- Report indicates positive trend in audit quality, identifies areas for improvement -
TORONTO, Nov. 25, 2014 /CNW/ - In its first public report on Canada's Big Four accounting firms released today, the Canadian Public Accountability Board (CPAB) said that its inspection findings indicate the quality of audits performed by Deloitte LLP, EY LLP, KPMG LLP, and PwC LLP improved in 2014.
"Based on the positive trend in 2014, it is clear that Canada's four largest public accounting firms continue to take audit quality seriously," said Brian Hunt, CEO, CPAB. "There is, however, still room for improvement in terms of driving consistent audit execution deeper into the organization. To this end, we have emphasized to the Big Four the need for continued focus on addressing audit issues that recur year over year as well as issues that we have identified in this inspection report."
In 2014, CPAB inspected 98 (2013:105) Big Four engagement files and found an overall improvement in audit quality, including a 36 per cent decline (2013: 43 per cent) in files with significant audit deficiencies. Since 2011 – when CPAB first issued its call to action to improve audit quality – the number of files inspected by CPAB with significant audit deficiencies has declined overall by more than two-thirds.
While no new audit quality themes emerged this year, CPAB's inspections indicate that challenges persist in the areas of complex accounting estimates, auditing in foreign jurisdictions, understanding and evaluating internal controls, applying professional judgment and executing professional skepticism.
Auditing complex accounting estimates
The application of accounting policies to prepare financial statements involves a number of estimates and judgments. Since these can be complex, and may be influenced by management bias, CPAB chooses these areas for inspection and continues to report findings.
Auditing in foreign jurisdictions
Auditing in foreign jurisdictions has been a challenge for a number of years. CPAB has seen the Big Four firms increase their focus in this area, including defining procedures for this kind of audit work, which has resulted in improved execution and better quality audits. At the same time, CPAB continues to face limitations when it comes to accessing and evaluating component auditor work in certain jurisdictions.
Understanding and evaluating internal controls
The report highlights the need for auditors to have a better understanding of internal control systems to effectively conduct an audit. CPAB's inspections of higher risk audit areas identified numerous instances where internal controls work was not well done. All firms need to critically re-evaluate how they approach an internal controls-based audit and ensure that appropriate training and guidance is provided to engagement teams.
Applying professional judgment and professional skepticism
Areas requiring the most professional judgment and needing involvement of the most experienced auditors featured prominently in CPAB's 2014 inspection findings. In many cases, up to 80 per cent of the audit work is conducted by staff with fewer than five years' experience. This lack of experience needs to be complemented with appropriate involvement of engagement leadership to ensure the delivery of a quality audit.
CPAB's inspections continue to identify a need for firms to enhance the professional skepticism of their staff, ensuring their people appreciate its importance and embedding appropriate processes and behaviors into their methodologies and cultures.
A key development in 2014 was the introduction of the Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol). Audit firms are now required to share significant inspection findings and CPAB's public reports with their clients' audit committees. CPAB strongly encourages audit committees to discuss the report and any file-specific findings, if applicable, with their auditor.
CPAB's 2014 Public Report on Big Four firm inspections is available at www.cpab-ccrc.ca.
The Canadian Public Accountability Board (CPAB) is Canada's audit regulator responsible for the regulation of public accounting firms that audit Canadian reporting issuers. CPAB operates independently from the provincial regulatory authorities who oversee the accounting profession. A world-class audit regulator and a champion of audit quality, CPAB contributes to public confidence in the integrity of financial reporting, which supports Canada's capital markets. CPAB operates from offices in Montréal, Toronto and Vancouver.
SOURCE: Canadian Public Accountability Board
For further information: Adrienne Jackson, Director, Communications, Canadian Public Accountability Board, 416-913-8260, ext. 4132, [email protected]