The spotlight report highlights several critical areas concerning the current economic conditions and the audit workforce environment. Audit committee chairs discuss key economic issues with their auditors, including interest rate fluctuations, inflation, supply chain challenges, and the financial repercussions of the Russia-Ukraine war. Additionally, concerns are growing about the potential long-term effects of remote and hybrid work environments on the professional development of audit personnel. This is compounded by worries about attracting new talent into the auditing field, which could result in a shortage of qualified auditors.

Significant discussions between audit committees and auditors also encompassed a variety of topics outside of mandatory communications. These included goodwill impairment, interest rates, internal control deficiencies, fraud, liquidity, cybersecurity, and auditor independence. Such discussions are vital for maintaining the integrity and effectiveness of the audit process.

Most audit committee chairs regularly discuss monitoring quality control systems and auditor independence with their auditors. These discussions often involve reviewing auditor presentations, the firm’s latest PCAOB inspection report, and the actions taken to address any identified deficiencies. However, PCAOB staff noted that some audit committees might not devote sufficient time to these critical reviews, potentially impacting the quality and independence of audits.

Access the Spotlight report on the PCAOB’s website.

The CAQ's analysis of financial restatements from 2013 to 2022 provides valuable insights into the evolving quality of financial reporting. This period saw a general decline in restatements, particularly "Big R" restatements, despite a spike in 2021 linked to exceptional purpose acquisition companies (SPACs) primarily due to issues in accounting for warranties.

Key findings indicate that errors in accounting for expenses, such as misapplications of reporting rules for accruals, reserves, and estimates, are the most common reasons for restatements. Fraud was implicated in a small percentage of cases, specifically 3% of total and 7% of "Big R" restatements. Notably, the financial, healthcare, and software industries were the most frequent sectors to report restatements. These restatements predominantly involved smaller companies, often traded on NASDAQ, highlighting a trend towards companies with potentially less mature internal control structures.

Furthermore, ineffective internal control over financial reporting (ICFR) was more likely reported post-restatement, indicating that ICFR assessments are not predictive of restatements. This analysis suggests that audit committees should particularly consider the risk of material misstatement, focusing on the familiar misstatement drivers and industry-specific risks.

Access the report on the CAQ’s website.

The study provides comprehensive data on financial restatements from 2004 through 2023, focusing on various aspects such as the number of Big R and Little r restatements, the average length of the restatement period, the impact on previously reported income, filer status of companies, and a breakdown by industry.

Here are some of the highlights from the study’s discussion of the type of accounting errors that have prompted restatements:

• Seven of the top 10 most common issues cited in restatements since 2004 can also be seen in the top 10 issues for 2023. Inventory, vendor and cost of sale issues, and consolidation issues appear as top issues for 2023 but not for the 20-year period. Consolidation issues in 2023 included joint ventures, non-controlling interests, variable interest entities and foreign exchange translations.
• Overall, debt and/or equity account issues continue to be the most common accounting issues cited in financial restatements. This issue was tagged in 27% of all restatements since 2004, totaling 4,624 restatements. Notably, the SPACs have contributed to almost 1,100 of these citations over the years.
• Debt and equity securities remain the most common restatement issue, constituting 21% of all the problems in 2023. In 2021, the issue was associated with 81% of all restatements, mainly due to the SPAC boom. This massive debt and equity securities spike consequently created sharp declines for the remaining issues.
• Since 2021, revenue recognition, expense recording, liabilities and accruals and cash flow classifications issues have all rebounded from 2-3% to 10-16% in 2023.

The study underscores that even excluding the impact of the SPAC warrant issues, debt and equity issues have been the most frequent cause of restatements over the past 20 years.

Access the report on Ideagen’s website.

In September 2023, the International Auditing and Assurance Standards Board (IAASB) finalized a new standard, the International Standard on Auditing (ISA) for Audits of Financial Statements of Less Complex Entities (LCE), which was subsequently published in December 2023. Over the development phase, Canadian representatives actively participated by establishing an advisory group, monitoring progress, consulting with stakeholders, and providing feedback through response letters.

Despite the international adoption, Canada opted not to implement the ISA for LCE, citing that it failed to meet the specific needs of Canadian auditors and the broader public interest. Concerns centered around the standard’s lack of tailoring for Canadian LCE audits and the potential public interest implications of maintaining two sets of auditing standards.

Looking forward, Canada is not halting its efforts to improve auditing practices for LCEs. The 2024-2025 Annual Plan includes initiatives to develop a Canadian-centric solution to the challenges faced in applying existing Canadian Auditing Standards (CASs) to LCE audits. This includes continuous input into ongoing IAASB projects to ensure scalability and proportionality are addressed. Specific projects involve revising CAS 240 related to auditors' responsibilities regarding fraud and evaluating the implementation of the newly revised CAS 315, which includes tools and resources developed to aid auditors in applying these standards effectively.

CPA Canada continues to support auditors with non-authoritative guidance and tools for implementing quality management standards and understanding new amendments in auditing standards, ensuring auditors are well-equipped to handle the complexities of LCE audits.

Access the press release on the IAASB website.

The report offers insights and illustrative examples into common inspection findings for auditors of crypto-asset reporting issuers. It also outlines good practices observed in audit files without findings and highlights emerging risks. As of February 2024, the report notes that 72 Canadian reporting issuers in the crypto-asset industry are audited by 26 public accounting firms registered with CPAB. It also provides charts indicating the primary area of specialization in which these reporting issuers operate.

Access the report on the CPAB’s website.

Under U.S. GAAP (ASC 830), registrants must monitor inflation in their operating countries. To determine if an economy is highly inflationary, they calculate the cumulative inflation rate for the three years preceding the reporting period, including interim periods. If this rate exceeds 100%, the economy is deemed highly inflationary. If it is below 100%, registrants must consider historical inflation trends and other relevant factors to decide if the economy should still be classified as highly inflationary. Special caution is advised in countries where inflation data reliability is questionable.

Determining whether a country should no longer be classified as highly inflationary requires significant professional judgment. To promote consistency, the CAQ International Practices Task Force developed a framework to help registrants monitor inflation statistics and apply ASC 830. This framework includes cumulative inflation data by country, categorized based on their cumulative inflation rates and ASC 830 guidance, using data from the International Monetary Fund (IMF). This information aids management in applying ASC 830 alongside internal controls over financial reporting to decide on a country's inflationary status. The Task Force also identified countries with projected cumulative inflation rates and noted inconsistent data reliability.

Access the document on the CAQ’s website.

SEC Chief Accountant Paul Munter emphasized the importance of setting the right "tone at the top" at audit firms to maintain the integrity of capital markets. The leaders of these firms play a crucial role in ensuring that professionals within the firm uphold integrity and professionalism over profit and growth.

The "tone at the top" determines whether a firm's culture focuses on delivering high-quality audits or prioritizing short-term profits. It influences the firm’s capacity to exercise professional skepticism and have an effective quality control system. Unfortunately, there have been instances where audit firms have neglected this, resulting in violations that undermine public trust.

The SEC Chief Accountant argues that setting the right tone at the top involves more than just having appropriate policies. “Senior partners must lead by example through their actions. This includes supporting staff when difficult calls need to be made, admitting mistakes, taking corrective action, and holding individuals accountable for unethical behaviour. Moreover, ethics and character should be fundamental to the firm’s hiring, retention, and promotion criteria. Firms should reward technical excellence and integrity at least as much as billing, profitability, and business development. Transparency and the empowerment of staff to report misconduct are also essential.”

In conclusion, he emphasizes that the “tone at the top” is crucial in maintaining the integrity of audit firms and the capital markets. Leaders of public accounting firms must prioritize integrity and professionalism over profit and growth.

Access the statement on the SEC’s website.

The updates reflect the PCAOB’s recent progress and continued drive toward its strategic goal of modernizing the PCAOB’s standards and rules. Since 2022, the Board has completed four standard-setting projects and issued proposals on six additional standard-setting and rulemaking projects.

The Board has approved two projects, namely Quality Control and General Responsibilities of the Auditor in Conducting an Audit (AS 1000), and they are currently awaiting SEC approval. Furthermore, two fresh initiatives have been incorporated into the short-term standard-setting agenda. The first one, Inventory, was shifted from the mid-term agenda, while the second one, Other Reporting, is a newly introduced project. In addition, a new venture focusing on Internal Audit has been added to the mid-term standard-setting agenda. The Attestation Standards Update project has had its timeline revised, with the expected time for action now set for 2025. Lastly, the project on Follow-On Disciplinary Proceedings has been removed from the PCAOB’s rulemaking agenda.

Access the updates on the PCAOB’s website.

AS 1000 enhances and consolidates a group of standards that the PCAOB adopted on an interim basis in April 2003 and that address the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, competence, and professional judgment. Merging these foundational standards into one standard enhances investor protection by reaffirming the general principles and responsibilities of the auditor and solidifying the foundation of every audit.

 Key Provisions of the New Standard and Related Amendments:

• The new standard streamlines and modernizes auditors' general principles and responsibilities, enhancing usability without creating new principles. It reaffirms the auditor’s responsibility to investors, providing a foundation for an objective and independent audit.
• It clarifies the auditor’s responsibility for evaluating if financial statements are “presented fairly” in conformity with the applicable financial reporting framework.
• The role and responsibilities of the engagement partner are further specified, distinguishing between the duties applicable to all auditors and those specific to engagement partners.
• The documentation completion period is reduced from 45 to 14 days, limiting opportunities for improper alteration of audit documentation and potentially accelerating the inspection process.
• The standard also clarifies that an auditor’s professional skepticism extends to other information obtained to comply with PCAOB standards and rules, emphasizing that this skepticism is exercised throughout the audit process.

The new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024, subject to approval by the Securities and Exchange Commission.

Access the new standard on the PCAOB’s website.

The new standard would require all PCAOB-registered firms to identify their specific risks and design a QC system with policies and procedures to guard against them.

 Key Provisions of the New Standard:

• The new standard adopts a balanced approach to Quality Control (QC), combining a risk-based strategy that encourages proactive risk management with set mandates to ensure rigorous QC system design, implementation, and operation.
• All firms registered with the PCAOB must design a QC system that complies with this standard, continuously monitor its operations, and take corrective actions for any inefficiencies, fostering continuous improvement.
• Such firms must also conduct an annual evaluation of their QC system and submit the results to the PCAOB via the new Form QC, endorsed by critical firm personnel, to enhance individual accountability.
• Firms auditing over 100 issuers annually must establish an External QC Function (EQCF) for independent judgment on the QC system, including evaluating significant judgments made in assessing and reporting on the QC system's effectiveness.

The Board developed the improvements to PCAOB QC standards through consultations with advisory groups. It issued a concept release in December 2019 and a proposal for public comment in November 2022. Substantial stakeholder feedback and PCAOB's economic analysis collectively informed the new standard.

In designing, implementing, and operating their QC systems, the PCAOB expects firms that are subject to both PCAOB standards and IAASB QC standards— which the PCAOB believes constitute a very substantial majority of firms that perform engagements under PCAOB standards—can leverage the work they have already done and the investments they have already made to comply with those other requirements.

Access the new standard on the PCAOB’s website.