Vancouver Stakeholder Outreach Sessions: What the AASB Heard – October 2017
In October 2017, the Auditing and Assurance Standards Board (AASB) held an offsite meeting in Vancouver, where it hosted two outreach sessions with local stakeholders on issues affecting auditing and assurance standards. The sessions were:
- Enhancing Investor Confidence in Financial Information Beyond Financial Statements: Is there an enhanced role for the auditor?
- Issues in applying the Canadian Auditing Standards (CASs) to audits of small-medium sized entities (SMEs).
The first session focused on understanding the information investors use in making their investment decisions, securities regulatory developments in this area and new auditor reporting standards. The session, held in collaboration with the CFA Society of Toronto and the B.C. Securities Commission, included participants such as investors, audit committee members, financial statements preparers, and auditors. The session explored whether there is a role for the auditor with respect to information investors use beyond financial statements, and the merits of the new reporting standards.
The second session focused on the perspective of practitioners who audit SMEs, with participants from small and medium-sized practices (SMPs). The session explored challenges they face in applying CASs to SMEs, how the AASB can respond to those challenges, and how consultations with practitioners can be improved.
Each session included presentations, roundtable discussions and opportunities for questions.
What we heard
Through electronic polling, participants gave their views on certain sections of the material presented during the sessions. The results provided real-time opinions on assurance over key performance indicators (KPIs) and insight into the issues practitioners face in audits of SMEs. Some of the polling results are highlighted below.
Enhancing Investor Confidence in Financial Information Beyond Financial Statements: Is there an enhanced role for the auditor?
Participants emphasized the following:
- Investors and directors use a wide variety of data to make their decisions – increasingly based on unaudited information.
- Non-GAAP measures and other KPIs are important because investors are focused more on future-oriented information and the cash impact of decisions, while GAAP information is historical.
- There is support for creating standard definitions of non-GAAP measures, but with flexibility to adapt (and reconcile it back) for sectors or industries. Comparability with competitors was identified as one of the most important attributes that needs to be addressed.
- Some support was expressed for enhancing assurance on individual KPIs and non-GAAP measures as can be seen by the following polling results:
- 45% – Further study to be performed.
- 40% – Focus attention on assurance standards around processes companies have to develop and approve other information.
- 10% – Focus on providing assurance on the measures themselves.
- 5% – Not an issue worth investigating.
- There is already significant time pressure on management to finalize material for quarterly reporting. Adding assurance to management’s discussion and analysis or other quarterly reporting could be problematic for management and the audit committee.
- Regarding key audit matters (KAMs):
- Some investor participants were not yet aware of KAMs and the value they can bring.
- Some participants thought KAM reporting should go further – "If there was a range of values that the auditor thought was reasonable, and the auditor disclosed where management reported within that range, that would be useful information" – investor participant.
Participants discuss the specific challenges in addressing the perception that non-GAAP information is audited.
Issues in applying the Canadian Auditing Standards (CASs) to audits of small-medium sized entities (SMEs)
Polling results indicated the primary reasons practitioners are facing challenges in applying the CASs to SME audits are insufficient guidance, education, or training tools provided to help practitioners bridge the gap between the increased complexity of the CASs and the ability to implement them efficiently and effectively.
- 25% – Insufficient consideration of SME environment.
- 25% – Difficult to determine applicable requirements in circumstances.
- 17% – Lack of clarity on nature and extent of work.
- 33% – Insufficient guidance, education, or training tools.
Polling results also showed the majority of participants being in favour of having a separate section entitled “Considerations specific to smaller entities” in the CASs.
- 71% - In Favour
- 21% - Not in favour
- 7% - Unsure
Other matters participants emphasized during table discussions include:
- The importance of making CASs scalable for audits of SMEs. There are areas within the CASs that are particularly hard to scale, such as determining:
- How much work is required to obtain an understanding of internal controls and control activities when the entity may not have established processes.
- When to use statistical audit sampling in performing audit procedures and how to select an appropriate sample size.
- How much work is required in testing the appropriateness of journal entries in response to risks related to management override of controls given the large population of what can be considered journal entries in SMEs.
- The importance of post-implementation review of CASs in order to determine which areas may be onerous or misapplied, and need improvement.
- Expanding outreach through the use of technology (such as webinars and video conferencing) to provide an opportunity for stakeholders outside the big cities to participate in standard-setting.
- Practitioners in SMPs often lack the same level of in-house technical resources of larger firms to perform the audit in a cost effective manner.
- Group the sections throughout the CASs titled “Considerations specific to smaller entities” into one document, so practitioners do not lose sight of this material.
Participants discuss the specific challenges SMPs face in applying CASs to their audits
The AASB is currently developing its Annual Plan for the year 2018-19 and will be considering the findings from these consultations in drafting its priorities for the coming year. Stay tuned to our website for updates.
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