News & Views Issue 2003/03
Here is an appendix in MS Word format: Review Independence Letter
From the Professional Advisory Services Department (with contributions from the Practice Review & Licencing Department)
News`N Views is circulated to sole practitioners and partners in all CA firms in BC and the Yukon. The views expressed in this newsletter are those of the authors and do not represent an official position of the Institute.
Please Circulate This Newsletter To Your Staff - Duplication is Encouraged
In This Issue
Accounting and Auditing Standards
Hints and Ideas
Bits and Pieces
CICA's Public Interest and Integrity Committee (PIIC) has issued the final proposal for an updated Canadian independence standard. Many of you will remember the exposure draft that was issued a year ago in September 2002, which resulted in a near record number of responses to CICA. The current proposal has been revised to reflect extensive consultations with stakeholders. A special general meeting (SGM) is planned for November 25, 2003 for the membership to vote on the proposal and the material is available for your review on the Institute's website at www.ica.bc.ca, look for the "blue dot." To log in, please use sgm as the userid and the password is nov25.
Council is encouraging you to vote for these changes. Because the complex nature of situations requiring independence leads to lengthy updated rules and related council interpretations, PIIC has prepared a "plain English" guide to assist members and firms in understanding and applying the proposed updated standard. This information is available on the SGM website. Also on the website is a series of "Frequently Asked Questions" to help members comprehend the impact of these proposals on their specific circumstances.
Independence Requirements Not New
It is important to keep in mind that independence requirements are not new and have been around for long time. What is new is the systematic principles based framework which practitioners must now use to analyze independence for each engagement. This means there is a positive requirement on the part of each practitioner to address the issue of independence prior to taking on a new client or starting an assignment for an existing client.
The other new feature is terminology such as "threats to independence" and "safeguards" to describe circumstances that have always existed and the ways members have been managing them. The updated standard does require practitioners to articulate and document more clearly how they maintain their independence on assurance engagements.
Requirement Applies to All Assurance Engagements
The requirement for independence on assurance engagements is well-established and has always applied to audits, review engagements, other assurance engagements, and specified audit procedures engagements. If you find that your independence has been compromised, you can still provide compilation services to the client provided that you disclose the nature and extent of the compromised independence in the Notice to Reader report.
Prohibitions are those circumstances where it is never appropriate to provide assurance services. More guidance has been provided in that there are now clear prohibitions specifically for listed entities and some of a general nature for all clients. The ones related to listed entities have been developed through discussion with securities regulators to address their identified concerns.
Small audit, Review or Compilation Clients
For member firms whose clients are mainly small audit or review engagements, the most common threats would be:
While compilation engagements do not require independence, there is still the need to disclose any influence, interest, or relationship which may impair the practitioner's independence in the eyes of a reasonable observer.
Consult with Colleagues or PAS
It is widely recognized that members will encounter circumstances where it may be difficult to determine if they are faced with a threat to their independence. Therefore, members are encouraged to discuss the situation with professional colleagues or staff in the Professional Advisory Services Department. Call Doug Wallis, CA at 604-488-2629 or Stella Leung, CA at 604-488-2609 or toll free at 1-800-663-2677. It's important for members to know that the BC Institute intends to provide ongoing support for members in applying the updated independence standard by making available practice aids and courses.
Members may be aware that a recent decision of the Saskatchewan Court of Queen's Bench found our Fee Quotations and Solicitation rules invalid under the Charter of Rights and Freedoms. As a result, these rules were reviewed and revised, as necessary, to ensure they comply with the Charter and continue to meet the needs of the profession in today's practice environment. The proposals were approved by the membership at the Annual General Meeting on June 25, 2003.
The scope of the endorsement rule is extended to ensure that the rule applies to all members and that members have a reasonable basis for making any endorsements; it requires members to perform sufficient appropriate procedures to support the endorsements.
This change in the Rules of Professional Conduct will unlikely affect your practice as there is a school of thought that direct solicitation is largely ineffective. The thinking is that "good work on a prompt basis for a fair fee, thereby generating client referrals" is often the best way to expand your client base, especially for smaller firms.
Members are encouraged to review the amended Rules 214 and 217 and the related Council Interpretations in the updated Member's Handbook, available for download on the Institute's website at www.ica.bc.ca.
Accounting and Auditing Standards
Members are reminded that CICA Handbook Section 5751 Communication with Those Having Oversight Responsibility for the Financial Reporting Process is in effect for fiscal years ended on or after December 15, 2002. The requirements as set out in this section apply to all entities and to both audits and reviews (to a lesser extent, see Handbook Section 8200.30).
In particular, auditors and accountants must communicate matters that affect independence and confirm in writing that they are independent within the meaning of the Rules of Conduct on an annual basis PRIOR to issuing the auditor's or review engagement report. Of course, this is not to suggest that practitioners communicate with audit committees (or equivalent) only once a year but rather on an ongoing basis, which is then formalized in writing on an annual basis. The appendix to section 5751 provides an example of the communication. Members are encouraged to incorporate (and modify as appropriate) this correspondence into their template package at their earliest opportunity.
Please see the appendix where member John Hutton, FCA, has modified a version of the sample communication letter from the CICA Handbook for members to use in review engagements. We thank John for sharing this with practitioners. This sample is available for download in Word format on the News 'N View page of the Members Only section of the Institute's website at www.ica.bc.ca. This letter may be modified if proposed changes to our Rules of Professional Conduct related to Independence are adopted.
Handbook Section 7500, Auditor Association with Annual Reports, Interim Reports and Other Public Documents has been revised and becomes effective for all documents issued on or after November 1, 2003. Members should be aware that this section is not restricted to public companies but rather affects both profit and not-for-profit organizations. If any of your clients publish annual reports that include financial statements on which you have performed an audit or review, you will likely need to perform additional procedures to comply with the new requirements.
This means that before you consent to the use of your report or your name in the document, you are required to read the other information in the document to ensure there is no inconsistency with the financial statements.
Members should be aware that when releasing revised Section 7500 this past summer, the ASB also issued new Handbook Sections 7100, The Auditor's Involvement with Offering Documents of Public and Private Entities and 7115, Auditor Involvement with Offering Documents of Public and Private Entities - Current Legislative and Regulatory Requirements. No doubt, members who provide audit services to companies that raise capital through offerings will want to take a careful review of all three sections.
CAmagazine has just published an article in the September 2003 issue to assist members in understanding these new Handbook sections. Click this link to read the article on the web version of CAmagazine: http://www.camagazine.com/index.cfm/ci_id/16725/la_id/1.htm.
The Assurance Standards Board (ASB) has issued a new Section 5600 Auditor's Report on Financial Statements Prepared Using a Basis of Accounting Other Than Generally Accepted Accounting Principles that becomes effective October 1, 2003.
Members are reminded that this new section applies to reviews and audits and they would report under this section ONLY when financial statements are prepared in accordance with:
When reporting for the above situations, there is now a requirement to include an additional paragraph after the opinion paragraph explaining to readers that the financial statements have not been, and were not intended to be, prepared in accordance with GAAP and that they are intended for the information and use of the intended users and may not be appropriate for any other purposes. This suggests that the client entity would prepare general purpose financial statements using GAAP.
The underlying principle of this new section is that GAAP is the basis of accounting normally used for financial statements. It is the ASB's view that "soft-qualifications" currently given on non-GAAP financial statements should not be permitted. SECTION 5600.07 STATES THAT GENERAL PURPOSE FINANCIAL STATEMENTS PREPARED ON A BASIS OTHER THAN GAAP WOULD REQUIRE A RESERVATION AS SET OUT IN SECTION 5510. In particular, we suggest members who have housing co-operative clients funded by CMHC pay careful attention to this new section.
Sharing information common to many licensed offices, based on practice review visits.
What Have You Missed?
In the last issue, Hints and Ideas noted that December 2002 marked the introduction of significant changes in both generally accepted accounting principles as well as the assurance standards that we, as a profession, are required to meet in audit and review engagements. Since the new year, the Practice Review and Licencing Department has noticed that a significant number of practitioners are not keeping current with the new standards and are having difficulty implementing them in their practices. Accordingly, this article will review the areas where members are having trouble.
EIC 122 - Balance Sheet Classification of Callable Debt Obligations
Any debt, irrespective of its agreed repayment terms, must be disclosed in its entirety as a current liability if the holder of the debt has the ability to call the debt at its sole discretion. A significant amount of commercial bank "term" debt falls into this category. Practitioners have frequently just carried over prior years' disclosure of the debt without taking steps to see if EIC 122 applies. Where practitioners have identified the issue, it has been handled well through either proper disclosure or appropriate qualification of the assurance report. (See related article from February 2003 issue www.ica.bc.ca/kb.php3?catid=222&artid=1241.)
Section 1300 - Differential Reporting
Practitioners are failing to recognize situations where differential reporting can be applied. Common scenarios include:
Clients who have undergone Section 85 reorganizations have traditionally issued shares that are retractable at the option of the holder. CICA Handbook Section 3860 requires the client to disclose the retractable shares as a current liability valued at the full retraction price unless they elect to use the disclosure option available under differential reporting. Members are reminded that disclosure of financial instruments is required for all assurance engagements as the former deferral of application of the full Handbook Section 3860 expired December 31, 2002. The required disclosures can be reduced by electing to follow the provisions under differential reporting. (See related article in May 2003 issue www.ica.bc.ca/kb.php3?catid=222&artid=1297.)
In order to comply with GAAP, companies with investments in subsidiaries must prepare consolidated financial statements unless they elect otherwise under the provisions of differential reporting. However, many practitioners have continued to use the "soft qualification" previously allowed when companies have continued to carry subsidiaries at cost. The "soft qualification" may no longer be used. The same comments apply to investments which should be accounted for using the equity method under CICA Section 3050 - Long Term Investments. (See related article in May 2003 issue www.ica.bc.ca/kb.php3?catid=222&artid=1297.)
Practitioners whose clients have elected certain provisions of differential reporting need to bear in mind two issues pertaining to file documentation. Firstly, you will need to revise your engagement and representation letters to incorporate differential reporting. Secondly, the client will need to confirm in writing the shareholders' unanimous agreement (including those not otherwise permitted to vote) to the specific differential reporting options adopted in the financial statements. A general reference to the adoption of differential reporting options is not acceptable. (See September 2002 issue for a sample consent letter and the Professional Engagement Manual for updated forms and letters www.ica.bc.ca/kb.php3?catid=222&artid=1132.)
Section 3061 - Property, Plant and Equipment
The changes required by this section have gone largely unnoticed by practitioners as they were introduced in conjunction with the changes to Section 3062 - Goodwill and Other Intangibles. The term "Capital Assets" refers to both tangible and intangible assets. As a result, using the term "Capital Assets" to describe only tangible assets is no longer appropriate. Some variation of "Property, Plant and Equipment" is likely an appropriate caption.
Section 5135 - The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements
Again, the changes required by this section have gone largely unnoticed. Practitioners must address the risk of material financial misstatements arising from fraud and error and document the procedures completed and conclusions reached. Also, significant changes to the management's letter of representation, including management's acknowledgment that the unrecorded errors discovered by the auditor are not material, are required. Most practitioners visited since January 1 have not complied with this requirement.
Section 8200 - Public Accountant's Review of Financial Statements
The provisions of Section 5751 of the CICA Handbook for Communications With Those Having Oversight Responsibility for the Financial Reporting Process now apply as required by Section 8200.30. Almost all practitioners have missed this requirement since its introduction. (See earlier article "Communicating with Audit Committees" in this issue.)
Section 8200 contains a requirement to document the client's control systems related to the preparation of the financial statements and the manner in which transactions are recorded, classified and summarized (paragraph 8200.02). One way members can easily comply with this requirement is to complete the Knowledge of Business memo available in the Professional Engagement Manual.
What Can You Do?
Where PROs encounter practitioners having difficulty in implementing these new standards, they will recommend frequently that practitioners take certain courses to address these shortcomings. Traditionally, members in public practice have concentrated on keeping their income tax skills up to date when addressing their professional development choices. With accounting principles and assurance standards now changing faster than they ever have, it is imperative that members take all of the steps necessary to keep current their knowledge of the CICA Handbook.
Professional Development Seminars of Interest to Members in Public Practice
2003 Fall PD Program
This year's Fall program will offer over 160 seminar titles. We hope that these courses will provide a worthwhile source for your continuing education. The Fall PD brochures were mailed to all members in August. Register early for courses of interest to you.
Mark Your Calendar: PD Weeks
Oct 20-23 Tigh-Na-Mara, Parksville
Two New PD Passports
PD Breakfast Passport
We are pleased to offer our members two great new PD Passports that will enable you to receive the type of PD you want while enjoying significant savings at the same time!
PD to Go! Passport offers substantial discounts on the purchase of selected course material, audiotapes, CD, Webinars and On-Line Executive Breakfasts. These "to go" materials allow you to learn what you want, where you want, and at the pace and in the amount of detail you choose.
PD Breakfast Passport, offers five Executive Breakfasts for the price of four. Choose from over 30 breakfast seminars being offered in Vancouver and selected titles in Victoria in the fall.
The BC Business Corporations Act & Related Tax Issues
This seminar will provide an overview of the new legislation and transitional requirements. Tax issues arising from its implementation will be considered and advantageous opportunities on transition will be discussed. The new, more streamlined and flexible provisions for reorganizations will be summarized and commercially advantageous features of the new Act highlighted.
Oct 15 7am-9:30am Four Seasons
The New Privacy Laws: What Organizations are Required to Know
Are you ready for the Privacy Commissioner to audit your organization? Do you know how your organization is collecting, using, and disclosing personal information? The Federal Government's Personal Information and Electronic Documents Act has passed into law. Every business, large or small, must have a privacy program in place. This is a new but extremely crucial part of an organization's future, and this seminar will help you understand the steps that your organization is required to take.
Oct 17 7am-9:30am Hyatt Regency
This half-day seminar will include an in-depth review of each option available and a look at applicable cross-referenced sections. The seminar will also review financial statement presentation and examples of note disclosure respecting each option adopted. It will include examples of the necessary "consent letters", engagement letters and client's representation letters.
Oct 29 1:30pm-5pm
Nov 4 1:30pm-5pm
Nov 18 9am-12:30pm
Jan 20 9am-12:30pm
Mbr $180 NonMbr $230 Passport Valid
Income Tax Issues for the File Preparer
Accountants that prepare files and income tax returns often see the issues, problems and opportunities first. This new one-day seminar uses the course material from the seminar "Basic But Essential Income Tax Issues" and is presented with a focus on matters more relevant to the "front-line" firm members. Planning, problems and approaches will be emphasized.
Oct 20 9am-5pm
Oct 27 9am-5pm
Nov 25 9am-5pm
Dec 3 9am-5pm
Mbr $325 NonMbr $410 Passport Valid
Seminars by Morden Shapiro
Practice Management Workshop
Nov 3 9am-5pm Sutton Place
Billing & Collecting Practices
Nov 4 9am-5pm Sutton Place
Life Planning Seminar for Public Accountants
Nov 5 9am-5pm Sutton Place
For detailed course descriptions, or for a complete schedule of upcoming PD seminars, consult your Fall 2003 PD brochure or check our website at www.ica.bc.ca. To register, call the PD Department at (604) 488-2641.
Bits and Pieces
The PAS Department is conducting the biennial Public Practice Statistics Survey this fall and we have sent the questionnaires to all sole practitioners and managing partners in BC and the Yukon. This year, we have made some changes to the questionnaire based on your feedback by splitting it into three parts:
You may respond to one, two, or all three parts of the questionnaire and you will receive the results to only the parts to which you respond. Response deadline is October 31, 2003. All practitioners are encouraged to participate - respond to only just one part if that's all you are interested in. Remember, participation is the only way for you to get the results! So, don't just let those questionnaires sit in your mail tray, return your completed questionnaire to the Institute by October 31, 2003. If you have any questions, contact Stella Leung, CA, Professional Standards Advisor at 604-488-2609, toll free 1-800-663-2677 or email firstname.lastname@example.org.
The International Federation of Accountants (IFAC) has issued two new guides to assist small and medium practices (SMP) and their clients manage and operate their computer systems:
Both are available for free downloading on IFAC's website at www.ifac.org/store under the SMP section. Each contains discussion on specific computer control issues and a best practice checklist. Check them out!
We have been asked by CCRA to remind members who conduct business at the Vancouver Tax Service Office (VTSO) on Pender Street and the Burnaby-Fraser Tax Service Office on King George Highway that they have changed their office hours. The offices are now open Monday to Friday from 8:15 a.m. to 4:30 p.m. except holidays. The payment counters at the VTSO will remain open until 5 p.m. on the 15th and last day of each month and telephone enquiry lines will remain open from 8:15 a.m. to 5 p.m.
Changes were made this summer to the Canada Elections Act which will be effective January 1, 2004. Audit requirements now extend to registered associations, leadership contestants, and nomination contestants. Members are invited to download an article on the Institute's website that summarizes the changes. We thank CICA for preparing this summary and sharing it with our members. The link to the article is www.ica.bc.ca/kb.php3?catid=493.
Members who provide services to public companies will be interested to know that the Canadian Public Accountability Board (CPAB) has just released for comments their proposed registration process. The fees to indicate your intent to register with CPAB range from $1,000 for firms with two or fewer reporting issuers to $500,000 for the four largest national firms. The annual fees are to be determined and will be billed on April 1, 2004 and payable in quarterly instalments. It is anticipated that the registration process will be completed by February 29, 2004 but interested firms must file their "Intent to Participate" form by December 31, 2003. For full details on the proposed process, please visit CPAB's website at www.cpab-ccrc.ca. Watch for more details in an upcoming issue of Beyond Numbers.
If you haven't heard, CICA has established an independent body, the Auditing and Assurance Standards Oversight Council (AASOC), to oversee the activities of the Assurance Standard Board (ASB). (The Accounting Standards Oversight Council is the counterpart for the Accounting Standards Board.) AASOC appoints members to ASB, provides input into the ASB's activities and oversees the standard setting process. Members of the Council include users, preparers, and auditors of financial and other reports. They welcome views on any aspects of auditing and assurance standards. Please email your comments to Jan Burns, the AASOC Secretary at email@example.com.
On a related note, we are pleased to inform members that BC member Jacqueline Tucker, FCA, has been appointed to the ASB for a three-year term ending March 31, 2006. Congratulations and good luck, Jacqueline!
NEWS 'N VIEWS is written by the Professional Advisory Services Department with contributions from the Practice Review and Licencing Department. The views expressed are those of the authors.