Global guidance

The CICA Handbook adds a new section for auditors who are reporting within an international context

When the Auditing Standards Board revised the comparison of Canadian auditing standards with the International Standards on Auditing in Section 5101 of the CICA Handbook last year, it asked the task force working on the project to consider whether Canadian CAs who are asked to use international standards needed additional guidance. In the long run, of course, one set of internationally accepted accounting and auditing standards are likely to emerge and gain recognition by the world's capital markets. But we're not there yet. In the meantime, what should auditors do?

Few auditors would have been asked about "foreign reporting" 10 years ago. With increasing cross-border trading and global financing, however, auditors may find they are being asked to report on financial statements that have been prepared in accordance with International Accounting Standards (IASs) or a foreign GAAP (such as US GAAP). What's more, they may be asked to conduct their audits in accordance with International Auditing Standards (ISAs) or foreign GAAS (which could be the generally accepted standards of another country, or ISAs). Can a Canadian auditor report solely in accordance with a foreign GAAP or foreign GAAS? What would the auditor's report look like?

The Handbook did not provide guidance on these questions. So the Auditing Standards Board asked its Section 5101 task force to develop new Handbook recommendations on foreign reporting. Section 5610 applies to the audit of financial statements of either a Canadian or a foreign entity. It deals with the criteria for accepting an engagement, general and examination standards, and reporting standards for foreign reporting engagements within the framework illustrated in the exhibit below.

For Canadian entities, there is a presumption that Canadian GAAP and Canadian GAAS are appropriate. For many Canadian entities, these are required by their incorporating or other governing legislation. Nonetheless, there may be circumstances when international or foreign GAAP or GAAS may provide useful information. For that reason, the new section does not prohibit reporting on Canadian entities when the audit is conducted in accordance with ISAs or foreign GAAS or when the financial statements are prepared in accordance with lASs or foreign GAAP.

Criteria for accepting an engagement Section 5610 permits the auditor to accept a foreign reporting engagement provided he or she has adequate knowledge of the international or foreign GAAP and/or GAAS selected - and the selected GAAP and/or GAAS are consistent with the financial statements' purpose. To ensure a common understanding, the auditor should obtain management's written acknowledgment of the financial statements' intended purpose.

General and examination standards

When conducting an audit, the auditor must follow the general and examination standards set out in "Generally accepted auditing standards," Section 5100 of the CICA Handbook, in order to comply with provincial institute rules of professional conduct. Canadian standards are, therefore, the "base" for Canadian auditors. When engaged to report in accordance with ISAs or foreign GAAS, the auditor would also perform any additional procedures required to comply with the general and examination standards (or their equivalent) of the ISAs or foreign GAAS.

Reporting

The new section contemplates three types of reports:

1. Reports under Canadian GAAS on financial statements prepared in accordance with IASs or foreign GAAP.

2. Reports under ISAs or foreign GAAS.

3. "Combined GAAS" reports that identify both Canadian GAAS and ISAs or a foreign GAAS.

Usually, only one set of an entity's financial statements is prepared for shareholders. If additional financial statements are prepared using a different GAAP, shareholders are entitled to know that more than one set exists. For that reason, the new section recommends that, when reporting to shareholders on more than one set of financial statements for the same period, the auditor's report include a cross-reference to the other report. Shareholders could, therefore, request the other financial statements.

When a Canadian entity prepares financial statements for shareholders in accordance with IASs or a foreign GAAP, but not also in accordance with Canadian GAAP, the shareholders are entitled to know that the financial statements might differ had they been prepared in accordance with Canadian GAAP. The new section recommends that an explanatory paragraph in the auditor's report refer to a Canadian GAAP reconciliation contained in the financial statements. If such a reconciliation is not contained in the financial statements, the section recommends including a warning that the financial position, results of operations and cash flows might be significantly different had the financial statements been prepared in accordance with Canadian GAAP

In addition, the auditor's report should emphasize that the financial statements have not been prepared in accordance with Canadian GAAP; if no explanation appears in the financial statements, the report should also state that the financial statements will not, or may not (as appropriate), meet the reporting requirements of Canadian statutes and regulations. An appendix to "Foreign reporting" contains a diagram explaining that the wording would be "may not" only where the entity has not prepared a Canadian GAAP reconciliation and the auditor is unsure whether significant differences exist between Canadian GAAP and the GAAP selected.

Section 5610 includes a similar recommendation for an auditor who reports to a Canadian entity's shareholders using an ISA or foreign GAAS report, but not a Canadian GAAS report; in this case, a caution in the auditor's report would explain that it is not intended to satisfy the reporting requirements of Canadian statutes and regulations.

The auditor may be asked to refer to both Canadian GAAS and another GAAS in one report. In such circumstances, the report would take the format prescribed by one GAAS but also identify the other GAAS in the scope paragraph (or its equivalent). Any difference in reporting would be explained in comments attached to, but distinct from, the report.

"Foreign reporting" represents a timely addition to auditing standards by providing guidance to auditors who are asked to use international standards in their engagements. While the new section appears fairly technical, it also includes a number of illustrative examples designed to help auditors deal with the often complex issues they face in determining whether they can accept and report in these situations.

[Author Affiliation]

Eric Turner, CA, is a senior manager in the CICA's Auditing Standards department.