The AOA’s principal functions are to regulate and supervise recognized auditors This is primarily achieved through the inspection of selected sections of audit files and by an evaluation of the elements of quality control of the firms who audit them.
In preparing for each firm inspection, the AOA asks the audit firm for information relating to the following elements of quality control (the “elements”):
All elements are not necessarily reviewed each year or in each inspection. The inspection team evaluates the information provided and determines the elements to be reviewed.
The results of individual file inspections also help determine elements to be examined. While the primary focus of inspections is on the quality of the audit work, as evidenced in the audit files, deficiencies identified may cause the inspector to review aspects of the firm’s quality control processes. For example, the AOA may ask to see performance evaluations and training taken by the staff on an engagement if the engagement appears to be outside the audit firm’s “comfort zone” and/or we may ask to see the client acceptance and continuance procedures that were performed with respect to that engagement.
For each individual file selected for inspection, the engagement team is asked to prepare a profile, which describes key metrics, such as the names of key engagement team members, specialists used, the hours charged, etc. The profile also identifies key engagement deliverables, including dates completed. The engagement profile is given to the AOA one to two weeks prior to the commencement of the file inspection and provides the inspector an opportunity to get familiar with the engagement prior to the initial meeting with the engagement team. The inspector will review publicly available information such as the financial statements and Management’s Discussion and Analysis or equivalent when such document does not exist, as well as any other information identified in or attached to the profile.
The file inspection typically begins with a meeting between the AOA inspection team and the key members of the engagement teams. This provides the AOA with additional background on the audit engagement and includes a high-level discussion of the audit approach to the focus areas.
It is important to note that the AOA does not necessarily inspect the entire audit file. Consistent with AOA’s risk based approach for assessing the quality of audit work in a selected audit file, inspectors select for inspection those material, high-risk financial statement items requiring more complex estimates by management and which present the most challenge to the engagement team judgments (e.g. impairment of long-lived assets, fair values of financial instruments, provision for warranties, etc.). The inspection of an individual focus area covers the various stages of the audit process: planning, evaluation and reliance on internal controls, execution, evaluation of results, financial statement presentation and disclosure, and reporting to the audit committee.
In addition to the focus areas, selected core areas are reviewed for each file. These include such items as materiality, risk assessment, fraud considerations, related-party transactions and communications with the audit committee or equivalent.
Before the inspector drafts a significant inspection finding, he/she will confirm with the engagement team the inspection team has been provided with all relevant audit evidence. This ensures the inspector has all the facts before coming to a conclusion on the matter. The inspector consults with other AOA staff having expertise in the particular area in question, as appropriate, and then discusses the proposed finding with the inspection team leader.
Once the inspection team determines a significant inspection finding has been identified, the inspector documents the finding in writing in an Engagement Findings Report (“EFR”). The EFR is then reviewed and approved by the AOA Managing Director and presented to the engagement team. The AOA expects to receive a firm’s written response to a significant inspection finding within ten business days.
The inspector reviews the engagement team’s response and completes the disposition section of the EFR. In some cases, the AOA requires the engagement team to perform more audit work in the current year, to be satisfied there is not a material error in the financial statements that requires restatement. The engagement team must also provide the AOA with evidence and the results of the additional audit work undertaken. If it is decided that a restatement is necessary, the AOA requires the audit firm to advise the audit client, including, when applicable, its audit committee. The inspection team follows up to make sure the restatement has occurred. In other cases, the disposition might require the engagement team to add evidence to the audit file of the audit work performed but not originally evidenced in the audit file. Again, the inspection team follows up to ensure this is done.
At the conclusion of the firm inspection, the AOA issues a draft inspection report for written comment by the audit firm (generally within 20 business days of the issue of the draft). Upon receipt of the response letter from the audit firm AOA will make such amendments to the draft report as it considers necessary and issues a final inspection report. The audit firm must implement the recommendations to the AOA’s satisfaction within a prescribed period of time, which is typically no more than 130 working days. Most commonly, the AOA will identify specific actions the audit firm must take in connection with its audits of the upcoming calendar year-ends. In all cases, the AOA follows up to ensure its recommendations have been satisfactorily implemented.
