CPA Canada PEP Assurance Elective Cheat Sheet

Use the tables for a quick pre-exam check. Expand a topic’s notes for explanations, examples, and additional distinctions.

Scope and study context

Assurance Case Triage

Case cue	What to do quickly
“Audit planning,” “year-end audit,” “financial statements”	Address acceptance/continuance, independence, users, materiality, RMM, significant risks, audit approach, procedures, reporting.
“Review engagement”	Emphasize limited assurance, inquiry and analytical procedures, plausibility, negative conclusion, and follow-up procedures for unusual items.
“Compilation”	No assurance. Focus on whether information is compiled from management-provided records and whether the basis of accounting is described.
“Special report,” “compliance,” “non-financial information”	Identify subject matter, responsible party, suitable criteria, users, assurance level, and whether direct or attestation engagement fits.
“Internal controls”	State weakness, implication/risk, recommendation, and benefit. Link to assertion or business risk.
“Issue with accounting treatment”	Quantify misstatement if possible, assess materiality/pervasiveness, propose audit procedures, and conclude on report effect.
“Independence/ethics concern”	Identify threat, significance, safeguards, and whether decline/resignation is required if threat cannot be reduced.

Engagement Selection Matrix

Assurance Levels and Evidence

Notes and examples

Evidence Quality Hierarchy

Stronger evidence	Weaker evidence
External evidence received directly by auditor	Evidence prepared internally by client
Original documents	Copies or screenshots
Written evidence	Oral representations
Auditor recalculation/reperformance	Client explanation only
Evidence from effective controls	Evidence from weak control environment
Year-end evidence for balances	Interim evidence without roll-forward

Inquiry alone is rarely sufficient for an audit conclusion. Written representations support other evidence but do not replace necessary procedures.

Acceptance, Continuance, and Engagement Terms

Notes and examples

Independence Threats

Threat	Example	Response
Self-interest	Partner owns shares in audit client; significant overdue fees	Remove interest, collect fees, add safeguards, or decline.
Self-review	Firm prepared accounting records then audits them	Use separate team and review safeguards if allowed; avoid management decisions.
Advocacy	Firm promotes client financing or litigation position	Decline advocacy role or assurance engagement if threat too high.
Familiarity	Long association, family relationship with CFO	Rotate personnel, independent review, remove affected person.
Intimidation	Management threatens dismissal over proposed adjustment	Escalate to governance, document, consider withdrawal.

Materiality Reference

Materiality is based on user decisions, not only a calculation. In cases, state the benchmark, justify it using users and circumstances, calculate a preliminary amount if data permits, and apply qualitative factors.

\[ \text{Overall Materiality} = \text{Selected Benchmark} \times \text{Justified Percentage} \]\[ \text{Performance Materiality} < \text{Overall Materiality} \]

Common Benchmark Heuristics

These are practical exam heuristics, not fixed rules. Justify using the case facts.

Qualitative Materiality Triggers

Audit Risk Model and Responses

\[ \text{Audit Risk} = \text{Risk of Material Misstatement} \times \text{Detection Risk} \]\[ \text{Risk of Material Misstatement} = \text{Inherent Risk} \times \text{Control Risk} \]

Notes and examples

Significant Risk Indicators

Indicator	Why it matters	Typical response
Revenue pressure	Fraud risk in revenue recognition	Cutoff testing, contract review, analytics, confirmations, journal entry testing.
Management bonus tied to EBITDA	Bias in estimates/accruals	Test accruals, estimates, classification, unusual entries.
New system implementation	Completeness/accuracy risk	IT controls, reconciliations, conversion testing, parallel runs.
Rapid growth	Cutoff, collectability, inventory, controls may lag	Expand substantive work, test controls before reliance.
Debt covenant pressure	Classification and measurement bias	Recalculate covenants, inspect waivers, assess going concern.
First-year audit	Opening balances and understanding entity	Extra planning, predecessor review if permitted, opening balance procedures.

Assertions and Procedure Design

A strong procedure states: action + population/source + assertion + criterion + follow-up.

Notes and examples

Weak vs Strong Procedure Wording

Weak wording	Stronger exam-ready wording
“Review revenue.”	Select a sample of sales recorded five business days before and after year end; agree invoice date, shipping document, contract terms, and GL posting to assess revenue cutoff.
“Check receivables.”	Send positive confirmations to a sample of material and overdue customers; for non-replies, inspect subsequent cash receipts and supporting invoices.
“Look at inventory.”	Attend the year-end inventory count, perform test counts from floor to count sheet and count sheet to floor, and investigate variances.
“Discuss with management.”	Inquire of management about obsolete inventory indicators and corroborate by inspecting aged inventory reports, post-year-end sales, and markdowns.

Assertion-to-Procedure Quick Map

A strong assurance answer links the risk to an assertion and then to a procedure.

Account / Area	Common Assertion Risk	Strong Procedure Examples
Revenue	Occurrence, cutoff, accuracy	Select sales near year-end and trace to shipping documents, contracts, invoices, and subsequent cash receipt
Accounts receivable	Existence, valuation	Confirm balances; review subsequent collections; assess allowance using aging and customer history
Inventory	Existence, valuation, completeness	Attend count; perform test counts; inspect obsolete items; compare cost to net realizable value
Purchases/payables	Completeness, cutoff	Search for unrecorded liabilities using subsequent payments, unmatched receiving reports, supplier statements
Payroll	Occurrence, accuracy	Reconcile payroll register to GL; test employee master file changes; inspect approvals
Fixed assets	Existence, valuation, rights	Physically inspect additions; agree to invoices; assess capitalization vs expense; review impairment indicators
Debt	Completeness, classification, presentation	Confirm with lenders; inspect agreements; test covenant compliance; review current/non-current classification
Estimates	Valuation, disclosure	Evaluate method, assumptions, source data, bias, subsequent events, expert reports
Related parties	Completeness, disclosure	Review minutes, confirmations, management representations, unusual transactions, ownership records
Provisions/contingencies	Completeness, valuation	Legal letter, board minutes, correspondence, subsequent payments, management assessment

Account Area Procedure Reference

Internal Control Reference

Control Objective Matrix

Notes and examples

Common Weaknesses and Recommendations

Cycle	Weakness	Risk / implication	Better recommendation
Revenue	Same person approves credit, records sale, and handles cash	Fictitious sales or stolen receipts	Separate cash handling from recording; require independent monthly AR reconciliation review.
Purchases	Vendor master changes not reviewed	Fictitious vendors or unauthorized payments	Restrict vendor setup access and require independent approval of new/changed vendors.
Payroll	HR changes entered without approval	Ghost employees or incorrect pay	Require approved HR forms and independent review of payroll change reports.
Inventory	No independent count supervision	Theft or inaccurate inventory	Assign independent count teams, use pre-numbered count sheets, investigate variances.
IT	Shared admin passwords	No accountability and unauthorized changes	Unique user IDs, least privilege access, periodic access review.
Financial close	Manual journals posted without review	Management override or errors	Require independent review of manual journals, especially unusual or late entries.

Control Testing Rules

If the case asks…	Answer focus
“Can we rely on controls?”	Test design and implementation first; then operating effectiveness.
“Walkthrough”	Follow one transaction through the system to understand process and confirm design/implementation.
“Test of control”	Inspect evidence that control operated, who performed it, when, and whether exceptions were resolved.
“Control deficiency”	Explain weakness, audit risk, recommendation, and effect on substantive work.
“Management letter”	Communicate control deficiencies and recommendations; do not confuse with audit opinion modification unless FS are materially misstated or scope-limited.

Control Categories

Control Type	Purpose	Examples
Preventive	Stop errors/fraud before they occur	Credit approval, purchase order authorization, segregation of duties
Detective	Identify errors/fraud after occurrence	Bank reconciliations, exception reports, inventory variance review
IT general controls	Support reliable systems	Access controls, change management, backups, operations controls
Application controls	Process-level automated controls	Three-way match, edit checks, automated pricing
Monitoring controls	Ongoing oversight	Management review, internal audit, board/committee review

Segregation of Duties

Separate these functions where possible:

Function	Should Be Separated From
Authorization	Custody and recording
Custody of assets	Recording and reconciliation
Recording transactions	Reconciliation and review
System administration	Transaction processing
Vendor/customer master file changes	Payment/receipt processing

How to Write a Control Weakness Response

Use a 4-part structure:

1. Weakness: What is wrong?
2. Implication: What could go wrong?
3. Recommendation: What should management implement?
4. Audit impact: How does this affect risk/procedures?

Example:

Element	Example
Weakness	The accounts payable clerk can create vendors and process payments.
Implication	Fictitious vendors or unauthorized payments could be processed and concealed.
Recommendation	Vendor creation should require independent approval, and payment runs should be reviewed by someone outside AP.
Audit Impact	Increase fraud risk in purchases/cash disbursements; test vendor master changes and subsequent payments.

Fraud, Laws, and Professional Skepticism

Sampling and Misstatement Evaluation

Sampling Factors

Notes and examples

Misstatement Types

Type	Meaning	Example
Factual	No judgement involved	Invoice recorded twice.
Judgemental	Difference in estimate or accounting policy judgement	Allowance too low.
Projected	Auditor projects sample error to population	Sample error rate applied to full population.

Evaluation Steps

1. Accumulate identified misstatements, including projected and judgemental differences.
2. Ask management to correct them.
3. Reassess materiality if circumstances changed.
4. Consider qualitative factors, not only dollar amount.
5. Evaluate whether uncorrected misstatements are material individually or in aggregate.
6. Conclude on report modification if material misstatement remains.

Reporting Decision Reference

    graph TD
	    A[Issue identified] --> B{Misstatement or scope limitation?}
	    B -->|Misstatement| C{Material?}
	    C -->|No| D[Unmodified opinion; communicate if needed]
	    C -->|Yes| E{Pervasive?}
	    E -->|No| F[Qualified opinion: except for]
	    E -->|Yes| G[Adverse opinion]
	    B -->|Scope limitation| H{Material possible effects?}
	    H -->|No| D
	    H -->|Yes| I{Pervasive?}
	    I -->|No| J[Qualified opinion: except for possible effects]
	    I -->|Yes| K[Disclaimer of opinion]
	    B -->|Emphasis or context| L{FS appropriately presented?}
	    L -->|Yes| M[Unmodified plus EOM/Other Matter if appropriate]
	    L -->|No| C

Notes and examples

Opinion Modification Table

Condition	Material but not pervasive	Material and pervasive
Material misstatement	Qualified opinion	Adverse opinion
Inability to obtain sufficient appropriate evidence	Qualified opinion	Disclaimer of opinion

Emphasis and Other Matter

Paragraph	Use when	Key distinction
Emphasis of Matter	Matter is appropriately presented/disclosed in FS and is fundamental to users’ understanding	Does not modify opinion.
Other Matter	Matter outside FS is relevant to users’ understanding of audit, responsibilities, or report	Does not modify opinion.
Material Uncertainty Related to Going Concern	Adequate disclosure of material uncertainty exists	Separate communication; not an adverse opinion if disclosure is adequate.

Going Concern Reporting

Situation	Reporting implication
No material uncertainty and going-concern basis appropriate	Unmodified, no special going-concern section required solely for routine risk.
Material uncertainty exists and disclosure is adequate	Unmodified opinion with Material Uncertainty Related to Going Concern section when required.
Material uncertainty exists and disclosure inadequate	Modified opinion due to material misstatement.
Going-concern basis inappropriate	Adverse opinion if FS prepared on going-concern basis.
Insufficient evidence due to management limitations	Qualified opinion or disclaimer depending on materiality/pervasiveness.

Audit Opinion Decision Table

Situation	Reporting Result
Sufficient appropriate evidence; no material misstatement	Unmodified opinion
Material misstatement, not pervasive	Qualified opinion
Material misstatement, pervasive	Adverse opinion
Scope limitation, material but not pervasive	Qualified opinion
Scope limitation, material and pervasive	Disclaimer of opinion
Important matter properly presented/disclosed	Consider emphasis of matter
Matter relevant to users’ understanding of audit/report	Consider other matter

Material vs Pervasive

Concept	Meaning
Material	Could influence user decisions
Pervasive	Not confined to specific elements, represents substantial portion of statements, or fundamental to users’ understanding

Quick decision rule:

• Material but isolated → usually qualified.
• Material and widespread/fundamental → adverse or disclaimer, depending on whether the issue is misstatement or lack of evidence.
• Properly disclosed but important → consider emphasis, not modification.

Emphasis of Matter vs Other Matter

Paragraph	Used For	Key Condition
Emphasis of matter	Matter presented/disclosed in the financial statements	Auditor wants to draw attention; opinion not modified
Other matter	Matter not presented/disclosed in the financial statements	Relevant to users’ understanding of audit, responsibilities, or report

Common trap: Do not use emphasis of matter to “fix” inadequate disclosure. If disclosure is materially inadequate, consider modification.

Review, Compilation, and AUP Traps

Special Assurance Engagements

Subject Matter and Criteria

Notes and examples

Direct vs Attestation

Feature	Direct engagement	Attestation engagement
Who measures/evaluates subject matter?	Practitioner	Responsible party or evaluator
Practitioner reports on	Outcome of practitioner’s evaluation	Subject matter information prepared by another party
Canadian standard family	CSAE 3001	CSAE 3000
Example	Practitioner evaluates whether controls meet criteria	Management asserts controls meet criteria; practitioner reports on assertion

Review Engagement Cheat Sheet

A review provides limited assurance, so the work is narrower than an audit.

Review Engagement Procedures

Typical review procedures:

• Inquiries of management and relevant personnel.
• Analytical procedures.
• Discussion of unexpected fluctuations.
• Reading financial statements for plausibility.
• Follow-up procedures when information appears inconsistent or misstated.

A review answer should not default to audit-level testing unless the case facts require follow-up on suspicious or inconsistent information.

Issue	Review-Level Response
Revenue increased sharply	Ask management for explanation; compare to sales records/trends; perform analytics by month/customer/product; follow up unusual items
Receivables aging worsened	Discuss collectability; compare subsequent collections; assess allowance reasonableness
Inventory margins changed	Analyze gross margin; discuss obsolete inventory; compare to post-year-end sales if needed
New debt	Inquire about terms; inspect agreement if necessary; assess classification/disclosure
Inconsistent explanation	Perform additional procedures to resolve inconsistency

High-Yield CAS Area Map

Subsequent Events Cheat Sheet

Adjusting vs Non-Adjusting

Case-Writing Templates

Audit Planning Memo Skeleton

Notes and examples

Assurance Procedure Formula

Use this structure in case answers:

1. To address the risk/assertion.
2. Select the population and sample basis.
3. Perform a clear audit action.
4. Agree/compare/recalculate/confirm to a named source or criterion.
5. Investigate exceptions and quantify misstatements.

Example: “To test revenue cutoff, select sales recorded in the last five business days before year-end and first five business days after year-end, agree each invoice to shipping documentation and contract terms, verify the date goods were transferred, and investigate items recorded in the wrong period.”

Control Recommendation Formula

Component	Example
Weakness	Sales staff can create customers and approve credit limits.
Implication	Fictitious customers or sales to poor-credit customers may result in bad debts or fraudulent revenue.
Recommendation	Limit customer setup to accounting and require credit manager approval for credit limits.
Benefit	Reduces unauthorized customers and improves collectability of receivables.

Reporting Analysis Formula

1. Identify the unresolved issue.
2. Quantify misstatement or possible misstatement.
3. Compare to materiality and qualitative factors.
4. Decide if pervasive.
5. State report effect and wording direction.

Practical Case Response Method

For each issue:

1. Identify the issue clearly.

   • “Revenue cutoff risk exists because sales increased significantly in the final week of the year.”

2. Explain why it matters.

   • Link to users, materiality, assertion, risk, or reporting.

3. Apply case facts.

   • Use the numbers, dates, incentives, controls, agreements, and constraints provided.

4. Recommend procedures or actions.

   • Be specific and feasible.

5. Conclude.

   • State impact on engagement, report, control recommendation, or next step.

Time Management Traps

Avoid spending too much time on:

• Generic definitions.
• Long standard summaries without application.
• Perfect materiality calculations at the expense of procedures.
• Rewriting case facts.
• Listing every possible procedure instead of the best procedures.
• Over-auditing a review or compilation engagement.

What Markers Usually Reward in Assurance Responses

Strong responses tend to be:

• Case-specific.
• Risk-based.
• Linked to assertions.
• Clear about assurance level.
• Practical and professionally worded.
• Conclusive when reporting or acceptance decisions are required.

Weak responses tend to be:

• Generic.
• Procedure lists with no risk link.
• Missing the report impact.
• Confusing audit, review, and compilation.
• Ignoring independence.
• Failing to explain materiality or pervasiveness.

Common CPA Assurance Exam Traps

Final Practice Step

Next, practise with timed CPA Assurance cases: for each issue, force yourself to write the standard/engagement choice, risk, materiality impact, specific procedures, and reporting conclusion in a concise case format.

CPA Canada PEP Assurance Elective Quick Orientation

This Cheat Sheet is for candidates preparing for the CPA Canada PEP Assurance Elective using the official exam code CPA Assurance. It is independent review support, not affiliated with CPA Canada, and is designed to help you refresh high-yield concepts before using topic drills, mock exams, original practice questions, and detailed explanations.

The Assurance elective rewards candidates who can:

• Identify the correct engagement type and reporting implications.
• Link risk, materiality, assertions, controls, and procedures.
• Write practical, case-specific audit or review procedures.
• Recognize independence, ethical, governance, and acceptance issues.
• Explain reporting options clearly when evidence, scope, or misstatement issues exist.
• Manage case time by prioritizing the most significant assurance matters.

High-Yield Assurance Framework

The Core Assurance Logic

Most assurance case issues can be handled with this sequence:

1. What is the user asking for?

   • Audit opinion?
   • Review conclusion?
   • No-assurance compilation?
   • Specific agreed procedures?
   • Internal control or special-purpose reporting?

2. What level of assurance is appropriate?

   • Reasonable assurance: positive opinion.
   • Limited assurance: negative-form conclusion.
   • No assurance: compilation or advisory support.

3. What are the risks?

   • Financial statement risk.
   • Engagement risk.
   • Independence risk.
   • Reporting risk.
   • User expectation risk.

4. What evidence is needed?

   • Inspection, observation, inquiry, confirmation, recalculation, reperformance, analytical procedures.

5. What is the reporting consequence?

   • Clean/unmodified report?
   • Modified opinion/conclusion?
   • Emphasis or other matter?
   • Withdrawal or decline engagement?

    flowchart TD
	A[Client request or case issue] --> B{Is assurance required?}
	B -->|Yes| C{Reasonable or limited assurance?}
	B -->|No| D[Compilation/advisory/no assurance]
	C -->|Reasonable| E[Audit: assess risks, controls, substantive evidence]
	C -->|Limited| F[Review: inquiry + analytics + targeted follow-up]
	E --> G{Sufficient appropriate evidence?}
	F --> G
	G -->|Yes| H{Material misstatement?}
	G -->|No| I[Scope limitation: consider qualified/disclaimer]
	H -->|No| J[Unmodified opinion/conclusion]
	H -->|Yes| K{Material and pervasive?}
	K -->|Material not pervasive| L[Qualified opinion/conclusion]
	K -->|Material and pervasive| M[Adverse opinion/conclusion]

Engagement Type Decision Table

Audit Risk, Materiality, and Assertions

Audit Risk Model

Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

\[ \text{Audit Risk} = \text{Inherent Risk} \times \text{Control Risk} \times \text{Detection Risk} \]

Practical exam use:

• If inherent risk is high, plan more persuasive evidence.
• If control risk is high, reduce reliance on controls and increase substantive testing.
• If acceptable detection risk must be low, perform more effective substantive procedures, closer to year-end, with larger sample sizes or more reliable evidence.

Notes and examples

Inherent Risk Indicators

Indicator	Why It Matters	Likely Audit Response
Complex estimates	More judgment and bias risk	Test assumptions, methods, data, sensitivity
Rapid growth	Revenue cutoff, collectability, inventory, controls may lag	Expand revenue, receivables, inventory testing
New accounting system	Data migration and control failure risk	Test conversion, access controls, reconciliations
Financing pressure	Incentive to overstate assets/profits or understate liabilities	Increase fraud-focused procedures
Related-party transactions	Non-arm’s-length terms and disclosure risk	Inspect agreements, board minutes, confirmations
Management bonus targets	Bias in estimates and revenue recognition	Apply professional skepticism to judgment areas
Going concern pressure	Disclosure and valuation issues	Cash flow review, financing support, covenant analysis

Materiality: What to Say in a Case

Materiality affects planning, procedure extent, evaluating misstatements, and reporting. In a case response, do more than calculate a number.

Include:

• Benchmark selected and why it is appropriate.
• Percentage applied and why risk supports higher/lower end.
• Performance materiality if relevant for planning testing.
• Qualitative materiality items even if quantitatively small.
• Reporting impact if misstatements are material.

Common qualitative materiality factors:

• Turns profit into loss or affects trends.
• Affects debt covenants, bonuses, financing, or regulatory compliance.
• Involves fraud, illegal acts, related parties, or management integrity.
• Changes key ratios or user decisions.
• Affects disclosures important to users.

Audit Evidence: Reliability Rules

Evidence Persuasiveness

Sufficient appropriate evidence depends on both quantity and quality.

Notes and examples

Common Evidence Mistakes

Avoid writing:

• “Discuss with management” as the only procedure for a material issue.
• “Ensure revenue is correct” without saying how.
• “Check invoices” without specifying direction of test.
• “Review documents” without identifying documents and assertion.
• “Compare to prior year” as sufficient evidence for a high-risk audit area.
• “Obtain management representation” as the primary procedure.

Better procedure wording:

Select a sample of sales recorded in the final two weeks of the year and the first two weeks after year-end. Trace each sale to the sales invoice, shipping document, customer contract, and subsequent cash receipt to determine whether revenue was recorded in the correct period and only when performance obligations were satisfied.

Substantive Procedures by Major Cycle

Revenue and Receivables

High-risk areas:

• Premature revenue recognition.
• Side agreements or return rights.
• Cutoff errors.
• Collectability issues.
• Related-party sales.
• Bill-and-hold or consignment arrangements.

Notes and examples

Useful procedures:

• Test sales before and after year-end for cutoff.
• Trace recorded sales to contracts, shipping, invoices, and cash receipts.
• Confirm receivables with customers.
• Review subsequent collections.
• Analyze credit notes after year-end.
• Review aged receivables and allowance assumptions.
• Investigate unusual margins, manual journal entries, and sales spikes.

Inventory and Cost of Sales

• Existence at year-end.

• Obsolescence or net realizable value.

• Count errors.

• Consigned goods.

• Standard costing and overhead allocation.

• Cutoff of purchases and sales.

• Attend inventory count and perform test counts floor-to-sheet and sheet-to-floor.

• Inspect damaged or slow-moving inventory.

• Test pricing to invoices or cost records.

• Compare cost to selling price less costs to sell.

• Review post-year-end sales of inventory.

• Test cutoff using receiving and shipping documents.

• Reconcile count sheets to final inventory listing.

Purchases, Payables, and Accruals

• Unrecorded liabilities.

• Expense cutoff.

• Unauthorized purchases.

• Related-party suppliers.

• Capitalization of expenses.

• Search subsequent disbursements for liabilities existing at year-end.

• Review unmatched receiving reports and supplier statements.

• Inspect invoices received after year-end.

• Test cutoff around year-end receiving dates.

• Review board minutes and contracts for obligations.

• Analyze expense trends and investigate unusual decreases.

Cash and Debt

• Restrictions on cash.

• Unrecorded debt.

• Covenant breaches.

• Incorrect classification.

• Interest accrual errors.

• Confirm bank balances and debt directly.

• Review bank reconciliations and outstanding items.

• Inspect loan agreements.

• Recalculate interest.

• Test covenant calculations.

• Review classification of current vs long-term debt.

• Inspect correspondence with lenders.

Payroll

• Ghost employees.

• Unauthorized rate changes.

• Incorrect vacation/bonus accruals.

• Terminated employees still paid.

• Reconcile payroll register to general ledger.

• Test new hires and terminations to HR approvals.

• Review master file changes.

• Recalculate gross-to-net pay.

• Compare payroll expense trends to headcount.

• Test bonus/vacation accrual assumptions.

Special Topics Candidates Often Miss

Fraud Risk

Fraud risk is not solved by asking management whether fraud occurred. Address incentives, opportunities, and rationalization.

Common fraud-focused procedures:

• Test manual journal entries, especially late, unusual, round-dollar, or posted by senior staff.
• Review accounting estimates for management bias.
• Investigate significant unusual transactions.
• Perform unpredictable procedures.
• Evaluate revenue recognition risk.
• Consider management override of controls.

Notes and examples

Related Parties

Related-party risks include incomplete disclosure, non-arm’s-length pricing, hidden obligations, and earnings manipulation.

Procedures:

• Review board minutes and shareholder records.
• Ask management and governance bodies about relationships.
• Inspect unusual transactions and contracts.
• Confirm terms directly where appropriate.
• Compare terms to market terms if possible.
• Ensure disclosures are complete and understandable.

Accounting Estimates

For estimates, focus on method, data, assumptions, and bias.

Estimate Area	Audit Focus
Allowance for doubtful accounts	Aging, subsequent collections, customer credit risk
Warranty provision	Historical claims, current sales, product changes
Inventory obsolescence	Slow-moving items, post-year-end sales, write-down history
Fair value	Valuation model, assumptions, external data, expert competence
Impairment	Cash flow forecasts, discount rates, sensitivity analysis
Legal provision	Legal letters, probability assessment, range of outcomes

Going Concern

Going concern issues often combine audit, financial reporting, and disclosure.

Indicators:

• Recurring losses or negative cash flows.

• Loan covenant breaches.

• Expiring financing with no renewal.

• Loss of major customer or supplier.

• Inability to pay debts when due.

• Significant legal claims.

• Review cash flow forecasts and assumptions.

• Compare forecasts to historical accuracy.

• Inspect financing agreements and renewals.

• Confirm support from lenders or owners where relevant.

• Review covenant compliance.

• Inspect subsequent cash receipts/disbursements.

• Assess disclosure adequacy.

Compilation and No-Assurance Services

Compilation engagements are commonly tested because candidates may accidentally imply assurance.

Key points:

• No assurance is expressed.
• Management is responsible for information.
• Practitioner compiles based on information provided.
• Practitioner should consider whether information appears misleading.
• Independence may need to be addressed depending on circumstances and reporting.

Common wording trap:

• Weak: “We will audit the numbers for accuracy.”
• Better: “A compilation does not provide assurance; users should understand that procedures are not designed to verify completeness or accuracy.”

Acceptance, Continuance, and Independence

Client Acceptance / Continuance Checklist

Before accepting or continuing, consider:

Notes and examples

Independence Threats and Safeguards

Threat	Example	Possible Safeguards
Self-interest	Financial interest in client; significant overdue fees	Remove interest, collect fees, independent review
Self-review	Auditor prepared records being audited	Separate teams, independent review, decline service
Advocacy	Promoting client financing	Limit role, avoid advocacy, independent review
Familiarity	Long association or close relationship	Rotate staff, independent quality review
Intimidation	Management threatens replacement or fee pressure	Escalate, governance communication, consider withdrawal

Common exam mistake: identifying an independence threat without concluding whether it is significant and what safeguard or action is required.

Governance and Communication

Assurance cases may require recommendations to management, the board, audit committee, or owners.

Communicate:

• Significant risks.
• Fraud or suspected fraud.
• Significant deficiencies in internal control.
• Uncorrected misstatements.
• Independence matters.
• Scope limitations.
• Significant accounting policy or estimate issues.
• Going concern concerns.
• Disagreements with management.

When governance is weak, recommend practical improvements:

• Independent board or audit committee oversight.
• Regular financial reporting package.
• Approval limits.
• Conflict-of-interest policy.
• Whistleblower process.
• Internal audit or periodic control review.
• Formal budgeting and variance analysis.

Writing Strong Assurance Procedures

Procedure Formula

Use this structure:

Select / obtain / inspect / recalculate / confirm / observe + specific item + source document + purpose/assertion.

Examples:

Notes and examples

Directional Testing

Direction matters.

Concern	Start From	Trace To	Assertion
Recorded sale may not exist	General ledger / sales listing	Invoice, shipping, contract, cash receipt	Occurrence
Sale may be omitted	Shipping documents / orders	Sales journal / GL	Completeness
Payable may be omitted	Subsequent payments / receiving reports	Payables listing / GL	Completeness
Inventory may not exist	Inventory listing	Physical inventory	Existence
Inventory may be incomplete	Physical inventory	Inventory listing	Completeness

Rapid Review Tables

Engagement Planning Checklist

Notes and examples

Common Assurance Issue → Likely Response

Case Fact	Likely Issue	Candidate Response
Client wants financing	Higher user reliance; possible bias	Lower materiality, heightened skepticism, test debt/covenants/forecast assumptions
Owner pressures accountant to “make numbers work”	Integrity and fraud risk	Consider acceptance, governance communication, expanded fraud procedures
New ERP system	IT/control and data migration risk	Test access, change management, conversion reconciliations
Inventory count not attended	Scope limitation or alternative procedures	Perform alternative existence procedures; assess report impact if insufficient
Major lawsuit	Contingency completeness/valuation/disclosure	Legal letter, minutes, correspondence, subsequent events
Significant sales after year-end credits	Revenue occurrence/returns risk	Test credit notes, returns policy, cutoff, collectability
Missing bank confirmations	Evidence limitation	Follow up confirmations; alternative procedures; reporting impact
Management refuses adjustment	Misstatement	Evaluate materiality/pervasiveness; modify if necessary

Common Candidate Mistakes to Fix Before Practice

• Recommending an audit when the user only needs limited assurance or no assurance.
• Forgetting that compilation provides no assurance.
• Writing procedures that are too vague to perform.
• Not linking procedures to assertions.
• Ignoring independence threats because the issue “feels small.”
• Treating all misstatements as qualified opinions without assessing pervasiveness.
• Using emphasis of matter for an uncorrected misstatement.
• Concluding on going concern without discussing disclosures.
• Relying only on management inquiry for high-risk areas.
• Missing qualitative materiality.
• Failing to use case facts in the recommendation.
• Spending too long calculating and too little explaining.

Quick Practice Plan

Use this review page first, then move immediately into independent companion practice:

1. Do short topic drills on materiality, assertions, reporting, and engagement type.
2. Write procedures from scratch, then compare to detailed explanations.
3. Complete mixed original practice questions that force you to identify the engagement type before choosing procedures.
4. Attempt timed mini-cases focused on risk, controls, and reporting.
5. Review every missed question by asking:\
   • Did I identify the right assurance level?\
   • Did I link risk to assertion?\
   • Did I write a procedure that would actually produce evidence?\
   • Did I conclude on reporting or engagement impact?

Final Exam-Prep Reminder

For the CPA Canada PEP Assurance Elective under exam code CPA Assurance, the fastest improvement usually comes from practicing applied case responses, not memorizing isolated definitions. Use this Cheat Sheet to refresh the decision rules, then move into a question bank with original practice questions, topic drills, mock cases, and detailed explanations so you can apply the concepts under exam-style time pressure.

Put the review into practice