CPAB 2023 Fraud Landscape & Audit Quality Notes (PDF)

NOTES4_2024-09-13 Some topics mentioned include the following (not necessarily complete) CPAB 2023 evolving fraud landscape (recently issued, so NOT in course outline, but is included in Brightspace): This is the second time in 3 years that CPAB has put out an emphasis on fraud document Fraud is...

NOTES4_2024-09-13 Some topics mentioned include the following (not necessarily complete) CPAB 2023 evolving fraud landscape (recently issued, so NOT in course outline, but is included in Brightspace): This is the second time in 3 years that CPAB has put out an emphasis on fraud document Fraud is evolving extremely rapidly and society is often not prepared to counter this omnipresent threat The accounting profession is seen as a major line of defense against fraud, so we have to be quite knowledgeable in newer techniques that fraudsters are using Older people in society often tend to not be aware of fraud, and so may often end up victimized. Please make sure that at least say your grandparents do not get victimized AUDIT QUALITY has been an important issue in the audit profession for the past century, it is constantly being discussed, and extensive research being done on it. However, the EXPECTATION GAP seems at times to be growing faster than our e orts to address audit quality Today the o icial CPA Canada Handbook section for fraud is CAS 240, which we may or may not have time to see in detail All stakeholders need to be hyper-vigilant to the risk of fraud “Be relentlessly curious” (page 3) Any good accountant / auditor needs to fully understand how a company is PROFITABLE, what are the factors necessary for profitability. A very large number of accountants / auditors do not understand this, many don’t care, and a few even argue, sometimes vehemently, that we are not responsible for it, that it is not even part of what we need to know Some auditors do not understand how a company earns its money, this needs to change, an auditor must pursue asking questions till they understand PROFESSIONAL SKEPTICISM is extremely important. Many times auditors might fall victim to human tendency to assume that the people we deal with would not mislead us. As auditors, we have a professional requirement to exercise professional skepticism. In the past, many audit failures have resulted from insu icient professional skepticism. The Institute has in the past at times issued communications reminding auditors responsibility for this CPAB 2020 interim: Revenue recognition IFRS 15 Insu icient challenge of fair value estimates Business combinations, example of Chrysler, thru Daimler-Chrysler thru Fiat-Chrysler thru Stellantis, with business overview and reasonings, organizational culture incompatibility Insu icient or incorrect understanding of underlying accounting and business processes CONFIRMATION BIAS RISK ANALYSIS, very prevalent in all modern businesses, due diligence, will be an important part of your MAJOR PROJECT Major personnel changes are a red flag PROFESSIONAL SKEPTICISM COMPONENT AUDITORS (CAS 600), auditor of subsidiary is often changed to be the same as the auditor of the parent company for e iciency purposes, audit planning must be done by all component auditors working together, COMPONENT MATERIALITY, rare example of major mistake in the CPA Canada Handbook, many auditors are quite uncomfortable with statistical auditing, up to about 2005 all audit textbooks had statistical auditing appendices with formulas and tables, today accounting firms have numbers (materiality, sample sizes, etc.) calculated by software into which sta auditor enters requested information QUESTION FROM STUDENT: Application of materiality Audit sample chosen from population, obtain IDENTIFIED MISSTATEMENT in sample, PROJECT into population to get POINT ESTIMATE of misstatement in population It is NOT su icient to then compare this number to materiality to determine whether we can conclude that the population is not materially misstated Need to consider SAMPLING ERROR (risk that the sample is not representative of the population) and NON-SAMPLING ERROR (risk that the auditor errs in their conclusions) Big 4 accounting firms have audit partners who are also PhDs in statistics somewhere in the world Big 4 accounting firms assume that non-sampling error is zero. This is based on reasoning that the firm hires good people with good education and qualifications, that these people are highly motivated and pay good attention to detail, that the accounting firm has good review procedures (work of the junior gets reviewed by the senior, etc.) So sampling error is then added to the point estimate before comparing to materiality This can then be reversed, subtract sampling error from materiality and then compare to point estimate. This is how PERFORMANCE MATERIALITY was first obtained PERFORMANCE MATEERIALITY = MATERIALITY - SAMPLING ERROR (assuming non-sampling error = 0) Today auditors routinely take say 75% of materiality to define performance materiality. Most auditors today are unaware of above formula, which seems to have been lost to history RULES OF PROFESSIONAL CONDUCT (in CPA ONTARIO Handbook, NOT CPA Canada Handbook): If a CPA does ‘public accounting’, a public accounting license is required in Ontario This can include any advice (such as tax advice) a CPA gives to another party, so beware If say a church basement non-profit organization asks you to be the ‘auditor’ of their F/Ss, you cannot do that without a public accounting license, and then perform audit with due diligence. This can often result in a person who knows nothing about accounting to then put their name as ‘auditor’ of the club Having a CPA behind your name means you have to be more careful about giving any advice to a non-accountant. You may be sued for PROFESSIONAL NEGLIGENCE should things go south, even if there is no compensation. Remember, professional negligence is di erent from other types of court cases