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Bulletin #0428-C

Compliance
Auditor Working Paper Review – Common Deficiencies

Contact: Laura Milliken
BULLETIN #0428 – C
Director, Financial Compliance
March 22, 2010
Phone: 416-943-5843

E-mail: lmilliken@mfda.ca

MFDA Bulletin

Compliance

For Distribution to Members’ Audit Firms and other Relevant Parties within your Firm

Auditor Working Paper Review – Common Deficiencies

Objective

The purpose of this Bulletin is to enhance awareness and understanding of the special audit
requirements for external auditors engaged to perform a financial audit of an MFDA Member
firm in accordance with Rule 3.5.1(b).

Requirements

MFDA Rule 3.5.1(b) requires each Member to file annually with the MFDA, through its auditor,
audited financial information of the Member within 90 days of the Member’s fiscal year end.
The audited financial information must be reported in the Form 1 – Financial Questionnaire and
Report (“FQR”) format and filed using the MFDA web-based application, the Electronic Filing
System (“EFS”). In accordance with Rule 3.5.3, the audit engagement is to be conducted in
accordance with Canadian generally accepted auditing standards (“GAAS”). In addition, Rule
3.6 outlines specific audit engagement requirements that are to be performed by the external
auditor of an MFDA Member, in addition to the GAAS requirements. Furthermore, Rule 3.6.5
requires the external auditor to retain copies of the FQR and all audit working papers for a period
of seven years and allow access to them for review by the MFDA and the MFDA Investor
Protection Corporation.

Common Deficiencies

The following are some of the deficiencies identified to date during MFDA staff’s review of
auditor working paper files performed pursuant to Rule 3.6.5:

Auditors’ Reports

• The date of the Part I Auditors’ Report referenced on the Part II Auditors’ Report was
different than the actual date of the Part I Auditors’ Report (Form 1).

Materiality Level

• There was no documentary evidence that the auditor considered Risk Adjusted Capital
and Early Warning Excess when determining materiality level for the audit (Rule
3.6.2(a)).

Review of Back Office System

• There was no documentary evidence that the auditor reviewed the Member’s back office
system (Rule 3.6.4).

Trade Date Basis of Reporting

• There was no documentary evidence that the auditor ensured that the Member reported
the market value of nominee name purchases and redemption proceeds on Statement A
on a trade date basis (Form 1 – General Notes and Definitions #4 and Rule 3.6.1).

Trust Accounts

• There was no documentary evidence that the auditor reconciled trust asset and liability
balances reported on the audited FQR to the back office trading system (Rule 3.6.1).

• There was no documentary evidence that the auditor ensured all suspense trust account
balances were reported on the Member’s FQR (Rule 3.6.1).

• There was no documentary evidence that the auditor reviewed the Member’s trust
account reconciliations, including physical trust accounts and suspense general ledger
trust accounts (Rule 3.6.2(b)(iv)).

• There was no documentary evidence that the auditor obtained written confirmation of all
Member’s trust accounts (Rule 3.6.2(b)(vi)(A)).

Nominee Name Assets

• There was no documentary evidence that the auditor reviewed the Member’s nominee
name asset reconciliations, including Guaranteed Investment Certificates (Rule
3.6.2(b)(iii)).

• There was no documentary evidence that the auditor ensured there are signed custodial
agreements in place with entities holding securities and other investment products on
behalf of the Member (Rule 3.6.2(b)(v)).

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• There was no documentary evidence that the auditor ensured that the minimum
regulatory clauses of MFDA Rule 3.3.3(b) were contained in the terms of signed
custodial agreements (Rule 3.6.1).

• There was no documentary evidence that the auditor performed alternative verification
procedures on nominee name account confirmations where responses to second requests
were not received (Rule 3.6.2(b)(vi)).

• There was no documentary evidence that the auditor obtained written confirmation of the
Member’s nominee name client accounts, including those accounts of the Member’s
directors and officers (Rule 3.6.2(b)(vi)(E) and (F)).

• There was no documentary evidence that the auditor confirmed, on a test basis, client
accounts with nil balances and those accounts that were closed since the last audit date
(Rule 3.6.2(b)(vi)(F)).

Security Positions

• There was no documentary evidence that the auditor accounted for all securities in
physical possession by physical examination and comparison with the books and records
of the Member (Rule 3.6.2(b)(ii)).

• There was no documentary evidence that the auditor obtained written confirmations of
the Member’s nominee name security positions held at the issuing institutions (Rule
3.6.2(b)(vi)(B)).

• There was no documentary evidence that the auditor obtained written confirmations of
the Member’s own security positions held at external locations (Rule 3.6.2(b)(vi)(D)).

Other Written Confirmations

• There was no documentary evidence that the auditor obtained written confirmation of the
Member’s operating bank account (Rule 3.6.2(b)(vi)(A).

• There was no documentary evidence that the auditor obtained written confirmation of the
Member’s executed MFDA Uniform Subordinated Loan Agreement (Rule
3.6.2(b)(vi)(C)).

Policies and Procedures Manual

• There was no documentary evidence that the auditor reviewed the Member’s internal
policies and procedures relating to segregation of client cash and securities. In addition,
the Member’s policies and procedures manual did not meet the minimum requirements of
MFDA Policy No. 4 – Internal Control Policy Statement 5 and the auditor did not report

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the exceptions on the Report on Compliance with Segregation of Cash and Securities
(Rule 3.6.2(b)(ix)).

• There was no documentary evidence that the auditor reviewed the Member’s internal
policies and procedures relating to monitoring bonding and insurance. Furthermore, the
Member’s policies and procedures manual did not meet the minimum requirements of
MFDA Policy No. 4 – Internal Control Policy Statement 3 and the auditor did not report
the exceptions on the Report on Compliance for Insurance (Rule 3.6.3(a)).

Incorrect Reporting of Balances

• A balance reported on Statement A line 7, which forms part of Total Other Allowable
Assets on Statement A line 10, was not receivable from Acceptable Entities (Form 1 –
Notes and Instructions to Statement A)
.

• Long-term loan owing to a related party which was not subordinated was incorrectly
classified on Statement A line 34 rather than as a current liability on Statement A line 30
(Form 1 – General Notes and Definitions #11).

• Retractable preferred shares that were not subject to a signed Undertaking in accordance
with MFDA Member Regulation Notice MR-0013 (“MR-0013”) were incorrectly
reported as capital on Statement A line 38 rather than as a current liability on Statement
A line 30 (MR-0013).

(Doc #149207v2)

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