Three out of four ain’t bad: CPAB 2022 interim audit inspections report

TORONTO, Oct. 23, 2022 – Three of the four largest accounting firms in Canada are within the acceptable limit of audit deficiencies according to an interim report released by Canada’s audit regulator. The Canadian Public Accountability Board (CPAB) released its 2022 interim inspections results report this past week. 

Three of four firms had fewer than 10 per cent of files with significant findings and continue to make improvements to their system of quality management. One firm had findings greater than 20 per cent. CPAB has a target of no more than 10 per cent of files inspected with significant findings. CPAB also sees a high level of significant findings at non-annually inspected firms. 

Audit evidence, independence seen as lacking by CPAB

According to its interim report, CPAB is disappointed with the quality of audit evidence obtained by auditors. Most notably, the regulator identifies issues with insufficient testing of an automated tool, and deficient data inputs and outputs. This is worrisome given the push within the audit community towards audit automation and the use of artificial intelligence. 

CPAB also identifies business acquisitions as an issue, specifically insufficient evidence to support the fair value of amounts included in preliminary purchase price allocations. It also identified issues regarding the appropriate evaluation of information obtained from third-party service providers. 

Also of note is the regulator’s identification of independence issues related to non-audit services provided by the auditors to reporting issuers. Audit independence has been seen as a growing problem with audit business lines as the Big Four accounting firms grown their consulting lines to the extent that they are now considered professional services firms, of which audit and tax advisory services are viewed as elements in a suite of services. 

Indeed, as reported by Canadian Accountant in our recent three-part series, audit independence is seen as a significant reason for a planned division of audit and consulting business lines at Ernst & Young Global. 

Planned file inspections almost complete for 2022

CPAB has completed 61 of 67 planned file inspections across Canada’s four largest audit firms and identified significant findings in seven of those files. This compares to seven significant inspection findings across 75 inspections in 2021.  

CPAB has also completed 12 file inspections to date at non-annually inspected firms and has identified significant findings in 11 of those files. CPAB considers the level of findings at many of the non-annually inspected firms continues to be unacceptably high. One area of prior concern for the audit regulator were audits conducted in foreign jurisdictions but CPAB says it has not identified any significant findings in foreign component auditor working papers reviewed to date. 

Quality management systems assessments are currently underway for the four largest audit firms and at a fifth annually inspected firm. CPAB says the level of significant inspection findings at one firm indicates that certain controls at this firm may not be designed appropriately or operating effectively. 

Media has taken an interest in Canada’s audit “problem child”

As previously reported by Canadian Accountant, significant differences exist in the level of transparency between audit regulators in Canada and the United States, with the PCAOB publishing far more information about its inspection reports, including the name of the inspected firm. The Globe and Mail highlighted this difference in 2021 in an article titled Canada’s accounting-firm problem child remains a mystery. 

In this year’s interim report, CPAB states that this firm “is continuing to show sustained improvement in our preliminary 2022 inspection results. A decision regarding further modification and/or potential removal of remaining requirements will be made in 2023.” The Globe and Mail updated the story this past week in Audit industry regulator says a Big Four accounting firm continues to have problems in its work. 

By Canadian Accountant staff.