HAWKINGS EPP DUMONT LLP · LLP THE EXTERNAL AUDIT – AN INTEGRATED APPROACH “HELP US HELP YOU” 1 . INTRODUCTIONS 2 • Michael Epp CPA, CA, CMA • 30 years of public practice

HAWKINGS EPP DUMONT LLP THE EXTERNAL AUDIT – AN INTEGRATED APPROACH “HELP US HELP YOU”

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INTRODUCTIONS

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•  Michael Epp CPA, CA, CMA

•  30 years of public practice experience

•  Proud father of five and boating enthusiast

INTRODUCTIONS

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•  Jeff Alliston, CPA, CA

•  Eight years of public practice experience

•  Avid golfer

WHAT TO EXPECT

•  An understanding of the audit process

•  How internal control procedures can help to reduce audit risk

•  How external auditor’s view risk

•  Integrating both internal risks with external risks (working together)

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THE AUDIT PROCESS

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THE AUDIT PROCESS

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PRE-AUDIT CONSIDERATIONS

•  Terms of Engagement

•  The Communication Process

•  Communicating Deficiencies in Internal Controls

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THE AUDIT PROCESS

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THE AUDIT PROCESS

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AUDIT PLANNING

In Audit Planning auditors address three key elements:

I.  Understanding the entity

II.  Risk assessment

III.  Auditor’s planned response

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I. UNDERSTANDING THE ENTITY

•  Industry, regulatory, and other external factors •  Nature of the entity •  Selection and application of accounting policies •  Objectives, strategies and related business risks •  Measurement and review of entity’s

performance

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I. UNDERSTANDING THE ENTITY Obtaining an Understanding of the Entity and it’s Environment: •  Industry factors

•  Regulatory factors

•  Business operations

•  Investments and financing activities

•  Financial reporting

•  Selection and application of accounting policies

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I. UNDERSTANDING THE ENTITY Identifying Risks of Material Misstatement

Two types of risks: 1)  Business Risk – A risk resulting from significant

conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies

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I. UNDERSTANDING THE ENTITY Identifying Risks of Material Misstatement

Two types of risks: 2) Fraud Risk – A risk resulting from events or

conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud

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I. UNDERSTANDING THE ENTITY Materiality in Planning and Performing an Audit

•  Professional judgement

•  Users of the financial statements

•  Performance materiality

•  Specific circumstances

•  Trivial misstatements

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II. RISK ASSESSMENT

TOP DOWN APPROACH

TO INTERNAL CONTROL

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TOP DOWN APPROACH TO INTERNAL CONTROL

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Municipalities objectives

Risk of material misstatement

Internal control


Start at the “TOP” •  Entity level and IT general controls

•  Pervasive

Next examine the “BOTTOM” •  Activity level and IT application controls

•  Control activities

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Control Activities

•  Performance reviews

•  Information processing

•  Physical controls

•  Segregation of duties

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Internal Control Requirements

•  Evaluate design

•  Evidence implementation

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Evaluate Design

•  Create or obtain process narratives/flowcharts

•  Identify control points along the processes

•  Match identified controls to identified risks

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Evidence of Implementation

Perform a walkthrough

• Test “one”

Utilize

•  Inquiry, Observation, Inspection, Tracing

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II. RISK ASSESSMENT

Risk Assessment Procedures:

•  Inquiry

•  Analytical Procedures

•  Inspection

•  Observation

We are collecting audit evidence in the planning of audit engagements.

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II. RISK ASSESSMENT

Audit Risk Model

AR = IR x CR x DR

Audit risk = Inherent Risk x Control Risk x Detection Risk

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II. RISK ASSESSMENT

Risk of Material Misstatement

RMM = IR x CR

Risk of material misstatement = Inherent Risk x Control Risk

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II. RISK ASSESSMENT

Risk Assessments – Two Levels Financial Statement Level • Overall risks

• Pervasive risks

Assertion Level • Transaction level risks

• Specific risks

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II. RISK ASSESSMENT

Risk Assessments – Two levels – Municipal Financial Statement Level •  New finance director •  New accounting software

Assertion Level •  Existence of inventory •  Completeness of accounts payable •  Existence / completeness / accuracy of government

transfers

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II. RISK ASSESSMENT Financial Statement Assertions

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Combined Assertions

Classes of Transactions

Account Balances Presentation & Disclosure

Completeness (C) Completeness Completeness Completeness

Existence (E) Occurrence Existence Occurrence

Accuracy (A) Accuracy Cutoff Classification

Rights & Obligations

Accuracy Rights & Obligations Classification & Understandability

Valuation (V) Valuation & Allocation

Valuation

II. RISK ASSESSMENT

Significant Risks •  Revenue recognition

•  Accounting estimates

•  Misappropriation of assets

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III. AUDITOR’S PLANNED RESPONSE

Main Objective

Utilizing risk assessments to direct appropriate risk responses and audit procedures

“RISK DRIVES WORK”

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THE AUDIT PROCESS

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PERFORMING THE AUDIT

Objective

To collect audit evidence from audit procedures designed to respond to the identified and

assessed risks.

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PERFORMING THE AUDIT Audit Evidence

•  Risk assessment procedures

•  Substantive procedures §  Tracing / Vouching / Confirmations

§  Analytical / Proofing

§  Recalculation

•  Internal control procedures §  Testing controls (sampling)

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PERFORMING THE AUDIT

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Substantive Tests

Internal

Controls

Combined Approach

THE AUDIT PROCESS

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AUDIT CONCLUSIONS AND REPORTING

Audit Documentation

The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached ( terms such as “working papers” are used)

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AUDIT CONCLUSIONS AND REPORTING

Working Papers

External: prepared by you the client •  Municipal taxes – substantive analytical

•  Salaries and wages – T4 reconciliation

Internal: prepared by the auditor •  Internal control testing

•  GST – reasonability

•  Accounting estimates (check)

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CONCLUSION •  Increased internal controls help to reduce

audit risk

•  How external auditors can help to reduce errors (control deficiencies)

•  How external auditors can work with entity’s to create new internal controls to help reduce and or mitigate risk

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QUESTIONS

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Documents

HAWKINGS EPP DUMONT LLP · LLP THE EXTERNAL AUDIT – AN INTEGRATED APPROACH “HELP US HELP YOU” 1 . INTRODUCTIONS 2 • Michael Epp CPA, CA, CMA • 30 years of public practice