Canadian Public Accountability Board issues risk alert on acquisitions impaired by year end and calls for stronger audit fraud risk work

The Canadian Public Accountability Board (CPAB) published an audit risk alert setting out considerations for auditors reviewing acquisitions of a business or assets that appear to have little or no operating history or actual value and that are partially or fully impaired by year end. The alert reflects inspection findings that auditors of Canadian reporting issuers did not adequately identify and evaluate fraud risk factors or perform sufficient procedures on the initial transaction even when the acquisition was written down to an immaterial or nil value by year end. CPAB linked the issue to concerns raised by the Canadian Securities Administrators in CSA Staff Notice 51-366 about venture-market acquisitions funded by significant securities issuance for assets or businesses of little apparent value, potentially at inflated prices and with misleading disclosure that could constitute market manipulation. Inspection observations included auditors concluding there was no risk of material misstatement due to fraud because an impairment was recorded by year end, leading to limited work on whether the acquired item met the definition and recognition criteria for an asset and on what changed between acquisition and impairment. CPAB highlighted fraud risk indicators tied to the transaction’s economic substance and business rationale, unusual contractual terms, potential undisclosed related parties, and potentially false or misleading information communicated by management, including in press releases. Where audit evidence remains insufficient, the alert notes that auditors may need to involve specialists and consider the impact on the audit opinion.