Update on auditor reporting standards
I am writing to update you on the Auditing and Assurance Standards Board’s (AASB) recent decisions and activities on auditor reporting standards. These include:
- Communication of key audit matters for audits of Toronto Stock Exchange (TSX)-listed entities, other than entities required to comply with National Instrument (NI) 81-106, Investment Fund Continuous Disclosure.
- Auditor’s reports for audits of entities listed in both Canada and the United States(combined reports).
- Exposure draft development.
Communication of key audit matters
The new and revised auditor reporting standards were issued in June 2017. At that time, the requirement for auditors to communicate key audit matters — those matters that, in the auditor’s professional judgment, were most significant in the audit – was limited to when the auditor is required by law or regulation or decides to do so.
This was partly because we were waiting for the U.S. Public Company Accounting Oversight Board (PCAOB) to finalize its auditor reporting standard. The U.S. regulators completed their process in late 2017 and since then the Board has been assessing the impact on Canada.
The PCAOB standard includes a similar reporting concept to communication of key audit matters – critical audit matter reporting – that will be effective for certain U.S. issuers for audits of financial statement periods ending on or after June 15, 2019, and all other U.S. issuers to which the requirements apply for periods ending on or after December 15, 2020.
Confusion could be caused if communication of key audit matters was required in Canada at a different date than the similar concept is effective for most issuers in the United States. So we decided that requirements to communicate key audit matters in Canada for certain entities will have the same effective date – December 15, 2020. However, the requirements can be adopted early.
We also reassessed our tentative conclusion that communication of key audit matters will first be required for audits of all TSX-listed entities. To make this decision, we considered:
- the PCAOB exemption on critical audit matter reporting for audits of investment companies; and
- the input the Board received from certain Canadian stakeholders in the investment funds industry.
We also recognize that listed and unlisted investment funds in Canada are required to comply with NI 81-106.
We want to hear from stakeholders before finalizing the requirements for communication of key audit matters for audits of investment funds (see Developing an exposure draft below). In October 2018, we approved revisions to Canadian Auditing Standards (CASs) to require communication of key audit matters for audits of TSX-listed entities, other than those required to comply with NI 81-106, for financial statement periods ending on or after December 15, 2020. An update to the CPA Canada Handbook – Assurance will be issued in December 2018.
Until now, many audits of Canadian entities listed in both Canada and the United States were conducted in accordance with both CASs and PCAOB auditing standards. Auditors were able to report compliance with the two standards in one combined auditor’s report.
Unfortunately, there are now many differences between the two auditor reporting standards – difficult to resolve in a combined report. We explored possible options to resolve these issues, but have not yet come to a conclusion.
We are in discussions with the U.S. securities regulator and the PCAOB to develop a combined report that would be acceptable in both Canada and the United States. Reaching such a conclusion may require changes to CASs.
In the meantime, it will not be possible for auditors to issue combined reports for financial statement periods ending on or after December 15, 2018.
Developing an exposure draft
We are working on an exposure draft to be issued in early 2019. It will address remaining issues on communication of key audit matters for audits of listed entities other than those on the TSX and investment funds.
The exposure draft will reflect the conclusions from our review of the experience of jurisdictions that already implemented the new auditor reporting standards. This includes work done by the University of Guelph on communication of key audit matters on 2017 audits of smaller listed entities in Australia.
More work to come
We are working with CPA Canada and other groups to implement effectively the new reporting standards. A key CPA Canada publication is “Reporting Implications of the Canadian Auditing Standards,” 2nd Edition, updated in October 2018.
We will also closely monitor implementation of the new reporting standards that become effective in 2018.
Ken Charbonneau, FCPA, FCA, ICD.D
Chair, Auditing and Assurance Standards Board