Auditing and Assurance Standards Oversight Council
Minutes of Meeting
April 7, 2016
The Auditing and Assurance Standards Oversight Council discussed the activities and performance of the AASB and the Independence Task Force. As part of its monitoring responsibilities, AASOC also received reports on the activities of a number of domestic and international organizations.
Stephenie Fox, Vice-President, Standards (non-voting)
Brian Hunt (non-voting) (in part)
Darrell Jensen, AASB Vice Chair (non-voting)
Ron Salole (non-voting)
Karen Stothers (non-voting)
Michael Tambosso, Independence Task Force Chair (non-voting)
Eric Turner, Director, Auditing and Assurance Standards (non-voting)
|Peter Jewett, Chair, Accounting Standards Oversight Council
Jeremy Justin, Senior Director Thought Leadership, CPAB
Fred Pries, AASB Vice Chair
|Observers:||Svetlana Berger, AASB Staff
Bill Mandelman, AASB Staff
Chi Yen Yeh, Office of the Chief Accountant, Ontario Securities Commission
Chair’s Opening Comments
Report of the Nominating Committee
Report of the Quality Assurance Committee
Review of the CPAB Annual Public Report on 2015 Inspections
Presentation from the AcSOC Chair
Activities of the AASB since the Last AASOC Meeting
Comments from AASOC Observers
Activities of CPAB, CSA, IAASB, Independence Task Force, IFAC, OSFI and PIOB
Other Administrative Matters
Bill McFetridge welcomed everyone to the meeting, including Fred Pries, attending as the new AASB Vice Chair. He noted that three observers had registered for the meeting.
Mr. McFetridge noted that Kevin Dancey, CEO of CPA Canada is retiring on April 30, 2016. In recognition of his retirement, AASOC made the following resolution:
WHEREAS, over the past ten years as the Chief Executive Officer of the Canadian Institute of Chartered Accountants and CPA Canada, Kevin Dancey has provided outstanding leadership to ensure that auditing and assurance standard setting in Canada continues to be of the highest quality;
AND WHEREAS, during his tenure, Kevin has maintained strong and unwavering support of the independent oversight of the development of auditing and assurance standards in Canada;
BE IT RESOLVED THAT the Auditing and Assurance Standards Oversight Council officially acknowledges and extends its profound appreciation to Kevin Dancey for his devoted service and guidance as the leader of the Canadian accounting profession and, in particular, his invaluable contribution and support to the oversight of the development of auditing and assurance standards setting in Canada,
AND BE IT FURTHER RESOLVED THAT this statement of appreciation be appropriately conveyed to Kevin Dancey, with a copy to be included in the official minutes of the April 7, 2016 meeting of the Auditing and Assurance Standards Oversight Council.
The Minutes of the meeting held on February 18, 2016 were approved (offline) as circulated.
Stan Pasternak reported on Nominating Committee activities since the last AASOC meeting. The Nominating Committee interviewed three candidates to fill the final vacancy on the AASB. All voting members of AASOC present at the meeting unanimously approved the appointment of Michelle Séguin to the AASB for a three-year term from April 1, 2016 to March 31, 2019. AASOC noted that there is still a need for an individual with IT audit experience. The Nominating Committee will look to fill this need in the next round of nominations.
The Nominating Committee also reviewed the criteria for membership on the AASB and suggested some minor revisions to further set out the qualifications for the member from industry. AASOC expressed the view that the criteria were not clear and asked the Nominating Committee to consider further revisions. Revised criteria will be discussed at AASOC’s next meeting in July 2016.
Mr. Pasternak noted that the Nominating Committee is continuing its efforts to identify and recruit new members, including a new Chair to replace Bill McFetridge on his retirement in March 2017. The Nominating Committee will consider AASOC’s profile and the types of candidates it will be looking for to replace a number of retiring members next year. The Nominating Committee will provide an update on its progress at the July 2016 AASOC meeting.
Bill McFetridge stated that both AASOC and the Accounting Standards Oversight Council (AcSOC) have been in existence for a number of years. Although the two Councils were established by different groups for different reasons, a number of procedures are similar. Mr. McFetridge and Peter Jewett, Chair of AcSOC feel that it would be appropriate to establish a working group comprised of members of both Councils to consider the challenges and potential benefits of merging the two Councils. AASOC agreed with this suggestion.
Annual Report on AASOC’s Activities
Phil Cowperthwaite presented the Quality Assurance Committee’s report on AASOC’s oversight activities for the period from April 1, 2015 to March 31, 2016. A suggestion was made that the report be updated to include reference to the review of the 2015 AASOC self-assessment, which was done at this meeting. All voting members of AASOC present at the meeting unanimously approved the report.
Bruce Winter presented a paper, “AASOC’s Consideration of the Public Interest,” revised to reflect input received from various parties since the February 18, 2016 AASOC meeting. This paper identifies AASOC’s public and their interests, as well as how AASOC assesses whether an action, decision or policy is in the public interest. The paper sets out how this assessment can be performed.
AASOC discussed whether the paper appropriately reflects what AASOC does to ensure public interest is met, rather than attempting to define the term “public interest”. AASOC confirmed that the appropriate focus is on the process followed by both AASOC and the AASB. One AASOC member noted that after the IAASB has approved a standard, the Public Interest Oversight Board (PIOB) concludes whether the IAASB acted in accordance with due process and with proper regard to the public interest. AASOC debated whether the AASB could approve a standard in accordance with due process that was not in the public interest. AASOC noted that its role is not to accept or reject the standard, but to confirm whether the AASB followed due process in approving the standard and with proper regard to the public interest. Therefore, it is the role of the AASB to identify and respond to public interest on each project, and for AASOC to be comfortable that the AASB has considered public interest.
AASOC agreed that revisions, including the deletion of the two middle sentences in the last paragraph in the Judgment Call section, need to be made to the paper to reflect the discussion at this meeting. AASOC decided that a final draft of the paper should be circulated to the AASB members for their input. Mr. Winter will attend an upcoming conference call of the AASB to present the draft paper.
AASOC agreed that an AASOC Communications Committee should be established and that Phil Cowperthwaite be appointed Chair. Bruce Winter was appointed Chair of the Quality Assurance Committee.
Jeremy Justin presented the results from the Canadian Public Accountability Board’s (CPAB) recent inspections of all participating firms inspected in 2015. Inspections indicate that, overall, audit quality was inconsistent across all firms.
The following audit quality themes noted in CPAB’s November 2015 inspection report on the four largest accounting firms also apply to the other firms inspected:
- executing audit fundamentals;
- understanding business processes relevant to financial reporting;
- complex accounting estimates;
- internal controls;
- professional judgment and skepticism; and
- identification of accounting issues.
AASOC asked if and how the AASB uses the CPAB inspection reports. Darrell Jensen noted that representatives from CPAB are invited to AASB meetings at which they provide more details than are included in the public report. In addition, CPAB meets with the AASB staff and staff from CPA Canada’s Research Guidance and Support Group to identify areas of concerns with standards or where implementation guidance may be needed.
In 2014, CPAB issued a protocol that sets out how audit firms communicate CPAB’s inspection findings to audit committees. AASOC asked how the protocol has been received. Mr. Justin noted that only anecdotal evidence has been received to date, and CPAB will be commencing a project to obtain feedback. The project will include a survey of audit committees.
AASOC welcomed Peter Jewett, Chair of AcSOC. Mr. Jewett updated AASOC on AcSOC’s current agenda, noting the following:
- AcSOC has also been considering the topic of public interest. Both the Accounting Standards Board (AcSB) and the Public Sector Accounting Board (PSAB) have also been considering this topic. AcSOC will have further discussions at an upcoming meeting, possibly as part of a review of the Terms of Reference of AcSOC, the AcSB and PSAB.
- The AcSB has issued its Strategic Plan for 2016-2021. PSAB has begun to work on its next strategic plan, which is expected to be issued for public comment later this year. Both strategic plans will likely reflect a need for more research to provide the Boards with information to support data-based decision making.
- At the most recent meeting of the AcSOC’s Strategic Committee there was a discussion as to whether in principle there was merit to establish a task force to review the current structure of accounting and auditing standards oversight and consider improvements. A briefing paper exploring these matters will be drafted for AcSOC’s June 2016 meeting.
Darrell Jensen presented an overview of the activities of the AASB since the last AASOC meeting. He noted that a number of matters were discussed at the AASB’s March 2016 meeting including the following:
The AASB discussed issues related to its project to revise Section 9100, Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements. The IAASB has commenced a project to consider revisions to its International Standard on Related Services (ISRS) 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information. An IAASB working group is chaired by Ron Salole (the CPA Canada nominee on the IAASB) and supported by the AASB staff. The AASB discussed the demand for “multi-scope engagements” (i.e., engagements that combine two or more engagements that provide differing levels of assurance, such as a review of financial statements with agreed-upon procedures on inventory balances). The AASB also noted inconsistencies in practice relating to the use of professional judgment in an agreed-upon procedures engagement. The AASB agreed that these two topics require further consideration.
Auditing Accounting Estimates
The IAASB has started a project to consider revisions to ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The AASB discussed key issues raised by the IAASB’s task force including:
- the relationship between complexity, lack of precision and estimation uncertainty;
- the scope of ISA 540 and whether it should be revised; and
- whether there should be a rebuttable presumption that estimates with high estimation uncertainty be considered a significant risk.
The AASB reviewed input received from stakeholders on its Invitation to Comment, “Implementation Considerations for New Auditor Reporting Standards.” Thirty-one written responses to the Invitation to Comment were received. In addition, the AASB staff conducted several face-to-face consultations and English and French language webinars were held.
Input received indicates that preparers and some industry bodies are concerned about the consequences of adopting the revised international auditor reporting standards. Many stakeholders suggest that the AASB wait for the U.S. Public Company Accounting Oversight Board (PCAOB) to issue its auditor reporting proposals. Generally, stakeholders support the AASB’s proposal for a staged implementation of the auditor reporting standards.
The AASB acknowledges that the uncertainty with the direction of the PCAOB proposals, and the consequences for reporting by Canadian U.S. Securities Exchange Commission (SEC) registrants create challenges to adopting the auditor reporting standards today. The AASB will continue to consider certain aspects, including concluding on the implementation dates, issues related to smaller reporting issuers and terminology used in the auditor reporting standards. The AASB will also consider whether performance aspects of the auditor reporting suite of standards could be adopted separately from the reporting aspects.
AASOC asked if the AASB considers the revised auditor reporting standards to be an improvement and of high quality. Mr. Jensen responded that the standards are considered to be high quality. AASOC noted that the SEC accepts international accounting standards that are not reconcilable to U.S. accounting standards; therefore, it is not clear why a different audit opinion is seen as problematic. Mr. Jensen noted that the AASB does not intend to abandon its commitment to adopt International Standards on Auditing, but strongly feels that it is in the Canadian public interest to align the timing of revised Canadian auditing standards with revisions to auditor reporting in the U.S.
AASOC also noted that the majority of responses to the AASB’s Invitation to Comment were received from stakeholders other than investors. AASOC asked the AASB to consider giving more weight to the views of users, such as investors and analysts, since the auditor’s report is prepared primarily for them.
Auditor’s Responsibilities Relating to Other Information
The AASB reviewed input received through written responses to its Exposure Draft, “The Auditor’s Responsibilities Relating to Other Information: Canadian Amendments,” and face-to-face consultations. In conjunction with the discussion on auditor reporting, the AASB will consider how this standard can best be implemented.
The AASB discussed issues related to its project to revise Section 9200, Compilation Engagements, including:
- the definition of a compilation engagement;
- the potential work effort of the practitioner; and
- possible wording of the practitioner’s report.
AASOC discussed whether the practitioner’s report should clearly state what it is not (i.e., an audit or a review engagement). However, some AASOC members felt that, from a public interest perspective, it is better for the report to take the opposite approach and clearly establish what a compilation engagement is.
AASOC noted that awareness and education will be key in this project. Eric Turner stated that, in line with the AASB’s strategic goal to increase stakeholder engagement, significant outreach is planned. In addition, there will likely be a public document for comment prior to the exposure of a draft standard.
Public Sector Auditing Standards
The AASB discussed issues related to its project to update the Sections in the CPA Canada Handbook – Assurance dealing with the special circumstances that may apply to the audits of public sector entities, including:
- if and how Section PS 5300, Auditing for Compliance with Legislative and Related Authorities in the Public Sector, can be incorporated into proposed Canadian Standard on Assurance Engagements (CSAE) 3530, Reports on Compliance with Agreements, Statutes and Regulations;
- whether guidance should be developed for addressing internal controls in CSAE 3000, Attestation Engagements Other than Audits or Reviews of Historical Financial Information, and CSAE 3001, Direct Engagements; and
- reviewing the need for additional guidance on performance audits.
The AASB discussed issues related to the IAASB’s initiatives related to:
- professional skepticism, quality control and group audits; and
- understanding and assessing the risks of material misstatement.
AASOC noted that several of the projects being undertaken are very significant and likely to be complicated. AASOC asked if the AASB has sufficient staff and volunteer resources to deal with these projects. Mr. Turner stated that the AASB staff will be performing an assessment of staff resource needs during the next operating year. In addition, the AASB will be considering whether changes or improvements could be made to its processes to deal with the increased demands on its members.
AASB Operating Plan 2016-2017
The AASB approved its Operating Plan for 2016-2017. The Operating Plan includes consideration of how the AASB will begin to implement its Strategic Plan for 2016-2021. AASOC asked for clarity on certain projects, including the post-implementation review process. AASOC also queried whether more specific deadlines should be established in the plan. Mr. Jensen noted that stakeholders will be able to get more detailed information on standards-related projects from the individual project pages, which are hyperlinked in the Operating Plan. Following this discussion, all voting members of AASOC present at the meeting unanimously agreed that the AASB followed due process in preparing the Operating Plan for 2016-2017.
AASB Strategic Plan 2016-2021
The AASB reviewed feedback received on its Invitation to Comment, “Draft Strategic Plan for 2016-2021.” Ten written responses to the Invitation to Comment were received and the AASB staff held a number of face-to-face consultations with stakeholders. English and French language webinars were also done. Feedback received was largely supportive of the proposed strategies and actions. Only minor revisions have been made to the Draft Strategic Plan. Stakeholders made a number of suggestions as to how the AASB should implement the proposed strategies and actions. The AASB’s Operating Plan for 2016-2017 includes a number of projects that will be undertaken to begin implementing the Strategic Plan. Many of the suggestions made by stakeholders will be addressed by these projects. The AASB expects to approve the final Strategic Plan on its April 2016 conference call.
A subcommittee of AASOC, comprised of Jean Bédard, Susan McIsaac and Michael Tambosso, reviewed the AASB’s proposed final Strategic Plan and the detailed analysis of comments raised by stakeholders. The group raised a few questions for the AASB to answer prior to approving the final Strategic Plan. Responses to these questions will be provided to the members of the subcommittee. Further, one member of the subcommittee will observe the AASB conference call at which the Strategic Plan is expected to be approved.
Project Progress and Monitoring Activities Reports
AASOC reviewed the project progress report used by the AASB to monitor whether identified project milestones are being met and to take action when unforeseen problems arise. It also reviewed a report tracking the results of these monitoring activities. Items that might be of particular interest were highlighted for AASOC’s attention. AASOC had no comments on either of these documents.
AASOC reviewed a written report from Susan McIsaac, who observed the March 2016 AASB meeting on behalf of AASOC. Ms. McIsaac noted no significant issues regarding due process and the consideration of the public interest by the AASB. AASOC accepted the observer reports as presented.
Canadian Public Accountability Board (CPAB)
Jeremy Justin reported that CPAB has begun its 2016 inspections of the big four public accounting firms. It has also begun a project to look at audit quality indicators. Six audit committees have signed up for a pilot project to be started this year.
Canadian Securities Administrators (CSA)
Cameron McInnis noted the following:
- The CSA has commenced a project to consider the topic of audit committees and their role with respect to audit quality. In particular, the project will consider issues such as what audit committees are doing to oversee the work of the auditor, what information investors want about the auditor’s work, what audit committees are doing when selecting auditors, and the cost/benefit of providing such information to investors.
- CPAB’s inspection report indicated that firms are facing challenges with regard to dealing with foreign jurisdictions. The CSA is engaging on this topic and discussing further with CPAB to determine if it can assist in providing a solution to these challenges.
- Ontario Securities Commission staff are providing input to the International Organization of Securities Commissions (IOSCO) on its response letter to the IAASB’s Invitation to Comment, “Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits,” on the topics of professional skepticism and group audits primarily.
Independence Task Force
Michael Tambosso noted the following:
- Changes to rules of professional conduct dealing with breaches and contingencies have not yet been released. They are currently being translated. In addition, Quebec has raised some questions with regard to references to Council Interpretations that are not adopted into legislation by Quebec.
- The Public Trust Committee is considering responses received to its Consultation Paper, “A Framework for the Canadian Independence Standards.”
- Since the last comparison of the rules of professional conduct to the International Ethics Standards Board for Accountants’ (IESBA) Code of Ethics changes have been made. The Independence Task Force is updating the comparison.
- The IESBA is re-exposing proposals on long association based on feedback received.
International Auditing and Assurance Standards Board
Ron Salole noted the following regarding a March 2016 meeting of the IAASB:
- The IAASB discussed issues related to its project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. Estimates are pervasive in financial reporting, regardless of the size of entity. The key focus of this project is to:
- revise ISA 540, establishing more robust requirements and appropriately detailed guidance to foster audit quality by driving auditors to perform appropriate procedures (including emphasis of the application of professional skepticism) in relation to accounting estimates and related disclosures; and
- determine whether non-authoritative guidance and support tools should be developed in the future to address special audit considerations relevant to financial institutions to supplement the revisions to ISA 540.
- The project initially arose in response to the issuance of IFRS 9 Financial Instruments. The move from using an incurred loss model to an expected credit loss model in IFRS 9 to deal with loan loss provisions creates significant challenges for auditors. IFRS 9 is effective for periods beginning on or after January 1, 2018. Based on input received from various stakeholders and the Consultative Advisory Group, the IAASB decided to expand the scope of the project as estimates are so pervasive in financial reporting. What is needed is an overhaul of ISA 540 rather than limited revisions to address IFRS 9. The IAASB developed a project update that provides some guidance for auditors in the interim.
- The IAASB working group, of which Mr. Salole is a member, is meeting regularly to discuss the project to revise ISA 540, with a goal of approving an exposure draft at its December 2016 meeting.
- Professional skepticism, which is one of the topics being addressed in the IAASB’s Invitation to Comment, “Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits,” affects a number of standards, including ISA 540. The IAASB agreed to accelerate its work on this project so that the working group may provide input to various other projects. Eric Turner is a member of the IAASB’s working group.
- The IAASB has begun a project to consider revisions to ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. This is expected to be a very significant project with a number of issues to be addressed.
- The IAASB is looking into assurance reports on integrated reporting. If the IAASB does not develop guidance, another group may. However, integrated reporting is not common in many countries. The IAASB will develop a discussion paper to gather information.
- Data analytics involves considering how the use of technology changes how an audit is performed. The IAASB is developing a discussion paper to inform the IAASB’s future activities in this area.
- The IAASB reviewed comments received on its Exposure Draft, “Responding to Non-compliance or Suspected Non-compliance with Laws and Regulations.” The IESBA provided an update on the status of revisions to its Code of Ethics dealing with responding to non-compliance with laws and regulations.
- An issues paper on agreed-upon procedures was reviewed. The IAASB is supportive of the proposals in the paper, and have identified an additional issue: the independence of practitioners who perform agreed-upon procedures engagements. The IAASB is expected to approve a discussion paper at its September 2016 meeting; however, this may be deferred as other projects have higher priority.
International Federation of Accountants (IFAC)
Carol Bellringer, who is a member of the IFAC Board of Directors, noted the following:
- IFAC’s Public Policy and Regulatory Advisory Group met prior to the IFAC Board of Directors meeting. It discussed fraud and corruption and how perceptions on trust depend on the country in which the practitioner is operating. The Advisory Group noted that analytical procedures can be powerful tools for identifying possible fraud, but also that professional skepticism plays a large role. The Advisory Group recommended that fraud and corruption be discussed separately.
- At its March 2016 meeting, the IFAC Board of Directors discussed integrated reporting to try to identify in which countries integrated reports are prepared, and what the role of the profession is or should be with regard to integrated reports.
Office of the Superintendent of Financial Institutions (OSFI)
Karen Stothers noted that OSFI is continuing its work on changes to some accounting and capital requirements.
Public Interest Oversight Board (PIOB)
The AASOC members were provided with a copy of a PIOB meeting summary for its March 11-12, 2016 meeting. Mr. McFetridge noted that the PIOB confirmed that due process was followed by:
- the IAASB’s in approving revisions to ISA 810, Engagements to Report on Summary Financial Statements; and
- the IESBA in approving changes to Part C of its Code of Ethics, “Preparation and Presentation of Information and Pressure to Breach the Fundamental Principals.”
2015 AASOC Self-assessment
Bill McFetridge presented the results of the 2015 AASOC Member Self-assessment Survey. Mr. McFetridge noted that members indicated that improvements could be made to the orientation session for new members. Given the steep learning curve, he suggested that an update session could be provided periodically to members throughout their terms. Stephenie Fox was asked how the results compare to those of AcSOC. She will obtain the results and circulate them to AASOC.
The AASOC members held an in-camera session, first without staff and then without the Chairs of the AASB and the Independence Task Force.
The next meeting of AASOC will be held on July 7-8, 2016 in Ottawa.
There being no further matters to discuss, the meeting was terminated.