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2016

CPAB 2016 Big Four Public Report and Highlights for Audit Committees

Nov 28, 2016

On November 28, 2016, the Canadian Public Accountability Board (CPAB) released its 2016 public report on the inspections of Canada’s Big Four public accounting firms and Highlights for Audit Committees, which includes common findings and recommendations to improve audit quality.

The CPAB's 2016 inspections findings indicates that, despite an overall decrease in significant inspection findings compared to last year, audit quality continues to be inconsistent.

In 2016, CPAB inspected 87 engagements files, 11 of those had significant findings. Last year, CPAB reported five key inspection themes. Ninety-six percent of their total findings related to these areas again in 2016: significant accounting estimates, executing audit fundamentals, professional judgment and skepticism, internal controls and understanding business processes relevant to financial reporting.

Review the Public Report and the Highlights for Audit Committees on the CPAB's Web site.

CPAB Protocol Feedback Survey results

Nov 22, 2016

On November 22, 2016, the Canadian Public Accountability Board (CPAB) released a summary of the results of the 2016 CPAB Protocol Feedback Survey.

Overall, the CPAB's Public Inspections Reports were well received. Engagement partners and audit committee chairs agree that reports are clear, easy to understand and provide the right amount of information. Both groups also indicated that they believe that CPAB's Public Inspections Reports help audit committees with their responsibilities as directors.

Review the survey on the CPAB's website.

Do Auditors Correctly Identify and Assess Internal Control Deficiencies? Evidence from the PCAOB Data

Nov 30, 2016

In November 2016, the Public Company Accounting Oversight Board (PCAOB) released the paper "Do Auditors Correctly Identify and Assess Internal Control Deficiencies? Evidence from the PCAOB Data." The paper was presented at the PCOAB’s 2016 Conference on Auditing and Capital Markets on October 20-21, 2016.

Auditors routinely fail to disclose material weaknesses prior to a material error (i.e. restatements). One potential reason is that auditors misclassify the severity of identified internal control deficiencies due to complexity in judging the materiality and likelihood of potential related errors. Another reason is that auditors face disincentives to report a material weakness without a clear indication of an existing error. The authors evaluate these possibilities using a proprietary database on auditor-identified control deficiencies that are not deemed material weaknesses, hence not publicly disclosed. They compared the severity of the control deficiency with the severity of ex-post reporting errors. Even though they found some evidence consistent with auditor and management incentives to misclassify material weaknesses as less serious deficiencies, they generally found that 1) the severity of identified control deficiencies is properly assessed and 2) the auditor is able to provide reasonable assurance about whether financial statements are materially misstated in the presence of identified deficiencies. Their evidence indicated that the inability of auditors to properly identify relevant internal controls is a contributing reason why material weaknesses are not discovered and disclosed prior to material error restatements.

Collectively, their results indicate that misclassification of the severity of internal control deficiencies is unlikely to be the main reason for why material weaknesses do not often precede a material error restatement. Rather, their results indicate that the inability of the auditor to properly identify relevant internal controls is a contributing factor to the lack of timeliness in disclosures of internal control material weaknesses.

Review the study on the PCAOB's website.

Engagement and Outreach in Support of the New Auditor’s Report

Dec 14, 2016

On December 14, 2016, the International Auditing and Assurance Standards Board (IAASB) released a summary of the work of the IAASB's Auditor Reporting Implementation Working Group. The Working Group representatives have spent 2016 attending various outreach events and engaging stakeholders around the world to support implementation.

As more countries begin to adopt the standards and early adopters emerge, discussions with stakeholders have evolved to focus on actual experiences. These conversations have assisted the Working Group in understanding implementation experiences, including any practical challenges and how such challenges are being addressed.

The Working Group is also exploring possible approaches to a post-implementation review. The post-implementation review’s purpose would be to determine whether the new and revised auditor reporting standards need further refinement.

Review the summary on the IAASB's website.

IAASB Discussion Paper – Exploring the Demand for Agreed-Upon Procedures Engagements and Other Services, and the Implications for the IAASB’s International Standards

Nov 29, 2016

On November 29, 2016, the International Auditing and Assurance Standards Board (IAASB) issued a Discussion Paper exploring how agreed-upon procedures engagements are undertaken and reports are used. It also explores the demand for engagements that combine reasonable, limited and no assurance. Canadian stakeholders are encouraged to respond to the IAASB by March 29, 2017.

Review the Discussion Paper on the IAASB's website.

Is Audit Behavior Contagious? Teamwork Experience and Audit Quality by Individual Auditors

Nov 30, 2016

In November 2016, the Public Company Accounting Oversight Board (PCAOB) released the paper "Is Audit Behavior Contagious? Teamwork Experience and Audit Quality by Individual Auditors." The paper was presented at the PCOAB’s 2016 Conference on Auditing and Capital Markets on October 20-21, 2016.

In this paper, the authors demonstrate that bad audit behavior is transmitted through the teamwork experience of individual auditors. They found that auditors who have previously worked in a team (team auditors) with those who are sanctioned by the regulators for audit failure (contagious auditors) are more likely to issue lenient audit opinions, and their audited accounting numbers are more likely to be downward restated in the future, compared to those who have no overlap with contagious auditors in their teamwork experience. This contagion effect is, however, absent among auditors who previously worked in the same audit firm but not in the same team (colleague auditors) as contagious auditors. Their findings highlight the importance of analyzing social learning via teamwork experience in understanding how audit quality at the individual level is shaped.

Review the study on the PCAOB's website.

Message from the AASB Chair – Moving Forward on New Auditor Reporting and Other Standards

Nov 14, 2016

On November 14, 2016, the Chair of the Auditing and Assurance Standards Board (AASB), Darrell Jensen, provided an update on the progress towards adopting new international standards.

They are still considering whether key audit matter reporting should be required for audits of other listed entities. They intend to conduct research on this topic with a view to making a decision within 18 months of the date when this reporting becomes effective for Toronto Stock Exchange listed entities.

The latest information available indicates that the U.S. standard-setting process should be complete early in 2017. They expect to be in a position to determine the impact of the U.S. standards in Canada and approve the CASs for auditor reporting and other standards in the spring of 2017. They currently do not anticipate making the CASs effective prior to periods ending on or after December 15, 2018.

The IAASB’s effective date for these standards is for periods ending on or after December 15, 2016. Accordingly, auditors conducting audits of financial statements in accordance with the CASs for periods ending on or after December 15, 2016 should not represent compliance with the ISAs unless they have complied with the respective ISAs issued by the IAASB, which have yet to be adopted in Canada.

Review the message on the AASB's website.

New CAQ Paper Promotes Stakeholder Dialogue on Non-GAAP Financial Measures

Dec 05, 2016

On December 5, 2016, the Center for Audit Quality (CAQ) released a new resource "Non-GAAP Financial Measures: Continuing the Conversation."

The publication explores the issue of non-GAAP information, providing context on its definition and use, pertinent regulatory developments, and the current level of auditor involvement. It builds on the CAQ's June 2016 publication, Questions on Non-GAAP Measures: A Tool for Audit Committees.

Additionally, the paper compiles sets of suggested questions for key stakeholder groups to consider regarding their preparation or use of non-GAAP financial measures. These stakeholders include management, investors, investment analysts, securities counselors, audit committee members, internal auditors, independent auditors, regulators, accounting standard setters, and academics.

Review the publication on the CAQ's website.

PCAOB Concludes 2016 Economic Conference on Auditing and Capital Markets

Oct 21, 2016

On October 21, 2016, the Public Company Accounting Oversight Board's (PCAOB) Center for Economic Analysis concluded its third annual Economic Conference on Auditing and Capital Markets, an event that promotes academic research on the economic impact of auditing on the capital markets.

Six research papers were chosen for presentation at the conference out of 83 submitted following the Center's call for papers. The papers presented addressed:

  • Expanded auditor reporting
  • The impact of individual auditors on audit quality
  • Internal control over financial reporting
  • Auditor assignments, teamwork and audit quality
  • Audits involving other auditors

Review the press release on the PCAOB's website.

PCAOB Posts Staff Q&A: Audits of Mainland China Issuers by Registered Firms Outside of Mainland China

Dec 30, 2016

On December 30, 2016, the Public Company Accounting Oversight Board (PCAOB) published staff answers to questions about the obligations of PCAOB-registered firms based outside of Mainland China that provide issuer audit services that they understand to be subject to certain Mainland China regulations.

In 2015, the Chinese Ministry of Finance put into effect Interim Provisions on Auditing Operations Conducted by Accounting Firms Concerning the Overseas Listing of Domestic Chinese Companies (the “MOF Rule”). The MOF Rule includes provisions related to the conduct of auditors based outside of Mainland China that perform audit work in Mainland China.

PCAOB staff has prepared answers to questions that have arisen or may arise in that context.

Review the Staff Q&A on the PCAOB's website.

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