Firms must demonstrate greater commitment to audit quality, CPAB says

2010 inspections show little improvement, though audit work is generally sound

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 there."

"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 duties."

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 audit quality."

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 concern.

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

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


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