Results of special inspection should be a wake-up call for auditing
TORONTO, Feb. 21, 2012 /CNW/ - Canadian audit firms must carry out
audits in foreign jurisdictions with a high degree of professional
skepticism and a thorough understanding of the business environment to
make sure they adequately adjust audit procedures to address the risks
arising from the jurisdiction's customs and practices, says the
Canadian Public Accountability Board (CPAB).
CPAB has identified Canadian reporting issuers with substantial
operations in a range of foreign jurisdictions and is performing
inspections of those audit files. CPAB's findings in this report are
based on a review of 24 audit files for Canadian public companies with
their primary operations in China.
"CPAB does not believe the issues identified in its review are unique to
audits of companies based in China," said CPAB CEO Brian Hunt. "We
believe it is due to auditors not adequately recognizing the
differences in the business environments of foreign jurisdictions that
require modification to the nature, timing and extent of their audit
Twelve of the audits were conducted by National firms and 12 were
conducted by Regional or Local firms. CPAB's review was carried out
between October 1 and December 31, 2011. Later in 2012, CPAB will
provide an additional report based on its inspections of audits in
other foreign jurisdictions.
"We are disappointed by the results of this review," said Mr. Hunt. "In
too many instances, auditors did not apply procedures that would be
considered fundamental in Canada. We also found a lack of professional
skepticism when auditors were confronted with evidence that should have
raised red flags regarding potential fraud risk."
Significant findings as a result of CPAB's review included:
Audit firms did not control the confirmation process, which refers to
communication with outside parties to confirm financial balances and/or
Auditors' reliance on confirmations with questionable reliability
Inadequate audit procedures to identify related-party transactions
Insufficient audit evidence to support the:
ownership or existence of significant assets
recognition of revenue
appropriateness of the income tax rate used
Based on the results of its review, CPAB identified 12 files that
required remediation to address deficiencies. Of the 12 files, one
required that the financial statements be restated. CPAB has also
placed a requirement on one firm restricting its ability to perform
audits of reporting issuers with operations in China. This requirement
will remain in place until CPAB has carried out a follow-up inspection,
the firm has implemented all of CPAB's recommendations, and the firm
can demonstrate it is performing audits to the required standards.
"These results should be a wake-up call for Canada's auditing
profession," Mr. Hunt said. "We believe Canadian auditors have the
talent and capabilities to perform audits in foreign jurisdictions.
However, they must execute these audits with a high degree of
professional skepticism and a thorough understanding of the business
environment, to ensure their audit procedures adequately address risks
arising from the foreign jurisdiction's business customs and
CPAB made recommendations in its report that, when implemented, would
have the greatest impact on improving audit quality in foreign
jurisdictions. CPAB recommended that auditors auditing in foreign
Understand and explicitly assess the business customs and practices in
foreign jurisdictions and adjust audit procedures accordingly
Adopt a rigorous client acceptance and continuance process
Adopt a heightened awareness of fraud risk
Implement special procedures for bank confirmations
Exercise caution when using external confirmations as audit evidence
Adopt a heightened awareness of related-party transactions
Verify income and commodity taxes
Following its review, CPAB sent each firm a private report that
identified recommendations on actions to be taken to remediate audit
file deficiencies and/or to improve audit quality control processes.
The audit firm must implement these recommendations within a prescribed
period of time (180 days or sooner, depending on the severity of the
issue). Failure to implement the recommendations to CPAB's satisfaction
would result in disciplinary action in the form of a requirement,
restriction or sanction on the firm.
"The audit firms have received CPAB's recommendations and either already
have or are in the process of adapting their audit procedures going
forward," Mr. Hunt said.
The full public report of CPAB's special inspection of audits in foreign
jurisdictions is available at www.cpab-ccrc.ca.
CPAB is Canada's audit regulator, dedicated to protecting the investing
public's interests. As champions of audit quality, CPAB regulates the
auditors of Canadian public companies through its national inspection
program. CPAB's risk-based inspection process focuses on key audit
risks that could have the greatest impact on audit quality. By
promoting high-quality, independent auditing, CPAB contributes to
public confidence in the integrity of financial reporting, which
supports our capital markets.
SOURCE Canadian Public Accountability Board
For further information:
For further information or to arrange an interview, contact:
Brian Hunt, CEO
Canadian Public Accountability Board