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Meeting with IESBA CPAB Update

This meeting provides an overview of CPAB and discusses their strategic plan, inspection approach, and initiatives to enhance audit quality.

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Meeting with IESBA CPAB Update

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  1. Meeting with IESBACPAB Update Glenn Fagan and Kam Grewal April 7, 2014

  2. Topics for Discussion • Overview of CPAB • Inspections universe • Strategic plan • Inspection approach • Enhancing audit quality • CPAB Protocol • Other Initiatives

  3. Overview

  4. Overview • The Canadian Public Accountability Board (CPAB) was incorporated in 2003 under the Canada Corporations Act. • CPAB is an audit regulator independent of, but accountable to the Canadian securities regulators. • CPAB oversees auditors of Canadian reporting issuers (RIs), that is, companies that have raised funds from the Canadian investing public.

  5. CPAB’s Mission The mission of CPAB is set out at section 3.1 of its Articles of Incorporation. “To contribute to public confidence in the integrity of financial reporting of reporting issuers in Canada by effective regulation and promoting quality, independent auditing.”

  6. Participating Firm Statistics(As of January 1, 2013)

  7. Annual Firm Influence • By market capitalization • 99.5% of domestic based audits • 91% of total market • By number of reporting issuers • 83% of total RIs Note: Annual firms are those having more than 100 reporting issuer clients and are inspected each year

  8. Distribution of Canadian Reporting Issuers (RIs) by Head Office Location As at January 1, 2013 371 Foreign 2 1 14 1,784 711 954 57 232 46 5 3,803 1Foreign RIs are Canadian reporting issuers headquartered outside of Canada that are primarily audited by foreign audit firms.

  9. CPAB’s Strategic Plan • During the last strategic plan, CPAB evolved its inspection methodology, systems and processes, and people to provide effective audit oversight. • The thrust of CPAB’s current 2013-2015 strategic plan is to build on these accomplishments and further enhance the organization’s effectiveness. • The core issue to be addressed by the strategic plan is to ensure audit firms reduce the rate of audit deficiencies in a manner that is sustainable in the longer term.

  10. CPAB’s Strategic Plan

  11. CPAB’s Strategic Plan • CPAB will focus on four priorities to further enhance audit quality • Thought leadership • Enhanced stakeholder engagement • Enhanced risk management • Focused, effective inspections • CPAB will work to increase the transparency of its inspection findings

  12. CPAB’s Strategic Plan

  13. CPAB’s Strategic Plan

  14. CPAB’s Inspection Approach • Risk based + risk over-ride • Annual firms • Big-4 • Other network firms (4) • Regional firms (6 – 7) • Bi-annual firms • 1 - 2 per year • Tri-annual firms • Focus on those with > 4 RIs (about 17 per year)

  15. Risk Based Inspections • The risk assessment reflects: • the number of reporting issuers (RIs) – 7,980 RIs • the number of participating firms – 296 audit firms • Risk analysis and assessment embedded into the entire organization • Research and analysis of the reporting issuer population • On going environmental scanning (including media monitoring) • Risk-based selection of reporting issuers • Risk-based allocation of resources to audit firm inspection

  16. Firm Inspection • Elements of quality control • Leadership • Ethical requirements (including independence) • Acceptance and continuance • Human resources • Quality monitoring • Engagement performance • File inspections

  17. Key Messages – Public ReportReleased March 31, 2014 • Key considerations to improve audit quality: • Results for 2013 have improved over the prior years • Sustainability is needed • Develop and implement action plans to support consistency • Reinforce an accountability culture to support consistency • Strike the appropriate balance between commercialism and professionalism

  18. enhancing audit quality

  19. BackgroundEnhancing Audit Quality Initiative • Provide input to /influence international initiatives to improve audit quality • Challenge the status quo in Canada • Enhancing Audit Quality (“EAQ”) Steering Group • Three working groups • Auditor reporting • Auditor independence • Audit committee

  20. Key RecommendationsEnhancing Audit Quality Initiative • Rejected mandatory rotation/ tendering in favour of comprehensive review of audit firm • Need for guidance for audit committees re annual assessments and comprehensive review • Development of tools for audit committees to perform annual assessment and comprehensive review • Recommended CPAB work with stakeholders to share inspection findings with audit committees

  21. CPAB Protocol

  22. Increased Transparency • CPAB believes greater transparency of inspection reporting will enhance audit quality, encourage audit partners and firm leadership to focus more on continuous quality improvement, and raise awareness of noteworthy audit issues at the audit committee level and beyond. • CPAB has worked with key stakeholders to develop a protocol designed to provide information that will improve an audit committee’s ability to effectively oversee the work of the auditor.

  23. The CPAB Relationship Board of Directors The Canadian Public Accountability Board (CPAB) Audit Committee • The Audit Environment Management External Auditors

  24. Development of Protocol Key Considerations • Fair and balanced communication of inspection findings • Maintain confidentiality • Retain effectiveness of current regulatory model • Voluntary approach • Public consultation

  25. Key elements of ProtocolSharing of RI file specific findings • Communication of RI audit file specific inspection findings with audit committees • Significant inspection findings will be communicated • Importance of fair and balanced communication • Excerpt from CPAB’s Engagement Findings Report to be sent by audit firm to audit committee • Interaction between the audit committee, auditor and management will change • Confidentiality

  26. Key elements of ProtocolCPAB Public Report • Annual communication of CPAB Public Report to audit committees • All RI audit committees will receive CPAB’s public report • Highlights audit quality issues • Highlights recurring firm level issues (Big 4 and Non-Big 4 firms) • Provides basis for dialogue on how firm and engagement team are responding to issues identified in Public Report

  27. Effective Date • Protocol is effective for RI audit file inspections commencing on or after March 1, 2014 • Voluntary approach • Listing of audit firms participating in the Protocol to be made available on CPAB’s website

  28. OTHER CPAB INITIATIVES

  29. Other CPAB Initiatives • Role in IFIAR • Auditing in Foreign Jurisdictions • Auditing Standards- Application guidance • Audit Quality Symposium

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