PCAOB finds fault with half of Ernst and Young Canada

audits inspected

One of the Big Four accounting firms, Ernst & Young Canada, was inspected by the
Public Company Accounting Oversight Board during the year. It concluded that the firm has
multiple deficiencies in its audit reports and engagements. Under the Sarbanes-Oxley Act,
registered firms from outside of the United States are subjected to the inspections done by
PRCAOB in the same process done with the US firms. EY Canada has been the principal audit
firm in multiple public companies and the PCAOB investigated that half of its engagements have
deficiencies within its audits.

The deficiencies mentioned are the failure to adequately inquire sufficient evidence
through substantive testing procedures and instead relying on IT-automated software in
conducting these procedures. Additionally, there is a failure to provide appropriate evidence in
its tests of controls relating to revenue, accounts receivable, and liabilities. The firm has given a
lack of audit documentation thus, failed to comply with the policies provided for auditing. One
of the findings of PRCAOB, other than the failure to comply with the auditing process, was its
breach of independence provided that it is one of the significant ethical principles governed by
professional accountants. The board learned about the firm’s non-compliance with financial
relationships with the client. It is said that a member of the engagement team accepted an offer
of an accounting employment role from a client and some related to non-audit services to the
client.

This issue can be wrapped around three concepts related to auditing. Firstly, the audit
documentation, substantive testing, and the Code of Ethics for Professional Accountants.
Documentation in auditing is extremely important as part of providing reasonable assurance to
the client. As part of the theoretical framework of auditing, it is assumed that all documents are
verifiable meaning that documents support account balances and transactions made by the
client to make use as evidence. It provides a record of work done during the audit, including the
procedures followed, and the tests conducted, and would assist the auditor to reach its
conclusions. It facilitates the planning, performance, and supervision of the engagement, and is
the basis for the review of the quality of the work. This, however, was failed to provide by the
auditors of EY Canada despite the audit of financial statements.

The Ey auditors conducted substantive testing in one of its clients, a Canadian energy
company however, EY Canada's engagement partner failed to evaluate a material estimate
reported by that company: the allowance for its customer receivables. Among other violations,
the engagement partner failed to obtain adequate support for key assumptions used in his
evaluation of the reasonableness of the allowance. He also failed to conduct substantive testing
on the data provided for its receivables regarding assertions of completeness and accuracy.
When auditors estimate that aspects in the financial statements have a high risk, they are to
perform additional testing procedures and exercise professional due care.
 Intentionally nondisclosure of sufficient information would indicate that the audit firm
lacks professional behavior. Under the Code of Ethics for Professional Accountants, the auditor
must obtain professional behavior and integrity in performing accounting or auditing
procedures. Professional behaviour refers to the ability of the auditors to comply with the
regulations provided by the law and policies as well as avoiding any conduct that might discredit
the profession. Additionally, the auditors lack the independence to conduct their audits because
one of its engagement members became an employee of one of its clients which would
demonstrate the lack of integrity and conflict of interest when performing an audit.

References:

PCAOB Sanctions EY Canada Engagement Partner for Flawed Auditing of Management

Estimate. (n.d.). Default. Retrieved March 3, 2024, from
https://pcaobus.org/news-events/news-releases/news-release-detail/pcaob-sanctions-ey-canad
a-engagement-partner-for-flawed-auditing-of-management-estimate

Ellis, C. (2024) PCAOB finds fault with half of Ernst and Young Canada audits inspected. .
Canadian Accountant - Accounting News, Business & Finance.
https://www.canadian-accountant.com/content/practice/pcaob-ey-canada-inspection-report-2
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