CPA Canada exams often include Assurance assessment opportunities (AOs) that test your knowledge of different reports used in assurance and related engagements. Though there are several special reports, in this blog, we’ll focus on learning audits, reviews, and compilations.
Summary
What’s an Audit engagement?
An audit engagement checks a company’s financial statements and underlying data to ensure they accurately reflect the company’s financial situation for users like investors. An audit provides reasonable assurance, the highest level of assurance available.
Audits require extensive work and are more expensive than other engagements. Auditors must gather detailed documents and third party support such as bank confirmations. Audit procedures involve detailed substantive testing and tests of controls such as inspecting inventory, and tracing invoices back to the general ledger.
The audit report provides a positive opinion which states: “In our opinion, the financial statements of ABC Company present fairly, in all material respects.”
What’s a Review engagement?
A review engagement is similar to an audit but requires less effort and therefore less time. Reviews provide a lower level of assurance, called limited assurance. Rather than stating the financial information is “reasonable”, a review checks if the information seems “plausible”, meaning it makes sense in the company’s situation.
In reviews, procedures involve inquiries, discussions, and analytical procedures, rather than detailed testing. The documentation needed is less extensive and doesn’t always require third party input. For example, cash can be tested in a review using bank statements provided by the client rather than bank confirmations sent to the client’s bank directly.
The review engagement report provides a negative conclusion stating, “Nothing has been brought to our attention to suggest that the financial statements are not fairly presented in all material respects.”
When presented with an AO on Audit or Review, and you’re asked to provide procedures, you should use the risk, assertion, procedure (RAP) framework for both audit and review procedures. For example, a procedure for review may be:
- Risk: ABC Inc. has seen an unusually large increase in property, plant, and equipment (PP&E) this year. There is a risk that this PP&E does not exist.
- Assertion: Existence
- Procedure: Inquire ABC Inc. management about any capital additions in the year and compare this to the general ledger to determine if the GL balance is plausible thus ensure existence of PPE.
What’s a Compilation engagement?
A compilation organizes financial information provided by the client into financial statements. The accountant does not verify the information, rather ensures it’s compiled in accordance with the chosen basis of accounting and that the financial statements are mathematically correct. A compilation provides no assurance and no audit opinion or review conclusion.
Examples of bases of accounting include:
- Cash basis of accounting
- Cash basis of accounting with certain accruals and estimates
- Other basis of accounting as required by the user
At the end of the engagement, a compilation report is provided to the client, including a note that explains the basis of accounting used to prepare the financial statements to the users.
How to approach these AOs to score a C
Below is a step-by-step framework on how to approach these AOs in the CPA Canada exam cases, with explanations:
Step 1: Identify valid report options based on the user’s needs.
Step 2: Briefly explain the different reports you identified in Step 1, making sure you discuss the assurance level of each.
Step 3: Discuss the important differences between the reports you’re comparing. Indicate whether each factor is a pro or con for each report and explain why. Only discussing one factor such as cost, will not get you to a C. Look at the case facts you are provided and discuss all relevant factors linking back to the user’s needs. Consider the following:
- The level of assurance needed (reasonable, limited, or no assurance)
- Cost
- Timeliness
- Type of procedures required
Unless stated otherwise, assume that the person you are explaining these reports to doesn’t know what the reports are. You need to explain everything in detail. For example, for the level of assurance, explain what reasonable versus limited assurance means. For procedures, if you state that an audit requires detailed substantive tests, explain what this means and what kinds of procedures are involved.
Step 4: Provide a firm, definitive conclusion on the type of engagement your client should request, consistent with your analysis.
Step 5: If applicable, request the client to clarify unclear terms with the user like “check” or “verify” to confirm the level of assurance required.
Step 6 (if asked): Provide 2-3 valid procedures for each report.
Read the case carefully to determine whether you need to provide procedures for all reports you are comparing or only the one you concluded to use. For review procedures, refer only to inquiry, discussion, or analytical procedures, not substantive tests like inspection, vouching, and so on, which are audit procedures.
The above 6 steps provide detailed walkthrough of how to appraoch these AOs. A shorter version of these 6 steps can be remembered with the acronym SAPPY:
- Special report (what reports?)
- Assurance level (reasonable, limited, or no assurance?)
- Pros/cons (level of assurance, cost, timeliness, type of procedures, user needs)
- Preferences of users (what do they want?)
- Your recommendation (including an assumptions and procedures, if asked)
Extra Resources
As you study, refer to the relevant Canadian Auditing Standards (CAS) and when discussing reports, remember to include the relevant CAS number in your case response.
Looking for help with passing the exams? Check out Gevorg’s CPA Assurance CAS Technical Study Notes.
