Practice Review 2024-25 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, with a strong emphasis on educating practitioners. In instances of non-compliance, the PRP ensures appropriate follow-up and/or remedial action is taken. A practice inspection will occur within the first year of a firm’s registration and every three years thereafter. However, certain risk factors could trigger a firm’s inspection cycle to be shorter than three years.

During a practice review, a Practice Review Officer (PRO) will review a practitioner’s completed assurance and/or non-assurance engagement files and determine whether the files comply with professional standards. When applicable, a firm’s quality management system is also included for review.  When a finding is identified, a reportable or non-reportable deficiency is raised.  Reportable deficiencies are considered material departures from professional standards that can be important to the quality of the work performed to support the usefulness of the financial statements, while non-reportable deficiencies are immaterial departures from professional standards. 

Once all selected files have been reviewed, the PRO assesses the impact of the reportable deficiencies and issues a “rating” based on one of the following three categories:

1. Meets Requirements: No further action is required but the firm is still expected to address any reportable deficiencies, and the firm will be reviewed in the ordinary course of its next inspection cycle.
2. Meets Requirements with Action Plan: The firm is required to provide a written action plan which should detail how specific reportable deficiencies will be addressed. If the action plan is deemed satisfactory, the firm will be inspected in the ordinary course of its next inspection cycle.
3. Does Not Meet Requirements: In addition to a written action plan, the firm is required to have a re-inspection within one year at a cost to be borne by the firm, along with any other recommendations deemed necessary by the Public Practice Committee (the “Committee”).

A staff review is performed after a PRO has issued their rating to ensure consistency of results against other inspections based on the identified deficiencies. These results are then submitted to the Committee on an anonymous basis for review and approval. 

In determining the remedial actions to be taken by a firm, the Committee’s considerations include the:

• nature and severity of the identified reportable deficiencies;
• adequacy of the firm’s action plan and/or analysis for restatement, and commitment towards addressing the recommendations;
• cooperation of the practitioner/firm and commitment towards improving overall firm quality; and
• risk to the public.

The Committee is comprised of 20 experienced licensed practitioners and 2 public representatives, who meet four times a year to discuss and approve various public practice matters, including practice inspection results.

Introduction

This article focuses on notable practice review observations from the past inspection year (April 1, 2024 to March 31, 2025), such as key highlights, significant recurring themes that caused firms to not meet requirements, and common deficiencies across the different engagement types. Lastly, the report will discuss areas of focus for the 2025-2026 inspection year.

2024-2025 Inspection Highlights

In the past inspection year, 937 practice inspections were completed and approved with an overall pass rate of 91%. Of the total practice inspections completed:

• 395 inspections were practices that performed assurance and non-assurance engagements (“assurance firms”); and
• 542 inspections were practices that performed only non-assurance engagements (“non-assurance firms”).

Of the 395 practice reviews of assurance firms:

• 87% were assessed as “Meets Requirements” or “Meets Requirements with Action Plan”; and
• 13% were assessed as “Does Not Meet Requirements” and, therefore, required a re-inspection. 

Of the 542 practice reviews of non-assurance firms:

• 94% were assessed as “Meets Requirements” or “Meets Requirements with Action Plan”; and
• 6% were assessed as “Does Not Meet Requirements” and, therefore, required a re-inspection.

The increase in the overall pass rate was due to more non-assurance firms adequately adopting the CSRS 4200 Compilation Engagement standard, which went into effect December 2021. An improved pass rate was expected for these firms as their inspection cycle fell more than two years after the effective date of the new standard.

An area of focus last year were non-assurance firms that performed related services engagements (i.e. compilations), and were required to design and implement a system of quality management.  While most of these firms produced a copy of their system of quality management at the time of their practice review, they still encountered challenges resulting in various reportable deficiencies which is described later in this article. 

Lastly, included in the 937 practice inspections were 66 re-inspections conducted (i.e., firms that were assessed as “Does Not Meet Requirements” in their previous inspection). For these follow-up reviews:

• 89% were assessed as “Meets Requirements” or “Meets Requirements with Action Plan”; and
• 11% were assessed again as “Does Not Meet Requirements” and therefore, will require a re-inspection of the practice within a year.

The statistics for re-inspections above remained consistent with the prior year. 

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

• For assurance engagements, the common areas where there was insufficient documentation around key assertions of material balances and classes of transactions that may have resulted in a material error were as follows:
  • Existence and completeness of inventory;
  • Valuation of assets, such as related party receivables and marketable securities; and
  • Cut-off, accuracy and completeness of revenue, especially related to the percentage of completion method.
• Lack of identification or application of the appropriate CPA Canada Handbook standard to an accounting issue was regularly identified in the following areas:
  • Incorrect treatment of forgivable loans;
  • Incorrect classification of assets and liabilities;
  • Failure to disclose the breach of a financial covenant; and
  • Incorrect treatment of a contribution or grant in a not-for-profit organization.
• For assurance engagements, lack of appropriate procedures in planning the engagement or on opening balances.
• In review engagements (CSRE 2400), minimal or no analytical procedures performed in areas where the practitioner assessed a material misstatement was likely to arise.
• Consistent with the previous two years, 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).
• For non-assurance firms, the failure to adopt the Canadian Standards on Quality Management (CSQM 1 and CSQM 2).

Key Practice Review Observations

The most common identified deficiencies are listed below, with some of these having been noted in previous years. Each of these reportable deficiencies could have had a different degree of significance based on the facts and circumstances on a particular file, and the 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 a firm being assessed as “Does Not Meet Requirements”.

Financial Statement Presentation and Disclosure

Part II - 3400 Revenue 

• Inaccurate or incomplete disclosure of revenue recognition policy when entity had multiple types of material revenue transactions. (paragraph 31)
• Inaccurate or incomplete disclosure of contracts in progress at the end of the reporting period, accounted for using the percentage of completion method. (paragraph 32A)
• Major categories of revenue recognized during the period were not separately disclosed. (paragraph 33)

Part II - 3856 Financial Instruments

• Retractable or mandatorily redeemable shares issued in a tax planning arrangement were incorrectly presented in the equity section of the balance sheet when all conditions were not met.  (paragraph 23)
• Financial assets and financial liabilities with no legally enforceable right to set-off were inappropriately reported as a net amount on the balance sheet.  (paragraph 24)
• Disclosure regarding financial liabilities were missed or certain required elements were omitted, such as the aggregate amount of payments estimated to be required in each of the next five years, interest rate, maturity date, repayment terms and terms and conditions of secured liabilities.   (paragraphs 43-45)
• When a financial liability was in default or breach of any term or covenants that permits a lender to demand accelerated repayment during the period, there was no disclosure of this fact in the financial statements. (paragraph 46)
• Incomplete or missing disclosure of retractable or mandatorily redeemable shares issued in a tax planning arrangement.  (paragraph 47(c), (d), (e))

Part II - 3840 Related Party Transactions

• Disclosure regarding transactions with related parties were either missed or incomplete. Disclosure, if present, was missing information about the transactions such as: 
  • Description of the relationship. (paragraph 51(a))
  • Description of the transaction and recognized amounts. (paragraph 51(b), (c))
  • Measurement basis used. (paragraph 51(d))
  • Terms and conditions of amounts due to/from. (paragraph 51(e))

Part II – 3800 Government Assistance

• Government assistance drawn up it in the form of a loan that is forgiven was not accounted for in the same manner as a grant. (paragraphs 24-25)

Part II - 1510 Current Assets and Current Liabilities

• Assets that were not ordinarily realizable within one year from the date of the balance sheet were incorrectly presented as current assets. (paragraph 3)
• Cash subject to restrictions that prevent its use for current purposes were not excluded from current assets. (paragraph 7)
• Debt where the creditor has at that date, or will have within one year from that date, the unilateral right to demand immediate repayment of any portion or all of the debt under any provision of the debt agreement was not classified as current liability. (paragraph 13)

Part II - 1540 Cash Flow Statement

• Various accounts were incorrectly presented as a component of cash and cash equivalents. 
  • Bank overdrafts there were not fluctuating frequently between positive to overdrawn. (paragraph 10)
  • Investments that were not readily convertible to a known amount of cash and subject to an insignificant risk of changes in value. (paragraph 8)
• Disclosure regarding the policy the enterprise adopts in determining the composition of cash and cash equivalents was omitted or incorrect. (paragraph 43)
• Investing and financing transactions that do not require the use of cash or cash equivalents were incorrectly included in the cash flow statement. (paragraph 41)

Part II - 3041 Agriculture

• Section was not adopted when it was applicable to financial statements beginning on or after January 1, 2022. (paragraphs 1-8, 91)
• Disclosure for productive biological assets missed elements such as:
  • Qualitative description of each major category of productive biological asset. (paragraph 89(a))
  • The quantities held of each major category of productive biological asset. (paragraph 89(b))
  • The amortization method used, including the amortization period or rate. (paragraph 89(c))

Part II – 3240 Share Capital

• Disclosure of share capital were incomplete, often missing the redemption value of redeemable shares, or the number of shares of each class, and the par value, if any. (paragraph 20)

Part III - 4410 Contributions – Revenue Recognition

• 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 that restriction.  (paragraphs 31-46, 65-67)
• Financial statements did not properly disclose the policies followed in accounting for endowment and/or restricted contributions. (paragraph 21)
• Contributions by major source were not separately disclosed in the financial statements. (paragraph 22)

AcG-14 Disclosure of guarantees

• Disclosure regarding each guarantee or each group of similar guarantees, even when the likelihood of the guarantor having to make any payments under the guarantee is either missing or incomplete.  (paragraph 9)

BC Societies Act 

• Remuneration that was paid by the society to the employees or persons under a contract with services that was at least the amount specified in the regulations was not disclosed in a note to the financial statements. (paragraph 36)
• Remuneration that was paid by the society to the directors in the period in relation to which the financial statements are prepared was omitted or missing the information required by the Act. (paragraph 36)

Audit Engagements

CAS 230 – Audit Documentation

• The auditor did not assemble the audit documentation and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. (paragraph 14)

CAS 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

• Missing or inadequate documentation of auditor’s inquiries of those charged with governance to determine whether they have knowledge or any actual, suspected or alleged fraud affecting the entity. (paragraphs 21-22)
• Missing or inadequate documentation of 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. (paragraph 33)

CAS 315 – Identifying and Assessing the Risks of Material Misstatement

• The auditor did not obtain an understanding of the control environment relevant to the preparation of the financial statements, through performing risk assessment procedures. (paragraph 21)
• Documentation of risk assessment procedures with respect to obtaining an understanding of control activities did not include an evaluation whether controls are designed effectively to address the risk of material misstatement at the assertion level or effectively designed to support the operation of other controls. (paragraph 26)
• Documentation regarding the discussion between the engagement partner and other key engagement team members was incomplete or omitted. (paragraphs 17-18)

CAS 330 – The Auditor’s Responses to Assessed Risks

• The auditor did not document the design or performance of substantive procedures for material class of transactions, account balances and disclosures, including inadequate documentation regarding the linkage of those procedures with the assessed risks at the assertion level (paragraphs 18-19, 25-28)

CAS 560 – Subsequent Events

• The audit procedures did not include an understanding of procedures management has established to identify subsequent events, or the inquiry with management and, where appropriate, those charged with governance as to whether any subsequent events have occurred that might affect the financial statements. (paragraphs 6-8)

CAS 580 – Written Representations

• The written representation from management was not appropriately dated as near as practicable to the date of the auditor's report. (paragraph 14)

Review Engagements (CSRE 2400)

Acceptance and Continuance of Client Relationships and Review Engagements

• No documentation about the consideration of ethical requirements, including independence as part of client acceptance and continuance (paragraphs 19, 24, 27)
• The practitioner did not agree the terms of the engagement with management or those charged with governance, as appropriate, prior to performing the engagement. (paragraph 34) 

Performing the Engagement

• The practitioner did not or sufficiently document an understanding of the entity’s accounting systems and accounting records, such as revenues, receivables and receipts or purchases, payables and payments. (paragraphs 44)
• The practitioner did not identify areas of in the financial statements where material misstatement is likely to arise based on their understanding of the entity. (paragraph 45)
• The practitioner did not sufficiently document the inquiry and analytical procedures performed on material items and/or areas in the financial statements where material misstatements are likely to arise. (paragraphs 46, 104). This includes common areas such as:
  • Sales (inter-relationship/comparison)
  • Expenses (inter-relationship/comparison)
  • Sales (cut-off)
  • Related party receivables (collectability) 
• The documentation of the practitioner’s inquiries of management and others within the entity, as appropriate, did not include some or all of the inquires required. (paragraph 47)
• When performing an initial review engagement, the practitioner did not obtain sufficient appropriate evidence about whether opening balances contain misstatements that materially affect the current period’s financial statements. (paragraph 55)

Written Representations 

• The written representations from management failed to disclose to the practitioner some of the key elements of the standard. (paragraph 69)

The Practitioner’s Report 

• The practitioner dated the report at a date earlier than the date on which (paragraph 103):
  • The practitioner has obtained sufficient appropriate evidence as the basis for the practitioner’s conclusion on the financial statements; 
  • Those with recognized authority have asserted that they have taken responsibility for the financial statements.  

Documentation 

• The practitioner did not assemble the final engagement file on a timely basis after the date of the engagement report. (paragraph 104, A172) 

Other Engagements

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)
2. When performing specified audit procedure reports, there was inadequate documentation of the planning and procedures performed. (CAS 805)

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 and agreed-upon procedures engagements) on December 15, 2023. For firms conducting an audit or review of financial statements or other assurance services, the effective date was one year earlier. 

Most assurance firms continued to be successful in providing a system of quality management that met most of the requirements under the 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 these quality risks. 

For non-assurance firms, there were instances where the firm did not adopt the system of quality management standards at the time of inspection, and was assessed “does not meet requirements”.  While most firms did have a system of quality management at the time of inspection, many of these firms encountered challenges meeting some of the core requirements of the standard, such as not establishing a quality objective or not identifying and assessing quality risks.

Compilation Engagements (CSRS 4200)

The 2024-2025 year represented the final year of the 3-year inspection cycle since CSRS 4200 came into effect and practitioners continued to demonstrate improvement in meeting the requirements of the standard (as indicated in the 2024-2025 Inspection Highlights section). 

In instances when a practitioner did not meet the requirements of the practice inspection program, the following key findings were identified:

1. Not adopting CSRS 4200 – a Section 9200 Notice to Reader report was inappropriately attached to the financial information prepared, and the working paper file did not meet any of the documentation requirements of the standard. 
2. Insufficient adoption of CSRS 4200 – the engagement file did not include documentation of:
   1. Compliance with relevant ethical requirements, including an independence analysis; 
   2. Engagement acceptance and continuance procedures; 
   3. Knowledge of the entity’s business and accounting system; and 
   4. Acknowledgement of responsibility from management for the final compiled financial information. 
3. Failure to include a basis of accounting note in the compiled financial information.  
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 included. 

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 accounting system; 
• Incorrectly dating the compilation engagement report; and
• Incomplete engagement letter (not including all the CSRS 4200 requirements). 

Tax Engagements

With respect to tax engagements, specifically T1s and T2s, issues encountered were due to a lack of knowledge or compliance procedures. For example, use of an incorrect tax treatment, not adhering to client filing deadlines, not having 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 the practice inspection program.  Examples of incorrect tax treatments include inappropriate deductions made in respect of an (1) 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 (per paragraph 18(1)(a) of the ITA) or (2) outlay, loss or payment on account of capital (per paragraph 18(1)(b) of the ITA). 

The use of disclaimers changed with the implementation of CSRS 4200, whereby disclaimers should no longer be used on financial information contained within the tax returns. The only appropriate form of communication that can be attached to financial information is a compilation engagement report under CSRS 4200, which would then require the practitioner to meet all requirements of the compilation standard.

Focus Areas for the 2025-26 Practice Review Year

Higher Risk Assurance Engagements 

Last year, the client list template was enhanced for assurance firms to specifically identify their clients’ industry and highlight key risk factors (when applicable) specific to the client engagement.  The practice review team will continue to focus on higher risk assurance engagements and may target a specific industry, a complex transaction or work performed outside the practitioner’s core area(s) of practice. This could 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) 

The focus on a firm’s system of quality management will continue to be monitored for both assurance firms and firms performing related services engagements. Key focus areas will include the (1) design and implementation of a firm’s system of quality management and (2) documentation of an evaluation of a firm’s quality management system which is required to be performed within one year following implementation.  

Firms are strongly advised to ensure they have properly met all requirements of the standard. Practitioners should review the CPA Canada Handbook, attend professional development courses, and can refer to CPA Canada’s CSQM resource page for further guidance in understanding and applying the standard.