Chapter 1
The Demand for Audit and Other Assurance
Services
Concept Checks
C1-1 What is meant by determining the degree of correspondence between information and
established criteria? What is the criteria for the audit of a company’s financial statements?
To do an audit, there must be information in a verifiable form and some standards (criteria) by
which the auditor can evaluate the information. Determining the degree of correspondence
between information and established criteria is determining whether a given set of information
is in accordance with the established criteria. For an audit of a company’s financial statements
the criteria are International Financial Reporting Standards, Accounting Standards for Private
Enterprises, Accounting Standards for Not-for-Profits.
C1-2 What are the major causes of information risk. How can information risk be reduced?
Information risk reflects the possibility that the information upon which the business risk
decision was made was inaccurate. The major causes of information risk are: remoteness of
information, biases and motives of the provider, voluminous data, and complex exchange
transactions. Users can reduce information risk by examining the information directly, sharing
the risk with the information preparer, or requesting some assurance over the information (either
an audit or a review engagement).
C1-3 Explain how and why the auditor makes information trustworthy and credible.
External users value the auditor’s assurance because of the auditor’s integrity, independence,
expertise, and knowledge of the subject matter. This makes the information credible and
trustworthy.
C1-4 Describe and explain the differences and similarities between financial statement,
compliance, and operational audits.
Differences—are based upon the information and criteria being audited: a financial statement
audit (e.g., historical financial statements) assesses evidence with respect to potential material
misstatements; a compliance audit (e.g., compliance with environmental legislation) assesses the
organization’s ability to comply with legislation; and an operational audit (e.g., effective factory
production) helps to provide good quality control and manage costs.
Similarities—The auditor is acting with due care, meaning that he/she is following some type of
systematic process governed by auditing standards (financial statements: CPA Canada
Handbook (GAAS); compliance: CPA Canada Handbook or IIA standards, depending upon
whether a public accountant is conducting the audit; and operational: most likely IIA standards).
The auditor is also independent and competent (although the degree of independence will vary
according to who is conducting the audit).
Copyright © 2019 Pearson Canada Inc.
1-1
,Instructor’s Solutions Manual for Auditing, Fourteenth Canadian Edition
C1-5 Describe and explain the difference and similarities among the various types of auditors.
Auditor Types of Engagements and Employers Type of Training
Internal Auditor Tend to perform compliance, financial, Although there is no requirement
and operational audits (although can for a designation, internal auditors
include fraud audits). Work for large for- often have a CPA or a CIA
profit and not-for-profit organizations designation. Internal auditors
(e.g., hospitals, universities). receive extensive training on how
to conduct operational audits.
Government Auditor Performs value-for-money audits, Government auditors generally
financial statement audits, and operational have a CPA designation (if
audits. Increasing opportunity for employed by the auditor general),
experience in operational auditing. although some have a CIA
Employed by provincial or federal designation.
government.
CRA Auditor Performs compliance audits related to Many CRA auditors have a CPA
personal, corporate, and value-added designation (although not
taxes (GST/HST). Works for the Canada required).
Revenue Agency.
Fraud and forensic Performs forensic and fraud audits. Many Many forensic accountants and
auditors forensic accountants and fraud auditors fraud auditors have a CPA
work for public accounting firms (or firms designation (although not
that specialize in forensic accounting required). Some have a CIA
services). Some also work in industry, designation or one of the fraud
government, and large not-for-profits (as specialist designations.
part of internal audit).
Public Accountant The main engagements are related to Public accountants have a CPA
assurance of financial information for a designation as well as a public
wide range of enterprises and industries – accountant’s license.
particularly financial statement audits.
However, can also perform compliance
and operational audits. Opportunity for
experience in auditing, tax consulting, and
management consulting practices.
Review Questions
1-1 You will be looking at his accounting records (evidence) and evaluating and collecting
information about those records. Your evaluation process will be done using relatively standard
audit procedures (part of GAAS – generally accepted auditing standards). Your objective is to
compare the evidence (his accounting records) to the financial statements that he has prepared
(which will become information available to others, such as the Canada Revenue Agency). To
help you evaluate his records (the evidence) you will use criteria (likely ASPE – Accounting
Standards for Private Enterprises). You are able to add value to the financial statements because
you are an independent professional qualified accountant.
Copyright © 2019 Pearson Canada Inc.
1-2
, Chapter 1: The Demand for Audit and Other Assurance Services
1-2 This apparent paradox arises from the distinction between the function of auditing and
the function of accounting. The accounting function is the recording, classifying, and
summarizing of economic events to provide relevant information to decision makers. The rules
of accounting are the criteria used by the auditor for evaluating the presentation of economic
events for financial statements and he or she must therefore have an understanding of accounting
standards, as well as auditing standards. The accountant need not, and frequently does not,
understand what auditors do, unless he or she is involved in doing audits, or has been trained as
an auditor.
1-3 Auditor independence is fundamental to the conduct of the audit and the auditor’s role in
protecting the public interest. In the case of the financial statement audit, when independence is
impaired, the credibility of the financial statements, the auditor, and the auditor’s report becomes
questionable.
This famous quote from Chief Justice Warren Burger, of the US Supreme Court, highlights the
auditors’ responsibility:
The independent auditor assumes a public responsibility transcending any employment
relationship with the client. The independent public accountant performing this special
function owes ultimate allegiance to the company’s creditors and stockholders, as well as to
[the] investing public. This ‘public watchdog’ function demands that the accountant
maintain total independence from the client at all times and requires complete fidelity to the
public trust.
1-4 Auditors’ lack independence can negatively influence professional skepticism in many
ways. If auditors are not independent, then they may not critically examine the evidence or
question management’s explanations when following up on unusual findings. For instance, if the
auditor has audited the company for several years and find management to be honest and
forthcoming, that past experience (which is referred to as a familiarity threat to independence)
may lead the auditors to readily accept answers without attempting to corroborate the
explanations (in other words not perform a critical examination).
1-5 To do an audit, there must be information in a verifiable form and some standards
(criteria) by which the auditor can evaluate the information. Examples of established criteria
include International Financial Reporting Standards (IFRS) or Accounting Standards for Private
Enterprises (ASPE), and the Income Tax Act. Determining the degree of correspondence between
information and established criteria is determining whether a given set of information is in
accordance with the established criteria using audit procedures that conform with GAAS –
generally accepted auditing standards. The information for Glickle Ltd.’s tax return is the
corporate tax returns filed by the company. The criteria are the Income Tax Act and all
interpretations. For the audit of Glickle Ltd.’s financial statements, the information is the
financial statements being audited and the established criteria are ASPE or IFRS and generally
accepted auditing standards.
Copyright © 2019 Pearson Canada Inc.
1-3
, Instructor’s Solutions Manual for Auditing, Fourteenth Canadian Edition
1-6 The auditor will use risk assessment skills for several purposes:
To assess the quality and effectiveness of the client’s risk assessment processes
To assess the likelihood of fraud, error, or other misstatements in the client’s financial
statements
To select the type of audit evidence that will need to be accumulated to mitigate the risks of
fraud, error or misstatement in the client’s financial statements
For other assurance engagements (i.e. non-financial statements), the auditor will similarly
need to assess potential risks of error or fraud and design or select audit procedures in
response to those risks
1-7 The auditor must assess risks to select the appropriate evidence to be collected. If the
auditor does not know the risks, then the wrong evidence might be collected, or the wrong
quality or amount of evidence might be collected.
1-8 Assuming a bank is deciding to make a loan to a business, the bank will charge a rate of
interest determined primarily by the following three factors:
Risk-free interest rate. This is approximately the rate the bank could earn by investing in
Canadian treasury bills for the same length of time as the business loan.
Business risk. This risk reflects the possibility that the business will not be able to repay its
loan because of economic or business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
Information risk. This risk reflects the possibility that the information upon which the
business risk decision was made was inaccurate. A likely cause of the information risk is the
possibility of inaccurate financial statements.
Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can
significantly reduce information risk.
1-9 Information risk is the risk that information upon which a business decision is made is
inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value
can be estimated using multiple methods with some estimates being more subjective than others.
Fair value estimates are made at a point in time, but can also change rapidly, depending on
market conditions. All of these factors increase information risk.
1-10 The major differences in the scope of audit responsibilities are:
Public accountants perform audits in accordance with generally accepted auditing standards
of published financial statements prepared in accordance with an acceptable financial
reporting framework
Government auditors from the auditors general (federal or provincial) perform compliance or
operational (value-for-money) audits in order to assure the Parliament that the expenditure of
public funds is in accordance with its directives and the law and is done with efficiency,
economy and effectiveness. They also do financial statement audits of Crown Corporations,
or sub-contract this work to external public accountants.
Canada Revenue Agency auditors perform compliance audits to enforce the federal tax laws
as defined by Parliament, interpreted by the courts, and regulated by the Income Tax Act.
Copyright © 2019 Pearson Canada Inc.
1-4
The Demand for Audit and Other Assurance
Services
Concept Checks
C1-1 What is meant by determining the degree of correspondence between information and
established criteria? What is the criteria for the audit of a company’s financial statements?
To do an audit, there must be information in a verifiable form and some standards (criteria) by
which the auditor can evaluate the information. Determining the degree of correspondence
between information and established criteria is determining whether a given set of information
is in accordance with the established criteria. For an audit of a company’s financial statements
the criteria are International Financial Reporting Standards, Accounting Standards for Private
Enterprises, Accounting Standards for Not-for-Profits.
C1-2 What are the major causes of information risk. How can information risk be reduced?
Information risk reflects the possibility that the information upon which the business risk
decision was made was inaccurate. The major causes of information risk are: remoteness of
information, biases and motives of the provider, voluminous data, and complex exchange
transactions. Users can reduce information risk by examining the information directly, sharing
the risk with the information preparer, or requesting some assurance over the information (either
an audit or a review engagement).
C1-3 Explain how and why the auditor makes information trustworthy and credible.
External users value the auditor’s assurance because of the auditor’s integrity, independence,
expertise, and knowledge of the subject matter. This makes the information credible and
trustworthy.
C1-4 Describe and explain the differences and similarities between financial statement,
compliance, and operational audits.
Differences—are based upon the information and criteria being audited: a financial statement
audit (e.g., historical financial statements) assesses evidence with respect to potential material
misstatements; a compliance audit (e.g., compliance with environmental legislation) assesses the
organization’s ability to comply with legislation; and an operational audit (e.g., effective factory
production) helps to provide good quality control and manage costs.
Similarities—The auditor is acting with due care, meaning that he/she is following some type of
systematic process governed by auditing standards (financial statements: CPA Canada
Handbook (GAAS); compliance: CPA Canada Handbook or IIA standards, depending upon
whether a public accountant is conducting the audit; and operational: most likely IIA standards).
The auditor is also independent and competent (although the degree of independence will vary
according to who is conducting the audit).
Copyright © 2019 Pearson Canada Inc.
1-1
,Instructor’s Solutions Manual for Auditing, Fourteenth Canadian Edition
C1-5 Describe and explain the difference and similarities among the various types of auditors.
Auditor Types of Engagements and Employers Type of Training
Internal Auditor Tend to perform compliance, financial, Although there is no requirement
and operational audits (although can for a designation, internal auditors
include fraud audits). Work for large for- often have a CPA or a CIA
profit and not-for-profit organizations designation. Internal auditors
(e.g., hospitals, universities). receive extensive training on how
to conduct operational audits.
Government Auditor Performs value-for-money audits, Government auditors generally
financial statement audits, and operational have a CPA designation (if
audits. Increasing opportunity for employed by the auditor general),
experience in operational auditing. although some have a CIA
Employed by provincial or federal designation.
government.
CRA Auditor Performs compliance audits related to Many CRA auditors have a CPA
personal, corporate, and value-added designation (although not
taxes (GST/HST). Works for the Canada required).
Revenue Agency.
Fraud and forensic Performs forensic and fraud audits. Many Many forensic accountants and
auditors forensic accountants and fraud auditors fraud auditors have a CPA
work for public accounting firms (or firms designation (although not
that specialize in forensic accounting required). Some have a CIA
services). Some also work in industry, designation or one of the fraud
government, and large not-for-profits (as specialist designations.
part of internal audit).
Public Accountant The main engagements are related to Public accountants have a CPA
assurance of financial information for a designation as well as a public
wide range of enterprises and industries – accountant’s license.
particularly financial statement audits.
However, can also perform compliance
and operational audits. Opportunity for
experience in auditing, tax consulting, and
management consulting practices.
Review Questions
1-1 You will be looking at his accounting records (evidence) and evaluating and collecting
information about those records. Your evaluation process will be done using relatively standard
audit procedures (part of GAAS – generally accepted auditing standards). Your objective is to
compare the evidence (his accounting records) to the financial statements that he has prepared
(which will become information available to others, such as the Canada Revenue Agency). To
help you evaluate his records (the evidence) you will use criteria (likely ASPE – Accounting
Standards for Private Enterprises). You are able to add value to the financial statements because
you are an independent professional qualified accountant.
Copyright © 2019 Pearson Canada Inc.
1-2
, Chapter 1: The Demand for Audit and Other Assurance Services
1-2 This apparent paradox arises from the distinction between the function of auditing and
the function of accounting. The accounting function is the recording, classifying, and
summarizing of economic events to provide relevant information to decision makers. The rules
of accounting are the criteria used by the auditor for evaluating the presentation of economic
events for financial statements and he or she must therefore have an understanding of accounting
standards, as well as auditing standards. The accountant need not, and frequently does not,
understand what auditors do, unless he or she is involved in doing audits, or has been trained as
an auditor.
1-3 Auditor independence is fundamental to the conduct of the audit and the auditor’s role in
protecting the public interest. In the case of the financial statement audit, when independence is
impaired, the credibility of the financial statements, the auditor, and the auditor’s report becomes
questionable.
This famous quote from Chief Justice Warren Burger, of the US Supreme Court, highlights the
auditors’ responsibility:
The independent auditor assumes a public responsibility transcending any employment
relationship with the client. The independent public accountant performing this special
function owes ultimate allegiance to the company’s creditors and stockholders, as well as to
[the] investing public. This ‘public watchdog’ function demands that the accountant
maintain total independence from the client at all times and requires complete fidelity to the
public trust.
1-4 Auditors’ lack independence can negatively influence professional skepticism in many
ways. If auditors are not independent, then they may not critically examine the evidence or
question management’s explanations when following up on unusual findings. For instance, if the
auditor has audited the company for several years and find management to be honest and
forthcoming, that past experience (which is referred to as a familiarity threat to independence)
may lead the auditors to readily accept answers without attempting to corroborate the
explanations (in other words not perform a critical examination).
1-5 To do an audit, there must be information in a verifiable form and some standards
(criteria) by which the auditor can evaluate the information. Examples of established criteria
include International Financial Reporting Standards (IFRS) or Accounting Standards for Private
Enterprises (ASPE), and the Income Tax Act. Determining the degree of correspondence between
information and established criteria is determining whether a given set of information is in
accordance with the established criteria using audit procedures that conform with GAAS –
generally accepted auditing standards. The information for Glickle Ltd.’s tax return is the
corporate tax returns filed by the company. The criteria are the Income Tax Act and all
interpretations. For the audit of Glickle Ltd.’s financial statements, the information is the
financial statements being audited and the established criteria are ASPE or IFRS and generally
accepted auditing standards.
Copyright © 2019 Pearson Canada Inc.
1-3
, Instructor’s Solutions Manual for Auditing, Fourteenth Canadian Edition
1-6 The auditor will use risk assessment skills for several purposes:
To assess the quality and effectiveness of the client’s risk assessment processes
To assess the likelihood of fraud, error, or other misstatements in the client’s financial
statements
To select the type of audit evidence that will need to be accumulated to mitigate the risks of
fraud, error or misstatement in the client’s financial statements
For other assurance engagements (i.e. non-financial statements), the auditor will similarly
need to assess potential risks of error or fraud and design or select audit procedures in
response to those risks
1-7 The auditor must assess risks to select the appropriate evidence to be collected. If the
auditor does not know the risks, then the wrong evidence might be collected, or the wrong
quality or amount of evidence might be collected.
1-8 Assuming a bank is deciding to make a loan to a business, the bank will charge a rate of
interest determined primarily by the following three factors:
Risk-free interest rate. This is approximately the rate the bank could earn by investing in
Canadian treasury bills for the same length of time as the business loan.
Business risk. This risk reflects the possibility that the business will not be able to repay its
loan because of economic or business conditions such as a recession, poor management
decisions, or unexpected competition in the industry.
Information risk. This risk reflects the possibility that the information upon which the
business risk decision was made was inaccurate. A likely cause of the information risk is the
possibility of inaccurate financial statements.
Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can
significantly reduce information risk.
1-9 Information risk is the risk that information upon which a business decision is made is
inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value
can be estimated using multiple methods with some estimates being more subjective than others.
Fair value estimates are made at a point in time, but can also change rapidly, depending on
market conditions. All of these factors increase information risk.
1-10 The major differences in the scope of audit responsibilities are:
Public accountants perform audits in accordance with generally accepted auditing standards
of published financial statements prepared in accordance with an acceptable financial
reporting framework
Government auditors from the auditors general (federal or provincial) perform compliance or
operational (value-for-money) audits in order to assure the Parliament that the expenditure of
public funds is in accordance with its directives and the law and is done with efficiency,
economy and effectiveness. They also do financial statement audits of Crown Corporations,
or sub-contract this work to external public accountants.
Canada Revenue Agency auditors perform compliance audits to enforce the federal tax laws
as defined by Parliament, interpreted by the courts, and regulated by the Income Tax Act.
Copyright © 2019 Pearson Canada Inc.
1-4
