The Auditing and Assurance Standards Oversight Council (AASOC) discussed the activities of the Auditing and Assurance Standards Board (AASB) and related matters.
At this conference call held on July 8, 2019, AASOC received presentations on, and discussed the following:
- Chairman’s Opening Remarks
- AASB Update
- Update on the Independence Standing Committee
Chair’s Opening Remarks
After welcoming everyone to the meeting, AASOC Chair Kevin Nye said that he will update the Council on the developments of the Independence Standing Committee at the end of the call. He encouraged Council members to give some thought to future Council agenda topics.
AASB Update
Auditor Reporting
AASB Chair Ken Charbonneau informed AASOC that the matters that will be discussed during the call do not require the Council to make any immediate decisions. The Council will be approached for due process approval of some projects in the coming months.
Communication of Key Audit Matters (KAM) in the Auditor’s Report
Background
Mr. Charbonneau reminded the Council that the Board published the Exposure Draft, “Communication of Key Audit Matters (KAM) in the Auditor’s Report,” on January 31, 2019, with comments due by May 15, 2019. The Exposure Draft addressed two matters: scope of the requirements to communicate KAM in the auditor’s report and the effective date.
Staff received 20 comment letters and consulted with approximately 75 individuals via virtual and in-person roundtables, webinars, one-on-one calls with investors, and by other means.
Scope for Investment Funds
One of the proposals set out in the Exposure Draft pertains to expanding the communication of KAM to apply to entities required to comply with National Instrument (NI) 81-106, Investment Fund Continuous Disclosure, which applies to both listed and unlisted investment funds. The Board received two letters supporting the proposal and ten letters that did not support the proposal. The remaining eight letters did not comment on this proposal. Respondents gave the following reasons for not supporting the expansion of the communication of KAM to investment funds:
- it adds limited value to the investor;
- it may lead to additional costs and time;
- it increases regulatory burden;
- it is inconsistent with the auditor reporting standards in the United States; and
- it is inconsistent with the International Standards on Auditing (ISAs).
Mr. Charbonneau noted that the AASB considered the purpose and reporting characteristics of an investment fund, disclosure, and liquidity regulations that apply to investment funds and the new information received on exposure. The Board decided to exclude entities required to comply with NI 81-106 from communicating KAM.
One Council member asked how the AASB’s proposal is inconsistent with the ISAs. Mr. Charbonneau replied that the Board proposed that communication of KAM be required for both listed and unlisted investment funds. This is different from the ISAs, which mandate that KAM be communicated for listed entities.
A Council member representing the regulator community said that there are complex differences when comparing one fund to another. She added that stakeholders would benefit in mandating that auditors of entities required to comply with NI 81-106 be required to communicate KAM, as it is good governance. She asked if the AASB had considered requiring the auditor’s report for these entities to indicate that communicating KAM is not required for these entities. Mr. Charbonneau responded that this comment would be raised at the next Board meeting.
Another Council member representing the regulatory community indicated that consistency between investment funds and other listed entities was not a concern. Users of investment fund products understand reporting across all entities and are unlikely to compare the financial statements of an investment fund with those of another listed entity.
Another member asked what the consequences are when an auditor that is required to communicate KAM for an entity determines that there are no KAMs to report. Mr. Charbonneau responded that the auditor of this entity would be required to add a KAM section to its auditor’s report then inform readers that it does not have any matters to communicate. Furthermore, he noted that an auditor of an entity that is not required to communicate KAM can voluntarily communicate KAM in the auditor’s report if it wishes to do so.
Scope for Other Listed Entities
Another proposal set out in the Exposure draft relates to communicating KAM for entities listed on exchanges other than the Toronto Stock Exchange (TSX).
Mr. Charbonneau informed AASOC that an AASB member conducted academic research regarding the value of communicating KAM for TSX-Venture (TSX-V) entities that resulted in mixed views from stakeholders. In addition, staff received six letters supporting the proposal of extending communication of KAM to entities listed on exchanges other than the TSX, three letters not supporting it, and eight letters not commenting on it.
After considering the comments received on the proposal, the AASB decided to require the communication of KAM for entities listed on exchanges other than the TSX.A Council member expressed concern that the AASB is accommodating entities required to comply with NI 81-106 but is not accommodating entities listed on exchanges other than the TSX. Mr. Charbonneau noted that the Board assessed the public interest considerations of both issues prior to making its preliminary conclusions.
Effective Date
The AASB proposed that auditors of entities within the scope of the proposal would be required to communicate KAM for financial statement periods ending on or after December 15, 2021. This would allow all parties in the financial reporting process enough time to:
- become familiar with the implications of the new standard;
- develop appropriate communications to stakeholders;
- develop processes and methodologies to drive a high-quality implementation; and
- allow entities and their auditors to learn from experiences gained from communication of KAM in other jurisdictions and from audits of TSX-listed entities.
The AASB received mixed feedback on the new standard’s effective date. After considering the comments received, the Board decided to defer the proposed effective date for auditors of entities within the scope of the Exposure Draft to financial statement periods ending on or after December 15, 2022. Mr. Charbonneau highlighted the public interest considerations of this decision, including that an extra year should result in higher-quality communications and that education is needed for all stakeholders in the financial reporting process.
Next Steps
The AASB intends to approve Handbook changes in September 2019 and will seek AASOC’s approval of due process in October 2019. The Board plans to issue the new standard into the Handbook in December 2019.
Combined Report Update
Mr. Charbonneau reminded AASOC that the Combined Report project aims to address the challenges faced by auditors of dual-listed entities. The differences between the Canadian and American auditor reporting standards do not allow auditors to issue a single audit report that complies with both country’s standards. The AASB took on this project to address the public interest considerations of having two separate reports on one set of financial statements, which may be confusing to readers.
Mr. Charbonneau informed the Council that the Board has determined that it is unable to develop a combined report to address both Canadian Auditing Standards and Public Company Accounting Oversight Board (PCAOB) standards. The Board intends to stop work on the project and focus its efforts on pursuing activities that are directed to the acceptance of an auditor report prepared in accordance with the ISAs by U.S. regulators
One Council member asked about the nature of the complications that arose in arriving at a combined report. Mr. Charbonneau said that the main issue was that the extent of the differences between the two standards meant that a combined report that met the requirements of both standards would be confusing for stakeholders and, therefore, would not have added value.
AASB Update
Identifying and Assessing Risks of Material Misstatement (ISA 315)
Eric Turner, Director, Auditing and Assurance Standards Board, informed AASOC that the International Auditing and Assurance Board (IAASB) issued its Exposure Draft on ISA 315 in September 2018. The AASB developed a response letter on the IAASB Exposure Draft by hosting video-conference discussions and field testing the proposed standard. He noted that the IAASB is currently working towards finalizing the standard and it aims to have a final draft for approval at its September 2019 meeting.
Audits of Less Complex Entities
Mr. Turner said that the IAASB issued a Discussion Paper on this matter in June 2019, with a comment deadline of August 14, 2019. He noted that the AASB is contacting Canadian stakeholders on the main challenges faced by auditors of less complex entities to determine if these issues can be addressed by way of standard setting activities. The Board also suggested that an advisory group be formed to monitor and respond to international activities.
Strategic Plan
The AASB’s current strategic plan ends on March 31, 2021. In the coming months, the Board will begin developing its next strategic plan. It agreed to establish a working group to help staff develop the Board’s future strategic plan. This group will provide staff with initial views and guidance prior to discussion at Board meetings.
Update on the Independence Standing Committee
Mr. Nye informed AASOC that he and Bruce Winter, the previous Council Chair, have revised the proposed terms of reference of the newly formed Independence Standing Committee. This document was sent to Genevieve Mottard, Chair of the Public Trust Committee, who will present this matter to CPA Canada’s Council of Chief Executives at its August 2019 meeting. Mr. Nye said that he will continue to brief the Council on this matter.
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The Auditing and Assurance Standards Oversight Council (AASOC) is an independent, volunteer body established by the Canadian Institute of Chartered Accountants (now Chartered Professional Accountants of Canada) in 2000. It serves the public interest by overseeing and providing input on the activities of the Auditing and Assurance Standards Board (AASB), which sets standards for assurance and related service engagements. Reporting to the public and consisting of prominent leaders from business and regulators, AASOC’s responsibilities include appointing AASB members, providing input on strategic priorities and evaluating the performance of the AASB.