PROFESSIONAL INSPECTION: REACH FOR THE TOP IN QUALITY!

Transcription

1 PROFESSIONAL INSPECTION: REACH FOR THE TOP IN QUALITY! All CPAs wh prvide prfessinal services t the public are subject t prfessinal inspectin pursuant t the General prfessinal inspectin supervisin prgram fr the practice f the prfessin f chartered prfessinal accuntant ("General prfessinal inspectin supervisin prgram"). During the inspectin year, 828 CPA practice units were inspected t ensure cmpliance with prfessinal standards and the prtectin f the public. This article deals with the deficiencies identified in It is als intended as a guide t imprving quality by helping practitiners deliver superir prfessinal services thrugh greater understanding f existing standards. Deficiencies identified Deficiencies were identified in the fllwing areas: audit, review, cmpilatin, financial reprting, Canadian Standard n Quality Cntrl (CSQC 1) and business valuatins. Sme cases were handed ver t the syndic fr inquiry int pssible breaches f the Cde f ethics f CPAs and the CPA Act. We strngly urge members in public practice t review the summary f deficiencies and breaches, which is prvided in Appendix A. The mst severe deficiencies, shwn in bld, may result in remedial actin and fllw-up. Actin plan Fllwing its inspectin, the Prfessinal inspectin cmmittee (the "cmmittee") sends a reprt n the deficiencies identified t the firm in questin. The firm then has the pprtunity t prvide a letter r an actin plan with cmments and the actins it plans t take t rectify each f the deficiencies identified. The actin plan als enables the firm t analyze the rt causes f the deficiencies, and t demnstrate its cmmitment t rectify them and achieve the desired quality bjectives thrugh varius means (i.e. apprpriate cntrl structure, training curses tailred t the clientele and/r up-t-date tls). Asking the right questins A lk at the rt causes f the deficiencies identified during the inspectin year raises imprtant questins abut the fllwing issues: Supervisin and review f wrk What s mre imprtant t the senir partner: managing the client base r supervising and reviewing the wrk perfrmed by the firm s persnnel? Reminder: Supervisin and review f the wrk is an bligatin, nt a chice. Dcumentatin f wrk Des the firm put prfitability ahead f quality? Des the firm believe it knws its clients s well that there s n need t dcument its wrk? Reminder: The cmmittee can nly evaluate prcedures that have been dcumented. In ther wrds, any wrk that isn t dcumented is nt cnsidered dne. Cntinuing educatin and integratin f learned cncepts Are training activities always an afterthught? Are the firm s ut-f-date wrk tls n lnger reliable? Reminder: Cntinuing educatin is nt nly a regulatry requirement; it is als a springbard fr acquiring the knwledge that makes us the true prfessinals that we are. Specific areas f activities and practitiner s level f experience Is the firm willing t expand at any cst by accepting all mandates, even thse fr which it des nt have sufficient expertise r knwledge? Reminder: Engagement acceptance and cntinuance is a critical step required under the standards.

2 Remedial actin Fllwing its inspectin, the cmmittee can recmmend a variety f crrective measures depending n the severity f the deficiencies identified, with a view t helping yu prvide better quality wrk. Remedial actin may include cntrl plicies and prcedures, refresher curses, file quality cntrl (with r withut refresher curses), a partial r full reinspectin, a 12-mnth perid f refresher training with supervisin, limitatin f the right t engage in certain prfessinal activities and suspensin f the public accuntancy permit. Tls and checklist A list f tls and reference dcuments, as well as a checklist, can be fund in appendices B and C. Cnsulting them n an nging basis will help keep yu up-t-date n the latest standard-setting news and prfessinal practice issues. The cmmittee members hpe that the prfessinal inspectins clearly demnstrate that CPAs are strngly cmmitted t achieving uncmprmising quality expected by the public. The Prfessinal inspectin cmmittee Ordre des cmptables prfessinnels agréés du Québec

3 Appendix A - List f mst-cmmn deficiencies Financial reprting A debt payable n demand r within ne year frm the balance sheet date was classified incrrectly as a lngterm liability (paragraphs and.14 f Part II f the CPA Canada Handbk Accunting [hereinafter "Part II f the Handbk"]). The entity did nt prvide the carrying amunt f assets it has pledged as cllateral fr financial liabilities (paragraph , Part II f the Handbk). The entity did nt disclse the amunt payable at the end f the perid in respect f gvernment remittances (ther than incme taxes) (paragraph , Part II f the Handbk). The balance sheet did nt shw ttal liabilities at the reprting date (paragraph , Part II f the Handbk). The entity issued preferred shares in a tax planning arrangement, but failed t: (a) present the shares as a separate line item in the equity sectin f the balance sheet; (b) prvide a suitable descriptin indicating that they are redeemable at the ptin f the hlder; and (c) disclse n the face f the balance sheet, the ttal redemptin amunt fr all classes f such shares utstanding (paragraph , Part II f the Handbk). The revenue recgnitin plicy was nt disclsed (paragraph , Part II f the Handbk). The accunting plicies adpted in measuring inventries, including the cst frmula, were nt disclsed (paragraph , Part II f the Handbk). The accunting plicy used t accunt fr incme taxes was nt disclsed (paragraphs and , Part II f the Handbk). The entity did nt disclse the fllwing infrmatin abut its related parties transactins: (a) a descriptin f the relatinship between the transacting parties; (b) a descriptin f the transactins, including thse fr which n amunt has been recgnized; (c) the recgnized amunt f the transactins classified by financial statement categry; and (d) the terms and cnditins relating t amunts due t r frm related parties (paragraph , Part II f the Handbk). The future minimum lease payments in the aggregate and fr each f the five succeeding years under perating leases were nt disclsed (paragraph , Part II f the Handbk). The entity did nt disclse the fllwing infrmatin abut issued share capital: dividend rates n preference shares and whether r nt they are cumulative, and the redemptin price f redeemable shares (paragraph , Part II f the Handbk). The entity did nt disclse the fllwing infrmatin abut credit risk arising frm financial instruments: the expsures t risk and hw they arise (paragraphs and A66, Part II f the Handbk) and the cncentratins f risk (paragraphs and A67, Part II f the Handbk).

4 Audit prcedures under Canadian Auditing Standards (CAS) The terms f the audit engagement that were agreed t with management did nt cver all the matters required by CAS 210. The auditr did nt cmmunicate with thse charged with gvernance an verview f the planned scpe and timing f the audit (mandatry fr all audit engagements) (CAS 260, paragraph 15). The auditr did nt make inquiries f management: (a) regarding management s prcess fr identifying and respnding t the risks f fraud in the entity, including any specific risks f fraud that management has identified r that have been brught t its attentin, r classes f transactins, accunt balances, r disclsures fr which a risk f fraud is likely t exist (CAS 240, paragraph 17 (b)); and (b) t determine whether it has knwledge f any actual, suspected r alleged fraud affecting the entity (CAS 240, paragraph 18). Analytical prcedures were nt perfrmed as part f the risk assessment prcedures t btain an understanding f the entity and its envirnment. When assessing risk, the auditr shall cnsider whether unusual r unexpected relatinships exist (CAS 240, paragraph 22). The auditr did nt dcument the reasns fr cncluding that the presumptin that there is a risk f material misstatement due t fraud related t revenue recgnitin is nt applicable in the circumstances f the engagement (CAS 240, paragraph 47). In determining verall respnses t address the assessed risks f material misstatement due t fraud at the financial statement level, the auditr did nt incrprate an element f unpredictability in the selectin f the nature, timing and extent f audit prcedures (CAS 240, paragraph 29 (c)). The auditr did nt design and perfrm audit prcedures t test the apprpriateness f jurnal entries recrded in the general ledger and ther adjustments made in the preparatin f the financial statements (CAS 240, paragraph 32 (a)). When btaining an understanding f cntrls that are relevant t the audit, the auditr did nt evaluate the design f thse cntrls and determine whether they were implemented (CAS 315, paragraph 13). The auditr did nt dcument perfrmance materiality r the factrs cnsidered in determining the materiality level (CAS 320, paragraphs 11 and 14). The substantive audit prcedures perfrmed n the fllwing material classes f transactins and accunt balances were nt dcumented: (a) revenues (cmpleteness, ccurrence, accuracy, cut-ff); (b) expenses (cmpleteness, ccurrence, accuracy, cut-ff); and (c) inventries (existence, rights and bligatins, cmpleteness and valuatin). (CAS 330, paragraphs 21, 25 t 28, 30, A42 t A47, A53, and A60 t A63) The auditr did nt perfrm analytical prcedures near the end f the audit t ensure the financial statements were cnsistent with his understanding f the entity (CAS 240, paragraphs 34 and A50, and CAS 520, paragraphs 6 and A17 t A19).

5 The auditr did nt perfrm audit prcedures designed t btain sufficient apprpriate audit evidence that all events ccurring between the date f the financial statements and the date f the auditr s reprt, r as near as practicable theret, have been identified (CAS 560, paragraphs 6 and 7). While a representatin letter was btained frm the client s management and, if applicable, thse charged with gvernance, this letter did nt cver all matters required by CAS 580. The auditr s reprt was dated earlier than the date n which thse with the recgnized authrity asserted that they tk respnsibility fr the financial statements n which the auditr is reprting (CAS 700, paragraphs 41, and A38 t A41). There was n dcumentatin that the engagement team members had discussins t determine hw and where the entity s financial statements may be susceptible t misstatement due t fraud r errr (CAS 240, paragraphs 15 and 44, and CAS 315, paragraphs 10 and 32). There was n dcumentatin that the engagement partner: tk adequate respnsibility fr the supervisin f the audit engagement; made sure, n r befre the date f the auditr s reprt, that the apprpriate reviews and discussins with the engagement team had taken place. (CAS 220, paragraphs 15 t 17). The auditr did nt dcument his evaluatin t determine whether an engagement quality cntrl review shuld have been perfrmed n an engagement fr an entity ther than a listed entity (CAS 220, paragraphs 19, 20, 24, 25, A26, A27 and A29). Review prcedures There was n dcumentatin that the issue f cntinuance and acceptance f the client relatinship was assessed (paragraphs and f the CPA Canada Handbk Assurance (hereinafter "the Handbk"). The engagement letter did nt cver all the matters required by Sectin 8200 r there was n indicatin in the file that the public accuntant had cme t a written agreement and understanding with the client as t the services t be prvided (paragraphs and f the Handbk). The file did nt include any wrking papers describing the majr aspects f the business, nrmal types f transactins, majr suppliers and custmers, r types f risk in the business (paragraphs and AuG-20 f the Handbk). The enquiry, analytical prcedures and discussin emplyed t establish the plausibility f the infrmatin being reprted were nt dcumented with respect t: 1. revenue, direct csts, grss margin and expenses; 2. GST and QST; 3. subsequent events; 4. inventry the client s cunt prcedures, assessment and review f the lists (quantities, prices, calculatins); 5. lans/ntes receivable cllectibility;

6 6. sales (accunts receivable) and purchase (accunts payable) cut-ff prcedures; and 7. trade and ther payables cmpleteness. The review file did nt dcument r explain the significant variances and unusual relatinships t supprt the plausibility f the financial statements. The practitiner shuld ensure that key financial statement areas are emphasized and dcumented accrdingly (paragraphs , t.24, and f the Handbk). The file did nt include any dcumentatin indicating that the review engagement was adequately reviewed by the engagement partner n r befre the date f the reprt (paragraph f the Handbk). The date f the review engagement reprt was nt dcumented in the file and, therefre, there was n indicatin f cmpliance with the requirements regarding apprval f the financial statements by thse with the recgnized authrity (paragraphs and , and AuG-47 f the Handbk). The representatin letter did nt cver all the matters required by Sectin 8200 r n representatin letter was btained frm the client (paragraphs and.33 f the Handbk). The review engagement reprt was nt in accrdance with the requirements f Sectin 8200 fr the years ended n r after December 14, 2010 (the wrng wrding was used) (paragraph f the Handbk). Cmpilatin standards There was n indicatin in the file that the public accuntant had cme t an agreement and understanding with the client as t the services t be prvided (paragraph f the Handbk). The Ntice t Reader was nt wrded in accrdance with the requirements f Sectin 9200 (the frmer wrding f the Ntice t Reader was used, wrng terminlgy) (paragraphs and.26 f the Handbk). While the Ntice t Reader cmmunicatin was n a separate page f the financial statement package, each page f the financial statements was nt cnspicuusly marked "Unaudited - See Ntice t Reader" (paragraph f the Handbk). The ntes t the financial statements referred t Canadian accunting standards fr private enterprises (ASPE), when in fact the financial statements were nt prepared in accrdance with all these standards (paragraphs and.08 f the Handbk). Quality cntrl fr firms that perfrm assurance engagements The firm has nt established a system f quality cntrl r dcumented its quality cntrl plicies and prcedures (CSQC 1, paragraphs 16 and 17). The firm did nt btain annual written cnfirmatin f cmpliance with its plicies and prcedures n independence frm all firm persnnel required t be independent (CSQC 1, paragraph 24). The firm s quality cntrl plicies and prcedures fr engagement quality cntrl reviews did nt set ut the criteria t determine whether an engagement quality cntrl review shuld be perfrmed fr audit and assurance engagements

7 fr entities ther than listed entities. Criteria may include such matters as: the nature f the engagement including the extent t which it invlves a matter f public interest; the identificatin f unusual circumstances r risks in an engagement r class f engagements; and whether laws r regulatins require an engagement quality cntrl review (CSQC 1, paragraphs 35 and A41). The firm did nt establish r implement a prcess that includes inspectin f at least ne cmpleted engagement fr each engagement partner n a cyclical basis (CSQC 1, paragraph 48). The firm did nt perfrm an nging cnsideratin and evaluatin f the firm s system f quality cntrl (CSQC 1, paragraph 48). Cde f ethics f chartered prfessinal accuntants and Canadian Harmnized Rules f Prfessinal Cnduct The five mst cmmn departures are the fllwing: Breach f sectin 21 f the Cde f ethics prhibiting a member wh perfrms a cntract, in whle r in part, in the practice f his prfessin frm including in such cntract any clause t the effect f directly r indirectly, fully r partially, excluding his persnal civil liability. Breach f rule f the Canadian Harmnized Rules f Prfessinal Cnduct requiring a member engaged in the practice f public accunting wh prvides a service nt subject t the requirements f rules t t disclse any activity, interest r relatinship which, in respect f the engagement, wuld be seen by a reasnable bserver t impair the member s r firm s independence such that the prfessinal judgment r bjectivity f the member, firm r a member f the firm wuld appear t be impaired. Breach f rule f the Canadian Harmnized Rules f Prfessinal Cnduct requiring a member wh perfrms an assurance engagement t btain apprval frm management f the entity when preparing jurnal entries. Breach f rule f the Canadian Harmnized Rules f Prfessinal Cnduct requiring a member r firm wh engages r participates in an assurance engagement t be and remain free f any influence, interest r relatinship which impairs the prfessinal judgment r bjectivity f the member r his firm r which, in the view f a reasnable bserver, wuld impair the prfessinal judgment r bjectivity f the member r his firm. Breach f rule f the Canadian Harmnized Rules f Prfessinal Cnduct requiring a member wh engages r participates in an assurance engagement t identify threats t independence, evaluate the significance f thse threats and, if the threats are ther than clearly insignificant, identify and apply safeguards t reduce the threats t an acceptable level.

8 Chartered Prfessinal Accuntants Act The tw mst cmmn departures are the fllwing: Breach f sectin 4 which prvides specifics n the practice f the chartered accuntancy prfessin (mre specifically, nn-cmpliance f signature n cmpilatin reprts). Breach f sectin 7 requiring chartered prfessinal accuntants wh hld a public accuntancy permit and engage in the prfessinal activity described in the third paragraph f sectin 4, except the perfrmance f cmpilatin engagements nt intended exclusively fr internal management purpses, t use the title "auditr." The title f auditr must be preceded by the title "chartered prfessinal accuntant r the abbreviatins r initials that refer t that title.

9 Appendix B Tls Tls and reference material develped by the Inspectin and Prfessinal Practice Vice-Presidency The fllwing dcuments are available at under "The prfessin and the Order / CPA requirements / Prfessinal inspectin / Publicatins and references" Article: "Using Canadian Auditing Standards (CASs) t yur advantage" Article: "Greetings frm the Prfessinal Inspectin Team Hw t imprve yur current engagements" Article n weaknesses mst frequently reprted during the inspectins under "The prfessin and the Order / CPA requirements / Prfessinal inspectin / Frequently Asked Questins" Frequently asked questins n prfessinal inspectins What s mre, a curse entitled "Ready fr yur prfessinal inspectin?" is ffered free f charge. Several sessins will be given befre December 31, Tls and reference material develped by the Ordre des CPA du Québec and CPA Canada Belw are several tls and dcuments that can help yu perfrm yur mandates: CPA Canada Handbk: available n the Kntia website (free access t all CPAs) Technical and ethics reference services: available fr free t all CPAs at under "Prfessinal Develpment / Services / Types f services" Quality Assurance Manual (QAM) and Canadian Prfessinal Engagement Manual published by CPA Canada ($) Training activities ffered by the CPA Order ($) Varius dcuments available at under "Prfessinal Develpment / Tls / Types f tls" Mdel financial statements ($) Audit prgrams and mdel audit files fr several specific sectrs: childcare centres (CPEs) and subsidized daycares, institutins in the health and scial services netwrk, NFPOs, municipal rganizatins, small and medium-sized NFPOs, and SMEs ($) Review and cmpilatin engagement mdel file and prgram ($) Sample engagement letters ($) (free fr subscribers t CPA Canada s Canadian Prfessinal Engagement Manual) Varius dcuments available at Guide Reprting Implicatins f New Auditing and Accunting Standards (12th editin, April 2014) Guide fr Auditrs: Auditing Summary Financial Statements Guide fr Auditrs f Registered Electral District Assciatins Appinted Under the Canada Electins Act (6th editin) Service Organizatins Applying CSAE 3416, Reprting n Cntrls at a Service Organizatin ($) CPA Canada Guide t Reprting n Cntrls at a Service Organizatin Relevant t Security, Availability, Prcessing Integrity, Cnfidentiality r Privacy ($)

10 Appendix C Checklist Organizatins that meet the specific standards f the Sciété d habitatin du Québec (SHQ) must fllw SHQ s specific rules fr reprting and perfrming prcedures when transitining frm the accunting framewrk in Part V f the Handbk t Part III (a Guide de redressement, in French nly, is available n the SHQ s website under Espaces Partenaires Cmptables États financiers ).