Chapter 2 – The Public Accounting Profession and Audit Quality PDF

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Chapter 2 – The Public Accounting Profession and Audit Quality Canadian Public Accountability Board (CPAB) is an independent oversight body whose mandate is to promote high-quality external audits of publicly listed companies  One of its core responsibilities is conducting regular inspections of p...

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Chapter 2 – The Public Accounting Profession and Audit Quality

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Canadian Public Accountability Board (CPAB) is an independent oversight body whose mandate is to promote high-quality external audits of publicly listed companies One of its core responsibilities is conducting regular inspections of participating audit firms

An Overview of the Canadian Public Accounting Industry Public Accounting Firms  

There are currently more than 5000 public accounting firms in Canada Four size categories are used to describe public accounting firms: “Big Four” international firms, national network firms, large local and regional firms, and small local firms

Big Four International Firms  

The four largest public accounting firms in Canada are called the “Big Four” These inter-national firms have offices throughout Canada and the world and audit nearly all of the largest companies in Canada and worldwide, and many smaller companies as well

National Network Firms    

Four firms in Canada are called national network firms because they have offices in most major cities These firms are large but consider-ably smaller than the Big Four The national network firms perform the same services as the Big Four firms and compete directly with them for clients Each national firm is affiliated with firms in other countries and therefore has international capability

Regional and Large Local Firms     

Regional and large local firms are firms with professional staffs of more than 50 people that service a specific geographic market There are fewer than 50 public accounting firms in this category Some have only one office and serve clients primarily within commuting distance Others have several offices in a province or region and serve clients within a larger radius Many of the regional and local firms are affiliated with associations of public accounting firms to share resources for such matters as technical information and continuing education

Small Local Firms   

Most of these public accounting firms have fewer than 25 professionals in a single office Many small local firms do not perform audits and primarily perform reviews and compilations along with accounting and tax services Those that do perform audits are primarily for smaller businesses, municipalities, and not-for-profit organizations, although some do have one or two clients with public ownership

Structure of Public Accounting Firms 

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The organizational form used by many public accounting firms is either a sole proprietorship or a partnership, although most provinces allow special-purpose limited liability partnerships or professional corporations The organizational hierarchy in a typical public accounting firm includes partners, managers, supervisors, seniors or in-charge auditors, and staff accountants, with a new employee usually starting as a staff accountant and spending two or three years in each classification before achieving partner status When we refer to “the auditor,” we mean the particular person performing some aspect of a financial statement audit The hierarchical nature of public accounting firms helps promote competence and highquality audits, as individuals at each level of the audit supervise and review the work of others at the level just below them in the organizational structure

Requirements to be a Public Accountant 

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The requirements to become a public accountant are quite rigorous, involving obtaining an undergraduate degree and the Chartered Professional Accountant (CPA) designation, which requires completion of graduate level education, professional exams, and practical experience Students enrolled in the CPA program are expected to develop two kinds of competencies during their period of practical experience: pervasive qualities and skills, and six technical competencies (financial reporting, strategy and governance, management accounting, audit and assurance, finance, and taxation)

Organizations Affecting the Canadian Public Accounting Profession CPA Canada   

CPA Canada, which represents the CPA profession nationally and internationally, is the umbrella organization for the CPA designation and provincial accounting bodies They enhance audit quality through several collaborative efforts with regulators, such as the Canadian Public Accountability Board (CPAB Another important role of CPA Canada is its assistance to the provincial accounting bodies in developing uniform standards of qualification for admission of CPAs and maintaining appropriate standards of professional conduct

Provincial CPA Organizations  

Individual CPAs are not members of CPA Canada, but rather members of their provincial CPA organizations These provincial accounting bodies are responsible for maintaining admission, licensing, and mandatory continuing education requirements; conducting reviews of public accounting firms; investigating complaints; and disciplining members, firms, and students

Auditing and Assurance Standards Board (AASB) 

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AASB is an independent board of CPA Canada that has the responsibility for issuing auditing and assurance standards for financial statement audits and other types of assurance and related services engagements While the AASB is committed to adopting International Standards on Auditing (ISAs) as Canadian Auditing Standards (CASs), it plays an important role in ensuring that the Canadian point of view is presented to the International Auditing and Assurance Standards Board (IAASB) Assurance standards are standards for assurance engagements other than historical financial statements o The requirements are included in “Other Canadian Standards” in the CPA Canada Handbook—Assurance. Assurance standards are issued by the Auditing and Assurance Standards Board

Internal Auditing and Assurance Standards Board 

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The International Auditing and Assurance Standards Board (IAASB) is an independent standard-setting body that sets international standards for auditing and assurance, and other related standards It is also responsible for facilitating the convergence of international and national auditing and assurance standards As of the time of writing, over 113 jurisdictions are using or are in the process of adopting International Standards on Auditing (ISAs) The IAASB consists of a full-time chair and 17 volunteer members, who are appointed by the International Federation of Accountants (IFAC)

Canadian Public Accountability Board (CPAB) 

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After the Sarbanes-Oxley Act of 2002 was passed in the United States creating the Public Company Accounting Oversight Board (PCAOB), a similar body was implemented in Canada called the Canadian Public Accountability Board (CPAB) The CPAB’s mission is to contribute to the public’s confidence in the integrity of financial reporting in reporting issuers in Canada by promoting effective regulation and high-quality, independent auditing In order to achieve its mission, the CPAB focuses on four priorities: effective inspections, risk management, thought leadership, and stakeholder engagement

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Public accounting firms are required to register with CPAB and are subject to quality control inspections by CPAB if they audit “reporting issuers” At the time of writing, there were 284 registered firms on the CPAB o Of that total, there were 153 Canadian, 58 American, 13 Australian, 11 British, and 6 Hong Kong firms, with the remainder from various countries around the world

Public Company Accounting Oversight Board (PCAOB) 

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Triggered by the bankruptcies and alleged audit failures involving such companies as Enron and WorldCom, the Sarbanes–Oxley Act is considered by many to be the most important legislation affecting the American auditing profession since the 1933 and 1934 Securities Acts The Sarbanes–Oxley Act established the Public Company Accounting Oversight Board (PCAOB), appointed and overseen by the U.S. Securities and Exchange Com-mission (SEC) Like the CPAB, the PCAOB provides oversight for auditors of public companies and performs inspections of the audit firms In Canada, although the CPAB will provide feedback on the standard-setting process, standard setting is the AASB’s responsibility Another difference is that auditing standards for private company audits are issued by the American Institute of Certified Public Accountants The PCAOB requires annual inspections of accounting firms that audit more than 100 issuers and inspections of other registered firms at least once every three years Similar to CPAB, violations could result in disciplinary action by the PCAOB and be reported to the SEC

Provincial Securities Commissions     

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Securities regulation in Canada is a provincial matter The national umbrella organization, the Canadian Securities Administrators The provincial securities commissions are responsible for administering the purchase and sale of securities within their jurisdictions Actions of the securities commissions have important implications for public company auditors When the Canadian audit profession proposed that auditors issue audit opinions on internal controls, as is the requirement in the United States, the British Columbia Securities Commission successfully stopped this proposal on the basis of the unnecessary costs for its reporting issuers (the majority of whom are small) The provincial securities commissions also have the ability to prosecute public accountants and the companies they audit

Securities and Exchange Commission (SEC)   

Many large Canadian companies are listed on American stock exchanges, and there-fore must meet the requirements of the Securities and Exchange Commission (SEC) The SEC assists in providing investors in public corporations with reliable information upon which to make investment decisions The SEC has the power to establish rules regarding public accountants as well as to prosecute them (and the companies that they audit) for violating SEC regulations

Legal Liability 

The ability of individuals as well as clients to sue public accounting firms exerts considerable influence on the way in which public accountants conduct themselves and audits

An Overview of CPA Canada Assurance Standards Canadian Auditing Standards 

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The Canadian Auditing Standards (CAS), which are the standards for the financial statement audit, are based upon ISAs originally developed and released by the IAASB of the International Federation of Accountants (IFAC) The CASs are organized as:

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This framework helps auditors to fulfill the following overall objectives of financial statement audit: o Providing reasonable assurance that the financial statements are not materially misstated o Considering both potential fraud and error o Communicating whether the financial statements comply with an applicable financial reporting framework using the expression of an opinion o Reporting on the financial statements o Communicating auditor findings in accordance with the CAS

Purpose of the Financial Statement Audit 

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The purpose of an audit is to provide financial statement users with an opinion issued by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework An audit is conducted based on the premise that management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework selected by management, and that management has designed, implemented, and maintained internal controls relevant to the preparation and presentation of financial statements that are free of material misstatements

Personal Responsibilities Exercise Professional Competence and Due Care   

Auditors are responsible for having appropriate competence and capabilities to perform the audit Recent CPAB reports clearly demonstrate that auditors must be technically qualified and experienced in those industries in which their clients are engaged In any case in which the public accountant or the PA’s assistants are not qualified to perform the work, a professional obligation exists to acquire the requisite knowledge and skills, suggest someone else who is qualified to perform the work, or decline the engagement

Comply with Ethical and Independence Requirements  

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CAS 200 states that auditors must comply with ethical requirements and independence The relevant independence and ethical requirements—which include integrity, objectivity, confidentiality, and professional behaviour—are outlined in rules of professional conduct applicable to the practice of public accounting and issued by various professional accounting bodies The rules of professional conduct and auditing standards stress the need for independence in an audit engagement

Maintain Professional Skepticism and Exercise Professional Judgement

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Auditors are responsible for maintaining professional skepticism and exercising professional judgment throughout the planning and performance of the audit Auditing standards describe professional skepticism as an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and critically assessing audit evidence In making judgments about the presence of material misstatements, auditors are responsible for applying relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement

Performance Responsibilities Adequate Planning and Supervision 

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Adequate planning should set out the engagement team responsibilities, the nature of the entity’s business, risk-related issues, problems that may arise, and a detailed approach to perform the engagement Supervision is essential in auditing because less experienced staff members often perform a considerable portion of the audit Supervision includes tracking the progress of the audit engagement, and considering the competence and capabilities of individual team members (including whether they have sufficient time to carry out their work and understand their instructions)

Determine and Apply Materiality Levels 

Because the auditor’s opinion is about whether the financial statements contain material misstatements, the auditor is responsible for determining and applying an appropriate materiality level or levels throughout the audit

Identify and Assess Risks of Materials Misstatement 

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To adequately perform the audit, the auditor is responsible for identifying and assessing the risks that the financial statements contain material misstatements and then performing further audit procedures in response to those risks to determine if material misstatements exist To adequately assess the risk of material misstatements, the auditor must have an understanding of the client’s business and industry, which helps the auditor to identify significant client business risks and the risk of significant misstatements in the financial statements

Sufficient Appropriate Evidence

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The auditor is responsible for obtaining sufficient appropriate audit evidence about whether material misstatements exist through designing and implementing appropriate responses to the assessed risks Decisions about how much and what types of evidence to accumulate for a given set of circumstances require professional judgment A major portion of this book is concerned with the study of evidence accumulation and the circumstances affecting the amount and types needed

Reporting 

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The requirements related to reporting note that the auditor is responsible for expressing an opinion in the form of a written report about whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework This opinion is based on the evaluation of audit evidence obtained and the auditor’s findings If the auditor has no reservations, then an audit report with an unmodified audit opinion is issued If the auditor has reservations, the opinion must be modified (referred to as “qualified”)

The Drivers of Audit Quality   

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Recently, there has been a growing consensus that more transparency into the audit process is a good thing for all stakeholders involved One problem with providing more insight into the audit process is that there is no clear consensus over the definition of audit quality Despite the difficulty in defining audit quality, there is much agreement that a quality audit would include a rigorous audit process and quality control procedures, with an appropriate level of professional skepticism, and that complies with professional standards CPAB emphasized that the key to providing high-quality audits is the audit firm culture, which maintains the appropriate balance between commercialism (managing the economic business of the firm) and professionalism (sustainable high-quality audits)

Build the Right Teams  

The people conducting the audit have the greatest impact on audit quality Audit teams need to have the right technical competence and industry experience

Provide the Right Support  

An open consultation environment within the firm can improve audit quality Partners and staff should feel comfortable to consult with the appropriate technical leaders when they do not have the necessary specialized knowledge

Conduct In-Process Reviews

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Rather than conducting the reviews when the audit is complete, conduct reviews during the audit engagement to have a greater impact on audit quality For instance, the reviews may lead teams to reconsider their audit approach and perform different or additional procedures before the audit is complete

Assign Accountability for Audit Quality 

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When audits fail, the engagement partner is often blamed o The responsibility for audit quality should be assigned to those specific individuals and included in their job descriptions Perhaps the most important factor is firm leadership, or what is referred to as “tone at the top” Some potential metrics are ratio of partners to staff, average years of experience and staff composition, training hours, chargeable hours by staff level, and percentage of high-risk clients Audit quality indicators are metrics for measuring audit quality

The Role of Other Parties in Audit Quality 

There are other key parties directly involved in the audit process that affect audit quality —management, the audit committee, and (possibly) an internal audit

Quality Control  

Quality control are policies and procedures used by a public accounting firm to make sure that the firm meets its professional responsibilities For a public accounting firm, quality control comprises the methods used to make sure that the firm meets its professional responsibilities to clients and others. These methods include the organizational structure of the public accounting firm and the procedures the firm establishes

Elements of Quality Control Canadian Auditing Standard  

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CPA Canada Handbook Section CSQC 1 describes general standards of quality control for firms performing financial statement audits and review engagements To ...