Firms must place greater focus on audit execution, CPAB says

2011 inspection results disappointing; firms implementing action plans for improvement

TORONTO, April 3, 2012 /CNW/ - Canadian audit firms must place a greater focus on the consistent execution of audit work, the Canadian Public Accountability Board (CPAB) says in its 2011 public report.

"The results of our 2011 inspections are disappointing," said CPAB Chief Executive Officer Brian Hunt. "We are particularly concerned that, in many cases, the same systemic inspection findings are being identified year after year without significant improvement."

CPAB's 2011 inspections found deficiencies in the application of Generally Accepted Auditing Standards (GAAS) in firms of all sizes. The Big Four firms, which audit 94 per cent of reporting issuers by market capitalization, had a GAAS deficiency rate of 20-26 per cent on the files CPAB inspected. In the case of other National and Regional and Local firms, this rate was higher. This means the work done on these files did not fully support the audit opinion and more work had to be done; in a few cases there were more fundamental problems with the audit. CPAB noted in its report that its inspection findings are consistent with those of audit regulators in other countries.

As a result of its findings, CPAB has required certain firms to develop action plans to improve audit quality. These plans include short-term actions to deal with 2011 year-end audits and longer-term actions to further enhance audit quality. "We are pleased the audit firms recognize that the status quo is not acceptable and have responded positively," Mr. Hunt said. "CPAB will closely monitor the firms' action plans throughout 2012 and into 2013 to assess whether they have been implemented effectively. We fully believe the firms are capable of implementing the necessary improvements."

While there has been little progress over the past year in terms of audit quality, Mr. Hunt said CPAB believes investors should continue to have confidence in the integrity of public company financial statements audited in Canada. "Our inspections did not lead to many restatements, and firms are progressing on their remedial action plans," he said.

Mr. Hunt also pointed out that the deficiency rate cited in CPAB's public report will not necessarily be consistent across all reporting issuers or industry sectors, because accounting and audit complexity vary.

Mr. Hunt said CPAB's inspections continue to identify problems in the execution of the audit work. "It was disconcerting to note that the majority of audit deficiencies we found related to basic audit procedures, not the audit of complex transactions," he said. "CPAB believes the 2011 inspection results are unacceptable and would not expect Audit Committees or the investment community to tolerate such a high deficiency rate. Continued vigilance is called for by investors and by all those responsible for the financial statements, including preparers, their Audit Committees and auditors."

In its assessment of the root cause of the audit deficiencies identified, CPAB said firms' senior audit engagement personnel need to spend more time with their staff to ensure that audit risks are appropriately identified and that the audit strategy to address these risks is properly executed.

CPAB's public report also discusses several issues relevant to today's complex audit environment, including whether audit firm structures remain appropriate, challenges relating to auditing in foreign jurisdictions, the impact of audit fee pressure on audit quality, the role of Audit Committees, and the relevance and transparency of financial statements and audits.

In 2011, CPAB inspected 88 audit firms and reviewed 245 audit engagements. These included Canada's Big Four firms, 10 other firms reviewed annually, 56 Regional and Local firms and 18 follow-up inspections. CPAB's inspection process identifies the higher-risk clients of each firm and the engagements inspected are chosen from this subset.

Following each inspection, CPAB sent each firm a private report that identified key recommendations to improve audit quality. The firms are required to implement each recommendation to CPAB's satisfaction within a prescribed period of time and CPAB follows up to ensure its recommendations are implemented. The firms have implemented, or are implementing, substantially all of the recommendations made in 2011.

The full public report of CPAB's 2011 inspections is available at www.cpab-ccrc.ca

CPAB is Canada's audit regulator, dedicated to protecting the investing public's interests. 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
Devon Group
416-504-5151 ext. 287
[email protected]

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