FOCUS ON PRACTICE INSPECTION - CPA Ontario · ACTION PLAN A specified course of action needs to be...

FOCUS ON PRACTICE INSPECTION2019

MAY 2020

CHARTERED PROFESSIONAL ACCOUNTANTS OF ONTARIO

FOCUS ON PRACTICE INSPECTION – 2019

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FOCUS ONPRACTICE INSPECTION

2019



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CONTENTS

MESSAGE FROM THE CHAIR AND DIRECTOR ............................................................................................................................4

BACKGROUND ..............................................................................................................................................................................................6

RESULTS OF INSPECTIONS ...................................................................................................................................................................8

RESULTS OF REINSPECTIONS .............................................................................................................................................................9

TRENDS IN INSPECTION RESULTS .................................................................................................................................................. 10

COMPILATION ONLY INSPECTIONS ..................................................................................................................................................11

INSPECTION OBSERVATIONS ..............................................................................................................................................................11

Audit Engagements ...........................................................................................................................................................................11

Review Engagements .......................................................................................................................................................................13

Quality Control ................................................................................................................................................................................... 14

Compilation Engagements ........................................................................................................................................................... 14

ENGAGEMENT QUALITY AND ROOT CAUSE ANALYSIS..................................................................................................... 16

Extent of Technical Knowledge and Continuing Professional Development ........................................................17

Availability and Use of Tools .........................................................................................................................................................17

Adequacy of Supervision and Review .................................................................................................................................... 18

COVID-19 IMPLICATIONS FOR PRACTITIONERS ...................................................................................................................... 18

Going Concern .................................................................................................................................................................................... 18

Subsequent Events ........................................................................................................................................................................... 19

Impairment ........................................................................................................................................................................................... 19

Inventory Observations .................................................................................................................................................................. 19

Obtaining Sufficient Appropriate Evidence ........................................................................................................................ 19

NEW AND EMERGING INDUSTRIES ................................................................................................................................................ 19

Crypto-Asset Industry ....................................................................................................................................................................20

Cannabis Industry ............................................................................................................................................................................20

QUESTIONS .................................................................................................................................................................................................20

APPENDIX 1 – NEW STANDARDS NOT YET EFFECTIVE .......................................................................................................21

Quality Management ........................................................................................................................................................................21

Compilation Engagements ............................................................................................................................................................21



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MESSAGE FROM THE CHAIR AND DIRECTORPractice Inspection remains a key component of CPA Ontario’s regulatory process, contributing to the protection of the public interest by promoting the highest standards of integrity and expertise to our members. Our primary focus is assessing practitioners’ adherence to professional standards, thereby contributing to users’ confidence in the integrity of financial information. Our inspection program also provides practitioners with an educational experience to help them improve their professional standards.

In the 2019 inspection year, Practice Inspection proactively selected companies in the crypto-asset and cannabis industries for inspection, the results of which are included in this report. While our inspection sample size in these industries is not large, practitioners should still find the results helpful. We will continue to closely monitor these industries and perform additional inspections as necessary.

This year, we inspected 1,3631 practising offices, approximately 94 per cent2 of which did not require further action or required a specific course of action. The remaining practising offices were subject to remedial action, ranging from reinspection to referral to the Professional Conduct Committee for possible disciplinary action.

Additionally, in 2019, the Practice Inspection Committee began requiring the mandatory completion of professional development courses by practitioners as a further consequence of inspections requiring reinspection. In the coming year, Practice Inspection will be assessing compliance with this requirement concurrently with scheduled reinspections.

While, overall, inspection results that do not require further action remain high, we have identified a downward trend indicating that some practising offices are still struggling to meet professional standards. In this report, we highlight the results of inspections as well as observations and suggestions for improvement that we believe will be helpful to practitioners. We have also performed a root cause analysis for those practising offices that are subject to remedial action, which we believe can assist practitioners in performing high quality assurance engagements.

1 547 assurance offices and 816 compilation only offices.2 85 per cent for assurance offices and 100 per cent for compilation only practices.

INSPECTIONS BY THE NUMBERS 2019

6,529 Registered Practising Offices at January 1, 2019

1,363 Inspections Completed

75 Reinspections From Inspections

7 Referrals to the Professional Conduct Committee



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Although the inspection activities presented in this report were not affected by the current COVID-19 pandemic, we have included commentary to assist practitioners in the year to come. The pandemic is expected to have an impact on most assurance engagements, particularly in areas related to going concern, subsequent events, impairment analysis, inventory observations and reliability of evidence.

We recognize that practising offices are also concerned about maintaining high service levels for their clients and ensuring their business can continue with as little disruption as possible. CPA Ontario must also ensure that the public is protected during these unprecedented times and as such, all regulatory activities are continuing as planned. In the interest of the health and safety of practitioners and our employees, we will be performing all inspections remotely until it is safe to do otherwise.

We would like to thank all the members of the Practice Inspection Committee and our entire inspection team for the important work that they do in contributing to the continuous improvement in quality in our profession.

Jean M. Prichard, CPA, CA Chair, Practice Inspection Committee

Michael A. Weinman, CPA, CA Director, Practice Inspection



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BACKGROUNDThe Practice Inspection Program is governed by CPA Ontario Regulation 18-1 and “applies to all Members and Firms engaged in the Practice of Public Accounting or in Providing Accounting Services to the Public.” Inspections are performed for practising offices on a risk-adjusted cyclical basis resulting in each practising office being inspected at least once every three years. In the case of new practising offices, an inspection takes place after its first year of operation.

The Practice Inspection Committee (“Committee”) reviews annual inspection results to identify areas where adherence to standards requires improvement and issues this communication to provide guidance to practitioners. The Committee is comprised of 17 Members, including the Committee Chair, and is appointed by the CPA Ontario Council.

This year, CPA Ontario reviewed the composition of its standing committees to ensure appropriate stewardship of the profession. The results of the review have been taken into account to ensure that the Committee is representative of CPA Ontario’s membership by geographic location and practices of all sizes.

PRACTICE INSPECTION COMMITTEE DECISIONS

After reviewing the deficiencies and any comments provided by the practising office, the Committee will determine one of the following:

NO FURTHER ACTION

The inspection is complete, and no further action is required.

ACTION PLANA specified course of action needs to be undertaken, commonly the provision of a suitable action plan.

REINSPECTIONA full or partial reinspection is required. As well, mandatory professional development courses may be required.

REFERRALA referral be made to the Professional Conduct Committee for possible disciplinary action.



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The factors considered by the Committee in determining the action to be taken following an inspection may include, but are not limited to:

• the degree to which the requirements of the Practice Inspection Program have been met;

• the nature and severity of any identified deficiencies;

• the cooperation of the practising office;

• the public interest; and

• upon reinspection, the results of the previous inspection of the practising office and the degree to which the practising office addressed identified deficiencies.



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RESULTS OF INSPECTIONS

8.2%

91.0%

0.8%

89.3%

9.7%

1.0%

85.0%

13.7%

1.3%

201720182019

No further action or action plan response

ReinspectionReferral to the Professional Conduct Committee

During the 2019 inspection year, 547 assurance-based practising offices (523 in 2018; 509 in 2017) were inspected or reinspected, of which:

• 85 per cent resulted in no further action or the submission of an acceptable action plan response from the practising office;

• 14 per cent resulted in a reinspection of the practising office; and

• 1 per cent resulted in referral of a practising office to the Professional Conduct Committee for an independent review of professional conduct and possible disciplinary action.

• Referral to the Professional Conduct Committee occurs when the Committee deems that the appropriate remedial action has not been effective or that a referral is required in the public interest.



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RESULTS OF REINSPECTIONS

10.2%

83.7%

6.1%

80.4%

9.8%

70.2%

19.2%10.6%

201720182019

9.8%

No further action or action plan response

ReinspectionReferral to the Professional Conduct Committee

Of the 47 reinspections of assurance-based practising offices completed in 2019 (41 in 2018; 49 in 2017):

• 70 per cent required either no further action or the submission of an acceptable action plan response from the practising office;

• 19 per cent resulted in a further reinspection of the practising office; and

• 11 per cent resulted in referral of a practising office to the Professional Conduct Committee for its independent review of professional conduct and possible disciplinary action.

The decision to reinspect a practising office is based on the significance of deficiencies identified.

Historically, the reinspection process has resulted in sufficient increases in quality and appropriate corrective action by practising offices resulting in a small number of referrals to the Professional Conduct Committee (five in 2019; four in 2018; three in 2017). Where the results of an inspection demonstrate a significant risk to the public, a referral is made to the Professional Conduct Committee without a reinspection to ensure timely corrective action is initiated. In 2019, there was one referral made to the Professional Conduct Committee after an initial inspection with respect to professional standards (one in 2018; zero in 2017) and one referral was made due to a licensing issue (none in 2018; one in 2017).



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TRENDS IN INSPECTION RESULTS

NO FURTHER ACTION/ACTION PLAN RESPONSE

87%

91%

87%

91% 89%

85%

2014 2015 2016 2017 2018 2019

The inspection results for practising offices who perform assurance engagements over the past six years demonstrate a decline in assurance quality, particularly over the past two years.

A significant driver of this decline relates to deficiencies in the adoption of the new review engagement standard that came into effect for financial statement periods ending on or after December 14, 2017. Due to the timing of inspections, we began inspecting files conducted under this new standard in 2018 with a greater emphasis in 2019.

Over the past six years, there has been an increase in the Committee’s decision to reinspect practising offices who perform assurance engagements. This increase corresponds with the decline in assurance file quality identified for all inspections.

The goal of practising offices should be to always improve the quality of work performed, resulting in fewer reinspections and referrals to the Professional Conduct Committee.



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COMPILATION ONLY INSPECTIONSThe preceding results do not include the inspection of 816 practising offices (651 in 2018; 600 in 2017) that only perform compilation engagements for which 100 per cent (more than 99 per cent in 2018 and 2017) resulted in no further action or the submission of an acceptable action plan response from the practising office.

INSPECTION OBSERVATIONSBelow are critical observations arising from practice inspections and may be considered some of the more significant deficiencies having a greater impact on the quality of work performed. The absence of sufficient evidence to support work performed in these areas commonly resulted in a decision to reinspect the practising office or a referral to the Professional Conduct Committee. It is important to note that Practice Inspection does not set standards. Professional standards are set out in the CPA Canada Handbooks and CPA Ontario Member’s Handbook.

AUDIT ENGAGEMENTS

AUDITING REVENUE

The sufficiency and appropriateness of substantive procedures with respect to the audit of revenue continues to be one of the most significant deficiencies identified in our inspections. Revenue often has a greater susceptibility to material misstatement, which may arise both from complex recognition requirements related to the characteristics of revenue streams and the presumptive risk of fraud when accounting for revenue. As a result, in all but the simplest environments, revenue recognition should normally be considered a significant risk in the audit and practitioners should increase their substantive and/or controls testing to mitigate this risk. An example of a simple environment is leasehold revenue from a single unit rental property.

[CAS 240 the auditor's responsibilities relating to fraud in an audit of financial statements; CAS 330 the auditor's responses to assessed risks]

AUDITING EXPENSES

We frequently identify deficiencies in our inspections relating to the nature and extent of substantive procedures performed with respect to expenses. Substantive procedures can consist of substantive analytical procedures (see next observation) or tests of details. When performing tests of details, practitioners must ensure their procedures address the risks identified by assertion. For example, when testing for completeness, expenses should be traced from source documents to the general ledger while to test cut-off, a review of expense transactions around year end should be performed.

[CAS 330 the auditor's responses to assessed risks]



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SUBSTANTIVE ANALYTICAL PROCEDURES

Substantive analytical procedures can be an effective tool for auditors. However, practitioners need to invest significant time to determine whether they are appropriate to achieve the desired assurance and whether they are appropriately designed. Substantive analytical procedures are most effective when evaluating large volumes of transactions in a highly predictable environment. We continue to identify situations where practitioners place an over-reliance on simple year-over-year analytics that generally do not meet the criteria of a substantive analytical procedure. Practitioners are reminded that to meet the requirements of this standard, they must develop expectations using reliable and accurate information, determine appropriate thresholds for further investigation and then follow-up on outliers through discussion with management and obtaining corroborating evidence.

[CAS 520 analytical procedures]

USE OF A SERVICE ORGANIZATION

In the course of performing an audit, entities often make use of service organizations. Common service organizations include those related to payroll and investment activities. In these instances, practitioners are required to obtain an understanding of the nature and significance of the services provided and design and perform audit procedures to respond to identified risks. When there is reliance placed on the operating effectiveness of controls, practitioners must perform tests of controls at the service organization or obtain a type 2 report. If a type 2 report is received, practitioners must review the scope of the report, the results of the tests of controls and the period covered by the report.

[CAS 402 audit considerations relating to an entity using a service organization]



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TESTING OF JOURNAL ENTRIES

The design and execution of procedures to test journal entries addressing the risk of fraud is a required audit procedure. Often, practitioners perform inadequate journal entry testing such as limiting testing to entries over a certain dollar threshold or only considering entries at, or near, year-end. Practitioners should consider reviewing journal entries that may have characteristics that could be indicative of fraud, regardless of dollar thresholds or proximity to year-end. These characteristics may include entries made to unrelated, unusual, or seldom-used accounts, those made by individuals who typically do not make journal entries, those that have little or no explanation or description, those that do not have account numbers, and those containing round numbers or consistent ending numbers. Practitioners should investigate journal entries that have been identified with possible fraud characteristics including obtaining corroborative evidence to support the appropriate recording of such entries.

[CAS 240 the auditor's responsibilities relating to fraud in an audit of financial statements]

REVIEW ENGAGEMENTS

This is the second year in which the implementation of the new review engagement standard (Canadian Standard on Review Engagements 2400) was included in the Practice Inspection Program. However due to the cyclical nature of the inspection program, most practising offices inspected in the current year have had their performance of engagements under CSRE 2400 assessed for the first time. Practising offices continue to be challenged in adequately documenting some of the new requirements of the standard.

UNDERSTANDING OF THE ACCOUNTING SYSTEMS AND ACCOUNTING RECORDS

Understanding the accounting system and records used by an entity is vital to identifying areas where a material misstatement is likely to arise. This allows the practitioner to focus analysis and inquiry on these areas. We continue to identify instances where this documentation should be improved. Practitioners should ensure that their documentation of systems and records is commensurate with the complexity of the business. For example, industries with complex accounting, such as the construction industry, should include greater detail as to how the entity being reviewed records revenue.

[CSRE 2400 paragraphs 43 and 44 the practitioner’s understanding]



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AREAS WHERE MATERIAL MISSTATEMENTS ARE LIKELY TO ARISE

CSRE 2400 requires practitioners to identify areas where material misstatements are likely to arise. We continue to identify instances in which practitioners do not complete this step in the performance of review engagements. This step is critical as it determines which areas the practitioner should focus on and which additional procedures should be performed. Practitioners should consider adopting a standard form or template to ensure this requirement is met.

[CSRE 2400 paragraph 45 identifying areas in the financial statements where material misstatements are likely to arise; CSRE 2400 paragraph 46 designing and performing procedures]

RELATED PARTY BALANCES

Related party receivables and payables are common accounts included on balance sheets of financial statements reviewed by practitioners. This has been an area where issues have been identified for many years as documentation with respect to classification and valuation of related party balances was an issue under both CSRE 2400 and the previous review standard. Practitioners are reminded that their procedures should not only address balances of receivables outstanding but also the likelihood of collectability. In addition, receivable balances without stated terms should be classified as long-term.

[CSRE 2400 paragraph 46 designing and performing procedures; CSRE 2400 paragraph 104 documentation]

QUALITY CONTROL

A practising office’s quality control system should be designed and implemented to improve overall quality and decrease deficiencies. We often identify occurrences where practitioners do not perform an ongoing evaluation of the quality control system nor do they ensure cyclical monitoring is performed. The absence of effective monitoring can have a negative impact on quality and is a significant factor in the decision to reinspect a practising office. We understand that many sole practitioners and smaller partnerships may not have internal resources to comply with these requirements. Practitioners may consider exploring reciprocal arrangements with other practitioners to fulfill their monitoring obligations.

[CSQC 1 paragraph 48 monitoring the firm's quality control policies and procedures; CSQC 1 paragraphs 49 - 54 evaluating, communicating and remedying identified deficiencies]

Practitioners should be aware that Quality Control standards are changing; see Appendix 1 for more information relating to the proposed Quality Management standards.

COMPILATION ENGAGEMENTS

In general, practitioners continue to meet the requirements of the existing compilation standard. However, practitioners need to be aware that a new compilation standard (CSRS 4200) has been issued that is significantly different than the current standard. One of the key changes is the new communication – the Compilation Engagement Report — which differs from the current Notice to Reader communication.

While early adoption of the new standard is permitted, practitioners in Ontario need to be aware that in order to provide compilation engagement services without a Public Accounting Licence (PAL), the prescribed wording set out in Ontario Regulation 238/05 under the Public Accounting Act, 2004 (PA Act) must be used.



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Currently, the prescribed wording within Regulation 238/05 has not yet been amended to reflect the new wording and as a result, only PAL holders can early adopt CSRS 4200 and use the new Compilation Engagement Report given the existing requirements in the PA Act.

See Appendix 1 for further information relating to the new compilation standard.



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ENGAGEMENT QUALITY AND ROOT CAUSE ANALYSISNumerous professional bodies have developed guides or frameworks to assess audit quality. One such guide, published by the International Assurance Standards Board, defines audit quality as follows:

“A quality audit is likely to have been achieved by an engagement team that:

• Exhibited appropriate values, ethics and attitudes;

• Was sufficiently knowledgeable, skilled, and experienced and had sufficient time allocated to perform the audit work;

• Applied a rigorous audit process and quality control procedures that complied with law, regulation and applicable standards;

• Provided useful and timely reports; and

• Interacted appropriately with relevant stakeholders.”

While published frameworks are specific to audit engagements, they are relevant to other engagements performed by practising offices in Ontario. Practitioners should strive to achieve high quality in all their engagements. One element that will assist practitioners in meeting this goal is assessing compliance with standards by performing a thorough evaluation of inspection results and performing a root cause analysis.



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All practitioners should review their inspection results to identify opportunities for improvement in their quality control system. However, for those practitioners whose inspections resulted in reinspection or referral, the performance of a root cause analysis is critical to success in future inspections.

Root cause analysis should be performed with the goal of developing comprehensive and impactful corrective actions. Actions developed should drive behavioural changes to achieve desired results and may require the dedication of additional resources including tools and guidance.

Practice Inspection has performed an overall root cause analysis of those inspections that resulted in reinspection or referral in the past year and have identified the following areas that should be considered for improvement by practitioners. As every practice is unique, practitioners are cautioned to perform their own assessment.

EXTENT OF TECHNICAL KNOWLEDGE AND CONTINUING PROFESSIONAL DEVELOPMENT

Practising offices sometimes take on engagements in which the engagement team’s technical knowledge is not robust. Technical knowledge may include knowledge relating to accounting frameworks, assurance standards and the industry of the entity being audited or reviewed.

Concerns identified in inspections included:

• practitioners who were unaware that new standards, such as CSRE 2400, were in effect;

• practitioners who accepted engagements using frameworks, such as International Financial Reporting Standards, in which they had little or no experience;

• practitioners who accepted engagements in industries, such as the pharmaceutical or construction industry, that required complex accounting;

• attending training sessions that did not have sufficient focus on assurance and accounting standards; and

• employing assurance procedures such as analytical procedures and tests of controls without understanding all requirements for their use.

AVAILABILITY AND USE OF TOOLS

Practising offices typically create or acquire standard forms and templates to assist them in engagement performance. While this process has the advantage of driving consistency and serving as good reminders, practitioners must take care that forms and templates are updated for changes in standards and are used in a thoughtful, rather than cursory, manner.


• files that were completed using pre-CSRE 2400 forms;

• practising offices that accepted a new type of engagement, such as an audit, without obtaining any forms or templates;



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• checklists that were not completed at the time work was performed;

• checklists that were rolled-forward from prior years without being updated for changes in the entity or professional standards; and

• checklists that were completed with simple yes/no responses that required commentary or elaboration to fufill the requirements of relevant standards.

ADEQUACY OF SUPERVISION AND REVIEW

Practising offices sometimes employ others, including students or newly qualified professionals, to complete assurance work. This is a practical and efficient way to complete assurance work. However, all work is the responsibility of the engagement partner and needs to be adequately supervised and thoroughly reviewed.


• files that did not clearly identify the partner with overall responsibility;

• files where insufficient time was allocated to plan, perform and review files;

• a lack of evidence to support which working papers were reviewed by the partner;

• queries raised by reviewers that were not followed-up on; and

• an over-reliance placed on staff to supervise and review the work of others.

COVID-19 IMPLICATIONS FOR PRACTITIONERSThe COVID-19 pandemic is unprecedented and will result in challenges for many organizations. These challenges affect the performance of both audits and review engagements. Practitioners will need to assess any adverse effects on assurance quality. Although not exhaustive, practitioners should carefully consider the following areas when performing assurance engagements during and after the pandemic.

GOING CONCERN

There may be significant impacts arising from the effects of the crisis that may affect going concern considerations in every organization. Unlike prior years, practitioners may need to consider management’s assessment of the going concern assumption regardless of an entity’s size and complexity as well as their historical financial performance. Practitioners are required to evaluate and conclude on the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements and should challenge the assumptions used by management as well as evaluate different scenarios addressing uncertainties in management’s assessment.



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SUBSEQUENT EVENTS

Subsequent events will have a different impact on an entity depending on the year end of the entity. Practitioners will need to ensure that for the year ends before the crisis developed, the effect of the subsequent events are properly assessed and clearly disclosed. Generally, we do not expect the pandemic to result in adjusting events for December 31, 2019 year ends, however, year ends in 2020 may require adjustments. Practitioners are cautioned that every entity is unique and subsequent events evaluations may still be affected by the pandemic long after social distancing requirements have been lifted.

IMPAIRMENT

For those companies using Accounting Standards for Private Enterprises, intangible assets such as goodwill as well as tangible assets need to be evaluated for possible impairment when events and circumstances indicate that an impairment may have occurred. Practitioners should strongly consider whether the COVID-19 pandemic is such an event. Practitioners should advise their clients of the importance of considering COVID-19 implications when developing their impairment evaluations.

INVENTORY OBSERVATIONS

The observation of inventory for March 31 and later year ends may be difficult or impossible due to the COVID-19 pandemic. In these situations, practitioners need to consider whether alternate procedures can be employed to comply with standards. For example, practitioners should evaluate whether inventory can be observed at a later date, followed by roll-back procedures to verify the existence of inventory at year end. Some practitioners may be considering using technology, such as remote video or drones, to observe inventory. In those situations, practitioners should carefully consider the additional risks this may create, including the risk of fraud. Ultimately, practitioners must consider whether any alternate procedures are sufficient and if a scope limitation exists in their engagement.

OBTAINING SUFFICIENT APPROPRIATE EVIDENCE

Due to the COVID-19 pandemic, practitioners may need to rely on electronic or scanned evidence rather than original documents. Practitioners should heighten their professional skepticism in these situations and perform additional procedures to obtain comfort as to the authenticity of evidence.

Further resources can be found at www.cpaontario.ca/covid-19-resources.

NEW AND EMERGING INDUSTRIESDuring the 2019 inspection year, we targeted assurance engagements in two emerging industries due to the unique nature of the risks and assurance issues as well as the increased potential for errors. We expect to continue closely monitoring these industries and conduct additional inspections in 2020 as needed.

https://www.cpaontario.ca/covid-19-resources



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CRYPTO-ASSET INDUSTRY

Activities in the crypto-asset industry include trading in crypto-assets and crypto-asset mining. Trading in crypto-assets involves trading in virtual currencies such as BitCoin. Crypto-asset mining is a process whereby a company provides computer processing power for the underlying method of accounting for crypto-asset trading. The fees earned for providing this computer processing are usually paid in a virtual currency. Audits of companies operating in these activities are complex, high-risk and involve difficult-to-verify virtual assets.

During the year we inspected three files from three practising offices that audited clients active in this industry. Although each of these companies exited the crypto-asset industry or greatly reduced their crypto activities during the year inspected, we still identified deficiencies in the audit approaches adopted by the practising offices. Deficiencies included inadequate evaluation of fraud risk factors, insufficient evidence to support the completeness of revenue and a lack of support for crypto-asset mining management fees.

CANNABIS INDUSTRY

There are many different types of companies in the Cannabis industry. These can be agricultural (cultivation of crops), pharmaceutical (medicinal uses), distribution, and retail operations. Most complicated issues will arise relating to the accounting for the biological assets of the entity when the entity grows cannabis.

During the year we inspected seven files from seven practising offices with clients operating in the cannabis industry. The framework most commonly used was International Financial Reporting Standards, however Accounting Standards for Private Enterprises was also employed. As this is not yet a mature industry, many of the inspected companies were in the start-up phase and had reduced operations. Of the files reviewed, three were cannabis producers, one was a retail cannabis operation and the remainder were active in the medicinal cannabis field.

While our sample of inspections did not identify significant deficiencies relating to cannabis operations, we expect that practitioners will encounter challenges as the industry matures. This includes the use of expert valuation services to address complex estimates as well as the consideration of regulatory aspects unique to this industry. In addition, the industry frequently undergoes mergers and acquisitions, which creates unique accounting issues.

QUESTIONSShould you have questions and/or require more information on any of the above, please contact: [email protected].

mailto:pracinsp%40cpaontario.ca?subject=



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APPENDIX 1 – NEW STANDARDS NOT YET EFFECTIVE

QUALITY MANAGEMENT

On February 8, 2019, the International Auditing and Assurance Standards Board (IAASB) issued an Exposure Draft on quality management at the firm and engagement level. Accordingly, the Auditing and Assurance Standards Board (AASB) followed by issuing an Exposure Draft on quality management at the firm and engagement level in Canada in April 2019. The Canadian Exposure Draft is proposing to adopt the new international standard unchanged except for an amendment to the relevant independence and other ethical requirements to allow reference to Canadian requirements.

The comment period has now closed. Based on the responses received to the Canadian exposure draft, the AASB provided the IAASB a written response in June 2019. The IAASB continues to deliberate proposals made by its task forces based on comments received from its stakeholders.

Practitioners will need to prepare for the changes arising from the new quality management standard and those firms that only complete compilation engagements will need extra effort to ensure that they meet Canadian Standard on Quality Management 1 (CSQM 1) once it becomes effective. The inclusion of related services engagements in CSQM 1 makes a significant change to the scope of the new standard in relation to the existing CSQC 1.

Further information can be obtained from:

www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/audit-and-assurance-alert-quality-management

www.frascanada.ca/en/csqc

COMPILATION ENGAGEMENTS

The new compilation standard is effective for compilation engagements for periods ending on or after December 14, 2021. The key differences in the new standard arise in the compilation report and the requirement to disclose the basis of accounting used in the financial statements.

Though not a comprehensive list of the new requirements, below are some important differences in the new standard:

• The new compilation report includes responsibility paragraphs

• Prior to or when accepting a compilation engagement, the practitioner must:

• make inquiries of management regarding the intended use of the compiled financial information, including whether that information is intended to be used by a third party.

https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/audit-and-assurance-alert-quality-management

https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/audit-and-assurance-alert-quality-management

https://www.frascanada.ca/en/csqc



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• obtain an acknowledgment from management of the basis of accounting expected to be applied in the preparation of the financial information.

• If the information is intended to be used by a third party, the practitioner needs to obtain an acknowledgment from management that the third party either:

• is in a position to request and obtain further information from the entity; or

• has agreed with management on the basis of accounting to be applied.

• If management does not acknowledge that the third party can obtain further information or has agreed on the basis of accounting, then the practitioner cannot accept the engagement unless the basis of accounting is a general-purpose framework. It is expected that compiled financial information prepared in accordance with a general-purpose framework will be rare.

• The practitioner must obtain knowledge related to the entity’s business and operations, accounting system and records and the basis of accounting used, and document this in the working paper files.

• The practitioner must obtain an acknowledgment from management of management’s responsibility for the compiled financial information.

Practitioners should read the new standard to understand the additional inquiry and new documentation requirements.

Practitioners need to be ready for the new standard by attending training, discussing the requirements with compilation engagement clients, preparing new engagement letters and updating policies and working paper procedures to meet the requirements.

While early adoption of the new standard is permitted, practitioners in Ontario need to be aware that in order to provide compilation engagement services without a Public Accounting Licence (PAL), the prescribed wording set out in Ontario Regulation 238/05 under the Public Accounting Act, 2004 (PA Act) must be used.

Currently, the prescribed wording within Regulation 238/05 has not yet been amended to reflect the new wording and as a result, only PAL holders can early adopt CSRS 4200 and use the new Compilation Engagement Report given the existing requirements in the PA Act.

More information can be obtained from the CPA Canada site:

www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/new-compilation-standard-guidance-resources

https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/new-compilation-standard-guidance-resources

https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/standards-other-than-cas/publications/new-compilation-standard-guidance-resources

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