Pcb Case Study Summary

1- There are many challenges in current audit environment from reading of PCAB 2013 public report, and three challenges are

• Globalization:

The need for expansion in global business is a necessity for big companies, and many Canadian companies are expanding their operation into overseas markets. This is a new challenge to the performance of high quality auditing, because new transaction will be made in these markets which are not necessarily follow Canadian GAAP standards for purpose of reporting. The auditors must ensure they understand business standards and regulatory that is applicable to entities that now form a part of consolidated financial statement. The auditors need to understand business structures which exist in foreign countries.

• Audit Quality:
The quality of audit is not just from hard work of auditor; usually it starts from the quality of information provided by management. This can be achieved by having effective accounting and information system that can provide required data to produce a high quality financial statement.

• Accounting rules and disclosure:
Once again since most of big companies are seeking to expand in foreign countries, the challenges increase because these countries may follow different accounting standards than the parent Canadian companies.

This will make it more challenging to ensure the accuracy of consolidated financial statement and disclosure of notes in the financial statement.

Summary results of the big four results from inspection

• Lack of professional skepticism

It is not a good practice for auditor to just accept management’s views without any arguments or appropriate challenges. Auditors should always challenge management for what they tell them against what they already have.

CPAB believes firms need to enhance the professional skepticism of their staff by:-

 Senior members of engagement team are rotated frequently to avoid complacency or threat of familiarity.

 Increase the visibility and effectiveness of senior engagement team members during all audits.

 Engagement team to be less accepting and more challenging in their approach to an audit.

 Training of professionals in exercising skepticism.

• Audit work of internal controls

It is important to test internal controls, in many cases audit fails due to lack of identifying the key control that must be tested by engagement team. Also the audit fails if wrong control was

tested.
Two of most common deficiencies identified are
 Relying on a sign-off signature as documentary evidence that a control was working.
 Relying on inquiry to verify that a control was working.
CPAB encourage all firms to have appropriate training and guidance for engagement team.

Summary results of the results from inspections of other firms.
• Group audits/foreign jurisdictions
Auditing firms rely on component auditors with operations around the world to perform large parts of engagements, they rely on foreign auditors without testing their accounting and auditing capabilities.

Firms need to make sure they have sufficient access to working papers of component auditors. Also they need to have adequate knowledge of the customs and business practices in foreign countries.

• Impairment testing

Firms must always audit fair value for the purpose of determining possible impairment of assets. This is determined by analyzing cash flow.

CPAB Has noticed that firms do not sufficiently analyze if these projections are based on reasonable assumption.

• Reliance of internal controls

Firms must not rely on internal controls when they have smaller reporting issues. When assessing effectiveness internal controls firms usually fail to identify and test controls that mitigate audit risk at assertion level.

2- 3 current and emerging issues

• Changes to auditor reporting

CPAB believes that more transparency with auditor reporting is needed. Auditors need to share information in order to provide bigger value to their audit of financial statement.

Listed below are areas that need improvement:

1- Key/Critical audit

matters
It is important to disclose key/critical audit matters to audit report. This will enhance audit quality and will improve the quality of financial statement. Also it is important to discuss the procedure taken and their results if they are relevant to the context matter.

2- Going concern disclosure
It is not recommended to include going concern in auditor statement if a material uncertainty does not exist.

3- Involvement of other auditors
It is important to disclose other auditor’s involvement, other than the firm, in the auditing report and to what extent, especially if they are not registered auditors.

4- International harmonization
Having an international standard for auditor reporting will reduce investor confusion since many audit reports is being read globally.

5- Disclosure of audit partner’s name
The PCAOB has suggested disclosing audit partner name.

• Auditing in foreign jurisdictions
CPAB found that results of its review was disappointing, auditors did not follow properly Canadian procedures. This is due to lack of understanding the nature of business in foreign jurisdictions; also it was due to lack of professional skepticism. CPAB believes it was a failure of auditor’s part to recognize the differences in business natures of foreign jurisdiction which needs modification of timing and nature of auditing procedure.
The failure can be caused by one of these points
 Confirmation process was not controlled properly. Also it was not reliable.
 Failure to prove ownership of some assets (Assertions), because auditors relied only on information provided by management.
 Inadequate auditing procedures of financial statement and related party transactions.
 Not enough evidence to support income tax rate used.

• Mandatory rotating and Tendering

It is highly recommended for mandatory rotation and tendering after certain time of period to assure quality of audit. And this is done to reduce the risk of familiarity and self-interest between the auditor’s and their clients.
Also it was found that many audit deficiencies happened because of lack of professional skepticism. Therefore minimum audit term limit was required to improve audit quality.