Canadian Public Accountability Board issues risk alert on acquisitions later impaired and weak auditor fraud risk assessment

The Canadian Public Accountability Board (CPAB) published an audit risk alert on audits of acquisitions of businesses or assets with little or no operating history or apparent value that are partially or fully impaired by year end. The alert draws on CPAB inspection findings and warns that auditors are not consistently identifying and responding to potential fraud risk factors in these transactions. CPAB links the issue to the Canadian Securities Administrators’ July 2025 Staff Notice 51-366, which raised concerns in venture markets about acquisitions funded through significant securities issuance at seemingly inflated prices and accompanied by potentially misleading disclosure. CPAB observed cases where auditors either did not identify fraud risk factors or concluded there was no risk of material misstatement due to fraud because the acquired business or asset was impaired by year end, leading to insufficient work on whether the acquired item met the definition and recognition criteria for an asset and what changed between acquisition and impairment. The alert highlights indicators auditors should scrutinize, including the economic substance of the deal, unusual contractual terms, potential undisclosed related parties, and potentially false or misleading information in financial reporting and market communications. Where evidence remains insufficient, CPAB notes that auditors may need to obtain further evidence, including via valuation or forensic specialists, and evaluate the impact on the audit opinion. CPAB points to similar messages in its Strengthening Audit Quality materials on audit evidence and says it will continue monitoring these emerging issues through inspections and further communications.