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2016

Alert – International Standards on Auditing Not Adopted as Canadian Auditing Standards as at December 15, 2016

Dec 05, 2016

On December 5, 2016, the Auditing and Assurance Standards Board (AASB) released an alert notifying that auditors performing audits of financial statements in accordance with CASs for periods ending on or after December 15, 2016 should not represent compliance with ISAs unless they have also complied with these ISAs issued by the IAASB.

The following ISAs, which are effective for audits of financial statements for periods ending on or after December 15, 2016, have not been adopted as CASs.

  • New Auditor’s Report: New and revised ISAs (and related conforming amendments) as a result of the project to enhance the communicative value of the auditor’s report
  • Other Information: Revisions to ISA 720, The Auditor’s Responsibilities Relating to Other Information (and related conforming amendments)
  • Disclosures: Changes to ISAs issued as a result of the Disclosures project.

Review the full alert on the AASB's website.

Assessing Initiatives to Improve the Quality of Group Audits Involving Other Auditors

Nov 30, 2016

In November 2016, the Public Company Accounting Oversight Board (PCAOB) released the paper "Assessing Initiatives to Improve the Quality of Group Audits Involving Other Auditors." The paper was presented at the PCOAB’s 2016 Conference on Auditing and Capital Markets on October 20-21, 2016.

One of the major current concerns of regulators internationally is the quality of the auditing of multinational groups, particularly those involving the co-ordination by the principal auditor of other auditors. These concerns resulted in changes to the international auditing standard on group audits, International Standards on Auditing (hereafter ISA) 600, which are consistent with current initiatives being considered by the PCAOB. The authors examine audit quality pre and post ISA 600 to help inform the IAASB as to the efficacy of the ISA 600 amendments and inform the PCAOB with regard their similar initiatives under consideration. They make use of unique Australian disclosures which allow them to identify the nature and extent of involvement of other auditors in group audits. They found that the revisions to ISA 600 have contributed to an improvement in audit quality, specifically for clients of non-Big 4 auditors. Further, the authors found that the quality of MNE group audits involving other auditors from the same network is lower, and this appears not to be affected by the ISA 600 revisions. Consistent with regulatory concerns, they also examine whether there are any incremental costs for group audits involving other auditors. While the authors found that group audits involving other auditors are more costly, they did not find evidence of an increase in audit fees associated with these regulatory initiatives.

Review the study on the PCAOB's website.

Auditors With or Without Styles? Evidence from Unexpected Auditor Turnovers

Nov 30, 2016

In November 2016, the Public Company Accounting Oversight Board (PCAOB) released the paper "Auditors With or Without Styles? Evidence from Unexpected Auditor Turnovers" by Tai-Yuan Chen and Hong-Da Wang. The paper was presented at the PCOAB’s 2016 Conference on Auditing and Capital Markets on October 20-21, 2016.

Using unexpected auditor turnovers as a quasi-experiment, in this study we examine whether individual auditors exhibit a significant impact on audit quality. More specifically, focusing on auditor turnovers precipitated by the incumbent auditor’s sudden death or by resignation due to health issues or a career change, we investigate audit quality changes surrounding these unexpected events. While we find some evidences that unexpected auditor turnovers are associated with significant audit quality changes for non-Big 4 audit firms, this is not the case for auditor turnovers at Big 4 firms even though there are greater differences in personal characteristics between outgoing and successor auditors in Big 4 firms. This finding suggests that notwithstanding differences in auditors’ personal characteristics, standardized audit procedures and strong internal controls can constrain individual auditors in large audit firms from impacting audit quality.

To summarize, their study suggests that on average individual auditors in Taiwan do not exhibit a significant personal effect on audit quality, particularly when they work for Big 4 audit firms. As Taiwan’s audit market is very similar to that of countries such as the U.S., Canada, or Australia, with Big 4 auditors accounting for 80% of public firm auditing, their findings have important implications for other countries. Specifically, as many countries are starting to mandate identification of signing audit partner(s) in the audit report, in an effort to hold individual auditors accountable for audit outcomes, their study suggests that whether this disclosure can improve overall audit quality is open to debate, in particular for Big 4 audit firms.

Review the study on the PCAOB's website.

Canadians speak out on IAASB’s Invitation to Comment

Jun 06, 2016

On June 6, 2016, CPA Canada released a blog by Eric Turner on how Canadian stakeholders firmly voiced their opinion on the IAASB’s Invitation to Comment (ITC) on Enhancing Audit Quality in the Public Interest; it’s important that this dialogue continue with the AASB as key standards get revised.

The ITC focuses on professional skepticism, quality control and group audits. In this blog, Eric gives a snapshot of the key messages that came out of these recent consultations.

Review the blog on the CPA Canada's Web site.

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.

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