Changes to Canadian Auditing Standards

By Jeff Lack, BAcc, CGA – Accounting Supervisor
From the WB Condo Connection – Volume 2, Issue 4
Boards of Directors will notice, and should be aware of, recent changes to Auditing Standards in Canada that will affect the financial audit of their condominium corporation. These changes take effect for all year-ends ending after December 14, 2010. In short, the old Generally Accepted Auditing Standards (GAAS) are being replaced by new Canadian Auditing Standards (CAS’s) which comply with the International Standards on Auditing (ISA’s) in order to meet the global trend of moving towards one auditing system for all countries.
However, since your condominium corporation is not a global or international company, you’re likely wondering what any of this has to do with you. In order to create consistency, the new CAS’s are mandatory for all audits, regardless of size or corporate structure, and auditors are required to comply with the new rules. As such, there are some changes that you should be aware of.

“Shall” vs. “Should”

The audit requirements under GAAS provided auditors with the ability to exercise professional judgment when performing audit tests by incorporating the word “should” into the requirements. For example, an auditor “should” perform a specific test for a specific item, such as obtaining a bank confirmation. However, if the auditor, using his / her professional judgment, deemed that the test (i.e. a bank confirmation) was not required, or that their other audit work was sufficient to obtain necessary audit evidence, they did not have to perform that test – the standards only suggested that they “should”.
The new CAS’s (based on the ISA’s) remove much of that professional judgment by replacing the word “should” with the word “shall”. In such instances, the auditor will now be required to perform such tests, regardless of their professional opinion, as they would not be in compliance with the standards if they did not complete the requirement that specifies that they “shall” perform such testing to obtain specific audit evidence.
Bottom Line: Additional required audit work may result in a higher audit fee.

Specific Changes that Boards will Notice

Board members who are familiar with the old standards and audit process will notice the following changes (and additions) to the new Canadian Auditing Standards.

1. Agreeing to Terms of the Audit Engagement

The Engagement Letter that has always been used by auditors will have some minor changes to it to distinguish and clarify the roles of management and the Board of Directors. However, the more significant change is the requirement that the Engagement Letter be signed by the Board and returned to the auditor prior to the auditor commencing the audit work.
Bottom Line: If a Board holds or does not sign the Engagement Letter, the audit can’t begin and an AGM can not be scheduled.

2. Communication with Those Charged With Governance

This standard now requires that the auditor follow several specific procedures for communicating directly with the Board of Directors. Where in the past much of the communication may have been done indirectly through the property manager, the auditor must now establish a two-way communications process directly with the Board. As such, designated Board members can expect to receive an email and / or phone call directly from the auditor to discuss the audit process. In this context, the auditor may also be asking more direct questions to the Board members, either verbally or in writing, including questions related to the Boards responsibilities and governance of the corporation and / or inquiries relating to significant matters such as the potential for fraud.
Bottom Line: Under the new standards, these procedures and questions are now required and will become standard so don’t be surprised by them – they should be expected.

3. Initial Audit Engagements – Opening Balances

Under the old rules (GAAS), when an auditor obtained a new client, he / she was able to use and rely on the opening financial statement balances provided that the client had an audit done in the previous year. Within Canada, it is taken as a given that all auditors are properly trained and governed, and as such the previous audit opinion can be relied upon. With the move to CAS’s (based on International Standards) this assumption regarding auditors training and governance is no longer valid as the new standards must now consider auditors from other countries. The result is that auditors must now obtain their own audit evidence to verify the opening balances of new clients rather than relying on the figures of the previous auditor.
Bottom Line: When switching auditors, additional first year “set-up” costs may be incurred as a result of the new, additional work that auditors must now perform for new clients.

4. Subsequent Events

Auditors are required to report all subsequent events (events occurring after the year end) that might materially affect the financial statements. For example, a major contract that is entered into after the year end should be disclosed. This requirement has not changed under the new rules.
What has changed however is the timeframe that auditors must consider for subsequent events. The auditor is required to cover all events up to the date of the financial statements. Under the previous standards, the financial statement date was the day that the auditor substantially completed their audit work. Under the new rules, the financial statement date must be the date that the Board of Directors approves the audit.
For example, in the past, if a corporation had a December 31 year-end and the auditor completed the audit on February 20 the audit report would be dated February 20. The auditor would be responsible to report any material subsequent events up to February 20.
Under the new rules, if the Board of Directors does not get around to approving the audited financial statements until April 4, the auditor must date the audit report April 4 and complete additional subsequent events testing up to April 4 (which, if there is a material event, may change the audit, requiring a new approval date which would require additional subsequent event testing). As you can see, there is a bit of a catch-22 here.
Bottom Line: Reviewing and approving the audit in a timely manner will ensure that additional follow-up work and subsequent event testing is minimized and the AGM can be scheduled appropriately.
While this does not cover all of the changes relating to the new Canadian Auditing Standards, it does address some of the more significant changes that Boards of Directors should be aware of. You may also notice some other minor items, such as Boards now being required to approve the year-end audit journal entries and additional details that have been added to the standard audit report.
If you have additional questions or concerns regarding these changes, we would encourage you to speak directly to your corporation’s auditor as he / she will be familiar with the new standards being used. We especially encourage you to contact your auditor and your property manager if your year-end date is after December 14, 2010 and you notice that any of the above procedures have not been implemented by your auditor.