing.
• The extent of audit procedures depends on identified risks, internal controls, accounting policies, procedure results, and professional judgment.
• Review procedures are a subset of audit procedures.
• The practitioner is not required to conduct detailed testing in a review but must do enough work to enhance users' confidence.
• Review procedures primarily involve inquiries of management, analytical procedures, and evaluation of evidence, and are substantially less extensive than audit procedures.

Reports:

• Both audits and reviews are appropriate for annual reporting if they achieve the desired level of assurance for stakeholders.

Factors for Securimax to consider when changing from an audit to a review:

• Cost: A review engagement is less costly due to fewer procedures.

Other considerations include:

• Bank Requirements: Banks often require assurance as part of loan agreements, with high assurance requiring an audit and lower assurance allowing for a review due to lower costs.
• International Requirements: Securimax may need an audit to win large government contracts if international requirements mandate it.
• IPO Plans: The Canadian Securities Administrators require two years of audited financial statements for IPOs, necessitating an audit if an IPO is planned.
• Government Contracts: Requirements from Securimax's clients to obtain an audit, should be considered.
• Future Audit Requirements: Increased costs may occur when transitioning from a review to an audit.
• A qualified opinion may be necessary in the future.
• Opening inventory balances might not be auditable in the first year, potentially impacting the company if an unmodified audit report is needed later.

Conclusion

• Review engagement reporting is more limited than an audit.

• A lower level of assurance is appropriate only if understood and agreed to by stakeholders.

• DDD Motor Sales Inc., a privately owned company, seeks a loan to purchase additional inventory, which will be excellent security for the bank.

• The bank has agreed that, since DDD can provide good security for the loan, an external audit will not be required.

• However, the bank manager has insisted that DDD hire a firm of professional accountants to examine DDD's financial records and provide some level of assurance.

• A review engagement is required because the bank requires a certain level of assurance, but it has already been agreed that an external audit will not be required.

• The practitioner performs enough work to report whether anything came to their attention that would lead them to conclude that the information being assured is not fairly presented in accordance with the applicable framework.

• The title of the report or communication prepared by Cicak & Jones will be an INDEPENDENT PRACTITIONER'S REVIEW ENGAGEMENT REPORT.

• The types of procedures conducted in a review engagement would be inquiry, analysis, and observation to address high-risk areas where it was determined material misstatements could arise and to address all material items in the financial statements.

• Procedures will include comparing year-over-year balances, considering relationships between financial statement data, and calculating various financial statement ratios.

• Once unusual or significant fluctuations are identified, the practitioner discusses these with the client.

Audit Report Types

• These are determined based on the scenarios faced during an audit.

Pending Exceptional Litigation Adequately Disclosed:

• Issue an unmodified opinion with emphasis of matter.
• The litigation is adequately disclosed but significant, requiring user attention.

Inadequate Client Records:

• Issue a disclaimer of opinion.
• The client's records are so inadequate that the auditor cannot obtain sufficient appropriate evidence.

GAAP Departure Concerning a Highly Material Item:

• Issue either an adverse or qualified opinion.
• A qualified opinion is appropriate if the departure is not pervasive and can be identified and quantified.
• An adverse opinion is necessary if the departure is pervasive.

Client Restriction on Contacting Legal Counsel:

• Issue either a disclaimer or qualified opinion.
• Preventing contact with legal counsel creates a scope limitation.
• A disclaimer is needed if the auditor cannot obtain sufficient evidence.
• A qualified opinion is possible if the effects can be identified, quantified, and explained.

Destroyed Accounting Records:

• Issue a disclaimer of opinion.
• The destruction creates a significant scope limitation.

Material Misstatement in Inventory Account:

• Issue a qualified opinion.
• The GAAP departure is material but not pervasive.
• The opinion should be "except for" inventory.

Misstated Inventories (Material and Pervasive):

• Issue either an adverse or qualified opinion.
• An adverse opinion is more likely if the misstatement pervades the financial statements.
• A qualified opinion might be considered if the misstatements can be specifically identified and quantified.

Audit Characteristics:

• An audit obtains sufficient appropriate audit evidence to reduce risk to an acceptably low level.

Assurance Engagement:

• An assurance engagement, such as a financial statement audit, involves a practitioner expressing an opinion on a subject matter like the fairness of financial statements.
• In such cases, the clothing company is the client, the users are those who rely on the financial statements, and the subject matter is the financial statements.

Aschari and Di Tomaso Audit of Pammenter Inc. - Refusal to Confirm Accounts Receivable:

• The type of report depends on the materiality of accounts receivable and potential error likelihood.
• An unmodified report if immaterial, an opinion qualified as to scope if material but not pervasive, and a disclaimer of opinion if material and pervasive.

Jovanovic and St. Pierre Audit of Robson Chemicals Inc. - Lawsuit Disclosure:

• Issue an unmodified, qualified, or adverse opinion.
• Failure to record the probable $3 million payout as a liability means the statements are likely materially misstated
• Issue an unmodified report, if immaterial.
• Issue a qualified opinion, if materially misstated, but the effect is not pervasive.
• Issue an adverse, if materially misstated, with a pervasive effect.

Certek Technologies Inc. and the Audit Expectation Gap:

• The auditor is responsible for expressing an opinion on the fair presentation of historical financial statements according to Canadian GAAP.
• Auditors do not review press releases or other unaudited information.

Audit Expectation Gap:

• It occurs when there's a difference between assurance providers' and financial statement users' expectations.
• Users may believe auditors should provide insights into a company's future success, and the auditor should have provided more information with respect to the future success of the company.

Reducing the Expectation Gap:

• By performing duties appropriately, following auditing standards, and achieving minimum performance standards.
• Using peer reviews to enforce auditing standards correctly.
• Regularly reviewing and updating auditing standards.
• Educating the public.
• Improving reporting to explain audit or review processes and assurance levels.
• Accurately reporting assurance levels provided.

Independent Practictioner's Review Engagement Report Differences with Audit Engagement Report

• In a review engagement report, the practitioner expresses a conclusion
• The negative statement will be ""nothing has come to our attention ..."".
• The opinion in an audit report appears earlier while the conclusion in a review engagement is at the end.
• The audit report may include a Key Audit Matters section.
• The conclusion in a review report is negative, whereas the opinion in an audit report is positive.
• The Audit report includes expanded auditor responsibilities.
• A description of the work done by the auditor indicates that the procedures used in the review engagement are less comprehensive than those of the audit.

Questions covering audit reports, review engagements, and audit opinions in various scenarios. These cover material misstatements, scope limitations during an audit, and the implications for the auditor's report.