2015 CPAB inspections report shows inconsistent audit performance

While CPAB’s latest report points to a rise in audit quality, it’s clear that more robust conversations between audit committees and their external auditors can drive meaningful change.

The Canadian Public Accountability Board (CPAB) has released its Annual Inspections Report 2015. The report notes that inspections at nine of the 14 public accounting firms reviewed annually (those with 100 or more reporting issuers) resulted in more significant findings compared to the previous year.

The audit quality bar has been raised significantly since CPAB began its inspections 10 years ago. However, there will always be opportunities for improving the quality and consistency of audits. CPAB’s report identifies opportunities for the audit quality of inspected firms to become more consistent, in particular for audits of public companies with small- to mid-sized capitalizations.

CPAB’s 2015 scorecard

CPAB’s inspection focus for 2015 was weighted to these reporting issuers (capitalization of $250 million or less) located in smaller business centres.

The following table summarizes the results:

A table summarizing the CPAB’s 2015 scorecard.

As a result of CPAB’s findings, the Big Four firms are required to:

  • improve the effectiveness of their systems of quality control over audits of entities with medium and smaller market capitalizations
  • consider region-specific issues that may be impacting audit quality
  • evaluate the underlying cause(s) of individual file significant findings
  • conduct comprehensive reviews of quality control systems and assess whether the systems have weaknesses that result in inconsistent audit execution on engagements
  • amend training and learning curriculum as necessary
  • determine next steps to drive consistency and improve audit quality across all engagements

CPAB expects other firms to undertake short-term actions that will improve the quality of their next year-end audits as well as longer term actions to drive and embed sustainable quality improvements. Large regional firms are expected to take additional action to support the execution of quality audits when accepting clients in an industry outside their specialty area, because this is where inconsistencies are most prevalent.

Audit committees encouraged to dialogue with external auditor

Under the protocol for audit firm communication of CPAB inspection findings with audit committees, audit firms who participate in the protocol share their significant file-specific inspection findings and CPAB’s public reports with their clients’ audit committees. In CPAB’s Highlights for Audit Committees, CPAB provides questions for audit committees to ask their auditors.

Audit committees for many issuers are becoming more engaged in discussions with auditors about audit quality. They are leveraging CPAB’s annual report to challenge auditors to demonstrate that their audits address matters identified by CPAB. These conversations can increase mutual understanding and promote improvements to audits.

Unfortunately, such robust dialogue does not appear to be taking place in all cases. While auditors have the primary responsibility for addressing findings in CPAB reports with audit committees, it’s just as important for audit committees to be cognizant of their own role. Effective oversight by the audit committee contributes to the quality and effectiveness of the audit overall.

For example, audit committees can:

  • reinforce with management the need to document systems processes so that auditors can better understand them
  • inform themselves about significant matters related to the audit and the financial statements
  • make the auditor aware of the audit committee’s insights and information about transactions and events
  • foster and monitor the appropriate tone in communications among the auditor, management and the audit committee

I hope that the latest CPAB report stimulates audit committees of medium and smaller reporting issuers to discuss audit quality issues with, and reinforce their oversight of, the external auditor.

Keep the conversation going

What is your reaction from reading the latest CPAB inspection report? Do the questions in CPAB’s Highlights for Audit Committees help in discussions between audit committees and the external auditor?

Post a comment below; or email me directly.

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada