2010 inspections show little improvement, though audit work is generally
TORONTO, April 18 /CNW/ - Canadian audit firms must demonstrate a
greater commitment to audit quality, including zero tolerance for audit
deficiencies, the Canadian Public Accountability Board (CPAB) says in
its 2010 public report.
"In the seven years we have been inspecting firms that audit public
companies, we have seen numerous examples of high-quality audit work,"
said CPAB Chief Executive Officer Brian Hunt. "In general, investors
can have confidence in the integrity of public company financial
statements that have been audited in Canada."
However, audit quality is not uniformly high across all audits in all
firms and, even for major firms, there can be occasional lapses that
result in reduced audit quality.
"Overall, we saw little improvement in audit quality from the year
before," Mr. Hunt said. "While audit work was generally sound, we
found, in firms of all sizes, examples of inadequate audit work,
ineffective audit engagement supervision and review, a lack of
professional skepticism and working papers that did not fully describe
the nature and extent of the audit work carried out."
CPAB's 2010 inspections also found several instances of poor or
non-existent communications with audit committees. CPAB's more serious
findings led to additional audit work being required on some files and
to the reissuing of a number of financial statements.
"Our 2010 inspection findings are cause for concern, given the
potentially serious implications of any reduction in audit firms'
commitment to the continuous improvement of audit quality," Mr. Hunt
said. "While many firms' performance is sound, overall we find too many
audit deficiencies and more than we would see if firms uniformly had a
commitment to zero tolerance for audit deficiencies."
While these deficiencies do not always lead to the reissuing of a
financial statement, Mr. Hunt said, "the risk of a restatement is
"The integrity of financial reporting, which is key to protecting
investors in our capital markets, demands an attitude and approach
dedicated to the continuous improvement of audit quality," Mr. Hunt
said. "It also requires a commitment on the part of audit firms to move
to zero tolerance for audit deficiencies."
While a commitment to zero tolerance for audit deficiencies does not
mean there will never be audit problems, Mr. Hunt said it, "greatly
reduces the likelihood that they will occur."
In its 2010 public report, CPAB urges audit firms to:
Enhance audit engagement supervision and review
Have senior personnel better coach and mentor their staff by completing
real-time engagement file reviews
Strengthen the role of the second partner who conducts quality control
reviews of each audit engagement
Apply more rigour in their quality monitoring programs
Improve their communications with audit committees
"We also encourage audit committees to raise the issue of audit quality
with their auditors," Mr. Hunt added. "A high-quality audit is an audit
committee's best assurance that it is effectively executing its
Audit committees should consider the pressure being placed on firms to
reduce audit fees, Mr. Hunt added.
"To support audit quality, firms need to continuously invest in
recruiting, training and retaining senior, experienced staff," Mr. Hunt
said. "However, in some cases, firms are under intense pressure to
reduce audit fees. Audit committees demanding lower fees need to be
sure they understand what implications that may have on the quality of
the audit. The interests of shareholders are best served if an
appropriate audit fee is paid — one that ensures the sustainability of
In 2010, CPAB inspected 69 audit firms and inspected 232 audit
engagements. These included inspections of Canada's Big Four firms,
inspections of 11 other firms reviewed annually, recurring inspections
of 25 firms and 29 follow-up inspections.
CPAB used a number of risk analysis processes to identify higher-risk
reporting issuer audits. The 2010 inspections drilled deeply into the
audit work in such high-risk areas as valuations, impairments, complex
financial instruments, revenue recognition, income taxes and going
Following each inspection, CPAB sent each firm a private report that
identified key recommendations to enhance audit quality. Each
recommendation requires a response from the firm within a prescribed
period of time and CPAB follows up to ensure that its recommendations
have been implemented. The firms have implemented, or are implementing,
substantially all of the recommendations made in 2010.
The full public report of CPAB's 2010 inspections is available at www.cpab-ccrc.ca.
CPAB is an audit regulator that oversees auditors of Canadian public
companies. CPAB's mission is to contribute to public confidence in the
integrity of financial reporting of public companies by promoting
high-quality, independent auditing.
SOURCE Canadian Public Accountability Board
For further information:
Brian Hunt, CEO
Canadian Public Accountability Board