Canada faces some implementation issues | KPMG | CA

Adapting to new proposals on Expanded Audit Reporting

Canada faces some implementation issues

Eight points for audit committees to consider.

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Adapting to new proposals on Expanded Audit Reporting

In response to the global impetus to improve audit transparency and generate enhanced auditor insight into key audit matters, the International Auditing and Assurance Standards Board (IAASB) recently (January 15) issued new International Standards on Auditing (ISAs). Following this lead, the Canadian Auditing and Assurance Standards Board (AASB) intends to adopt these standards as Canadian Auditing Standards (CASs), although they have tentatively deferred Canadian implementation to a later date than that required by the corresponding ISAs. This extension has allowed the AASB to issue an “Invitation to Comment,” with the goal of soliciting input on implementation issues from all Canadian audit stakeholders, including audit committees (ACs).

These standards move away from binary, pass/fail auditor reports and boilerplate language. Among several new components, a key new requirement is that they propose to require auditors to indicate what were, in their opinion, the key audit matters—the areas of most significant risk or judgment—and why they considered them so. The auditors must also discuss what they did in response to those risk areas. The intention, then, is to have a report tailored to each company’s specific circumstances, particularly with respect to the risk profile and the auditor’s understanding of and response to those risks.

Canada faces some implementation issues

Similar expanded reporting is already required in some European jurisdictions, such as the Netherlands and the UK—visit our “Expanded Auditor Reporting” reference page for additional information. Indeed, auditor reporting in the UK has in some instances gone further than the minimum requirements and included the auditor’s findings related to identified risks, to the delight of investors, who are keen for any added risk insight or information that can be gleaned from the audit. The US, on the other hand—while having issued an exposure draft some time ago—has no existing expanded auditor reporting requirement in place. While the PCAOB (Public Company Accounting Oversight Board) intends to issue a revised proposal later this year, final standards and their effective implementation date may not be known for another year, which means that their effective date would likely be after the effective date of the auditor reporting ISAs.

The AASB is proceeding carefully. Cognizant of the challenges inherent in Canadian implementation, they participated in the IAASB’s initial commenting process and the key Canadian concerns were taken into account. Now that the ISAs have been issued, rather than simply implement them on a parallel timeframe to other global jurisdictions, the AASB is initiating its own “Invitation to Comment” [PDF 132 KB] for 2015, encouraging all Canadian audit stakeholders—including corporate ACs and management executives—to have their say.

Sitting, as it is, in an unsettled international landscape, Canada faces some CAS implementation issues that ACs—as well as management executives—should consider seriously:

Top 8 points to consider in the new AASB standards:

1. Knowledge is critical

  • AC members should be aware of and fully understand the content and implications of the proposed new CAS requirements, not only to offer their opinion on them, but also to determine how this might affect the way they operate.

2. The AASB will tentatively allow staged implementation of the new standards 

  • This will be in 2017 for TSX-listed entities and 2018 for other listed entities. Do you think there should be staged implementation? If so, is this the best way to segment the population of listed entities? What about applicability to publicly accountable enterprises that are not listed?

3. The timing for Canada is extended, but still imminent 

  • The staged implementation proposed for Canada should allow extra time for audit stakeholders to prepare for implementation. Will it be enough? What challenges does your company face on this front?

4. Many Canadian companies operate in both Canada and the US

  • This means they must also adhere to PCAOB (Public Company Accounting Oversight Board) standards, which have no expanded auditor reporting requirement at the present time, raising the possibility that any large, dual-listed company subject to PCAOB standards could choose to report only under PCAOB standards. This could result in smaller companies bearing the CAS implementation burden and costs, as larger companies wait for the PCAOB to weigh in. Does this affect your company and is the potential for this to happen fair? Should the AASB wait until the PCAOB has finalized its standards before requiring implementation of the CAS standard?

5. Canadian ACs are not currently required to submit a risk report

  • A key underpinning of good governance is that management, the AC and the auditors work together to respond to organizational risks. To that end, some European jurisdictions require a company’s annual report to include an AC report on how management responded to key risks and the AC’s oversight of those processes. Without such a report required of Canadian ACs, a broader risk report from the auditor could potentially speak to issues not discussed by the company or the AC—a situation which could generate tension between management, AC and auditor while increasing auditor time and effort to frame the issue appropriately. What are your views on requiring reporting by ACs on key risks and on how those risks were addressed as a pre-requisite to expanded auditor reporting (this may mitigate the potential for auditors conveying information that may not be discussed elsewhere in the company’s continuous disclosure documents)? 

6. The audit discussion environment will change

  • In terms of execution, the new requirements—especially determining and framing the key audit matters—will take considerable time and effort, and the results are supposed to be unique to the entity and not boilerplate in nature. This means those results will be a very important part of the audit discussion and that the nature of those discussions—within the AC and with auditors and management—is likely to change and tensions may arise. Interactions will be different, cover more territory and, in some cases, communications and collaborative processes may even change. Are you prepared for the challenges this new discussion climate may create?

7. Fulfilling the requirements of the new standards will probably require more time and resources on the part of both the AC and auditors 

  • As the new standards will require additional time and effort for ACs, management and auditors, there will be additional costs. Should companies be willing to pay more for these new audit reporting standards? What are your views on the potential relationship between the cost and benefits of the new standards?

8. The time to act is now 

  • It is important that audit committees and management views are heard on this matter, as the changes are significant.

Stakeholders should have their say—but speak now, or…

Some ACs and AC members may not have been following the audit reporting project closely, so this is the time to get up to speed and enter the loop. Once the commenting period has past—the deadline is October 30, 2015—no exposure draft will be issued, meaning the opportunity to provide your opinion will be past and the CASs will be imminently issued. It’s important that more than auditors and investors comment on these matters. Now is the time for the business community to speak up, help to ensure its opinion is heard and be part of a process that will affect it significantly and directly going forward.

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