CPAB 2013 Report: Inspection results show positive trend

The Canadian Public Accountability Board (CPAB) recently issued its public report on its 2013 inspections of audit firms.

The Canadian Public Accountability Board (CPAB) recently issued its public report on its 2013 inspections of audit firms. Here are some highlights:

  • The quality of audits continues to improve – firms generally have sound audit methodologies and are committed to audit quality; most audits are well done;
  • Inspections show a positive trend – there was a 36 per cent decline in audit deficiencies among firms inspected annually (these firms account for audits of 99 per cent of Canadian market capitalization of reporting issuers);
  • Consistency of execution is a challenge – CPAB believes firms need to embed improved audit quality throughout all audits;
  • The largest number of deficiencies came from audits of smaller companies – 42 per cent of deficiencies arose in audits of reporting issuers with less than $25 million in market capitalization; and
  • Canadian companies with foreign operations can present significant challenges – these challenges exist for management, the audit committee, the auditor and the audit inspector.

CPAB made changes to the format of this year’s report to reflect the new protocol to provide greater transparency of inspection findings to audit committees. (Auditors who participate in the protocol must provide audit committees of their reporting issuer clients with a copy of the CPAB public report, as well as significant findings specific to the individual reporting issuer, if selected for inspection.) An appendix to the report is specifically directed at audit committees. It expands on report findings and includes a number of observations that may be of interest to audit committees. Auditors will want to be familiar with CPAB’s report, and this appendix in particular, as it will become a focus for audit committees in their oversight discussions with the auditor.

CPAB’s inspections focus on the highest-risk areas of the most complex audits. The following areas contain the most frequent deficiencies:

  • Application of professional skepticism 
  • Reliance on internal controls 
  • Audit of accounting estimates 
  • Auditing revenue 
  • Audit work on internal controls 
  • Audit of business combinations 
  • Group audits/foreign jurisdictions 
  • Evaluation of accounting policies 
  • Use of management’s expert or the auditor’s expert 
  • Response to risk assessment, including fraud risk 
  • Journal entry testing to address risk of management override of controls 
  • Impairment testing
Many of the deficiencies are not new. In fact, because of their continued occurrence, the Canadian auditing profession has issued non-authoritative guidance to assist auditors in many of these areas over the last year or so. See a list of links provided below where you can find the relevant guidance. All auditors, not just those that audit reporting issuers, may find using this guidance, together with the related auditing standards themselves, helpful in reducing future audit deficiencies in their audit practices.

With the ongoing audit firm action plans to address audit quality concerns, the increased involvement of audit committees in audit quality matters, and CPA Canada likely to continue to issue guidance on implementation issues, I wouldn’t be surprised to see a further reduction in audit deficiencies next year!

Keep the conversation going…. what is your reaction to the CPAB report? What do you think should be the primary area of focus to bolster audit quality going forward?

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