C-PEM Introduction Webinar

1. C-PEM IntroductionWebinar Stuart Hartley FCA shartley@focusroi.com

2. Agenda.. • C-PEM challenges and solutions • Tips for reducing the cost of audits • Other changes in C-PEM

3. Introducing C-PEM • Released in June 2010 • Volume 1 Core concepts • Audits, reviews and compilations • Volume 2 Practical Guidance Includes 2 integrated case studies • Part A Audits • Part B Reviews • Part C Compilations • Part D Practice Aids (forms, etc. on a CD)

4. The C-PEM Case Studies

5. C-PEM Challenges & Solutions …. • Auditing standards have been clarified/revised • Major changes • The C-PEM Solution • Multiple Financial Reporting frameworks • Major changes • The C-PEM Solution • Applying CASs to Micro Sized Entities • The C-PEM Solution • Reviews, compilations and other

6. Challenge #1 • ALL Auditing standards have been clarified -- some revised (Re-written!)

7. “Clarified” Standards • Italics to specific “shalls” • New structure for auditing standards • Introduction • Objectives • Definitions • Requirements (the auditor shall…) • Application and Other Explanatory Material

8. Impact of Clarified Standards • Plus • Structure makes them easier to read/use • Framework provides a consistent approach • “Shalls” make very clear what is required • Minus • “Shalls” make very clear what is required • Standards are more prescriptive • Change in practice is required • New terminology to learn

9. t n e e g Evaluate the audit s m n Plan the audit n i s evidence obtained t o s r p e o s s p e s e R A R k k Perform Implement Prepare the s s i i responses risk assessment R R auditor’s report to assessed RMM procedures The CAS Structure 1. 2. 3

10. CAS 200 - Overall Objectives • 200.18 • The auditor shall comply with all CASs relevant to the audit. A CAS is relevant to the audit when the CAS is in effect and the circumstances addressed by the CAS exist. • 200.19 • The auditor shall have an understanding of the entire text of a CAS, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. • 200.21 • To achieve the overallobjectives of the auditor, the auditor shall use the objectives stated in relevant CASs in planning and performing the audit

11. Tip 1… • Read & understand the CAS requirements • CICA Handbook Part 1 • C-PEM Volumes 1 and 2 • Use of C-PEM Forms and practical aides • Staff training courses • Webinars, etc. Applying the new CASs effectively requires an investment to be made

12. Overall objective: Reduce audit risk to an acceptably low level

13. CAS CAS Title Italics Shalls New Old HB CAS 600 Audits of group financial statements 7 40 33 6930 CAS 700 Forming an opinion/reporting on F/S 12 38 26 5400 CAS 250 Consideration of laws and regulations 3 18 15 5136 CAS540 Estimates 1 16 15 5305 CAS 570 Going concern 0 15 15 N/A CAS 550 Related Parties 5 18 13 6010 CAS 705 Modifications to the opinion 10 23 13 5510 CSQC1 CANADIAN STANDARD ON QUALITY CONTROL 35 47 12 GSF 1 CAS 210 Agreeing the terms of audit engagements 5 16 11 5110 CAS 710 Comparative information 2 13 11 5701 CAS 530 audit sampling 0 10 10 N/A CAS 510 Initial audit engagements — opening balances 0 9 9 various CAS 560 Subsequent events 3 12 9 6550 CAS 240 Fraud in an audit of financial statements 28 36 8 5135 CAS 450 Evaluation of misstatements identified 3 11 8 5142 CAS 260 Communication with those charged with governance 7 13 6 5751 CAS 505 External Confirmations 4 10 6 5303 CAS 330 The auditor's responses to assessed risks 21 26 5 5143 CAS 580 Written representations 7 12 5 5370 CASs with more than 5 new “shalls”

14. Objective for Estimates The objective of the auditor is to obtain sufficient appropriate audit evidence about whether: (a) accounting estimates, including fair value accounting estimates, in the financial statements, whether recognized or disclosed, are reasonable; and (b) related disclosures in the financial statements are adequate, in the context of the applicable financial reporting framework.

15. 5305 Estimates CAS540 Current Subject matter "Shalls" Italics Risk Assessment Procedures 2 Identifying and Assessing RMM 2 Responses to the Assessed Risks 3 Further Substantive Procedures 3 Evaluating Reasonableness of Estimates 1 Disclosures 2 Indicators of Possible Management Bias 1 Written Representations 1 1 Documentation 1 1 Totals 16 Estimates

16. C-PEM overview of Estimates

17. 6010 Related Parties CAS 550 Current Subject matter "Shalls" Italics 1 Risk Assessment Procedures 7 1 Identifying and Assessing RMM 2 1 Responses to the Assessed Risks 5 Evaluating Accounting/Disclosure of Related Parties 1 1 Written Representations 1 1 Communication with Those Charged with Governance 1 Documentation 1 5 Totals 18 Related Parties

18. C-PEM Overview of Related Parties

19. 5303 External Confirmations CAS 505 Current Subject matter "Shalls" Italics Use of confirmations 1 Management's Refusal to allow confirm 2 2 Results of the External Confirmation Procedures 5 Negative Confirmations 1 1 Evaluating the Evidence Obtained 1 1 Confirming accounts recievable 4 Totals 10 Use of External Confirmations

20. Audit sampling CAS 530 Current Subject matter "Shalls" Italics Sample Design, Size and Selection of Items for Testing 3 Performing Audit Procedures 3 Nature and Cause of Deviations and Misstatements 2 Projecting Misstatements 1 Evaluating Results of Audit Sampling 1 0 Totals 10 Sampling

21. 6550 Subsequent events CAS 560 Current Subject matter "Shalls" Italics 1 Events between Date of F/S and Date of Auditor's Report 4 1 Facts after Date of Report but before Date F/S are Issued 4 1 Facts Known to Auditor after F/S Issued 4 3 Totals 12 Subsequent Events

22. Materiality CAS 320

23. Going concern CAS 570 Current Subject matter "Shalls" Italics Risk Assessment Procedures 2 Evaluating Management's Assessment 4 Additional Audit Procedures when events identified 1 Audit Conclusions and Reporting 1 Material Uncertainty Exists 3 Going Concern Assumption Inappropriate 1 Management Unwilling to Extend Its Assessment 1 Communication with Those Charged with Governance 1 Significant Delay in Approval of Financial Statements 1 0 Totals 15 Going Concern

24. 5142 Evaluation of Misstatements Identified CAS 450 Current Subject matter "Shalls" Italics 1 Accumulation of Identified Misstatements 1 Consideration of Identified Misstatements 2 1 Communication and Correction of Misstatements 2 Evaluating the Effect of Uncorrected Misstatements 2 Communication with Those Charged with Governance 2 1 Written Representation 1 Documentation 1 3 Totals 11 Misstatements

25. Challenge #2 • Multiple Appropriate Financial Reporting Frameworks (AFRFs)

26. GAAP until recently

27. GAAP from 2011 Onwards

28. Multiple AFRFs IFRS and ASPE are Canadian GAAP

29. Challenge #3 • Applying CASs to Micro Sized Entities In Europe: • Less than 1 million euros in revenue • Equivalent to 1.3 million Canadian dollars • Less than 10 employees

30. Reality of Micro Entity Audits • Limited number of F/S users • Reduced risk • Unsophisticated business processes and accounting systems • Few employees • Ownership is concentrated • Nature/quality of audit evidence available is less than larger entity • Costof an audit • disproportionately high as compared to larger entities

31. How CASs address SME audits… • “The auditor’s objectives are the same for audits of entities of different sizes and complexities. • This does not mean that every audit will be planned/performed in exactly the same way. • CASs recognize that specific audit procedures to be undertaken may vary considerably based on size of entity “Applying ISAs Proportionately with the Size and Complexity of an Entity” issued by IFAC in August 2009.

32. CAS Applicability to SMEs

33. Overall Audit Scope does not change

34. Still Required to Understand Internal Control • Pervasive areoften called entity level controls • Specific are oftencalled business process or application controls

35. Tip 2… Do not ignore the ‘Control Environment’. The active involvement of an owner-manager may serve to mitigate transactional risks (where segregation of duties not possible) in a small entity;

36. Traditional Audit Phases BUT Where does the required risk assessment fit?

37. Tip 3… ‘Risk assessment’ is NOT simply an ADD ON to rest of audit. x Risk assessment should enable the auditor to focus work on areas where the RMM is the highest and to reduce work on low risk areas. This applies in any size audit.

39. The Solution • Applying C-PEM to smaller entities

40. C-PEM • A completely new version of PEM that: • Reflects the new clarified CASs • Additional guidance on reviews and compilations • Aims for an enlarged base of users • An attractive book (in full color) for partners/staff to read on the bus/train/gym workout or at home • More practical “how to” guidance • Integrated case studies and completed forms/memos

41. C-PEMForms What C-PEM forms to use is always based on professional judgment C-PEM Forms facilitate: • Compliance with CAS requirements • Ease of use with new objectives and instructions • Capture of relevant audit evidence in one place • Reuse (after updating) - for up to 3-4 years • Ease of file review C-PEM Forms require some staff training on their use. Designed for use by a knowledgeable auditor C-PEM “Worksheets” are ONLY to be used when applicable

42. Tip 4… Select appropriate Forms to Use Select what C-PEM forms to use BEFORE work begins • Standard forms • Condensed forms • Memo to file (using standard forms as a guide) There is no reason why all three types of documentation cannot be used on the same audit. If a matter is significant use the standard form, if straightforward use the condensed and if really simple use a memo. Worksheets are only to be used when applicable

43. C-PEM forms structure Form numbering Financial Statements 100 series Tax matters 200 File completion 300 Planning 400 Risk Assessment 500 Risk Response 600 Detailed audit plans A-ZZ Income statement 700 Disclosure checklists 900 NOTE: Some form numbers have changed to better reflect their position in the audit process

44. Financial Reporting Frameworks – existing GAAP

45. Key C-PEM Forms

46. TIP 5…Spend time planning and saving costs

47. Tip 6 … Scope out low risk areas Scope out immaterial/low risk areas or Combine them and treat as one F/S area Consider where work can be reduced EACH year But consider whether an immaterial area is only small because of missing transactions

48. Risk Assessment (500 series) Form # Name Year 1 Year 2 Year 3 Year 4 Year 5 Identifying risks through 510 understanding the entity 520/522 Risk assessment 525 Going concern 530/532 Entity Level control 545-560 Control design/implementation 424 Summary of Assessed Risks New Form prepared Form Updated Key C-PEM Forms

49. Identify & assess risk • Scope of required risk assessment CAS 315.11-12 • Key PointIdentify sourcesof risks not just effects on the F/S How: C-PEM 510, 510c or NFP 510

50. TIP 7 …Focus on causes of risks not the effects