Regulatory Assessments

The consistent execution of quality audits requires both a strong system of quality management and a firm culture that demonstrates a commitment to quality including reinforcing the importance of the profession’s public interest responsibility. Firm leadership must dedicate enough resources to ensure robust systems of quality management are designed, implemented and comply with the Canadian Standard on Quality Management (CSQM 1).

Our continued focus on a firm’s system of quality management, including firm implementation of CSQM 1, considers the nature and circumstances of the firm and its public company audit engagements. CPAB’s 2022-2024 strategic plan recognizes the importance of firm culture and includes a commitment to advance a quality-driven culture across auditors of Canada’s public companies. An effective culture emphasizes doing the right thing — all the time, putting the public interests first. A firm’s system of quality management is not a separate activity within the firm but is the integration of a culture that demonstrates a commitment to quality.

Click here to access the October 2022 publication System of quality management call to action: Strengthening audit quality, a communication to all audit firms registered with CPAB. This document provides more detail on the importance of culture to a firm’s system of quality management, preliminary observations on the implementation of the new quality management standards and an example to illustrate the iterative nature of a firm’s system of quality management.

CPAB’s audit quality assessment program includes an evaluation of the effectiveness of the system of quality management at the annually inspected audit firms.

For each individual file selected, CPAB requires the engagement team to prepare a profile outlining key information including the names of senior engagement team members, specialists used, the hours charged etc. The profile also identifies key engagement deliverables. The engagement profile is delivered to CPAB two weeks prior to the file inspection and provides the inspection team an opportunity to get familiar with the audit of the RI prior to the initial meeting with the engagement team. The inspection team will review publicly available information such as the financial statements and Management's Discussion and Analysis, as well as any file-specific information identified within the profile.

The file inspection typically begins with a meeting between the CPAB inspection and firm engagement teams. This provides CPAB with additional background on the audit engagement and includes a high-level discussion of the audit approach to the focus areas.

It is important to note that CPAB does not inspect the entire audit file (not a cover to cover review). Usually, the inspection team will consider between two and four focus areas as a basis for assessing the quality of audit work in a selected file. These areas are generally material high-risk financial statement items requiring more complex estimates and judgments by RI management and which present the most challenge to the engagement team (e.g., impairment of long-lived assets, fair values of financial instruments, provision for warranties etc.). The inspection of an individual focus area covers the various stages of the audit process: planning, evaluation and reliance on internal controls, execution, evaluation of results, financial statement presentation and disclosure, and reporting to the audit committee. Core areas such as materiality, risk assessment and fraud are also reviewed for each file.

During an inspection, file inspection findings are communicated to the firm in writing as part of an Engagement Findings Report (EFR). Any deficiency in the application of generally accepted auditing standards related to a material financial balance or transaction stream, where the audit firm must perform additional audit work to support the audit opinion and/or is required to make significant changes to its audit approach, is considered to be a significant finding.

Should a deficiency be identified by the inspection team that is believed to constitute a significant finding this is first communicated verbally to the firm to allow for a discussion regarding any additional facts or circumstances that the firm would like CPAB to consider in its assessment of the deficiency.

If the inspection team’s conclusion with respect to the significance of the deficiency is unchanged by the additional information the matter is referred to an EFR panel for a decision. All members of the EFR panel have a Chartered Professional Accountant designation and include members of CPAB’s leadership team and senior inspection leaders. The EFR panel serves as a quality control check and is intended to ensure consistent treatment of similar findings across all of CPAB’s inspections.

The inspection team prepares a background document that provides an overview of the audit work performed and CPAB’s concerns. Should the firm disagree with CPAB’s concerns, the firm has the opportunity to provide a written submission for consideration by the EFR panel on why the firm believes that sufficient audit work had been performed. The background document and the firm’s written submission, if one is provided, is provided to the EFR panel members for review prior to the panel meeting.

If the EFR panel concludes that the deficiency constitutes a significant finding, the inspection team documents each of the significant findings in the EFR and issues it to the firm. The firm is required to provide CPAB with a written response to each significant finding within 10 business days. The response will include a description of how the firm intends to remediate the identified significant findings. Most of the significant findings require the firm to carry out additional audit procedures to determine the need, if any, to restate the financial statements due to material error. The remaining findings require firms to add evidence to the audit file to show they had obtained sufficient and appropriate audit evidence with respect to a major balance sheet item or transaction stream.

At the end of the firm inspection, CPAB meets with firm leadership to discuss the overall inspection results, then issues its inspection report. The inspection report is a private communication between CPAB and the firm and includes recommendations to improve audit quality, resulting from both file inspections and the evaluation of the firm’s system of quality management.

Each firm shares its file-specific significant inspection findings, and CPAB's public inspections report, with its reporting issuers’ audit committees as per its participation in the Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol). The public report includes common inspections findings and questions for audit committee consideration to encourage more robust discussions among management, the firm and audit committees and to support audit committees in their oversight responsibilities.

The audit firm must implement the recommendations to CPAB's satisfaction within a prescribed period, which is typically no more than 180 days.

If a firm has not addressed the weaknesses, deficiencies, or recommendations identified in a final inspection report to the satisfaction of CPAB, or has not made a submission to CPAB in accordance with CPAB Rule 414 (remediation of weakness or deficiencies identified in the inspection report), CPAB may make public on its website the relevant portions of the final inspection report that deal with the weaknesses, deficiencies or recommendations that have not been addressed to CPAB’s satisfaction within the required timeline.

Should CPAB determine that a significant weakness, deficiency, or recommendation has not been adequately addressed, the matter will be referred to the Enforcement Screening Panel to determine if formal notice of publication should be issued. Once formal notification of CPAB’s intention to publish under Rule 416 is received by the firm, it will have the ability to contest the publication by filing a petition for a review proceeding under Rule 603.

Publications made pursuant to CPAB Rule 416 are published on CPAB's website. These publications include the relevant portions of a firm's inspection report recommendations with which it failed to comply to CPAB's satisfaction within the required timeline. In accordance with the CPAB Rules and in the interest of ensuring firms comply with recommendations designed to protect the investing public, these notices will remain public until the firm provides CPAB with evidence of satisfactory implementation.

Publications under Rule 416 commenced as of January 1, 2023.

What is the Protocol?

The Protocol sets out how audit firms communicate CPAB’s inspection findings to audit committees. Please see the Protocol for more details.

How does the Protocol work?

Under the Protocol, audit firms provide the audit committees of all their reporting issuers with CPAB's annual audit quality assessment report. The annual audit quality assessment report highlights CPAB's common findings across its inspections in a given year, as well as recommendations to improve audit quality.

If CPAB inspects a reporting issuer's audit file that year, the audit firm will also provide that reporting issuer's audit committee with significant findings, if any, specific to a reporting issuer's audit file inspection. The significant inspection findings are written by CPAB and include the audit firm’s response to ensure a fair and balanced communication to the audit committee. Audit committee members receiving the information should ensure it remains confidential. The audit firm will confirm to CPAB that the specific inspection findings have been communicated to the audit committee.

Which audit firms are participating in the Protocol?

An audit firm’s participation in the Protocol is voluntary. Click here to access a list of audit firms participating in the Protocol.

Click here to access a list of Canadian audits firms that are not participating in the Protocol.