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AASOC

AASOC Public Meeting Report – October 24-25, 2019

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 October 24-25, 2019, AASOC received presentations on, and discussed the following:

  • Chair’s Opening Remarks
  • Approval of the June and July AASOC Minutes
  • AASB Update
  • Provincial CPA Body Matters
  • AASB Due Process
  • Monitoring Group Update
  • Alternative Performance Measures Update
  • Less Complex Entities
  • AASB’s Strategic Plan
  • Other Canadian Updates
  • International Updates
  • The Corporate Reporting Environment
  • Due Process Manual
  • Update on the Independence Standing Committee
  • Update on CPA Canada’s Foresight Project

Chair’s Opening Remarks

Kevin Nye, AASOC Chair welcomed all attendees, including Miville Tremblay, Chair of the Accounting Standards Oversight Council (AcSOC), who attended as an observer.

Mr. Nye updated AASOC on the new-member orientation session that was held on the October 23, 2019 and was well attended.

He thanked Cameron McInnis for hosting AASOC at the Ontario Securities Commission (OSC) office.

He informed the Council that today’s agenda encompasses an update on the AASB’s activities, the Board’s strategic plan, a discussion of Board matters that impact the provincial CPA bodies, a CPA Canada presentation on the developments of its Foresight Project, and a discussion on the corporate reporting environment, among other topics.

Approval of the June and July AASOC Minutes

AASOC approved the minutes of the meetings held on June 24-25, 2019 and July 8, 2019.

AASB Update

Ken Charbonneau, AASB Chair, provided an update on some of the Board’s activities since the last AASOC meeting. He noted two items will be discussed in detail in this agenda item: Public Sector Auditing Standards and the formation of two advisory groups for two international projects. The Board’s remaining activities will be discussed in detail in other agenda items.

Public Sector Auditing Standards

Mr. Charbonneau said that this project serves the public interest as it focuses on updating the extant Public Sector Standards (PS series) to reflect changes in auditing standards and the evolution of audits in the public sector. The project is currently in its final phase. The AASB issued the Exposure Draft, “Assurance and Related Services Guideline (AuG) 50, Conducting a Performance Audit in the Public Sector in Accordance with CSAE 3001,” with comments due by August 30, 2019. The Public Sector Auditing Standards Review Task Force reviewed and assessed the comments. Mr. Charbonneau noted that the comments were favourable overall. The Board reviewed the Task Force’s assessment at its October meeting and discussed the pertinent issues stakeholders raised. The Task Force will provide a first draft of the revised Guideline to the Board at its December 2019 meeting. The Guideline is expected to be approved in early 2020.

One AASOC member who works in the legislative auditor general community noted that concerns have been raised in her community. They include concerns around the definition of legislative auditor. Mr. Charbonneau responded that the AASB considered stakeholders’ feedback on this point and requested the Task Force to revise the definition to add clarity. The Council member also noted concerns raised in the community about the non-legislative auditors applying the standard. Mr. Charbonneau noted that this concern is beyond the scope of AuG-50 as the Board has no jurisdiction over who uses the standards it issues.

Advisory Groups

The AASB Chair informed AASOC that since the June Council meeting, the Board approved the formation of advisory groups for the Audit Evidence and Extended External Reporting projects. Mr. Charbonneau said the advisory groups’ objectives are to monitor and assess international developments and provide a Canadian perspective. A public call for volunteers will be issued.

One AASOC member asked about the AASB’s process in forming advisory groups. Mr. Charbonneau responded that advisory groups are formed for most international projects when the projects are launched.

Another AASOC member inquired about the International Standard on Quality Management (ISQM) 2 project. She asked why the AASB agreed that the concept of entities with significant public interest should be removed from the engagement quality review requirement. She noted that this is a reduction in the requirement and considered this not in the public interest. Eric Turner, AASB Director, noted that the Board believes that an engagement quality review is a response to audit quality risks. The Board thinks such a review should not automatically be required for all public interest entities. The reasons include that the term public interest entity is not defined in a Canadian context. In many cases, there may not be quality risks for such an entity depending on the circumstances. The Board was concerned that mandating an engagement quality review in all such cases would be ineffective. He noted that the International Auditing and Assurance Standards Board (IAASB) is still discussing this issue and several stakeholders have raised the concern on the international level.

In response to a question on the ISQM 2 cooling-off period, Mr. Turner said that the focus of this issue is whether the cooling-off period should be specified in the auditing standards as opposed to the independence standards. The AASB agreed that firms should set up cooling-off requirements for its engagements, but it did not support specifying the cooling-off period in the audit standard itself.

Provincial CPA Body Matters

Mr. Charbonneau stated that the objective of this session is to inform AASOC on two AASB standard-setting matters that affect provincial CPA bodies.

International Standards on Related Services (ISRS) 4400, Agreed-upon Procedures

The AASB’s plan to adopt ISRS 4400, Agreed-Upon Procedures (AUP) in Canada will result in the removal from the Handbook two existing standards dealing with specified auditing procedures engagements. Mr. Charbonneau noted that the provincial codes of conduct require practitioners to be independent when performing “a specified auditing procedures engagement as contemplated by the CPA Canada Handbook – Assurance.” Therefore, the provincial codes will need to change to reflect this change to standards.

Mr. Charbonneau noted that this issue was first raised with the Public Trust Committee in October 2018; however, at this point no action has been taken. The AASB will continue to keep the Public Trust Committee, the Independence Standing Committee (when formed), and the provincial CPA bodies updated on the AUP project’s progress. The Board will also monitor the provincial bodies’ activities to address the independence issue on a timely basis. The Board will update AASOC on this issue at future meetings.

Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements

Mr. Charbonneau reminded AASOC that it was briefed at the June meeting on the issues Public Business Accountants (PBAs) raised on the Exposure Draft, “Compilation Engagements.” The PBAs’ concern was that they will not be able to perform compilation engagements under the proposed new standard. In response to a Council member’s request at the June meeting, Mr. Charbonneau said that the AASB has no information on how many entities use the PBAs’ services and how many would be affected by the proposed new CSRS 4200. However, the Board worked with the provincial bodies to gather information about the restrictions in each of the provinces that may affect non-CPAs’ ability to perform compilation engagements under the new standard.

The AASB decided to retain the word “professional” in the definition of “practitioner” so it would be consistent with the definition in the review engagements standard. The proposed new standard requires a certain level of expertise that professional accountants possess. Mr. Charbonneau said the Board decided to retain the reference to CSRS 4200 in the compilation engagement report because it is informative, conveys the added value of the engagement and is consistent with the requirement in CSRS 4460, Reports on Supplementary Matters Arising from an Audit or a Review Engagement.

Mr. Charbonneau reiterated that the concerns PBAs raised are a regulatory issue. They are governed by provincial statutes, which are not the same in each province and are subject to interpretation by each provincial CPA body. AASB standards should not and cannot address the regulatory requirements and interpretations of each province.

Conclusion

AASOC agreed the AASB cannot resolve the issues as they are outside the Board’s jurisdiction. The Council expressed its support to the Board in proceeding with its activities on the planned timeline. The Council recommended the Board formally communicate its concerns on the two issues to the Public Trust Committee in a letter signed by the Board Chair.

AASB Due Process

Compilation Engagements

Mr. Turner directed the AASOC’s attention to the meeting materials on CSRS 4200. He explained that the Board conducted extensive consultations with stakeholders, which identified several key public interest issues with the extant Section 9200. The Board concluded that the Section is outdated and needs replacing. The Board recruited a task force to assist it with analysis and recommendations. The Board sought practitioner’s views and considered the work done on compilations by other standard-setting bodies, including the IAASB. In June 2018, the Board issued the Exposure Draft, “Compilation Engagements,” which received 188 comment letters. The Board approved CSRS 4200 at its October 2019 meeting. 

In response to an AASOC member’s question, Mr. Turner said that practitioners cannot control the use of the compilations report. However, he noted that the Board decided to add a general warning at the bottom of the report for the user. This warning cautions readers that the compiled financial information may not be appropriate for their purposes. The report also states that the practitioner did not perform an audit engagement or a review engagement, nor was the practitioner required to perform procedures to verify the accuracy or completeness of the information provided by management.

AASOC concluded that the AASB followed due process with proper regard for the public interest in developing and approving CSRS 4200 and the related consequential amendments.

Communication of Key Audit Matters (KAM) in the Auditor’s Report

Mr. Turner reminded AASOC that the AASB issued its Exposure Draft, “Communicating Key Audit Matters in the Auditor’s Report,” in January 2019, with comments due by May 15, 2019. The Exposure Draft proposed to expand the scope of KAM reporting to include entities listed on exchanges other than the Toronto Stock Exchange (TSX) and all entities required to comply with National Instrument (NI) 81-106, Investment Fund Continuous Disclosure. The proposed effective date was for periods ending on or after December 15, 2021.

Mr. Turner informed AASOC that the AASB unanimously approved revisions to Canadian Auditing Standard (CAS) 700, Forming an Opinion and Reporting on Financial Statements, and the related confirming amendments at its September 2019 meeting. Auditors are required to communicate KAM for audits of financial statements of TSX-listed entities other than those required to comply with NI 81-106.

The key features of these revisions are:

  1. auditors of the financial statements of other listed entities other than entities required to comply with NI 81-106 will be required to communicate KAM in accordance with CAS 701, Communicating Key Audit Matters in the Independent Auditor’s Report;
  2. communicating KAM will not be required for entities required to comply with NI 81-106 (both listed and unlisted); and
  3. the effective date is for financial statement periods ending on or after December 15, 2022, one year later than proposed in the Exposure Draft.

One AASOC member asked if the AASB plans to issue implementation guidance for this project. Mr. Turner responded that the Board intends to release implementation guidance on the communicating KAM in the auditor’s report in two or three phases. The Board is currently looking at U.S. implementation guidance for the communication of critical audit matters, which is similar to KAM. In the spring of 2020, the Board will also work with the large accounting firms to assess implementation issues.

AASOC concluded that the AASB followed due process with proper regard for the public interest in revising and approving CAS 700 and related conforming amendments.

Monitoring Group Update

Stephenie Fox, Vice-President, Standards, informed AASOC that the Monitoring Group has recently announced the appointment of Ana Martinez-Pina and Sagar Teotia as Co-chairs of the Monitoring Group for a two-year term.

Alternative Performance Measures Update

Ms. Fox said she received an update from Tom Trainor who, along with Richard Talbot, has been leading the CFA Society’s initiatives on Alternative Performance Measures. Mr. Trainor noted that the Alternative Performance Measures Working Group is funded by eight pension plans and the CFA Societies of Canada. The Group’s goal is to develop a set of standards for specific industries that can be implemented and ultimately improve the level of corporate disclosures. The Working Group has initiated two pilot projects, one on the real estate industry and the other on the oil and gas industry. He also noted that each project has a dedicated project manager and analyst.

Mr. Charbonneau reiterated the AASB’s support for and interest to work with the Alternative Performance Measures Working Group.

In response to a question, Ms. Fox noted that the International Accounting Standards Board currently has a Primary Financial Statements project that intends to balance the needs of management and users. The project proposes the requirement of additional subtotals and the disclosure of management performance measures.

Less Complex Entities

Mr. Turner said the purpose of this session is to provide AASOC members with a brief update on the developments related to Audits of Less Complex Entities (LCEs). He informed the Council that the AASB committed in its 2016-2021 Strategic Plan to place increased emphasis on identifying and responding to scalability issues arising from new or revised standards. He noted that a series of consultations have been undertaken over the last three years to gain a better understanding of issues in applying the CASs to audits of LCEs. In May 2019, the IAASB issued the Discussion Paper, “Audits of Less Complex Entities: Exploring Possible Options to Address Challenges in Applying the ISAs.” The Board submitted a response letter to the IAASB’s Discussion Paper based on the feedback received from Canadian stakeholders through comment letters and roundtables.

The IAASB is expected to discuss the results of its Discussion Paper at its December 2019 meeting. Mr. Turner said that at the AASB’s September 2019 meeting, the Board agreed to form an Audits of Less Complex Entities Advisory Group to assist it with addressing stakeholders’ needs in this area. A public call for volunteers has been issued.

In response to an AASOC member’s question, Mr. Charbonneau said that the AASB does not support a definition approach for LCEs. Rather, the Board recognizes that in any organization there are complex and less complex areas. It agrees that the standards need to be scalable and adjustable to deal with the complexity of different areas of a business. The Board’s view is a result of its outreach with Canadian stakeholders.

AASB’s Strategic Plan

Mr. Charbonneau said that this agenda item provides AASOC with background to the AASB’s initial discussions related to its strategic plan for 2021 and beyond. He noted that half of the October 2019 AASB meeting was dedicated to strategic planning, including a discussion on:

  • the strategic-planning process;
  • the related timeline;
  • an environmental review; and
  • an initial analysis of the Board’s strengths, weaknesses, opportunities, and threats.

The AASB also received presentations on the following topics:

  • Academic Research to Assist AASB Decision Making, by Pam Murphy, AASB member
  • The Impact of Data Driven AI on the Audit, by Dwight Wainman, CEO and President, CaseWare
  • CPA Canada Foresight Update, by Gord Beal, Vice President, CPA Canada, Research, Guidance and Support
  • AICPA Strategic Plan, by Robert Dohrer, Chief Auditor, AICPA

The AASB set up a working group of Board members and staff to support it in this initiative.

Mr. Charbonneau noted that the AASB aims to issue its Strategic Plan Discussion Paper in May 2020.

In response to a question, Mr. Charbonneau said that the AASB deems the advancement in technology as an environmental risk. It is looking at how technology affects the work of the auditor and the companies being audited.

One AASOC member asked about the changing reporting needs of stakeholders. Mr. Charbonneau said that the AASB’s assurance standards were built to provide assurance on financial statements. Now the Board is challenged with stakeholders’ need to provide assurance on other information. It is interested in seeking further information in this area.

AASOC provided its feedback on the AASB’s environmental review and its strengths, weaknesses, opportunities, and threats (SWOT) analysis and indicated its support. Council members had no concerns but asked questions and provided input about what they believe the Board needs to consider, including:

  • Is the Board conducting outreach at the earliest possible stage?
  • Is the Board addressing the expectation gap?
  • What will the discussion paper (to obtain stakeholder comments) look like?
  • How will the Board obtain information to guide its direction regarding assurance over information outside the financial statements?
  • Is the Board prepared to disrupt itself (direction, processes, etc.)?
  • Should the Board be working more collaboratively with the provinces?
  • Is Time to market both a threat and a strength?
  • Will the SWOT analysis be discussed with the Council when it has been completed?

Other Canadian Updates

Accounting Standards Oversight Council (AcSOC)

Miville Tremblay, AcSOC Chair, provided the following updates: 

  • AcSOC met on October 17-18, 2019, in Toronto, Ontario, where it held extensive discussions on its future approach to oversight and its role in providing strategic input to the Boards.
  • In addition to its regular updates, the Council received presentations on sustainability, environmental and social reporting, as well as an update on CPA Canada’s Foresight project.

Canadian Public Accountability Board (CPAB)

Carol Paradine, CPAB CEO, said that CPAB issued its Fall Inspections Report in October 2019. This report provides an overview of CPAB’s 2019 audit quality assessments completed to date of the country’s four largest public accounting firms. She noted the following: 

  • The total number of inspections findings to date is lower than 2018.
  • More than half of the significant findings to date were related to the audit of estimates, in particular, assessing financial statement amounts where estimates of fair value are required continues to be a challenge.
  • CPAB has noted findings in several of the audits of cannabis companies. This is mainly because estimating the fair value of biological assets is complicated by market uncertainty and volatility related to volume and price of expected sales.
  • CPAB has inspected the audits of seven crypto-asset reporting issuers and found significant findings in six of the seven filed reviewed.
  • The audit of revenue recognized based on the percentage-completion method continue to raise issues because auditors are not obtaining sufficient and appropriate audit evidence to support the estimate of progress achieved.

Ms. Paradine noted that CPAB is partnering with Office of the Superintendent of Financial Institutions (OSFI) for an audit quality roundtable in October 2019.

Canadian Securities Administrators (CSA)

Mr. McInnis, Chief Accountant of the Ontario Securities Commission (OSC), provided the following updates:

  • In response to the comments received on its proposed NI 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 aims to publish a revised NI for comment once final approvals have been obtained.
  • Given that the projects are closely correlated, the CSA will monitor the International Accounting Standards Board’s (IASB) Primary Financial Statements project.
  • The OSC published a Staff Notice in January 2019 seeking suggestions on ways to further reduce unnecessary regulatory burden. The OSC will publish a report on its findings by the end of 2019.

Office of the Superintendent of Financial Institutions (OSFI)

Kenneth Leung, Director of the Accounting Policy Division at OSFI, provided the following updates:

  • Karen Stothers’ role at OSFI has changed from Senior Director, Accounting Policy to Senior Advisor, Regulation Sector. Ms. Stothers will support the Superintendent in his responsibilities as the Chair of the Financial Stability Board’s Roundtable on External Audit work. She will also advance OSFI’s data and technology strategy as Co-chair of the OSFI’s Data and Technology Committee.
  • The Accounting Policy Division will be headed by Renée Chen, formerly a Director of the Accounting Policy Division at OSFI.
  • OSFI is interested in the KAM reported by cross-listed large financial institutions for 2019 year-ends.
  • OSFI is partnering with CPAB to host a Canadian Audit Quality Roundtable at the end of October 2019.

International Updates

International Auditing and Assurance Standards Board (IAASB)

Mr. Turner, Director of the AASB and IAASB Member, provided the following updates:

  • The IAASB met in September 2019 in New York. Its next meeting will be in December 2019.
  • At its September meeting, the IAASB approved the revisions to ISA 315, Identifying and Assessing the Risks of Material Misstatements. The revised ISA will be effective for audits of financial statements for periods beginning on or after December 15, 2021. Mr. Turner noted that the AASB will be following this standard closely as there will be significant implementation guidance required.
  • The IAASB received an update on Group Audits and will continue this discussion at its December 2019 meeting.
  • The IAASB also held a joint meeting with the International Ethics Standards Board for Accountants (IESBA) to continue its discussions of projects where coordination between the two boards is important.

International Federation of Accountants (IFAC)

Ms. Fox noted that two Canadians are on IFAC: Joy Thomas, President and CEO of CPA Canada, and Sheila Fraser, former Auditor General of Canada. IFAC will meet on November 15, 2019, in Vancouver, British Columbia.

Public Interest Oversight Board (PIOB)

Kenneth Leung, Director of the Accounting Policy Division at OSFI provided the following updates on behalf of Karen Stothers, PIOB Member:

  • The PIOB held its quarterly meeting in Madrid, Spain, on September 26-27, 2019, where it discussed the public interest issues identified in the current projects of the standard-setting boards.
  • The PIOB met with and received an update from Anne-Marie Vitale, Chair of the International Accounting Education Standards Board.
  • The PIOB’s next meeting will be on November 25-26, 2019, in Madrid, Spain.

The Corporate Reporting Environment

Kevin Nye informed AASOC that the purpose of this session is to discuss the corporate reporting environment and the role of the various players in the financial reporting supply chain.

He noted that the proper functioning of our capital markets depends on credible, high-quality financial and non-financial information that enables stakeholders to make well-informed decisions.

Over the past few years, several international jurisdictions have chosen to focus mainly on audit quality to address concerns with financial reporting. An example is the United Kingdom where the immediate response to recent corporate failures was the criticism of the auditing profession.

Mr. Nye said that the AASB needs to discuss its role in finding a solution to the closure of the expectation gap, and AASOC needs to identify its role in supporting the Board in this initiative.  

After some discussion, AASOC agreed that the IASB’s Primary Financial Statements project could affect auditors greatly. If the IASB requires non-GAAP measures to be presented on the financial statements, these measures must be audited. In addition to considering the work that the AASB can conduct over alternative performance measures, the Council requested that the AASB focus on why there is an expectation gap and whether educating the public should be something that the AASB considers in its next strategic plan.

Due Process Manual

Mr. Charbonneau informed AASOC that a project was initiated in 2018 to review the AASB’s Terms of Reference and to develop a new Statement of Operating Procedures. Council approved these documents at its December 2018 meeting. In March 2019, the Board agreed to undertake a project to develop the AASB Due Process Manual. The Manual reflects a codification of the Board’s process. He noted that the Board is discussing a few process steps before finalizing the Manual, one of which is the decision to re-expose a standard.

He noted that the AASB is considering the requirement to vote on re-exposure for every standard. This is only required when there has been a significant change made to an exposure draft in response to comments received from stakeholders. The Council indicated its support for this idea as it would be prudent of the Board to do so.

The AASB Chair said that the Board plans to approve the final Due Process Manual at its December 2-3, 2019 meeting. Then it will be brought to AASOC for approval at its December 18, 2019 meeting.

Update on the Independence Standing Committee

Bruce Winter, the previous AASOC Chair, provided an update on recent developments as they relate to the Independence Standing Committee. He reminded the Council that an informal committee was convened to assist with delineating what oversight of the Standing Committee might look like. 

Mr. Winter said that the Standing Committee met with Geneviève Mottard, Chair of the Public Trust Committee, and Michele Wood-Tweel, Vice-President of Regulatory Affairs at CPA Canada, on October 25, 2019, to discuss the Standing Committee’s developments.

After some discussion, AASOC agreed that Mr. Winter will update the draft Terms of Reference for the Standing Committee’s consideration, after which they will be sent to Ms. Mottard for the Public Trust Committee’s input. Mr. Winter noted that he will update the Council on this matter at its next meeting in February 2020.

Update on CPA Canada’s Foresight Project

Mr. Nye reminded AASOC that it received a presentation on CPA Canada’s Foresight Project at its February 2019 meeting. He said Gordon Beal, CPA Canada’s Vice-President, Research, Guidance and Support, will provide an update on the project.

Mr. Beal reiterated that the accounting profession is on the precipice of a fundamental transformation. How we respond and manage these changes will affect the future of Chartered Professional Accountants (CPAs), the profession, and Canadian businesses. He said that CPAs have a role to play in data governance and value creation.

He said that data is taking on a far more prominent role in the economy in how organizations deliver value. Models and methodologies exist to assess the value of data through research organizations and big technology platforms. CPAs have a role in assessing and reporting on the value of data as an asset. CPAs also have a role in:

  • developing metrics to describe and grade data;
  • assessing the relevance, accuracy and completeness of datasets;
  • managing data access; and
  • fostering ethical and trustworthy artificial intelligence applications. CPAs will provide value, context, and judgment for the effective use of data in value creation.

In discussing the CPAs role in value creation, Mr. Beal noted that in the past, value creation was described in financial terms. There is a fundamental change in how companies are measured today – beyond profit. CPAs are sought to be creators, enablers, reporters, and preservers of value. CPAs are currently adding value in the emerging digital economy; however, new competencies, skills and practical tools are needed.

One member commented that Canada is in a distinct position from a health-care perspective. The government gathers a lot of data through Canada’s public health-care system. Over the past couple of years, there have been discussions on ways to monetize this information given the international interest in Canada’s health data.

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The Auditing and Assurance Standards Oversight Council (AASOC) is an independent, volunteer body established by the Canadian Institute of Chartered Accountants (now Chartered Professional Accountants of Canada) in 2000. It serves the public interest by overseeing and providing input on the activities of the Auditing and Assurance Standards Board (AASB), which sets standards for assurance and related service engagements. Reporting to the public and consisting of prominent leaders from business and regulators, AASOC’s responsibilities include appointing AASB members, providing input on strategic priorities and evaluating the performance of the AASB.