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Bulletin #0684-C

For further information, please contact:

Eva Lip
Manager, Financial Compliance
Compliance
For Distribution to Relevant Parties within your Firm

Findings Noted During Auditor Working Paper Reviews

Background

This Bulletin is intended to enhance awareness and understanding of the special audit requirements for external auditors engaged to perform a financial audit of a MFDA Member firm in accordance with Rule 3.5.1(b).  The findings included in this Bulletin were identified during MFDA Staff’s reviews of auditor working papers performed during the four year period ended December 31, 2015.

All findings identified and included in this Bulletin have been addressed with the respective engagement partners at the completion of MFDA Staff’s review of their working papers.

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 (“Form 1”) 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 Auditing Standards (“CAS”).  In addition, Rule 3.6 outlines specific audit engagement requirements that are to be performed by the external auditor of a MFDA Member, in addition to the CAS requirements.  Furthermore, Rule 3.6.5 requires the external auditor to retain copies of the Form 1 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. 

Summary of Review Findings

The following items are findings identified by MFDA Staff during the review of auditor working paper files performed pursuant to Rule 3.6.5 (with the applicable Rules noted in parentheses):

  • 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));
    • Reviewed the controls and procedures related to the Member’s accounting and back office trading systems (Rule 3.6.4);
    • Reviewed to ensure the trust asset and liability balances reported on the audited Form 1 were reconciled to the back office trading system (Rule 6.2(b)(iv) and (vii));
    • Reviewed the Member’s nominee name asset reconciliations (Rule 3.6.2(b)(iii));
    • Ensured there are signed custodial agreements in place with all entities holding investment products for the Member (Rule 3.6.2(b)(v));
    • Accounted for all securities that are in the physical possession of the Member (Rule 3.6.2(b)(ii));
    • Reconciled the balances on the Member’s trial balance to the balances reported on the Form 1 (Rule 3.6.1);
    • Performed audit tests and/or other audit procedures to ensure the margin and capital requirements used in determining the Member’s Risk Adjusted Capital were calculated in accordance with MFDA requirements (Rule 3.6.2(b)(vii));
    • Obtained written confirmations of the Member’s:
      • Operating and trust bank accounts (Rule 3.6.2(b)(vi)(A));
      • Nominee name security positions held at the issuing institutions (Rule 3.6.2(b)(vi)(B));
      • Own security positions held at external locations (Rule 3.6.2(b)(vi)(D)).
    • Obtained written confirmation from the Member’s lawyers as to the status of lawsuits and other legal matters (Rule 3.6.2(b)(vi)(G));
    • Confirmed, on a test basis, client accounts that were closed since the last audit date (Rule 3.6.2(b)(vi)(H));
    • Ensured the Member prepared the Form 1 on a trade date basis (Rule 3.6.1);
    • Performed all of the prescribed procedures in the Report on Compliance for Insurance and Segregation of Cash and Securities (Rule 3.6.2(b)(ix) and 3.6.3(a)).
  • The Notes to the audited Form 1 did not disclose that trade date basis of reporting was used for the purposes of the capital calculations (Rule 3.6.1 and Note 6 of the General Notes and Definitions of the Form 1).
  • The Notes to the audited Form 1 were not specifically tailored to the MFDA requirements (Rule 3.6.1).

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