Auditing and Assurance Standards Oversight Council
Minutes of Meeting
July 7-8, 2016
The Auditing and Assurance Standards Oversight Council discussed the activities 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)
Darrell Jensen, AASB Vice Chair (non-voting)
Karen Stothers (non-voting)
Michael Tambosso, Independence Task Force Chair (non-voting)
|Regrets:||Brian Hunt (non-voting)
Fred Pries, AASB Vice Chair (non-voting)
Ron Salole (non-voting)
Eric Turner, Director, Auditing and Assurance Standards (non-voting)
|Guests:||Jeremy Justin, Senior Director Thought Leadership, CPAB|
Chair’s Opening Comments
Report of the Quality Assurance Committee
Report of the Communications Committee
Report of the Nominating Committee
Review of the Effectiveness of the Oversight Councils
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.
The Minutes of the meeting held on April 7, 2016 were approved (offline) as circulated.
Bruce Winter presented a paper, “AASOC’s Consideration of the Public Interest,” revised to reflect input received from AASOC since its April 7, 2016 meeting. Mr. Winter attended a meeting of the Auditing and Assurance Standards Board (AASB) in April 2016 to discuss the purpose and contents of the paper. The AASB members were invited to provide input. Mr. Winter reviewed these comments and made further revisions. He noted that no major concerns were expressed by the AASB members. The AASOC members suggested some final revisions to the wording in the paper.
AASOC discussed the efforts of other groups to define the term “public interest” and what it means in the context of standard setting and oversight. In particular, the Public Sector Accounting Board (PSAB) has developed a public interest framework, and the Accounting Standards Oversight Council (AcSOC) began consideration of the public interest over a year ago. Stephenie Fox noted that the PSAB framework was prepared for internal use only and AcSOC has not yet prepared a document on the public interest. The AASOC members stated that it would not be in the public interest to have different papers that are not consistent. AASOC concluded that it would be appropriate and perhaps useful to other groups for AASOC to publish its paper.
Following this discussion, voting members present at the meeting unanimously approved the paper.
Phil Cowperthwaite reported on Communications Committee activities since the last AASOC meeting. He noted that there is synergy between the AASB and AASOC, including an overlap in key stakeholders. Many of AASOC’s key stakeholders receive communications from the AASB. Each AASB project proposal includes proposed communications and identifies key stakeholders affected by the project. Therefore, the Communications Committee suggested that it review all project proposals.
AASOC discussed the nature and content of communications that it may issue. The AASOC members expressed the desire for communications to be issued that will raise AASOC’s profile. AASOC believes that it is important for the public to understand the key role AASOC plays in overseeing standard setting.
In response to a request from one AASOC member, the Communications Committee will develop a slide deck that members can use if asked to make presentations on the standard-setting process and AASOC’s role in providing oversight.
Stan Pasternak reported on Nominating Committee activities since the last AASOC meeting. At its April 7, 2016 meeting, AASOC reviewed the criteria for membership on the AASB and suggested some minor revisions. AASOC discussed the proposed revised criteria, suggested another minor revision, and approved the amended criteria.
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 is considering AASOC’s profile and the types of candidates it will be looking for to replace a number of retiring members next year. A Call for Nominations is posted on AASOC’s website. Further, the AASOC members and staff are encouraged to forward the Call to their personal contacts.
AASOC discussed a proposed review of the effectiveness of AcSOC and AASOC. This review will encompass the roles and activities of the Councils and consider whether there are improvements or efficiencies that can be achieved. Stephenie Fox presented draft terms of reference for a joint task force to conduct this review. The task force would provide an update to both Councils in late 2016, and a draft report and recommendations in early 2017. Input from key stakeholders will be sought by mid-2017. AASOC supports equal representation on the task force and suggested that each Council provide 3 to 4 members.
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 April, May and June 2016 conference calls and the June 2016 meeting, including the following:
The AASB discussed issues related to the International Auditing and Assurance Standards Board’s (IAASB) project to revise International Standard on Related Services (ISRS) 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information, including:
- whether the use of ambiguous terminology in the practitioner’s report should be prohibited even if the use of such terminology is required by law, regulation or contract;
- whether the practitioner should be required to agree with the entity whether the use of the report would be restricted, and, if so, to whom;
- the proposed work effort when using the work of others; and
- how to address engagements that contain aspects of different types of engagements and different levels of assurance (for example, an engagement to report on compliance with terms of an agreement combined with an agreed-upon procedures engagement).
The AASB reviewed final revisions to proposed Canadian Standard on Association (CSOA) 5000, Use of the Practitioner’s Communication or Name. Section 7500, Auditor's Consent to the Use of the Auditor's Report in Connection with Designated Documents, includes an auditor’s consent in connection with the entity’s financial statements and the auditor’s report thereon filed with securities regulatory authorities. Consistent with Section 5020, Association, proposed CSOA 5000 does not include such an auditor’s consent. Section 7500 will be withdrawn from the CPA Canada Handbook – Assurance when CSOA 5000 becomes effective. The AASB will consider the implications of no longer having this consent covered by a standard.
AASOC noted that many other jurisdictions do not have a standard equivalent to Section 5020. Mr. Jensen stated that the AASB believes the standard is important because it protects the public by requiring the practitioner to take appropriate action when the public may be misinformed about the involvement of the practitioner with information with which the practitioner is associated.
Auditing Accounting Estimates
The IAASB has started a project to consider revisions to International Standard on Auditing (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:
- how to address scalability within the standard; and
- risk assessment, including how to identify and assess risks and the work effort in responding to risks.
In response to a question from AASOC as to why scalability is an issue, Mr. Jensen stated that the AASB is concerned that the required work effort included in the standard may be overly focused on addressing highly complex accounting estimates, and not flexible for dealing with a broad range of accounting estimates.
The Financial Stability Board hosted a roundtable on audit quality in June 2016. Attendees discussed at length the exercise of professional skepticism and how auditors question management, particularly in the area of estimates. The objectives of revisions to ISA 540 include enhancing professional skepticism by auditors.
Since the April 2016 AASOC meeting, there have been a number of developments related to the AASB’s project to adopt revisions to auditor reporting standards:
- The AASB held in-depth discussions during two conference calls and one in-person meeting on Canadian-specific issues, including:
- an analysis of the implications to practitioners of having a different effective date than the related International Standards on Auditing (ISAs); and
- how to deal with the transition period in the Handbook.
- The U.S. Public Company Accounting Oversight Board issued proposals related to its auditor reporting standards.
- The AASB Chair and/or staff met with key Canadian stakeholders including the Canadian Public Accountability Board, the Canadian Securities Administrators Chief Accountants and the Office of the Superintendent of Financial Institutions.
- The AASB Chair and the Director, Auditing and Assurance Standards, attended the IAASB National Standard Setters meeting.
The AASB reached certain key conclusions, including:
- the AASB should move forward to adopt the revised auditor reporting standards in Canada;
- consistent with the International Standards on Auditing, reporting on key audit matters should apply to listed entities;
- the effective date should be deferred by one year from that proposed in the Invitation to Comment (i.e., 2018 versus 2017);
- there should be a one-year staging of key audit matter requirements, the same as that proposed in the Invitation to Comment (i.e., TSX companies in 2018 and all others in 2019); and
- earlier application of the standards should be allowed starting in 2017.
AASOC noted that awareness of the proposed revisions is very low. Mr. Jensen stated that the AASB is aware of this. Among other elements of a detailed implementation plan involving the AASB and other stakeholders, the AASB plans to issue a message from the chair to update stakeholders on developments. Further, the AASB believes that the deferral in effective date provides opportunities for more communication to raise awareness.
One AASOC member noted that the large banks in Canada have October 31 year ends. However, the proposed effective date of December 15, 2018, with earlier application permitted may mean that auditors of the large banks in Canada will not apply the auditor reporting standards for October 31, 2018 year ends. Auditors of smaller banks, on the other hand, would be required to report using the new standards for 2018 because they have calendar year ends. AASOC questioned whether an earlier effective date of October 15, 2018 would result in a more effective implementation of the standards. There is a view that the smaller banks generally look to the larger banks to lead the way when developing their practices. AASOC noted that the banks would also be applying IFRS 9 Financial Instruments in the same period but AASOC did not see this as an impediment to an effective implementation of the reporting standards. AASOC noted that an option to have large banks using the new reporting in 2018 would be for the prudential regulator to require the banks to early apply the new standards for their 2018 audits. However, it was noted that the process for doing so is complex and may be less desirable than the AASB choosing an earlier effective date.
AASOC questioned whether it is clear that the benefits of requiring key audit matters reporting by auditors of non-TSX listed entities exceed the related costs. Mr. Jensen noted that this is a complex issue that the AASB considered carefully during its deliberations. Given that Canada would apply the new standards later than many other jurisdictions, including those with smaller listed entities, the AASB believes that this will provide the opportunity for it to assess more closely the costs and benefits prior to the 2019 effective date for key audit matters reporting by those entities. Accordingly, the AASB is monitoring implementation of the new auditor reporting standards in other jurisdictions. Further, the IAASB is planning to conduct a post-implementation review in 2017-2018 as part of its planned approach to considering expanding key audit matters reporting beyond listed entities. The AASB is also developing a post-implementation review process for Canadian standards, including the auditor reporting standards. The AASB would be informed by these reviews and consider whether changes to auditor reporting standards are necessary.
The IAASB is expected to approve a project to consider revisions to ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, at its September 2016 meeting. The AASB discussed key issues raised by the IAASB’s task force including:
- the proposed project objectives;
- whether there is a need to introduce a framework to facilitate the auditor’s assessment of risk;
- what information or documentation is required when tracing transactions through the business process;
- how to document the use of the auditor’s judgment; and
- how to address impact on other key standards, including assessing fraud and the auditor’s responses to risk.
The AASB discussed issues related to its project to revise Section 9200, Compilation Engagements, including:
- the definition of a compilation engagement;
- whether compilation engagements should be subject to firm quality control standards;
- the preconditions to accepting a compilation engagement;
- the exercise of professional judgment in a compilation engagement; and
- management’s responsibility for significant judgments.
One AASOC member asked whether other professional accounting bodies in Canada applied Section 9200 prior to the unification of the profession. This member expressed concern about whether revisions would result in a substantial change for practitioners. Mr. Jensen noted that changes are needed to improve consistency in how the engagements are performed and address public expectation gaps. These gaps arise because there is often a lack of clarity about the basis of accounting used to compile the information and the limited involvement of the practitioner with the information. The AASB expects that new requirements will provide greater transparency in these respects and greater consistency in performance.
Non-compliance with Laws and Regulations
The International Ethics Standards Board for Accountants (IESBA) approved revisions to its Code of Ethics addressing the professional accountant’s responsibilities when non-compliance or suspected non-compliance with laws or regulations is detected by the auditor. Various ISAs and other international standards make reference to the IESBA Code. To ensure that international standards do not conflict with the IESBA Code, the IAASB proposed limited amendments that clarify and emphasize key aspects of the IESBA’s revisions in the international standards. The IAASB approved these amendments at its June 2016 meeting. The AASB believes that changes to documentation requirements in ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements, were not necessary. Documentation is sufficiently addressed in ISA 230, Audit Documentation. However, the AASB does not believe that this represented a fatal flaw and was supportive of the final revisions.
The AASB discussed enhancing the role of the AASB Chair, in light of increased activities set out in the AASB’s Strategic Plan for 2016-2021. The AASB will consider what the role would involve, the time commitment and term, and other implications.
AASOC asked whether CPA Canada has approved the funding for this position. A business case is being prepared to seek additional funding from CPA Canada as part of the budgeting process for 2017-2018.
AASOC noted that the competencies of such an individual should be set out clearly. In considering potential candidates, AASOC will need to consider the appropriate level of technical knowledge required of the Chair, as well as the ability to communicate with a broad range of stakeholders. An AASOC member suggested that if outreach is the primary goal, perhaps the role of the Chair should not be changed, rather a staff person hired. Other AASOC members noted that a Chair conducting outreach would have more credibility than a senior staff person. AASOC agreed that it would be better to have the Chair performing outreach with key stakeholders.
AASB Strategic Plan 2016-2021
The AASB approved its Strategic Plan for 2016-2021 at its April 2016 conference call. A basis for conclusion document was drafted, which will be posted on the AASB’s website along with the Strategic Plan. A subcommittee of AASOC, comprised of Jean Bédard, Susan McIsaac and Michael Tambosso, reviewed the Strategic Plan and the detailed analysis of comments raised by stakeholders. The subcommittee raised a few questions, which the AASB answered prior to approving the final Strategic Plan. One member of the subcommittee observed the conference call at which the AASB approved the Strategic Plan.
The subcommittee raised two concerns about the process for developing the AASB Operating Plan and its Strategic Plan. While acknowledging that for pragmatic reasons it was necessary for the AASB to approve its Operating Plan for 2016-2017 while the final details of the Strategic Plan were still being considered, the subcommittee believes that, in the future, the Strategic Planning process should be completed before operating plans are considered. Secondly, the subcommittee was concerned that there did not appear to be sufficient time for the AASB to fully address all comments and questions the subcommittee raised towards the end of the strategic planning process. Although the subcommittee is satisfied with the final Strategic Plan, the subcommittee believes that improvements can be made to the process to allow full deliberation of all its comments and questions for both operating and strategic plans and will work with the AASB towards this goal. The subcommittee will develop a process for reviewing the AASB’s development of its operating and strategic plans. Stephenie Fox noted that AcSOC has a process in place for such reviews.
Following this discussion, voting members of AASOC present at the meeting unanimously agreed that the AASB followed due process in preparing its 2016-2021 Strategic Plan. AASOC also agreed to make the subcommittee a permanent AASOC committee.
Project Progress and Monitoring Activities Reports
AASOC reviewed the AASB’s project progress report. It also reviewed a report tracking the results of the AASB’s monitoring activities. AASOC had no comments on either of these documents.
AASOC reviewed written reports from Jean Bédard, Bruce Winter and Carol Bellringer, who observed the April and May 2016 conference calls and the June 2016 AASB meeting on behalf of AASOC. AASOC also received a verbal report from Cameron McInnis, who observed the June 27, 2016 conference call. The observers noted no significant issues regarding due process and the consideration of the public interest by the AASB. Jean Bédard noted that comments were received from Canadian stakeholders on an IAASB Invitation to Comment and then the AASB sent its own response to the IAASB. He queried what the AASB’s process is if the AASB does not agree with input received from a Canadian stakeholder. Darrell Jensen stated that the AASB expresses its view but includes comments when it has heard differing views from others.
AASOC accepted the observer reports as presented.
Canadian Public Accountability Board (CPAB)
Jeremy Justin reported the following:
- The inspection of the four largest accounting firms is progressing. A report will be issued in the fall of 2016.
- A survey of audit committees about CPAB’s protocol for audit firm communication of CPAB inspection findings with audit committees has closed. CPAB is analyzing responses, which will be shared at the next AASOC meeting in October 2016.
- CPAB has started a project to consider audit quality indicators. Chairs from six audit committees are participating in this pilot project to use audit quality indicators to improve discussions with their auditors.
- CPAB is planning for its next audit quality symposium, to be held in May 2017.
One AASOC member asked what CPAB’s views are on some of the new projects being started by the IAASB and the AASB, such as data analytics. In particular, this member asked whether standard setters should wait for practice to evolve in such areas or commence projects to address issues now. Mr. Justin replied that CPAB is considering these issues as it conducts its file inspections.
Canadian Securities Administrators (CSA)
Cameron McInnis noted the following:
- The CSA has started a project to explore audit committee disclosures, with a goal of issuing a concept paper in mid-2017. The project will consider whether there is a need for more disclosure of how the audit committee oversees the work of the auditor, what was discussed between the audit committee and the auditor, and the impact of disclosure on audit committee behaviour. The CSA will consult with various stakeholders in the fall of 2016.
- The International Organization of Securities Commissions (IOSCO) issued a report in May 2016 on a survey it conducted to gain a better understanding of existing legal, regulatory and other requirements related to the audit committee’s oversight of the auditor and the audit process of domestic, publicly listed entities in IOSCO member jurisdictions.
- In 2002, IOSCO issued an updated statement on non-generally accepted accounting principles (non-GAAP) measures to address expectations when an issuer discloses non-GAAP financial measures.
Independence Task Force
Michael Tambosso noted the following:
- Revisions to independence rules related to breaches of independence rules and contingent fees will be approved by the provincial bodies and members. These rules will be effective December 2016.
- A comparison of the Canadian rules of professional conduct on independence to the IESBA Code of Ethics has been completed. A comparison to rules of the U.S. Securities Exchange Commission (SEC) will be started when resources are found.
One AASOC member noted that CPA Canada’s Public Trust Committee previously had recommended that the IESBA Code of Ethics be adopted and questioned the need for the Independence Task Force to develop the comparison with the SEC rules. Mr. Tambosso indicated that this is in response to regulators who expressed the view that it is important to know how Canadian rules compare to those of the U.S.
International Auditing and Assurance Standards Board
Neither Ron Salole, CPA Canada Nominee on the IAASB, nor Eric Turner, Technical Advisor to Ron Salole, was able to attend the meeting. On their behalf, Jacqui Kuypers noted the following regarding a June 2016 meeting of the IAASB:
- The IAASB received an overview of the responses to its Invitation to Comment dealing with professional skepticism, quality control and group audits. Project proposals are being developed for consideration at a future IAASB meeting.
- The IAASB discussed issues related to its project to revise ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures. The IAASB expects to issue an exposure draft in late 2016.
- Professional skepticism, which is one of the topics 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 expects to approve a project proposal in September 2016 and will work toward issuing an exposure draft by mid-2017.
- Data analytics involves considering how the use of technology changes how an audit is performed. The IAASB approved a discussion paper to inform the IAASB’s future activities in this area.
- The IAASB approved limited amendments to international standards addressing responding to non-compliance or suspected non-compliance with laws and regulations.
- An issues paper on agreed-upon procedures was reviewed. The IAASB is expected to approve a discussion paper at its September 2016 meeting.
- The IAASB approved a survey on its work plan for 2017-2018. However, it noted that there is little flexibility to start new projects.
Cameron McInnis expressed concern whether the IAASB will give appropriate priority to group audits.
International Federation of Accountants (IFAC)
Carol Bellringer noted the following:
- At its June 2016 meeting, the IFAC Board continued discussions with the Monitoring Group on how to strengthen the independence of standard setting from a funding point of view.
- The Chairs of the standard-setting bodies provided updates on their respective activities, including a focus on the speed of standard setting. Each Chair justified why it is important to take time to follow due process, while also proceeding at an appropriate speed.
- There has been much discussion of integrated reporting at the international level. It is not clear why it is active elsewhere but not in North America.
- IFAC’s Public Policy and Regulation Advisory Group is discussing issues related to taxation as a followup to IFAC’s 2014 paper on fairness in taxation.
With regard to integrated reporting, Cameron McInnis noted that investors in North America are generally not asking for integrated reports at this time. Regulators do not have plans for requiring such reporting at this point, but continue to actively monitor developments in this area.
Office of the Superintendent of Financial Institutions (OSFI)
Karen Stothers noted the following:
- OSFI issued a final guideline on implementation of IFRS 9, noting that OSFI is expecting high-quality implementation by the big banks.
- OSFI issued a letter in early July 2016 to financial institutions emphasizing the need for due diligence on mortgage writing.
- Carolyn Rogers will replace Mark Zelmer as Assistant Superintendent, Regulation Sector, effective August 15, 2016.
Public Interest Oversight Board (PIOB)
The AASOC members were provided with a copy of the PIOB’s annual report. AASOC discussed the reliance it places on the PIOB to oversee the activities of the IAASB, and whether this process should be reviewed. AASOC noted that the AASB consults in Canada on international standards to ensure the public interest in Canada is addressed. One member also noted that there has been no Canadian member on the PIOB for a couple of years. Without first-hand input, AASOC asked whether it has sufficient knowledge of the PIOB and its activities. AASOC recognized that the PIOB’s Annual Report provides much more detail than it did in the past. AASOC also receives reports from each PIOB meeting that are made available on the PIOB’s website. AASOC asked that staff include the PIOB as part of its monitoring activities so that points of interest are brought to the attention of the AASB and AASOC.
The AASOC members held an in-camera session.
The next meeting of AASOC will be held on October 24, 2016 in Toronto.
There being no further matters to discuss, the meeting was terminated.