Canada Agreeing the terms of audit engagements: What you should know

According to the IFAC’s Code of Ethics for Professional Accountants, a professional accountant in public accounting shall determine whether accepting a new client relationship would create any threats to compliance with the fundamental principles. These threats to integrity or professional behavior may be formed by several factors, such as questionable issues associated with the client (its owners, management, or activities).

To avoid this, a firm, before accepting any new client should investigate things about them including its owners and business activities in order to evaluate whether there are any questions over the integrity of the potential client which create unacceptable risk. Generally, these investigative actions are performed under procedures such as ‘know your client/customer or ‘customer due diligence which are also carried out in order to comply with anti-money laundering regulations.

Once accepted, the firm should consider the suitability of specific engagements it has been asked to perform for the clients.

There could be ethical matters, such as family relationships or members of the audit firm holding shares in the client firm, that give rise to a conflict of interest or even confidentiality issues. CAS (Canadian Audit Standard) has recently released the Audit and Assurance Alert (CAS 600) Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) setting forth some guidelines in relation to Agreeing to the terms of audit engagements and raising awareness about the standards. This article briefly describes them.

Some of the significant changes in CAS 600:

When is CAS 600 effective?

CAS 600 is effective for audits of group financial statements for periods beginning on or after December 15, 2023, with early application permitted.

When and who is it applicable?

It is applicable when the auditor is being engaged to audit group financial statements. If the financial information of more than one entity or business is being included then it could be done through a ‘consolidation process which is similar to the extant CAS 600. The consolidation process involves preparing consolidated financial statements in accordance with the applicable financial reporting framework besides presenting combined financial statements and aggregating the financial information of the entities or separate business units.

The standard is also valuable for auditing financial statements including individuals from another firm. The auditor would adopt the requirements as necessary based on the engagement circumstances. This is consistent with the extant CAS 600.

How can groups with varying complexity adapt to the standard?

As a de facto rule, all engagement members including the component auditors need to exercise professional skepticism and professional judgment while planning and performing a group audit. The group engagement partner is responsible for creating an environment that emphasizes the expected behavior of engagement team members.

This can be demonstrated through their actions and communications. The CAS 600 includes examples of the impediments to the exercise of professional skepticism at the engagement level and possible actions that the engagement team may take to mitigate such impediments.

Responsibilities of Group Engagement Partner and Group Auditor

The group engagement partner is the person who is ultimately responsible for looking after compliance with the requirements in CAS 600. In a few instances, the group engagement partner (also called group auditor) is permitted to assign the design or performance of procedures, tasks, or actions to other appropriately skilled or suitably experienced members of the engagement team, including component auditors

Engagement Acceptance or Continuance, Including Restrictions on Access to Information or People

Due to enhanced acceptance and continuance requirements, the standard provides guidance for dealing with restrictions on access to information or people. During the engagement acceptance or continuance phase of the audit the group auditor is able to obtain agreement from group management that it acknowledges and understands its responsibility to provide the group auditor with certain information:

• Access to all information such as records, documentation, and other matters, that is relevant to the preparation of the group financial statements. 
• Additional information is likely to be requested by the engagement team for the purpose of the group audit.
• Unrestricted access to persons within the group from whom necessary audit evidence may be obtained.

The standard provides examples of how the group auditor may be able to overcome some of the more common restrictions faced, including guidance on dealing with access restrictions when the group has a non-controlling interest in an entity that is accounted for by the equity method.

Risk-based Approach for Planning and Performing the Group Audit

CAS 600 uses the risk-based approach to plan and perform the group audit engagement and obtain sufficient appropriate audit evidence to provide a basis for the group audit opinion. The risk-based approach in CAS 600 provides requirements and guidance on what, where, and by whom the work is to be performed. The group auditor’s responsibilities become even more important in identifying and assessing risks of material misstatement at the group financial statement level and assertion level and for designing and performing the audit procedures. 

It provides guidance about the scope of further audit procedures that would respond to the assessed risks of material misstatement at a component (with the involvement of component auditors as applicable) using three approaches:

• Design and perform further audit procedures on the entire financial information of the component
• Design and perform further audit procedures on one or more classes of transactions, account balances, or disclosures
• Perform specific further audit procedures

However, the standard recognizes that the involvement of component auditors is critical for many group audit engagements and that the group auditor needs to determine the nature, timing, and extent of involvement of component auditors.

Scalability of the Standard

The principles-based approach in CAS 600 allows the auditor to adapt and apply the standard to a wide variety of circumstances, and audits of groups of different complexity. The standard includes separate sections to highlight the requirements and application material for circumstances when component auditors are involved. Therefore, if the group auditor carries out the entire group audit – for example when the group auditor can perform audit procedures centrally or is able to perform procedures at the components without involving component auditors – some of the requirements in CAS 600 are not relevant because they are conditional on the involvement of component auditors.

Materiality and Aggregation Risk

The existing standard contains both concepts of component materiality and component performance materiality. However, it does not explain the consideration of aggregation risk in the group audit.

Now, CAS 600 focuses on component performance materiality for planning and performing audit procedures on component financial information for purposes of the group audit. This change was made to differentiate the materiality used for the component in the group audit from the materiality used in performing a standalone audit of the financial information of the component. The standard also defines aggregation risk and has added this definition to CAS 320, Materiality in Planning and Performing an Audit, along with a corresponding change to the definition of performance materiality, as a consequential amendment.

Canadian Amendments to ISA 600 (Revised)

The only Canadian amendment made to ISA 600 was to replace references to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (Including International Independence Standards) (IESBA Code) with relevant ethical requirements applicable in Canada. In this regard, revisions were made to the references to ethical requirements in the sample Auditor’s Report in Appendix 1 of CAS 600.

Hence, you read about the alert issued about how CAS 600 replaces the extant standard and what were the new and revised requirements to consider. myCPE keeps on bringing up useful CPD webinars in both live and on-demand videos on subjects like these. Here’s a Wonderful On-Demand Course to tell you more.