Practice Review: 2023-24 Findings and Areas of Focus

Practice Review Program Overview

The purpose of the Practice Review Program (PRP) is to protect the public by assessing a firm’s compliance with professional standards, and in instances of non-compliance, ensuring appropriate follow-up or remedial action is taken, while also providing an educational experience. Practice reviews typically occur within the first year of a firm’s operation and then every three years thereafter, however, certain risk factors could lead a firm’s inspection cycle to be shorter.

During a practice review, Practice Review Officers (PROs) may identify reportable deficiencies related to accounting or assurance standards in accordance with the CPA Canada Handbook that are not met. Based on the nature and significance of the deficiencies identified, the PRO assesses the inspection into one of the following categories:

1. Meets Requirements: no further action is required but the firm is still expected to address the reportable deficiencies (if any), and the firm will be reviewed in the ordinary course of the next cycle.
2. Meets Requirements with Action Plan: the firm is required to provide an action plan which includes detailing how the reportable deficiencies will be addressed and, if deemed satisfactory, the firm will be reviewed in the ordinary course of the next cycle.
3. Does Not Meet Requirements: the firm is required to provide an action plan which includes detailing how the reportable deficiencies will be addressed and will be required to have a follow-up review within one year at a cost to be borne by the firm, along with other potential consequences required by the Public Practice Committee (the “Committee”).

The PRO’s initial assessment and the related reportable deficiencies are reviewed by an Associate Director or the Director of Practice Review to ensure consistency of results against other reviews based on the identified deficiencies. These results (anonymized and redacted) are then submitted to the Committee for review and approval. The Committee is comprised of 20 CPA members and two public representatives who meet four times a year to discuss and approve various matters, including the practice review results of firms.

In determining the action to be taken following a practice review, the Committee’s considerations include, but are not limited to:

• the degree to which the requirements of the PRP have been met;
• the nature and severity of the identified deficiencies;
• the adequacy of the firm’s action plan and/or analysis for restatement and commitment towards rectification of issues identified;
• the cooperation of the practitioner/firm and commitment towards improving overall firm quality; and
• the risk to the public.

Introduction

As a result of the COVID-19 pandemic, CPABC introduced a hybrid review model which continues today. All reviews (assurance or non-assurance) where a practitioner operates a home-based practice, are performed as desk reviews (i.e. reviews conducted remotely by the PRO). All other reviews may be conducted as in-person or desk reviews, based on the arrangements made between the practitioner/firm and the PRO with the default approach being remote inspections for non-assurance firms and in-person inspections for assurance firms.

This article will focus on key practice review observations from the past inspection year (April 1, 2023 to March 31, 2024), including the most significant areas where firms did not meet requirements of the PRP. Thereafter, the report will cover areas of focus in the 2024-2025 inspection year.

2023-2024 Inspection Highlights

During the 2023-2024 inspection year, 837 (2022-23: 880) practice reviews were completed with an overall pass rate of 87% (2022-23: 89%). Of the total practice reviews completed:

• 269 (2022-23: 296) of the reviews, or 32% (2022-23: 34%), were practices that performed assurance and non-assurance engagements (“assurance firms”); and
• 568 (2022-23: 584), or 68% (2022-23: 66%), were practices that performed only non-assurance engagements.

Of the 269 reviews of “Assurance” practices:

• 87% (2022-23: 88%) were assessed by the Public Practice Committee (the “Committee”) as “Meets Requirements” or “Meets Requirements with Action Plan”; and
• 13% (2022-23: 12%) were assessed by the Committee as “Does Not Meet Requirements” and, therefore, required a follow-up review of the practice. In 2% (2022-23: 2%) of these cases, the practitioner/firm was also required to have an Engagement Quality Reviewer and/or Supervisor on the engagement types which caused the firm to not meet requirements.

Of the 568 reviews of practices which performed only non-assurance engagements:

• 91% (2022-23: 89%) were assessed by the Committee as “Meets Requirements” or “Meets Requirements with Action Plan”; and
• 9% (2022-23: 11%) were assessed by the Committee as “Does Not Meet Requirements” and, therefore, required a follow-up review of the practice.

The increase in the overall pass rate was due to more non-assurance firms adequately implementing the CSRS 4200 Compilation Engagement standard which went into effect December 2021. The improved rate is expected for these firms as their inspection cycle fell more than a year out from the effective date of CSRS 4200.

Lastly, included in the 837 practice reviews were 62 follow-up reviews (i.e. re-inspections) conducted (i.e., firms that were assessed as “Does Not Meet Requirements” in their previous inspection). For these follow-up reviews:

• 89% (2022-23: 91%) were assessed by the Committee as “Meets Requirements” or “Meets Requirements with Action Plan”;
• 11% (2022-23: 9%) were assessed again by the Committee as “Does Not Meet Requirements” and thereby, will require a second re-inspection of the office.

In the last inspection year, the following observations were noted for firms that were assessed as “Does Not Meet Requirements”:

• For assurance engagements, common areas where there was insufficient documentation around key assertions of material balances and classes of transactions related to:
  • Existence and completeness of inventory;
  • Valuation of a related party receivable; and
  • Cut-off, accuracy and completeness of revenue.
• The occurrence of one (or more) material error(s) that was the result of not identifying or not applying the appropriate CPA Canada Handbook standard to an accounting or assurance issue was regularly identified in the following areas:
  • Lack of amortization on a depreciable asset;
  • Failure to disclose the breach of a financial covenant; and
  • Incorrect treatment of a contribution or grant in a not-for-profit organization.
• In Review Engagements (CSRE 2400), minimal or no analytical procedures performed in areas where the practitioner assessed a material misstatement was likely to arise;
• Similar to the prior year, the failure to appropriately adopt CSRS 4200, such as missing the basis of accounting note, including a misleading basis of accounting note or completing the engagement in accordance with the previous standard, Section 9200 (Compilation Engagements); and
• Some firms accepted engagements outside their core area of practice or in an area where they did not have substantial previous experience (“dabbling”).

Key Practice Review Observations

The items identified below were the most common identified deficiencies. Each of these reportable deficiencies may have had a different degree of significance on a particular file and impact on the overall quality of work performed. The absence of sufficient evidence to support work performed in one or more of these areas could impact the overall assessment of an inspection; potentially resulting in being assessed as “Does Not Meet Requirements” by the Committee.

Financial Statement Presentation and Disclosure

1. When the creditor had the unilateral right to demand immediate repayment of any portion or all of the debt under any provision of the debt agreement, the obligation was not classified as a current liability. (CPA Canada Handbook Part II – 1510 paragraph 13)
2. Assets that were not ordinarily realizable within one year from the balance sheet date where incorrectly presented as a current asset. (CPA Canada Handbook Part II – 1510 paragraphs 3 and 7)
3. An enterprise’s bank overdraft that was not fluctuating frequently between positive to overdrawn was incorrectly presented as a component of cash and cash equivalents. (CPA Canada Handbook Part II – 1540 paragraph 10)
4. When an enterprise had multiple types of material revenue transactions, there was no disclosure of the different policies for each type. (CPA Canada Handbook Part II – 3400 paragraph 31)
5. Income tax disclosures were missed from the financial statements. For example, when the taxes payable method was applied, disclosure was missed regarding the amount of unused income tax losses carried forward and unused income tax credits. When the future income taxes method was applied, disclosure was missed regarding the amount of future income tax assets and future tax liabilities in respect of each type of temporary difference for each period presented. (CPA Canada Handbook Part II – 3465 paragraphs 88-89)
6. Government assistance received in the form of a forgivable loan was not accounted for in the same manner as a grant. (CPA Canada Handbook Part II – 3800 paragraphs 24, 25)
7. When an enterprise had transactions with related parties, disclosure regarding these transactions was missed or certain required elements were omitted, such as a description of the relationship, the measurement basis used, and the terms and conditions for amounts due to or from. (CPA Canada Handbook Part II – 3840 paragraph 51)
8. Retractable or mandatorily redeemable shares issued in a tax planning arrangement were incorrectly presented as equity when control was not retained by the shareholder receiving shares in the arrangement (CPA Canada Handbook Part II – 3856 paragraph 23)
9. When a financial liability was in default or breach of any term or covenant that permits a lender to demand accelerated repayment during the period, there was no disclosure of this fact in the financial statements. (CPA Canada Handbook Part II – 3856 paragraph 46)
10. Significant risks arising from financial instruments were not disclosed in the financial statements. If the disclosure was present, it missed details regarding the change in risk exposures from the previous period and the concentrations of risk for each type of risk arising. (CPA Canada Handbook Part II – 3856 paragraphs 53-54)
11. When an organization received or was entitled to receive restricted contributions, there was no disclosure on the policy it follows for accounting for those restricted contributions. (CPA Canada Handbook Part III – 4410 paragraph 21)
12. When restricted contributions were received and the organization followed the deferral method (or has received a restricted contribution in the general fund under the restricted fund method), it was not recorded correctly based on the restriction. (CPA Canada Handbook Part III – 4410 paragraphs 31, 33, 34, 38, 39, 40, 45)

Audit Engagements

1. Documentation of risk assessment procedures with respect to obtaining an understanding of the entity and its environment, and the applicable financial reporting framework and the documentation of the entity's system of internal control did not include the entity's information system and communication relevant to the preparation of the financial statements (CAS 315 paragraphs 19-27)
2. When assessing the risk of material misstatement due to fraud, the auditor did not document management’s knowledge of actual, suspected or alleged fraud, or management’s process for identifying and responding to fraud and error. (CAS 240 paragraph 18-19)
3. Auditor did not make inquiries of those charged with governance to determine whether they have knowledge or any actual, suspected or alleged fraud affecting the entity (CAS 240 paragraph 21)
4. The auditor did not conduct a team planning meeting to discuss how and where the entity’s financial statements may be susceptible to material misstatement due to fraud, including how fraud might occur. (CAS 240 paragraphs 16, 45)
5. The auditor did not perform analytical procedures to identify whether there were unusual or unexpected relationships in accounts that may indicate risk of material misstatements. (CAS 240 paragraph 23)
6. The auditor performed an inappropriate assessment of materiality. (CAS 320)
7. The auditor did not document the design and performance of substantive audit procedures for each material class of transactions, account balances, and disclosures. (CAS 330 paragraph 18; CAS 500 paragraph 6)
8. The auditor did not document the design and performance of audit procedures to test the appropriateness of journal entries recorded and other adjustments made in the preparation of the financial statements. (CAS 240 paragraph 33; CAS 330 paragraph 20)
9. The written representation from management was not appropriately dated as near as practicable to the date of the auditor's report. (CAS 580 paragraph 14)
10. The auditor did not revise materiality when they became aware of information during the audit that impacted their initial determined amount. When a lower materiality was concluded than that initially determined amount, the auditor did not assess whether it was necessary to revise performance materiality and the appropriateness of the nature, timing, and extent of further audit procedures. (CAS 320 paragraphs 12-13)
11. When the auditor identified misstatements, they did not evaluate whether the misstatements were indicative of fraud. (CAS 240 paragraphs 36-37)
12. Auditor did not identify, evaluate and address threats to compliance with relevant ethical requirements including independence. (CAS 220 paragraph 17)
13. Auditor did not obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statements. (CAS 510 paragraph 6)
14. The auditor did not assemble the final audit file on a timely basis after the date of the auditor’s report. (CAS 240 paragraph 14)

Review Engagements

1. The practitioner did not sufficiently document the inquiry and analytical procedures performed on the material items and/or areas in the financial statements where material misstatements are likely to arise. (CSRE 2400 paragraphs 46, 104)
2. The documentation of the practitioner's understanding of the entity's accounting systems and accounting records was not completed or partially completed. (CSRE 2400 paragraphs 43, 44)
3. The practitioner did not obtain an understanding of the entity and its environment, and the applicable financial reporting framework, to identify areas in the financial statements where material misstatements were likely to arise and thereby provide a basis for designing procedures to address those areas. (CSRE 2400 paragraphs 43, 44)
4. The documentation of the practitioner's inquiries of management and others within the entity, as appropriate, did not include some or all the inquiries required. (CSRE 2400 paragraph 47)
5. When performing an initial review engagement, the practitioner did not obtain sufficient appropriate evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statements. (CSRE 2400 paragraph 55)
6. The date of the written representations was not as near as practicable to, or was after, the date of the practitioner's report. (CSRE 2400 paragraph 73)
7. When the prior period of the financial statements were or were not subject to a review engagement or an audit engagement by a predecessor practitioner, the practitioner did not state this fact in an Other Matter paragraph. (CSRE 2400 paragraph 100, 101)

Other

1. When performing BC Financial Services Authority (BCFSA) or BC Law Society trust audit engagements under CSRS 4400, the practitioner did not issue the Agreed-Upon Procedures Report. (CSRS 4400 paragraph C30)

System of Quality Management

The Canadian Standard on Quality Management (CSQM 1 and CSQM 2) came into effect for non-assurance firms conducting other related services (i.e. compilation engagements under CSRS 4200) on December 15, 2023 while for firms conducting audits or review of financial statements or other assurance services, the effective date was one year earlier.

Firms conducting assurance engagements were already required to have a quality assurance manual under Canadian Standard on Quality Control (CSQC 1). However, the new standard for quality was expanded to also include firms conducting related service engagements. As such, many non-assurance firms needed to design, implement and operate a system of quality management for the first time. Most assurance firms were successful in providing a system of quality management that met the requirements under the new standard; however, there were instances where the firm did not identify quality risks. Quality risks are required to be identified and assessed for each quality objective along with the design and implementation of responses to address the quality risks.

If a firm did not adopt the system of quality management standards, the requirements of the PRP would not be met, however, most firms who were required to adopt CSQM 1 and CSQM 2 did have a system of quality management at the time of inspection.

Compilation Engagements (CSRS 4200)

Practitioners/firms that performed compilation engagements continued to be fairly successful in meeting the requirements of the PRP (as indicated in the 2023-24 Inspection Highlights section). Firms often included working papers in their file documentation to support the financial information as not being false or misleading.

The following areas resulted in practitioners/firms not meeting the requirements of the practice review:

1. Not adopting CSRS 4200 – The standard was not adopted in the working paper file and a Section 9200 Notice to Reader report was inappropriately attached to the financial information prepared.
2. Insufficient adoption of CSRS 4200 – insufficient adoption of the standard into their working papers which did not include documentation of the following:
   1. Compliance with relevant ethical requirements, including an independence analysis;
   2. Engagement acceptance and continuance procedures;
   3. Knowledge of the entity’s business; and
   4. Acknowledgement of responsibility from management for the final compiled financial information.
3. Omitting the basis of accounting note.  
4. Inaccurate or misleading basis of accounting note – stating that financial information was prepared in accordance with a general-purpose framework (e.g. ASPE) when there was no statement of cash flow and all/most of the disclosure requirements under that framework were not met.

Additional common deficiencies noted in compilations were as follows:

• Lack of documentation for an appropriate assessment of independence, for example, when a threat to independence was identified and no safeguard was described;
• Missing one or more of the documentation requirements for the practitioner’s knowledge of the entity; and
• Incorrect dating of the compilation engagement report.

Tax Engagements

With respect to tax engagements, specifically T1s and T2s, issues encountered were due to a lack of knowledge or compliance procedures, such as adherence to client filing deadlines, no documentation within the file regarding consideration of foreign income and assets and not obtaining signed and dated T183s from clients prior to e-filing returns.

Deficiencies related to a lack of documentation or incorrect tax treatment may result in a firm not meeting the requirements of practice review.  For example, if a significant deduction was taken for a non-deductible amount, such as not adding back non-deductible legal fees or non-deductible life insurance expenses in the calculation of net income for tax purposes. Paragraph 18(1)(a) of the Income Tax Act indicates that no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred for the purposes of gaining or producing income from the business or property.

Pursuant to paragraph 18(1)(b) of the Income Tax Act, no deduction shall be made in respect of an outlay, loss or payment on account of capital, except as expressly permitted under the Income Tax Act. An example is the cost of a property not being allocated between land and building which could result in the total cost being added to the CCA schedule and CCA inadvertently taken on land.  

The use of disclaimers changed with the implementation of CSRS 4200. Prior to the effective date of CSRS 4200, practitioners were required under Section 9200 to include a disclaimer on financial information contained within tax returns (i.e. GIFI or T2125 – Statement of Business or Professional Activities or T776 – Statement of Real Estate Rentals). The disclaimer indicated that the information was “prepared solely for income tax purposes without audit or review from information provided by the taxpayer.” However, subsequent to the effective date of CSRS 4200 (periods ending on or after December 14, 2021), disclaimers should no longer be used on financial information contained within the tax returns. If a communication is to be attached to financial information, the only appropriate form of communication that can be attached is a compilation engagement report under CSRS 4200, which would also require the practitioner to meet all the requirements of the standard.

Focus Areas for the 2024-25 Practice Inspection Year

Assurance Engagements (Audits and Reviews)

CPABC will continue to focus on higher risk assurance engagements which may target a specific industry, a complex transaction or work performed outside the core area(s) of a practice. This may result in more extensive discussions during the file selection process and/or during the inspection of the file to ensure standards are appropriately met.

Quality Management (CSQM 1 and CSQM 2)

With CSQM 1 and CSQM 2 now fully in effect, the impact to firms that only perform related services engagements, such as compilation and trust engagements, will be significant since this is a new standard that these firms will need. As this will be a key focus area of the PRP the next few years, firms are encouraged to ensure they have properly implemented this new standard. Practitioners should review the CPA Canada Handbook, attend professional development courses, and refer to CPA Canada’s CSQM resource page for further guidance and understanding of this standard.

Compilation Engagements (CSRS 4200)

The 2024-25 year represents the final year of the 3-year inspection cycle since CSRS 4200 went into effect in December 2021. PROs will inspect the remaining firms in this cycle while also monitoring the “pass rate” for firms that are up for re-inspection in compilations this coming year.

 A few reminders with respect to CSRS 4200:

• There are scope exclusions for when certain services being performed do not require the completion of a compilation engagement (CSRS 4200 para 2) and practitioners should understand whether a compilation engagement is required for of their clients.
• If a compilation engagement is deemed appropriate, the firm must ensure all the requirements of the compilation engagement standard are met.
• A note describing the basis of accounting applied in the preparation of the compiled financial information is a core element of the compilation standard. The basis of accounting note is to assist users in understanding how the financial information was prepared and the practitioner may provide assistance; however, management retains responsibility for the compiled financial information and the selection of the basis of accounting.