The Auditing and Assurance Standards Oversight Council (AASOC) discussed the activities of the Auditing and Assurance Standards Board (AASB) and related matters.
At its meeting in Toronto, Ontario, on February 3-4, 2020, AASOC received presentations on, and discussed the following:
- Chair’s Opening Remarks
- Approval of December AASOC Minutes
- AASB Due Process
- AASB Update
- Performance Review Committee Update
- AASB Annual Plan and Annual Report
- Update on the AASB’s Next Strategic Plan
- Brydon Report Update
- Other Canadian Updates
- International Updates
- Update on the Independence Standing Committee
- Monitoring Group Update
- Emerging Developments in Financial Reporting
- Impact of Big Data on Audit Practices
Chair’s Opening Remarks
Auditing and Assurance Standards Oversight Council (AASOC) Chair Kevin Nye welcomed all attendees, including Jean-François Trépanier, Vice-Chair of the Auditing and Assurance Standards Board (AASB).
Mr. Nye informed AASOC that today’s agenda encompasses an update on the AASB’s activities, the due process approval of a standard, a review of the Board’s Annual Plan, an update of the Board’s Draft Strategic Plan, and a discussion of some major global developments, including the Brydon Report, the impact of big data on audit practices, and other topics.
Approval of December AASOC Minutes
AASOC approved minutes of the meeting held on December 18, 2019.
AASB Due Process
Canadian Auditing Standard (CAS) 315 Identifying and Assessing Risks of Material Misstatement
AASB Director Eric Turner turned AASOC’s attention to the meeting materials on CAS 315, Identifying and Assessing Risks of Material Misstatement. He explained that this standard deals with the audit risk model where an auditor designs and implements responses to the assessed risks of material misstatements. There were some challenges involved in identifying and assessing audit risks for entities – in particular, those that vary in size and nature. Practitioners required clearer guidance to help address these challenges. As a result, the International Auditing and Assurance Standards Board (IAASB) proposed some amendments to International Standard on Auditing (ISA) 315 (CAS 315). Mr. Turner noted that the revised standard is lengthy and includes many amendments due to the key role it plays compared to other standards.
In terms of project resources, Mr. Turner said that the AASB used an Advisory Group to consider revisions to CAS 315. The Board also issued the Exposure Draft, “Identifying and Assessing Risks of Material Misstatement” in September 2018 and proposed no Canadian amendments. The Board unanimously approved CAS 315 at its December 2019 meeting.
In response to a question on what, from a user’s perspective, makes the standard different. Mr. Turner informed AASOC that no major changes were made to the standard. The purpose of the revisions was to clarify certain areas where the standard previously was not appropriately applied. The new standard establishes more robust requirements and appropriately detailed guidance to drive auditors to perform appropriate risk assessment procedures in accordance with the size and nature of an entity. This would be done by focusing on enhancing the auditor’s approach to understanding the entity and risk assessment activities considering the changing environment. He said that the IAASB and the CPA Canada’s Research Guidance and Support team will issue supporting materials on implementation of the revised standard. A Council member added that the revised standard not only requires practitioners to find confirming evidence but also contradictory evidence, which enhances the quality of an audit.
One AASOC member asked if the AASB reviews all documents that the IAASB issues pertaining to a standard. Mr. Turner responded that the Board does so. It also sends a comment letter to the IAASB once the Board has conducted some outreach activities with its stakeholders to better understand the implications of a standard on Canadian stakeholders. As part of its due process, the Board also considers whether a Canadian amendment is required for any given standard.
In response to a Council member’s question on scalability, Mr. Turner said that scalability was a key feature of this project. In their feedback on areas of improvement, stakeholders identified challenges relating to scalability when performing risk assessment procedures in the audits of small and medium entities. The IAASB addressed this issue in the new standard by enhancing the auditor’s considerations related to scalability, clarifying the nature and extent of the work to be performed when obtaining an understanding of the entity’s components, and introducing the concept of a spectrum of inherent risk. AASB Chair Ken Charbonneau added that the final standard looks quite different from the Exposure Draft, mainly to address scalability issues.
One AASOC member asked if the Basis for Conclusions in the CPA Canada Handbook – Assurance explains why no changes were made to the IAASB’s standard. Mr. Turner noted that when the AASB adopted the international standard, the Board understood that the IAASB would explain the focus of the project, the reasons for adoption, etc. in its Basis for Conclusions. The AASB’s Basis for Conclusions would state why the project was adopted and explain any amendments made in accordance with the Board’s amendment criteria. In the case of CAS 315, no amendments were made. However, to reflect the extent of comments received from Canadian stakeholders on the proposed standard, the Basis for Conclusions identifies the significant matters raised and how the IAASB addressed them.
Another AASOC member asked if CAS 315 addresses the risk of fraud. Mr. Turner noted that CAS 315 recognizes that there is a link between risk assessment and fraud, but it only addresses fraud in the context of identifying material misstatements as part of an entity’s inherent risk factors. The standard then points the auditor to CAS 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, for further information on fraud. The AASB Vice-Chair added that the definition of “significant risk” has been modified in the revised standard. The new definition is articulated around two concepts: inherent risk and presumed significant risks in accordance with other standards.
AASOC concluded that the AASB followed due process with proper regard for the public interest in developing and approving CAS 315.
Mr. Turner briefed AASOC on some of AASB’s activities since the last Council meeting. He noted two items that will be discussed in detail in this agenda item: future-oriented financial information and the Board’s quality management standard.
Future-oriented Financial Information
In March 2020, the Accounting Standards Board (AcSB) will withdraw Part V of the CPA Canada Handbook – Accounting. This includes Section 4250, Future-oriented Financial Information. Two of AASB’s Guidelines refer to this Section: Assurance and Related Services Guideline (AuG) 6, Examination of a Financial Forecast or Projection Included in a Prospectus or Other Public Offering Document, and AuG-16, Compilation of a Financial Forecast of Projection. The AcSB will retain Section 4250 as non-authoritative guidance for stakeholders to voluntarily use in the preparation of future-oriented financial information.
At its January meeting, the AASB discussed this matter, including the implications for AuG-6 and AuG-16. The Board will clearly communicate in both AuG-6 and AuG-16 that Section 4250 is no longer authoritative. The Board will return to AASOC’s March meeting for the due process approval of both of these guidelines.
In 2016, the IAASB undertook a project to revise the quality control standards at the firm and engagement level. The revisions to the standard were made to strengthen and improve the standard’s requirements and to focus on identifying, assessing, and responding to quality risks in a broad range of engagement circumstances. The AASB proposed that Canada adopt the same scope as the international standard and, thereby, extend quality control standards to related services engagements, not just assurance engagements as is currently the case.
At its January meeting, the AASB noted that it was unable to obtain sufficient feedback from stakeholders on the proposed change in scope. The Board discussed the extent of additional consultations needed to assist it in making an informed decision on this matter. It agreed to hold a workshop(s) in the spring or summer 2020 to allow practitioners to identify implementation challenges and provide the Board with some feedback on the new standard.
Performance Review Committee Update
Performance Review Committee Chair Bruce West informed AASOC that the Committee met on January 28, 2020, to review the AASB’s nine-month Performance Report, discuss the AASB’s 2020-2021 Annual Plan, and receive an update on the Board’s next Strategic Plan.
Mr. West added that the Performance Review Committee agrees with the AASB’s nine-month review assessment, noting that the Committee is satisfied that the 2020-2021 Annual Plan would provide a basis for the Committee to assess the Board’s performance for the year ended March 31, 2021.
With regards to the AASB’s next Strategic Plan, Mr. West informed AASOC that the Performance Review Committee discussed the Board’s rationale in arriving at a four-year strategic horizon. The Committee provided the Board with input into its Strategic Plan to consider the developments in the Monitoring Group and Brydon Report, among other things.
AASB Annual Plan and Annual Report
On the AASB’s 2019-2020 Annual Report, Mr. Charbonneau stated that the Board has performed a nine-month review of its current Annual Plan for the period ended December 31, 2019. It is on track to achieve most of its objectives. He highlighted the few activities that were delayed, explaining they would be completed by March 31, 2020, carried forward to the 2020-2021 Annual Plan, or addressed through the Board’s next Strategic Plan.
Mr. Charbonneau informed AASOC that Performance Review Committee raised a concern with regards to some of the AASB’s delayed activities pertaining to stakeholder engagement. He noted that the Board continues to face challenges with engaging users, which is also a challenge for the AcSB and the Public Sector Accounting Board. The Board continues to develop unique methods of engaging the user stakeholder group. Mr. Turner added that achieving a high level of stakeholder engagement has been a key objective of the Board’s current Strategic Plan. The Board has made significant progress in its stakeholder engagement over the past five years mainly through the use of technology and the hiring a permanent Board Chair. The Board will continue to try different ways of engaging the user stakeholder community. The Council requested a future presentation on this topic.
One AASOC member asked if the AASB conducts a performance assessment before the nine-month mark. Mr. Charbonneau said that the Board reviews its performance on a quarterly basis, adjusting activities and targets accordingly. The nine-month review is especially important for the Board because it includes an assessment on whether its activities will be completed by year-end.
In discussing the AASB’s 2020-2021 Annual Plan, Mr. Charbonneau informed AASOC that the Board conducted an environmental analysis that identified emerging issues in the audit and assurance environment. He noted that in performing the environmental analysis, the Board concluded that it does not need to take urgent action in the final year of its Strategic Plan to address the environmental issues and risks identified. The Council reviewed and discussed the key activities and targets for 2020-2021 for each of the Board’s strategic objectives.
Mr. Charbonneau informed AASOC that the AASB will review and will be asked to approve a revised draft of its Annual Plan at its March 2020 meeting. The Board will seek the Council’s due process approval of the 2020-2021 Annual Plan at the March 25, 2020 meeting. The Board intends to publish its 2020-2021 Annual Plan on April 1, 2020.
Update on AASB’s Next Strategic Plan
Mr. Charbonneau reminded AASOC that the AASB began its strategic planning process in October by conducting an environmental scan. Also, in October the Board discussed its strategic planning process, the related timeline, and performed an initial analysis of its strengths, weaknesses, opportunities, and threats.
At the AASB’s January meeting, a facilitator worked with the Board redrafting its mission statement, identifying its strategic directions, developing its goals, and setting objectives for each goal.
Mr. Charbonneau informed AASOC that in discussing the term of its next Strategic Plan, the AASB decided on a four-year term, due in part to be consistent with the IAASB. He added that there are many consistencies between the AASB’s and the IAASB’s strategic plans, including the timeline of their work plans.
One AASOC member noted that the IAASB’s Strategic Plan term was based on aligning it with the International Ethics Standards Board for Accountants’ (IESBA) timeline. She asked if the AASB considered this factor when arriving at the term of its Strategic Plan. Mr. Charbonneau said that this was not of concern to the Board. It wanted to ensure that its Strategic Plan was aligned with the International Board, with which its work plan is consistent.
Mr. Charbonneau also informed AASOC that the AASB is currently in the process of redrafting its mission statement and may potentially exclude a vision statement.
Mr. Charbonneau also informed AASOC that at the AASB’s January meeting, the Board revisited the environmental themes identified in October. It reinforced that the five themes previously identified are the ones that should be included in its Strategic Plan. These themes are:
- advancement in, and use of, technology;
- environment for less complex entities;
- increasing complexity and its implications;
- changing reporting needs of stakeholders; and
- changing public confidence in audits.
He also noted that these themes are consistent with the IAASB’s environmental themes.
AASOC requested that the AASB provide it with a comparison of the Board’s plan to the IAASB’s plan. This will helpful Council members better understand how the two plans correlate. This will be provided to the Council at its June meeting.
AASOC reviewed and provided input into the AASB’s draft strategic directions.
In response to a question, Mr. Charbonneau noted that the AASB will consider any emerging issues before it issues the Strategic Plan.
Mr. Charbonneau informed AASOC of the AASB’s next steps as they relate to the Strategic Plan. The Board will review the first draft of the Strategic Plan at its March 2020 meeting, after which the Performance Review Committee will have an opportunity to provide input at its March 12, 2020 meeting. The Board plans to approve the draft Strategic Plan in April 2020 and issue it for consultation in May 2020.
Brydon Report Update
Vice-President, Standards, FRAS Canada, Stephenie Fox, informed AASOC that the purpose of this session is to update members on the Brydon Report on Improving Audit Quality and Effectiveness.
The U.K. Secretary of State for Business, Energy and Industrial Strategy commissioned an independent review into the quality and effectiveness of audit. This review was led by Sir Donald Brydon, the outgoing Chair of the London Stock Exchange Group.
This review was commissioned in response to the perceived widening of the audit expectations gap, company failures in the United Kingdom, and the growing expectation of audit and assurance. In his report, Sir Donald challenges auditors to make audits more informative for a broader group of stakeholders.
Ms. Fox noted that a call for views was issued in April 2019, and 120 formal submissions were received from a wide range of global stakeholders. The Group hosted more than 100 meetings and roundtables around the world to ensure that stakeholders’ views were considered in the report.
The Brydon Report included many recommendations, some of which are highlighted below:
- A redefinition of audit and its purpose: The report noted the purpose of an audit “is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements.” The report suggests that auditors should also provide useful information to present and potential investors, creditors, and other users. This information should include original information that will likely have a material impact on users’ decisions.
- The creation of a corporate auditing profession: The report explains that currently auditing is an extension of the accounting profession. Sir Donald believes that it should be an independent profession of its own. The report, therefore, recommends that the Audit Reporting and Governance Authority (ARGA) “should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit that includes but is not limited to the statutory audit of financial statements.”
- Fraud detection and prevention: The report recommends that it be an obligation for the auditor to endeavour in the detection of material fraud in all reasonable ways. It also recommends that directors report on actions they have taken to prevent and detect material fraud. There should be a corresponding duty on the auditor to state in the audit report how the directors’ statement on material fraud was assured. The report also suggests that auditors should receive training in forensic accounting and fraud awareness.
- Communicating judgments: In communicating the reasons for having chosen a particular treatment of a value, the report suggests that auditors should be required to identify the relevant variables to the audit committee and inform the committee of the resolutions that were made. The report also recommends the transparency of any potential differences in the treatment of goodwill and intangibles considered by management and the auditor. Moreover, it suggests that the auditor report on an entity’s culture.
- Resilience statement: The report suggests that a “Resilience Statement” should replace the existing going concern and viability statements. The Resilience Statement would encompass a going concern opinion for the short term, a statement of resilience in the medium term, and a consideration of the risks to resilience in the long term. Auditors would be required to report to the Board of Directors any anxiety about the Resilience Statement. In the case that the Board does not respond appropriately, this concern would be escalated to the ARGA.
- Alternative performance measures and key performance indicators (KPIs): The report recommends that any alternative performance measures reported by a company, and any use of KPIs to underpin executive remuneration, should be subject to audit.
The report also addressed several other areas, including the engagement of stakeholders, whistleblowing, technology, and auditor liability and transparency.
After some discussion, AASOC agreed to continue monitoring the situation globally and better understand the issues in Canada.
Other Canadian Updates
Canadian Public Accountability Board (CPAB)
CPAB CEO Carol Paradine provided the following updates:
- Jeremy Justin, CPAB’s Chief Risk Officer and Vice-President, Strategy, is chairing an International Forum of Independent Audit Regulators working group on technology. It will focus on a regulatory approach to inspect auditing tools used by audit firms.
- CPAB completed its assessment of quality management systems at the four large audit firms. The report will be published next month.
- CPAB completed its review of IFRS 9 Financial Instruments. The results are being communicated to audit firms and audit committee chairs.
- In its Fall Inspections Report, CPAB has noted significant findings in several audits of cannabis and crypto-asset reporting issuers.
In response to a question, Ms. Paradine stated that CPAB uses a risk-based approach to identify files that it chooses to review. In 2019, there was an emphasis on the audit of cannabis and crypto-asset reporting issuers.
Canadian Securities Administrators (CSA)
Carla-Marie Hait, Chief Accountant and Chief Financial Officer of the British Columbia Securities Commission, provided the following updates:
- In response to the comments received on the CSA’s proposed National Instrument 52-112 Non-GAAP and Other Financial Measures, the CSA has simplified the proposals and reduced the scope of application by excluding some entities such as investment funds and certain other entities.
- The CSA will publish a second notice and request for comment on revisions to its proposed rule for non-GAAP and other financial measures in February 2020.
- The CSA has also issued several publications pertaining to entities facilitating the trading of crypto-assets, access-equals-delivery model for public companies, and proposals regarding investment funds.
In response to a question, Ms. Hait noted that the CSA’s proposed rule does not address the auditor’s responsibility in relation to such measures.
Office of the Superintendent of Financial Institutions (OSFI)
Karen Stothers, Senior Advisor, Regulation Sector at OSFI, provided AASOC with the following updates:
- OSFI confirms another Canadian bank has been designated as a global systemically important bank.
- OSFI is seeking comments on its Consultation Paper pertaining to the capital and liquidity requirements applicable to small and medium-sized deposit-taking institutions. OSFI proposes changes to the requirements for these institutions in its Consultation Paper, with the goal of improving institutions’ preparedness and resilience to financial risks.
International Auditing and Assurance Standards Board (IAASB)
Mr. Turner, Director of the AASB and IAASB Member, provided AASOC with the following updates:
- The IAASB met in December 2019 in New York. It will meet again briefly in January and February, with its next week-long meeting being in March 2020.
- At its December meeting, the IAASB approved its 2020-2023 Strategic Plan as well as its 2020-2021 Work Plan.
- The IAASB approved its revised standard on agreed-upon procedures (AUP), which expands the scope of AUP to non-financial information as well.
- The IAASB also approved an exposure draft for non-authoritative guidance on performing assurance engagements on extended external reporting. This exposure draft will be issued in February with a June comment deadline. The AASB will be considering whether to write a response to the IAASB on this matter.
- The IAASB received an update on its Quality Management project as well as its ISA 220, Quality Management for an Audit of Financial Statements project. The IAASB will continue this discussion at its March 2020 meeting.
- The IAASB discussed and provided direction to the Audits of Less Complex Entities Working Group.
Public Interest Oversight Board (PIOB)
Ms. Stothers, PIOB member, provided AASOC with the following updates:
- The PIOB met in November 2019 and intends to meet next in March 2020.
- The PIOB met with the Chairs of the IAASB and the IESBA to discuss the public interest issues identified in the current projects of these standard-setting boards.
Update on the Independence Standing Committee
Mr. Nye informed AASOC that he met with Jamie Midgley, Chair of CPA Canada’s Public Trust Committee (PTC), to discuss the issues pertaining to the Independence Standing Committee. Mr. Nye noted that this was a good meeting where the PTC Chair indicated his support of the Council’s role in oversight of the Independence Standing Committee.
Mr. Nye will update AASOC on this matter at its June 2020 meeting.
Monitoring Group Update
Ms. Fox provided AASOC with an update on the Monitoring Group’s developments.
Emerging Developments in Financial Reporting
Ms. Fox informed AASOC that the purpose of this session is to update Council members on the emerging developments in financial reporting and to discuss the audit impact of these developments.
Ms. Fox introduced Michelle Thomas, an AcSB Principal and a subject-matter expert on the its Financial Statements project.
Ms. Thomas indicated that the purpose of the International Accounting Standards Board’s (IASB) new General Presentation and Disclosures project is to enhance the relevance of financial reporting. The IASB issued its Exposure Draft, “General Presentation and Disclosures,” in December 2019 with a June 30, 2020, comment deadline.
Some of the Exposure Draft’s key proposals pertain to the following:
- the introduction of categories and subtotals in the statement of profit and loss;
- additional guidance on aggregation and disaggregation, including for operating expenses and unusual incomes and expenses;
- ·narrow-scope amendments to the statement of cash flows;
- a requirement to provide disclosures about management performance measures (MPMs); and
- a requirement to provide disclosures about unusual items.
On the requirement to disclose MPMs, Ms. Thomas noted that MPMs disclosed in the notes would need to comply with general requirements of the financial statements, including faithful representation, which requires that MPMs will be calculated consistently from one period to the next. She said that the IASB’s preliminary view is that MPMs can complement the financial information in the financial statements and would be consistent with what financial statements users are requesting.
In response to a question, Ms. Thomas noted that if MPMs are used in public communications outside of financial statements, they would be subject to audit.
One AASOC member asked if the IASB would be prescribing how entities should calculate MPMs in its Primary Financial Statements project. Ms. Thomas indicated that the IASB does not intend to prescribe how these measures are calculated. However, a reconciliation between each measure and the most directly comparable subtotal or total specified by IFRS® Standards would be required.
The AcSB has also issued its own Exposure Draft on this project to obtain input from Canadian stakeholders, with a comment deadline of June 30, 2020. The Board and its staff will conduct a significant amount outreach to inform the Board’s response letter to the IASB’s Exposure Draft. Mr. Charbonneau added that the AcSB and the AASB will work together on the project’s outreach activities.
In terms of the audit implications of the emerging developments in financial reporting, Mr. Charbonneau said this matter is highlighted in the AASB’s next Strategic Plan. The Board will focus on developing framework-neutral guidance.
Following a discussion, Mr. Nye thanked Ms. Thomas and Ms. Fox for their presentation to AASOC.
Impact of Big Data on Audit Practices
Mr. Nye introduced Naveen Kalia and Bryant Ramdoo, two KPMG Partners who spoke to AASOC on the impact of big data on audit practices.
Mr. Ramdoo stated that most of the world’s data was created in the past two years and data has three characteristics: volume, velocity. and variety. Data is integral to machine learning and artificial intelligence (AI), something that could create great efficiencies within an audit and provide a greater level of assurance.
In 2018 alone, the technology giants (Google, Microsoft, etc.) spent $26 billion to $39 billion on AI.
Canadian audit firms are currently at a stage of teaching anomaly patterns to AI. They are also teaching AI to detect outliers and perform real-time auditing. Between 2012-2019, audit firms gathered data, assessed its quality, labelled it, and programmed rules to identify potential issues.
The profession currently faces several implementation challenges to using big data including:
- data quality;
- data privacy;
- data neutrality;
- data-security and residency issues;
- client readiness; and
- client resistance.
Mr. Kalia highlighted that, as demands for and use of new technologies accelerate, audit firms will need to learn new skills and attract digitally literate employees trained in data science.
After a question-answer period, Mr. Nye thanked Mr. Kalia and Mr. Ramdoo for their interesting presentation on the impact of big data on audit.