What are the procedures that an auditor performs before accepting a client or continuing an engagement?

1.What are the procedures that an auditor performs before accepting a client or continuing anengagement?

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Balance Sheet, Financial Ratio, Generally Accepted Accounting Principles

The following table provides an overview of how the Office applies the three principles of acceptance and continuance:

Initial engagement acceptance: new financial audits

New discretionary financial audit engagements. Where the Auditor General of Canada is not named as an entity's auditor in any Act of Parliament, an entity may make a request by Order in Council that the Auditor General be appointed as auditor or it may make a specific request directly to the Auditor General.

The Auditor General may decline a request to perform a discretionary financial audit and may waive the requirement to be appointed auditor of a Crown corporation under Section 134(2) of the FAA.

For each new discretionary financial audit where the Office has discretion to accept or decline the engagement (including all requested appointments under 134(2) of the FAA), the entity principal shall

• consult Legal Services to determine whether the Office has the authority to conduct the engagement;
• perform the required acceptance procedures;
• present an acceptance recommendation and briefing note to the assistant auditors general of the annual audit practice for approval; and
• for an accepted engagement, document in the audit engagement file the practice decision and accompanying analysis and briefing note.

The assistant auditors general of the annual audit practice1 should review and approve the recommendation to accept or decline a discretionary financial audit before the start of planning activities and before the Office makes commitments to prospective audit entities. Prior to approving such recommendations, the assistant auditors general of the annual audit practice shall consult with the executive committee to ensure Office-wide resourcing is considered.

The November 2005 policy decision that the Office will act as auditor or joint auditor of all parent Crown corporations does not eliminate the need for an acceptance and continuance analysis before accepting such an appointment. This analysis is appropriate to establish whether the Office

• is competent to perform the engagement and has the capabilities, including time and resources, to do so;
• can comply with relevant ethical requirements; and
• has considered the integrity of the client and does not have information that would lead it to conclude that the client lacks integrity.

This will determine whether it is necessary or appropriate for the Auditor General to waive the requirement to be auditor or joint auditor and decline the engagement.

New statutory financial audit engagements. All new statutory financial audit appointments require the completion of initial acceptance procedures; however, they require review by the assistant auditors general of the annual audit practice only where significant issues are identified, including those that would cause the Office to waive or decline the appointment were that option available.

Where the acceptance procedures identify issues that would cause the Office to waive or decline the appointment if that option were available, the engagement leader consults with the assistant auditors general of the annual audit practice to agree on their assessment, presenting a briefing note outlining the nature and scope of the issues, conclusions resulting from consultation with others, and how the issues were resolved.

For each new statutory financial audit, the engagement leader shall

• perform the required acceptance procedures;
• document the procedures in the audit engagement file and consider the impact of findings, if any, on engagement risk and audit strategy; and
• where significant issues are identified, including those that would cause the Office to waive or decline the appointment were that option available,

  (a) present a briefing note to the assistant auditors general of the annual audit practice outlining the nature and scope of the issues, conclusions resulting from consultation with others, and how the issues were resolved;

  (b) document in the audit file the nature and scope of the issues, conclusions resulting from consultations, how the issues were resolved, and the briefing note;

  (c) consider the guidance expressed in CAS 706.A5 regarding including an "Other Matter" paragraph in the auditor's report to explain why it was not possible to withdraw from the engagement.

Information to be obtained and sources. The information the Office needs to obtain before accepting a new financial audit engagement is set out in the Acceptance Template, which is completed when preparing an acceptance analysis. Auditors may also refer to OAG Annual Audit 2321 for situations involving group audits.

Sources of information may include

• communication with existing or previous providers of professional accountancy/assurance services to the entity, in accordance with relevant ethical requirements, and discussions with other third parties;
• inquiry of other Office personnel or third parties such as legal counsel and government officials; and
• background searches of relevant databases.

Documenting acceptance of new financial audit appointments. Whether or not issues have been identified, the Office needs to adequately document the decision-making process concerning the acceptance. This includes a synthesis of documents collected, interview notes, and a rationale for the decision made. Information collected and conclusions reached during the assessment of potential risks associated with the assurance engagement, on the competence of audit team members, knowledge of the entity, potential conflicts of interest, and management integrity form part of any briefing notes to executives or others, in addition to resource and funding requirements. Where issues were identified, and the Office decided to accept the engagement, the engagement leader documents how the issues were resolved.

If the Office decides not to accept an assurance engagement, the audit team places all documentation and records of the decision in the permanent section of the audit file in the audit working paper software.

Initial engagement acceptance: performance audit and special examination

Performance Audits. The Office identifies and selects performance audits. Its authority to conduct the audit does not come from an appointment, but rather from the Auditor General Act.

The concept of initial engagement acceptance by the Office, prior to planning a performance audit, normally does not apply.

Generally, in performance audits the public sector auditor is empowered by legislative authority and mandate to select and conduct the performance audit. CSAE 3001.29, however, requires the practitioner to agree to the terms of the engagement with the engaging party. In these circumstances, an alternative procedure to meet the aim of the requirement in CSAE 3001.29 is to seek acknowledgment that the responsible party understands the terms of the performance audit. Seeking such acknowledgment may help to avoid misunderstandings.

Special Examinations. Section 142(1) of the Financial Administration Act, subject to section (2), provides that a special examination shall be carried out by the auditor of the Crown corporation. As such, the Office's special examination practice is mandatory where the Office is the auditor of the Crown corporation. These engagements can typically be described as a continuation of an entity relationship from one form of audit to another.

The Auditor General may be appointed examiner under Section 142(2) of the FAA, even though the Office is not the auditor of the Crown corporation. Under this circumstance, it would be appropriate to conduct an acceptance and continuance analysis similar to that conducted for a new discretionary financial audit.

The concept of initial engagement acceptance by the Office, prior to planning a special examination, other than for appointments under Section 142(2) of the FAA, does not apply.

Performance audits, special examinations, and continuing financial audits

The planning phase of a performance audit, special examination, and continuing financial audit includes an assessment of the audit team's competence, capability, time and resources, ability to comply with relevant ethical requirements, and, where applicable, consideration of the integrity of the entity (OAG Audit 1031, and OAG Audit 3031). For performance audits, this assessment begins during the Office’s strategic audit planning and selection process.

These assessments are carried out as part of the planning procedures noted in the table above and provide valuable information in performing engagement risk assessments. Where issues are identified as a result of these planning procedures, the engagement leader consults the assistant auditors general of the applicable audit practice2 and documents how the issues were resolved.

The engagement leader remains alert to any information that would have caused the Office to decline (or otherwise not accept) the audit engagement had that information been available earlier, and communicates any such information promptly to the assistant auditors general of the applicable audit practice, so that the Office and the engagement leader can take the necessary action.

Audit Practice Capacity

Should individual audit practices be unable to accept one or more new engagements within established audit practice resource envelopes, the assistant auditors general of the applicable audit practice shall consult the remaining audit practices assistant auditors general prior to accepting the engagement.

Withdrawal from an audit appointment, cancelling or significantly postponing an audit

Withdrawal. Withdrawal from an appointment as auditor may be desirable or necessary in certain circumstances. Where the engagement leader obtains information that would have caused the Office to decline an engagement appointment had the information been available earlier, and/or the engagement leader believes the Office should consider withdrawal from an engagement, the engagement leader consults the assistant auditors general of the applicable audit practice, Legal Services, and the Auditor General.

Examples of situations where withdrawal from an audit appointment should be considered are

• known issues with management integrity (for example, fraud),
• significant resource capacity issues to conduct a discretionary engagement, and
• management's lack of commitment to timely financial reporting.

Cancellations and postponements. While withdrawal as auditor is a rare occurrence, the Office may exercise the discretion provided for performance audits by the Auditor General Act by cancelling and postponing audits. In addition, an audit of any type (financial audit, performance audit, or special examination) may be postponed where this option exists and the Office believes an audit can be conducted at a later date.

Communication. Due to the significance of the circumstances, the fact that Office audit engagements are often conducted on related entities, and the fact that entities are subject to audit across various product lines, it is appropriate to inform the executive committee of the circumstances encountered that are leading the Office toward withdrawing from, cancelling, or significantly postponing any audit engagement.

A briefing note presented to the executive committee outlines the nature and scope of the issues, conclusions resulting from consultations, and how the issues were resolved including the withdrawal, cancellation, or significant postponement decision.

Analyzing a potential withdrawal, cancellation, or significant postponement may involve

• determining with Legal Services whether there is a professional, legal, or regulatory requirement to remain as auditor or for the Office to report the withdrawal, cancellation, or postponement, and the associated reasons, to others outside the Office;
• discussing with the appropriate level of the entity's management and those charged with its governance the appropriate action that the Office might take based on the relevant facts and circumstances;
• if the Office determines that it is appropriate to withdraw, cancel, or postpone the engagement,

  (a) discussing with the appropriate level of the entity's management and those charged with its governance this decision and the associated reasons; and

  (b) communicating with the Clerk of the Privy Council, Secretary to the Cabinet, and/or Parliament as required; and

• documenting significant matters, consultations, conclusions, and the basis for the conclusions.

Source and legislative authorities for audit mandates

To further assist in the understanding of the legislative authorities referred to in the above sections, a discussion of legislative authorities follows. It is not, however, intended to be an exhaustive list of the sources of Office audit mandates. Additional sources, such as Section 7.1 of the Auditor General Act, may exist.

The Office's audit mandate includes assurance engagements that can be classified as

• discretionary financial audit engagements,
• statutory financial audit engagements,
• performance audits, or
• special examinations.

Discretionary financial audit engagements. Most of the discretionary financial audits that the Office conducts are pursuant to Section 11 of the Auditor General Act. This section of the Act states that the Auditor General can, if in his or her opinion such an assignment does not interfere with his or her primary responsibilities, at the request of the Governor in Council, inquire into and report on any matter relating to the financial affairs of Canada or inquire into and report on any person or organization that has received financial aid from the Government of Canada.

Another source of discretionary financial audits from the Auditor General Act is the combination of sections 5 and 7. Section 5 states that the Auditor General is the auditor of the accounts of Canada, including those related to the Consolidated Revenue Fund, and shall make examinations and inquiries as he or she considers necessary to enable him or her to report as required by the Act. Section 7(2) of the Act states that the Auditor General shall call attention to anything that he or she considers to be of significance and of a nature that should be brought to the attention of the House of Commons.

In addition, the Office has a broad mandate to be the auditor or joint auditor of parent Crown corporations and their wholly owned subsidiaries; however, in some instances, it may choose not to audit one of these corporations. Under Section 134(2) of the Financial Administration Act (FAA), the Auditor General shall be appointed the auditor or a joint auditor of every Crown Corporation, unless the Office decides to waive its right to be named the auditor of a Crown Corporation.

In November 2005, the Auditor General approved the following policy decisions regarding the right of the Auditor General to be appointed auditor or joint auditor of Crown corporations under subsection 134(2) of the Financial Administration Act:

• The Auditor General will act as auditor or joint auditor of all parent Crown corporations.
• The Auditor General will continue to act as auditor of those wholly owned subsidiaries of various parent corporations that she then audited.
• For those subsidiaries that the Auditor General did not then audit, she waived her right to be appointed as auditor. However, she reserved her right to be appointed as auditor of certain subsidiaries, based on the Office's assessment of the risk and significance of the subsidiary to its parent.
• To facilitate the annual appointment process, the Auditor General decided to continue to act as auditor of a Crown corporation once she has been appointed. Should she subsequently decide to waive the appointment as auditor for a particular corporation, she would inform, in writing, the Clerk of the Privy Council and Secretary to the Cabinet.

For territorial corporations where there is no specific constituent act naming the Auditor General as the auditor, the Office relies on the general mandate of the Auditor General as the auditor of the accounts of the territories (sections 40(1) and (2) Northwest Territories Act, sections 43 and 46 (1) and (2) Nunavut Act, and sections 34(1) and (2) Yukon Act) as well as the financial administration acts of each territory.

Statutory financial audit engagements. Statutory financial audits are those audit engagements conducted under Section 6 of the Auditor General Act and those where the Auditor General of Canada is named as the entity's auditor in any Act of Parliament and where the Auditor General does not have the discretion to waive or decline the appointment.

New statutory financial audits are usually a result of the creation of a new entity or Crown corporation whose enabling legislation names the Auditor General of Canada as the auditor.

Engagement leaders are expected to monitor and report to their assistant auditor general on developing activities in the organizations they audit that may result in a new or changed mandate that the Office of the Auditor General may be asked to undertake.

Performance audits. Sections 7 and 8 of the Auditor General Act give the Office considerable discretion to determine what areas of government to examine in a performance audit. Performance audits may look at a single government program or activity, an area of responsibility that involves several departments or agencies, or an issue that affects many departments. In determining what to audit, the Office focuses on areas in which federal organizations face the highest risk. Examples of high-risk areas are those that cost taxpayers significant amounts of money or that could threaten the health and safety of Canadians if something were to go wrong. The Act was further amended in 2005 with the introduction of Section 7.1 to permit performance audits of certain foundations that receive public money. Section 7.1 was expanded in 2006 to give the Auditor General the power, at his or her discretion, to inquire into the use of federal grants, contributions, or loans, even when they are transferred outside government to their eventual recipients (excluding other levels of government).

Section 23(2) of the Auditor General Act sets out that the Commissioner of the Environment and Sustainable Development, on behalf of the Auditor General, has the mandate to report annually to the House of Commons concerning anything that the Commissioner considers should be brought to the attention of Parliament in relation to environmental and other aspects of sustainable development.

Special examinations. The Office conducts special examinations at least once every 10 years, as provided in sections 138(1) and (2) of the FAA. Section 142(1) of the FAA, provides that a special examination shall be carried out by the auditor of the Crown corporation unless the Governor in Council appoints another auditor under section 142(2). As such, our special examination practice is mandatory where we are the auditor of the Crown corporation.

The provisions of section 142(2) are sometimes used to appoint the Auditor General as sole examiner when the Auditor General is a joint auditor of a Crown corporation.

The Office may conduct special examinations more frequently, if required by the Governor in Council (the Cabinet acting in a legal capacity), the appropriate minister, the corporation's board of directors, or the Auditor General.

Footnote:

1

References to “the assistant auditors general” throughout this audit manual section shall be read to mean the group of all assistant auditors general overseeing the annual audit practice.

Return to footnote 1 referrer

2

Reference to “applicable audit practice” throughout this audit manual section shall be read to mean the audit practice within which the audit is being performed.

Return to footnote 2 referrer

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