In March 2022, the Canadian Public Accounting Board (CPAB) released a report of their findings related to the quality of corporate audits in Canada.
While CPAB inspections focus on public company auditors, their findings are equally relevant to auditors of private organizations—and to the audit committees that are responsible for engaging them and overseeing their work.
Below are seven takeaways from the CPAB report that audit committees should keep in mind, to help them make the right decisions for their organization and ensure a well-executed audit.
While the CPAB reported an improvement over the previous year's findings, the 2022 report found that the quality of audits was still largely inconsistent. A poor-quality audit can have significant implications for your business, including loss of trust in your financials from stakeholders, reputational damage, and regulatory penalties.
Making sure your organization receives a quality audit starts with finding the right auditor and thoroughly evaluating their reputation, team capabilities, and audit processes.
Revenue and related accounts, inventory, goodwill and intangible assets, business combinations, and investments were all areas that the CPAB paid particular attention to during their inspection.
One of the most common findings in the report was “auditing estimates involving significant assumptions or judgments about future conditions or events.” It's crucial to ensure not only that the organization's management team has made accurate assumptions and judgments about estimates, but also that your auditor is challenging those assumptions and asking for appropriate evidence as part of the auditor's assessment process.
Crypto assets and the cannabis industry are prime examples where the risk of audit issues could be heightened. In the case of the former, there are still uncertainties over how to account for and classify digital currencies in financial statements. For cannabis companies, the CPAB found that discrepancies can exist around effective fraud risk assessments, accounting for cash transactions, and estimating fair value of biological assets.
As the audit committee, it's important to ensure two key things. First, that your management team has appropriately accounted for these new types of transactions. And second, that your auditor understands how to respond to new scenarios and developments in your industry, and identify, assess, and report on the accounting and audit implications of the emerging risks.
Knowing what's behind unusual transactions and investigating contradictory evidence makes it easier to detect instances of fraud—but in some cases, the CPAB found that these instances were either dismissed or rationalized away.
It's important for the audit committee to understand and appropriately challenge the business rationale behind transactions. In addition, your auditor needs to not only understand your business, but also have experience with your overall industry. They bring the background knowledge needed to understand your organization's financial decisions and ask the right questions.
Companies are increasingly outsourcing parts of their operations, such as payroll management, investment fund management, supply chain, data processing, etc. The CPAB report found, however, that the controls in these cases were not always effectively evaluated.
When outsourcing to a third party, your organization should be actively involved in designing and overseeing implementation of controls, to ensure they meet your needs, will stand up in an audit, and satisfy your stakeholders. It's important that your auditor assesses the use of these third parties and determine when to obtain a System and Organization Controls (SOC) report to support their work.
New digital tools, such as data analytics and automation, are helping to improve audits by allowing auditors to improve efficiency, gain deeper insights, and be more innovative.
Talent, however, is still equally important—there's no substitute for business and industry knowledge. An experienced auditor who prioritizes quality will combine advanced digital audit processes with human insights and critical thinking. Understanding how they leverage technology and who is on the audit team should both be on the list of questions your audit committee needs to ask when evaluating an auditor.
As previously stated, the CPAB found that quality management had improved in the last year, but they also noted further progress was still required in some cases.
Audit quality is a mindset. The auditor your organization works with should have an “always-on” approach to audit quality that's made clear at both the beginning of an engagement and in their presentation of key findings to the audit committee. Even after an audit is concluded, your auditor should be focused on professional development and training, advancing and improving processes, and following best practices for setting the highest quality standards.
Feel confident in your organization's audit results
An audit is one of the most critical aspects of running your organization. It doesn't just support regulatory compliance; it also helps your organization to build trust and credibility within your industry and among your stakeholders.
At BDO, the drive to deliver and improve quality informs every aspect of our auditing practice. Learn more about our approach in our Audit Quality Report. For more information, please contact: