Moving in the right direction: Latest CPAB inspections show significant decline in audit deficiencies

Despite a challenging audit environment, auditors of reporting issuers are demonstrating overall improvements in audit quality according to the Canadian Public Accountability Board (CPAB) in its latest public report.

Despite a challenging audit environment, auditors of reporting issuers are demonstrating overall improvements in audit quality according to the Canadian Public Accountability Board (CPAB) in its latest public report. Can the profession keep it up?

The CPAB 2012 public report Effective Regulation – Sustainable Solutions concludes that investors should continue to have confidence in the integrity of public company financial statements audited in Canada. CPAB cites an encouraging 30 per cent decline in audit deficiencies in the audit files it selected for inspection in 2012 using its risk-based approach. Further, CPAB’s inspections resulted in only five restatements of financial statements (two per cent of files inspected). This reflects the actions that audit firms implemented to address weaker 2011 inspection results. As some audit firms are at different stages of implementing audit quality improvements, CPAB expects audit quality will continue to improve in 2013 as these enhancements take hold.

Despite the positive results, CPAB doesn’t want auditors to rest on their laurels. The report indicates that while all firms can and do perform quality audits, consistency of execution is an ongoing challenge and one that CPAB believes is the root cause for the majority of audit deficiencies. Audit firms that focus on the “drivers of consistency in audit execution” show the most improvement. So CPAB encourages all firms to continue to focus on audit execution as an important way to enhance audit quality. CPAB believes audit firms can do this by such things as:

  • establishing an accountability culture where “doing it right” is valued and actively supported by the firm’s leadership
  • developing and implementing action plans to permanently change behaviours and better embed audit quality into each engagement
  • developing processes and systems to ensure that staff have sufficient time to complete a quality audit
  • emphasizing the importance of quality supervision and review of audit work
  • fully utilizing the skills and knowledge of the firm’s most experienced practitioners

CPAB’s report also addresses other areas that are relevant to improving audit quality, including:

  • means of enhancing professional skepticism
  • the challenges of auditing Canadian companies operating in foreign jurisdictions
  • the audit committee’s role as a key contributor to audit quality
  • appropriately balancing quality audit work with a reasonable fee for such work

I found of particular interest CPAB’s common inspection findings including such things as the audit of accounting estimates, group audits, substantive analytical procedures and audit work on internal control. They often come up in conversations I have with provincial practice advisors and others about areas of difficulty for auditors at the grass roots level. In my view, it reinforces the need across the profession for continued efforts to improve auditors’ understanding of the requirements in certain key standards and how to effectively comply with them in practice, on a consistent basis.

Keep the conversation going….let me know your views on CPAB’s 2012 report. What are your conclusions about the state of audit quality in Canada?

Post a comment below; or email me directly.

Eric

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

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