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Agenda..
C-PEM challenges and solutions Tips for reducing the cost of
audits Other changes in C-PEM
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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)
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The C-PEM Case StudiesCase Study A
Cambridge Furniture Inc.─ Case Study B
Kennedy & Co. ─
Business Furniture m anufacturing
$1.5 m illion $ 230,000
8 2 + owner
Sales
Staff
Furniture m anufacturing
Sam ple audit docum entation provided in C-PEMVolum e 2
Prim arily standard C-PEM
forms
Prim arily m emos to file
and condensedC-PEM form s
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C-PEM Challenges & Solutions ….
1. Auditing standards have been clarified/revised Major changes The C-PEM Solution
2. Multiple Financial Reporting frameworks Major changes The C-PEM Solution
3. Applying CASs to Micro Sized Entities The C-PEM Solution
4. Reviews, compilations and other
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Challenge #1ALL Auditing standards have been clarified -- some revised (Re-written!)
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“Clarified” Standards Italics to specific
“shalls” New structure for auditing standards
1. Introduction2. Objectives3. Definitions4. Requirements (the auditor shall…) 5. Application and Other Explanatory Material
Current Italics
Change in number of paragraphs (not content) "Shalls"
282 A 100% increase in requirements 532
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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
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The CAS Structure
1. 2. 3 Plan the audit
Performrisk assessment
procedures
Evaluate the audit evidence obtained
Prepare theauditor’s reportRi
s k A
sses
sme n
t
Ris k
Res
pons
e
Repo
rti n
g
Implement responses
to assessed RMM
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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 overall objectives of the auditor, the auditor shall
use the objectives stated in relevant CASs in planning and performing the audit
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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
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Overall objective: Reduce audit risk to an acceptably low level
Overall Audit Objectives CA S 200
Specific CAS Objectives CA Ss 210-720
47 “sha lls”
11 “sha lls ”
474 “sha lls ”
Applicationm ate ria l
Applicationm ate ria l
Applicationm ate ria l
Firm Wide QC CSQC1
“Reducing audit risk to an acceptably low level”
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CASs with more than 5 new “shalls”
CAS CAS Title Italics Shalls New Old HBCAS 600 Audits of group financial statements 7 40 33 6930CAS 700 Forming an opinion/reporting on F/S 12 38 26 5400CAS 250 Consideration of laws and regulations 3 18 15 5136CAS540 Estimates 1 16 15 5305CAS 570 Going concern 0 15 15 N/A CAS 550 Related Parties 5 18 13 6010CAS 705 Modifications to the opinion 10 23 13 5510CSQC1 CANADIAN STANDARD ON QUALITY CONTROL 35 47 12 GSF 1
CAS 210 Agreeing the terms of audit engagements 5 16 11 5110CAS 710 Comparative information 2 13 11 5701CAS 530 audit sampling 0 10 10 N/A CAS 510 Initial audit engagements — opening balances 0 9 9 variousCAS 560 Subsequent events 3 12 9 6550CAS 240 Fraud in an audit of financial statements 28 36 8 5135CAS 450 Evaluation of misstatements identified 3 11 8 5142CAS 260 Communication with those charged with governance 7 13 6 5751CAS 505 External Confirmations 4 10 6 5303CAS 330 The auditor's responses to assessed risks 21 26 5 5143CAS 580 Written representations 7 12 5 5370
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Objective for EstimatesThe 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.
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Estimates5305 Estimates CAS540
Current Italics
Subject matter "Shalls"
Risk Assessment Procedures 2Identifying and Assessing RMM 2Responses to the Assessed Risks 3Further Substantive Procedures 3Evaluating Reasonableness of Estimates 1
Disclosures 2Indicators of Possible Management Bias 1Written Representations 1
1 Documentation 1
1 Totals 16
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Risk
Ass
essm
ent
Risk
Res
pons
e
Repo
rtin
gW hat estim ates are required?
Have estim ates been prepared properlyusing consistent m ethodology?
Is the supporting evidence re liable?
How were the estim ates prepared?
How accurate were prior years estim ates? Any evidence of m anagem ent b ias?
Any evidence of fraud?
Are in accordance
w ith the of accounting estim ates
financial reporting fram ework?
financial s tatem ents d isclosures
If a sign ificant risk, has d isclosure been m ade of the estim ation uncerta inty?
O btain m anagem ent representa tions
Extent o f estim ation uncerta in ty involved?
How sign ificant are the estim ates?Is an expert required?
C-PEM overview of Estimates
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Related Parties 6010 Related Parties CAS 550
Current Italics
Subject matter "Shalls"
1 Risk Assessment Procedures 71 Identifying and Assessing RMM 21 Responses to the Assessed Risks 5
Evaluating Accounting/Disclosure of Related Parties 11 Written Representations 11 Communication with Those Charged with Governance 1
Documentation 1
5 Totals 18
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Risk
Ass
essm
ent
Risk
Res
pons
e
Repo
rtin
gIdentify re la ted parties including changes from previous periods
Identify any other re lated parties and if found ask why not previously identified
Understand nature, extent and purpose of transactions
If outside norm al course of business inspect underlying docum ents.
O btain evidence to support m anagem ents assertions about the
.nature, extent and
purpose of transactions
Is financia l sta tem ent d isclosure adequate?Does audit op in ion need to be m odified if insufficient evidence available?O btain m anagem ent representations
Report on any find ings
Consider s ign ificant risks
Consider potentia l for fraud
Consider possib le fraud
Rem ain a lert for rela ted partytransactions throughout audit
C-PEM Overview of Related Parties
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Use of External Confirmations5303 External Confirmations CAS 505
Current Italics
Subject matter "Shalls"
Use of confirmations 1Management's Refusal to allow confirm 2
2 Results of the External Confirmation Procedures 5Negative Confirmations 1
1 Evaluating the Evidence Obtained 11 Confirming accounts recievable 4 Totals 10
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SamplingAudit sampling CAS 530
Current Italics
Subject matter "Shalls"
Sample Design, Size and Selection of Items for Testing 3Performing Audit Procedures 3Nature and Cause of Deviations and Misstatements 2Projecting Misstatements 1Evaluating Results of Audit Sampling 1
0 Totals 10
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Subsequent Events6550 Subsequent events CAS 560
Current Italics
Subject matter "Shalls"
1 Events between Date of F/S and Date of Auditor's Report 41 Facts after Date of Report but before Date F/S are Issued 41 Facts Known to Auditor after F/S Issued 4
3 Totals 12
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Materiality CAS 320
Financialstatem ent
leve l
‘Overall’ Materiality
‘ Overal l ’ Materiali tyPerformance
‘ Specifi c’ Material ity
Performance
‘Specifi c’ MaterialityAccount balance,class of transactions
and disclosures level
Q uantitative amo unt $
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Going Concern Going concern CAS 570
Current Italics
Subject matter "Shalls"
Risk Assessment Procedures 2Evaluating Management's Assessment 4Additional Audit Procedures when events identified 1Audit Conclusions and Reporting 1Material Uncertainty Exists 3Going Concern Assumption Inappropriate 1Management Unwilling to Extend Its Assessment 1Communication with Those Charged with Governance 1Significant Delay in Approval of Financial Statements 1
0 Totals 15
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Misstatements5142 Evaluation of Misstatements Identified CAS 450
Current Italics
Subject matter "Shalls"
1 Accumulation of Identified Misstatements 1Consideration of Identified Misstatements 2
1 Communication and Correction of Misstatements 2Evaluating the Effect of Uncorrected Misstatements 2Communication with Those Charged with Governance 2
1 Written Representation 1Documentation 1
3 Totals 11
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Challenge #2 Multiple Appropriate
Financial Reporting Frameworks (AFRFs)
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GAAP until recently
Canadian GAAP
Privateentity
Listedentity
Governm ententity
Not forProfit
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GAAP from 2011 Onwards
ASPE
ASPE+NFP
IFRS
IFR Sfor SM E?
PSAB
Privateentity
Listedentity
Governm ententity
Not forProfit
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Multiple AFRFsIFRS IFRS for
SMEsASPE ASPE +
NFP PSAB
Number of Pages
2500 220 700 740 ?
Focus Listed Entities
SMEs SMEs NFPs Government
Source IASB IASB
IFRS and ASPE are Canadian GAAP
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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
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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
Cost of an audit disproportionately high as compared to larger
entities
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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.
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CAS Applicability to SMEs
CAS Objectives
‘Auditor shall..’
Application &other material
Largerentities
Smallerentities
Practical guidance+
Considerations Specific to Sm aller Entities
Practical guidanceon m eaning andim plem entation
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Overall Audit Scope does not change
Entity Objectives Financ ial Statements
& Assertions
Governance
Leadership/ management
RevenueP rocesses
OtherP rocesses
Transactions
PurchasingP rocesses
PayrollP rocesses
Perv
asive
Pervasive (entity level)
Informat ion Systems
Inhe
rent
Risk
s Controls
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Still Required to Understand Internal Control
Pervasive areoften called entity level controls
Specific are oftencalled business process or application controls
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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;
ControlEn v ironm e nt
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Traditional Audit Phases
Client Acceptance Planning Form
OpinionPerform
Procedures
CompletedChecklists
M em o to file ConclusionsM em o for file
CompletedChecklists
BUT Where does the required risk assessment fit?
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Tip 3…‘Risk assessment’ is NOT simply an ADD ON to rest of audit.
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.
Client Acceptance Planning Form
OpinionPerform
Procedures
Com pletedChecklists
M em o to file ConclusionsM em o for file
Com pletedChecklists
+ Risk Assessm ent?x
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Client Acceptance Planning
Form Opinion
Perform Procedures
Risk Assessment Risk Response Reporting
AnalyticalProcedures
P relim im ary procedures A ud it p re-conditions
A ssessed R isks o f m aterial m iss tatem entat the FS & A ssertion Leve ls
Team D iscussionsO vera ll audit strategy
Tests ofdetail
Tests ofcontrol?
O vera ll R esponses
D esign Fu rther A ud it p rocedu res
S uffic ien t appropriate audit evidence
C onc lusions d raw nbased on ev idence ob ta ined
Evaluate the audit evidence obtained
Risk assessm entprocedures
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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
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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
StandardForms
C ondensedForm s M em os
(based on form s)
S ize o f en tityLarge r S m alle r
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Tip 4… Select appropriate Forms to Use
Select what C-PEM forms to use BEFORE work begins1. Standard forms2. Condensed forms3. 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
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C-PEM forms structureFinancial Statements 100
seriesTax matters 200File completion 300
Planning 400Risk Assessment 500Risk Response 600Detailed audit plans A-ZZIncome statement 700Disclosure checklists 900
Form numbering
NOTE: Some form numbers have changed to better reflect their position in the audit process
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Financial Reporting Frameworks – existing GAAP
900 – 999 FINANCIAL REPORTING FRAMEWORKS
905 FRF — Accounting standards for private enterprises To come—
959 FRF (Financial reporting framework) — Existing Canadian GAAP Read first
960 FRF — Existing GAAP — General
962 Worksheet FRF — Income taxes
963 Worksheet FRF — Long-term investments
964 Worksheet FRF — Leases
965 Worksheet FRF — Deferred charges, intangibles and goodwill
966 Worksheet FRF — Employee future benefits
967 Worksheet FRF — Financial instruments
968 Worksheet FRF — Supplementary
970 FRF Supplement — Not-for-profit entities
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Key C-PEM Forms Planning (400 series)
Form # Name Year 1 Year 2 Year 3 Year 4 Year 5405-410 Preliminary activities
420 Materiality424 Scoping (+ later risk assessment)
425 Audit Team Discussions430 Overall Audit Strategy435 Risk assessment procedures
New Form prepared Form Updated
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TIP 5… Spend time planning and saving costs
W hat does th is entity do?W ho are the key people? W hat are the key risks?
W hat materiality to use?Identify financia l s tatem ent use rs and the ir needs
How could fraud occur?C onsider opportunities, p ressu res and m otives . D eve lop som e fraud risk scenarios.
How w ill fraud risk be addressed?W hat changes are required to audit strategy?W ho is doing what, why and w hen?W hat docum entation is required?How w ill team com m unications take place?
W hat is our response to risks?W here is (using judgem ent)- m ore work required?- less or no w ork required?
W hat's changed th is year?Any new risk factors to address?
A udit TeamD iscuss ions
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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
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Key C-PEM Forms Risk Assessment (500 series)
Form # Name Year 1 Year 2 Year 3 Year 4 Year 5
510Identifying risks through understanding the entity
520/522 Risk assessment525 Going concern
530/532 Entity Level control545-560 Control design/implementation
424 Summary of Assessed Risks
New Form prepared Form Updated
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Identify & assess risk Scope of required
risk assessment CAS 315.11-12
Key PointIdentify sources of risks not just effects on the F/S
Sources of Risk
External riskfactors
Internal risk factors(nature o f en tity)
R isks resu lting fromentity ob jectives &
stra teg ies
R isks from accounting
policies used
R isks identified from use o f Industry
perform anceindicators
Absence o f re levant
In te rnal controlsM ap sources of risk to possib le
errors/fraud in theF ina ncia l
S tatem ents
* R M M = R isks o f m ate ria l m iss ta te m e n t
How: C-PEM 510, 510c or NFP 510
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TIP 7 … Focus on causes of risks not the effects
The e ffectWater com ing through cie ling
The causeHole in the roof
Invento ry is overva lued S low dow n in econom y C u t o ff e rro rs found B ookkeeper p rone to m istakesEstim ates a re conservative O w ner w ants to m in im ize taxes
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Assess Risks in One Place
Source of risk Result of risk Risk Assessment
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Nature of Internal Control
Risks of material misstatement (RMM)
IC to prevent/detect error
Residual RMM
Low Risk High risk
Objective = F/S free from material misstatement
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Control Risk – Two ApproachesTop Down Approach Bottom up Approach
W hat risks requirem itigation by control?
W hat risks requirem itigation by control?
Docum ent the operation of‘re levant’ in ternal controls
Docum ent internal controls (cradle to grave)
Are controls actually operating
Perform a walkthrough
Has m anagement m itigated the RM M in the F/S
Has m anagement mitigated the RM M in the F/S
W hat controls in p lace toprevent or detect/correct m isstatem ents from occurring?
W hat controls in p lace toprevent or detect/correct m isstatem ents from occurring?
ControlDesign
ControlDesign
ControlDocum entation
ControlDocum entation
ControlIm plem entation
Conclusion on Control Risk
Conclusion on Control Risk
ControlIm plem entation
RiskIdentification
RiskIdentification
You only need to evaluate controls ‘relevant’ to the audit
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Consider using the matrices…Process xyz
Risk A Risk B Risk C Risk D Assertion C E A A C AControl IC Com
Control Procedure 1 CA P PControl Procedure 2 IS D
Control Procedure 3 CA P P PControl Procedure 4 M D
Control Procedure 5 CA P
Control Procedure 6 IS D D D
Conclusion on Control Design Y Y N Y
Can you identify the control weaknesses, control strengths & key controls?
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Tip 8 … Focus on Changes
For risk assessment in year 2 focus only on changes
Identify any new risks and related controls Evaluate whether the relevant controls already
identified are still in operation (implementation) If risk factors have not changed simply ensure the controls
identified in year one are STILL in operation. If no change, both control design and implementation
have been addressed
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Tip 9 … ROLL FORWARD Plan for forms to be carried forward and updated
Most planning/risk assessment forms should ONLY be completed from scratch every 3-4 years (unless major changes have occurred)
Document evidence so that data collected can be reused.
Focus audit effort in year two onwards on what has changedand needs updating – not re-documenting existing data
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Tip 10… Customize Your Risk Response
Base your response on the risk assessment --- Ensure work is directed to high risk areas and away from low risk areas
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Key C-PEM Forms Risk Response (600 series)
Form # Name Year 1 Year 2 Year 3 Year 4 Year 5
6??
Applicable worksheets such as overall responses, sampling, estimates, related parties etc.
645Litigation, claims and non-compliance
650 Subsequent events
670 Use of journal entries A-UU Detailed audit plans7?? Income statement
900+ Financial reporting disclosures
New Form prepared Form Updated
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File completionForming an Opinion (300 series)
Form # Name Year 1 Year 2 Year 3 Year 4 Year 5310 Checklist — Audit completion
320Notes on significant audit decisions
335Worksheet — Summary of identified misstatements
350 Written representations
360 Legal and other correspondence
370Worksheet — Matters for future consideration
New Form prepared Form Updated
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Review Engagements C-PEM Material
expanded Road map Forms basically
unchanged
The FoundationThe basic understanding of the entity
Volume 2 C hapter 35
Design and perform ance of review
engagem ent proceduresVolume 2 C hapter 35, 36
Assess PlausibilityVolume 2 Chapter 37
Review engagem ent
reportVol. 2 Chapter 38
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Other Material in C-PEM Compilations
Updated material FOFI
No changes Primer on fraud Expanded sampling guidance Tips for Client Interviews
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C-PEM Summary – A must BUY Comprehensive guide to all the new
CASs Two bound volumes
Illustrations in color Integrated case studies
Ideal training tool Extra copies available for staff
members User friendly forms
Practical and flexible practical aids