CPAB’s purpose is to enhance audit quality by working with audit firms to encourage consistency of quality audit execution. Our risk-based inspections identify good practices and impediments to ongoing quality improvements – both are core to our discussions with audit firms, audit committees, management and investors. CPAB issued its 2017 annual public inspections report on March 27, 2018, noting that, despite an overall decrease in significant inspection findings in 2017 compared to the previous year, there is continued inconsistency in certain aspects of audit quality. Our annual report examines audit quality at Canada’s 14 largest public accounting firms whose clients include 100 or more reporting issuers. In 2017, CPAB inspected 128 annual firm files (compared to 135 in 2016) and identified significant findings in 15 of those files (compared to 24 in 2016). There were three restatements. Overall, inspection themes in the 10 other firms inspected annually were similar to those in the inspections of the Big Four firms (Deloitte LLP, EY LLP, KPMG LLP, PwC LLP). Specifically, these inspection themes were related to the execution of audit fundamentals, professional judgment and skepticism, and significant accounting estimates. Canada’s public accounting firms have sound audit methodologies in place and, in most cases, we are seeing compliant execution. However, we are also seeing recurring inspection findings that highlight areas for improvement in audit quality. We believe these improvements can be realized through more robust and effective quality management processes, and embedding quality along the full audit cycle, not just assessing it at the end through internal and external inspections.In 2018 we will evolve our strategy to incorporate additional reviews of firm quality management systems, beginning with the larger firms. We expect to apply the new model to the 10 other annually inspected firms in 2019 or beyond. As with any change, we know there will be learnings along the way and the opportunity to further develop and refine the proposed methodology in future inspection cycles. We encourage all firms to commit to continuous improvement at every level of their organization. Firm action plans will play a critical role, as will addressing recurring inspection themes. Audit quality indicatorsCPAB has increased its focus on the use and benefit of audit quality indicators (AQIs) as quantitative measures of the audit process. AQIs complement our evolving inspection strategy and should positively impact audit quality. We encourage audit firms, audit committees, management and audit firms to continue to explore how AQIs can be integrated into their audit processes.In 2016, CPAB launched an AQI pilot project with audit committee chairs and their management teams. Participants were encouraged to select a limited number of indicators (five to 10) in the first year of the pilot covering audit execution, firm level metrics, management indicators, engagement team and client service indicators. Early benefits of using AQIs included a better understanding of the roles and responsibilities related to audit quality of management, audit committees and audit firms, and improved knowledge of and engagement in the audit process by all members of the audit committee. CPAB believes that AQIs are a useful tool for audit committees to broaden and deepen the dialogue around audit quality and supports increased awareness, discussion and collaboration regarding AQIs to develop good practices. To help advance this effort, CPAB continued the pilot through 2017 and encourages Canadian reporting issuers and their audit committee members to engage in the dialogue. Foreign jurisdictions CPAB’s inspection activity of companies with foreign operations is often limited to engagement files accessible only in Canada because we currently have no legal means to compel access to work completed by component auditors. In many cases, the work we are able to access may represent only a small portion of the audit. (For a list of jurisdictions where CPAB is unable to access working papers, please visit www.cpab-ccrc.ca, Focus by Topic, Auditing in Foreign Jurisdictions).As reported last year, in 2015 CPAB proposed a regulatory way forward to the relevant Canadian securities authorities to access information and related audit working papers so we may fulfill our responsibilities. The Canadian Securities Administrators (CSA) have issued a consultation paper and are currently reviewing the responses to determine next steps. CPAB looks forward to CSA’s proposals on this issue.Stakeholder engagementExpanding our interaction with audit committees, with a focus on mid to smaller market cap reporting issuers, will continue. We will also publish information on how to evaluate the audit firm and audit risks, how audit committees are most effectively addressing their oversight role, and on industry-specific issues to explore with their auditors.Effective regulation, proactive engagement, sustainable solutions
CPAB and other international audit oversight bodies are contributing to the increased emphasis on audit quality. We continue to influence the development of the international audit regulatory framework through our leadership position in the International Forum for Independent Audit Regulators (IFIAR). We are also active participants in Canada’s domestic regulatory agenda.
We encourage everyone responsible for financial statements – preparers, audit committees and auditors – as well as the investing public, to continue to enhance their focus on audit quality.
Carol Paradine, CPA, CAChief Executive Officer