Audit firms must improve auditing in foreign jurisdictions, CPAB says

Results of special inspection should be a wake-up call for auditing profession

TORONTO, Feb. 21, 2012 /CNW/ - Canadian audit firms must carry out audits in foreign jurisdictions with a high degree of professional skepticism and a thorough understanding of the business environment to make sure they adequately adjust audit procedures to address the risks arising from the jurisdiction's customs and practices, says the Canadian Public Accountability Board (CPAB).

CPAB has identified Canadian reporting issuers with substantial operations in a range of foreign jurisdictions and is performing inspections of those audit files. CPAB's findings in this report are based on a review of 24 audit files for Canadian public companies with their primary operations in China.

"CPAB does not believe the issues identified in its review are unique to audits of companies based in China," said CPAB CEO Brian Hunt. "We believe it is due to auditors not adequately recognizing the differences in the business environments of foreign jurisdictions that require modification to the nature, timing and extent of their audit procedures."

Twelve of the audits were conducted by National firms and 12 were conducted by Regional or Local firms. CPAB's review was carried out between October 1 and December 31, 2011. Later in 2012, CPAB will provide an additional report based on its inspections of audits in other foreign jurisdictions.

"We are disappointed by the results of this review," said Mr. Hunt. "In too many instances, auditors did not apply procedures that would be considered fundamental in Canada. We also found a lack of professional skepticism when auditors were confronted with evidence that should have raised red flags regarding potential fraud risk."

Significant findings as a result of CPAB's review included:

• Audit firms did not control the confirmation process, which refers to communication with outside parties to confirm financial balances and/or transactions
• Auditors' reliance on confirmations with questionable reliability
• Inadequate audit procedures to identify related-party transactions
• Insufficient audit evidence to support the:
• ownership or existence of significant assets
• recognition of revenue
• appropriateness of the income tax rate used

Based on the results of its review, CPAB identified 12 files that required remediation to address deficiencies. Of the 12 files, one required that the financial statements be restated. CPAB has also placed a requirement on one firm restricting its ability to perform audits of reporting issuers with operations in China. This requirement will remain in place until CPAB has carried out a follow-up inspection, the firm has implemented all of CPAB's recommendations, and the firm can demonstrate it is performing audits to the required standards.

"These results should be a wake-up call for Canada's auditing profession," Mr. Hunt said. "We believe Canadian auditors have the talent and capabilities to perform audits in foreign jurisdictions. However, they must execute these audits with a high degree of professional skepticism and a thorough understanding of the business environment, to ensure their audit procedures adequately address risks arising from the foreign jurisdiction's business customs and practices."

CPAB made recommendations in its report that, when implemented, would have the greatest impact on improving audit quality in foreign jurisdictions. CPAB recommended that auditors auditing in foreign jurisdictions:

• Understand and explicitly assess the business customs and practices in foreign jurisdictions and adjust audit procedures accordingly
• Adopt a rigorous client acceptance and continuance process
• Adopt a heightened awareness of fraud risk
• Implement special procedures for bank confirmations
• Exercise caution when using external confirmations as audit evidence
• Adopt a heightened awareness of related-party transactions
• Verify income and commodity taxes

Following its review, CPAB sent each firm a private report that identified recommendations on actions to be taken to remediate audit file deficiencies and/or to improve audit quality control processes. The audit firm must implement these recommendations within a prescribed period of time (180 days or sooner, depending on the severity of the issue). Failure to implement the recommendations to CPAB's satisfaction would result in disciplinary action in the form of a requirement, restriction or sanction on the firm.

"The audit firms have received CPAB's recommendations and either already have or are in the process of adapting their audit procedures going forward," Mr. Hunt said.

The full public report of CPAB's special inspection of audits in foreign jurisdictions is available at www.cpab-ccrc.ca.

CPAB is Canada's audit regulator, dedicated to protecting the investing public's interests. As champions of audit quality, CPAB regulates the auditors of Canadian public companies through its national inspection program. CPAB's risk-based inspection process focuses on key audit risks that could have the greatest impact on audit quality. By promoting high-quality, independent auditing, CPAB contributes to public confidence in the integrity of financial reporting, which supports our capital markets.

For further information or to arrange an interview, contact:

Stephanie Sayer
416-500-1656
[email protected]

Brian Hunt, CEO
Canadian Public Accountability Board
416-913-8261
[email protected]
www.cpab-ccrc.ca