2021: Audit Quality 4.0
CPAB is squarely focused on the future of audit quality. As we move into our 2019-21 strategic plan cycle, we know the next three years promise both great challenges and great opportunities in audit regulation and along the road to higher quality, consistent public company audits in Canada.
The world of financial reporting is evolving faster than ever, confidence in public institutions and in the audit profession is front page news and regulators are in the spotlight. Enabling disruptors – new technologies, new businesses, and a myriad of other changes we can’t yet predict – will reshape the audit as we know it. The demand for different skills from auditors and regulators alike is already here. Machine learning and artificial intelligence have started to replace certain basic audit procedures. Emerging business developments are changing the profile of Canada’s public markets – blockchain and cryptocurrency are just two newcomers already challenging what used to be tried and true audit fundamentals.
CPAB must remain relevant in this new world. The 2021 audit environment will require an agile and progressive regulator to make sure quality is even better than it is today, and that investors can continue to count on financial reporting in Canada. Over the next three years, CPAB will engage with stakeholders to drive sustainable solutions to accelerate audit quality. We will relentlessly pursue innovation, continuous improvement and next generation audit quality. We will be a place where the best of the best want to be. And, we will be a beacon for regulatory excellence, trust and professionalism.
Be sure to check back here in November to read our final 2019-21 strategic plan outlining exactly how we’ll get there.
Fall 2018 inspections results – inconsistencies persist, quality reviews reveal gaps
CPAB issued its 2018 report on the inspections of Deloitte, EY, KPMG, and PwC on October 3. To date we have reviewed 77 out of 80 planned files across the firms (86 in 2017) and identified significant findings in 14 of those files (six in 2017). There are no restatements to date.
Two firms demonstrated an acceptable level of audit quality; two firms had more findings than last year and are proactively addressing CPAB’s remediation requirements. Common findings were related to business combinations, revenue recognition, impairment testing, and basic audit procedures.
Overall, while we see sound audit work being performed by dedicated, ethical professionals acting with integrity in Canada, our findings continue to reflect inconsistent audit execution across firms. These results tell us firms need to do more to fully embed audit quality across the whole assurance portfolio.
In 2018 CPAB introduced a new methodology to assess existing quality management systems and to help accelerate improvements. Firm leadership and CPAB identified specific weaknesses and gaps across all firms’ quality management systems. Of note, in many cases our file-related significant findings were indicative of deficiencies in the firms’ quality management systems.
All firms must advance their assessment work where not complete, remediate deficient processes and implement new controls. We will continue to review and reassess the firms’ progress in 2019.
Foreign jurisdiction audits – access improving but some barriers persist
Investors should be concerned when foreign laws and regulations impede or reduce the auditor oversight they are accustomed to in Canada; it’s important that CPAB has direct access to work performed by component auditors. We’ve made good progress working with Canadian securities regulators to amend legislation to improve our access, and most audit firms continue to cooperate with us where we need access to working papers outside of Canada. While discussions are ongoing we have yet to obtain access in China.
Data analytics and emerging technologies – disruptive enablers
Auditor use of data analytics and emerging technologies is growing. To date CPAB has seen a modest level of this activity in our inspections but we know this will change soon. We will continue to watch the development and implementation of new tools and procedures, and provide our perspective on how they can enable better quality over time. For example, we are working to understand what is being done to ensure the completeness and integrity of client data used in data analytics audit routines.
Crypto-assets – auditing in a new frontier
This is a bold new frontier for most of us. Auditors must establish sound crypto-asset practices early on to ensure these audits are performed well, and that the investing public’s interest continues to be protected.
CPAB is working with audit firms, professional bodies and other regulators in Canada and internationally to ensure high quality audits in this emerging area. There is an urgent need for guidance on how auditors should be responding to typical audit risks associated with these clients. We’re assisting CPA Canada in the development of resources for auditors which is planned for release this fall.
Audit quality indicators
The use of Audit Quality Indicators (AQIs) is gaining traction among Canadian audit committees. In 2016, CPAB launched an exploratory AQI Pilot project with Canadian audit committees, their management and external auditors to get feedback about the usefulness of AQIs and to support broader national and international discussions. More than 18 participants of varying sizes took part over two years. The results show that AQIs have significant potential to positively impact audit quality. For our final report on this project, please check out our AQI page on the CPAB website – it has loads of information to get you started.
In 2018, we launched an AQI network to enable information sharing and support for current and future AQI users. The network allows CPAB to collect and share information about AQIs with the wider audit community. To join, or to learn more, contact AQINetwork@cpab-ccrc.ca.
I encourage everyone in the financial reporting ecosystem – preparers, audit committees and auditors – as well as the investing public, to continue to enhance their focus on quality work. I look forward to talking more about how we can all help accelerate audit quality to continue to support a robust and trusted capital market in Canada.
Carol Paradine, CPA, CACEO CPAB