CPAB: Mystery Big Four accounting firm will not meet audit threshold this year

TORONTO, October 15, 2023 – The latest inspection report from Canada’s audit regulator shows little audit inspection progress as a group among the Big Four. The Canadian Public Accountability Board released its 2023 Interim Inspections Results report this past week. It revealed that one of Canada’s largest public accounting firms will fail to meet its audit quality targets for the second year in a row. 

While significant findings are down slightly (seven instead of eight), according to the interim report, CPAB has yet to complete as many inspections as it had last year (53 instead of 67). CPAB sets a target of no more than 10 per cent of files with significant findings, which is defined as a deficiency in the application of generally accepted auditing standards. The unnamed firm had four of the seven files with significant findings so far. 

In January 2023, CPAB implemented its first phase of changes related to public disclosure, and now publishes the names of accounting firms subject to enforcement action. It does not reveal the names of firms in its inspection reports, although that may change, subject to legislative amendments. CPAB states that two of CPAB’s disclosure recommendations require rule or legislative changes before they can be implemented. That work may be completed in 2024. 

Until then, we cannot know if any single accounting firm passed its inspections with a clean slate, as the findings apply to the Big Four as a group. All we know is that one, mystery firm continues to have significant audit quality troubles. 

Audit regulator raises risk warning

The interim report identifies four themes of concern in the inspection findings and delves deeper in some detail. Material misstatement, particularly in relation to the implementation of the revised Canadian Auditing Standards 540 (Revised) — Auditing Accounting Estimates and Related Disclosures, otherwise known as CAS 540, appears significant. 

CPAB is also concerned that accounting firms are placing too much trust in third-party services provided to reporting issuers. This would appear to have been the problem in a recent inspection report of PwC Canada that was conducted by the Public Company Accounting Oversight Board in the United States. AS reported by Canadian Accountant, the PCAOB singled out an audit of an oil and gas company undergoing a “business combination,” for failing to vet a third party’s estimate of oil and gas reserves. 

Similarly, some engagement clients are using perpetual inventory systems, which firms are inadequately checking. And, finally, the quality of audit documentation is lacking, particularly by senior members of engagement teams, which presumably includes partners. This section concludes with the waspish comment: “Oral explanations provided by engagement team members do not represent adequate support for the work performed.” 

Future areas of interest

The interim report also identifies three areas of concern moving forward: climate risk, fraud, and artificial intelligence. More firms are including climate-related risk assessments in their engagements but there is a lack of consistency. Fraud risk and the evolving fraud risk landscape is an area of which CPAB continues to educate stakeholders. And the advancement and availability of AI applications used by both auditors and management of Canadian reporting issuers is flagged. 

By Canadian Accountant staff.