aci toolkit evaluation of external auditor

8/15/2019 ACI Toolkit Evaluation of External Auditor

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AUDIT COMMITTEE INSTITUTE – CANADA

Evaluation of the external auditor

Uncertain economic forecasts and a

changing regulatory environment define

today’s world. As a result, reliable financial

information and high-quality audits have

never been more essential.

Today, audit committee members are more

focused than ever on enhancing both the

effectiveness and efficiency of their audit

committees, including improving the interaction of

the audit committee with management, internal

audit, and the external auditors. ndeed, the

relationship with the external auditors is a !ey

element of reform globally " audit committees

seem set to ta!e on greater responsibilities,including an enhancement of the responsibilities

associated with recommending the appointment

of external auditors and approving non-audit

services.

The audit committee plays a !ey role in !eeping under review the scope and results of the external audit, its

cost effectiveness and the independence and ob#ectivity of the auditors. $here the auditors also supply a

substantial volume of non-audit services to the company, the committee should !eep the nature and extent of

such services under review, see!ing to balance the maintenance of ob#ectivity and value for money.

n the current environment, many audit committees are considering how they should discharge theirresponsibilities in relation to the effectiveness and efficiency of the external audit arrangements.

Tendering the audit is by no means the only available option under this responsibility " audit committees

are capable of evaluating the performance of their independent auditors and holding them accountable

for the performance of their professional duties.

% &'(& )*+ *, a anadian limited liability partnership and a member firm of the

)*+ networ! of independent member firms affiliated with )*+ nternational

ooperative /0)*+ nternational12, a 3wiss entity. All rights reserved.

A review of the audit process, the effectiveness and


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performance of the audit team, and the output, quality

and cost effectiveness of the audit, is a valid alternative

to the tender approach. 4ot only would such a review

help optimi5e the performance of auditors6 it would also

encourage good communication between the auditor and

the audit committee.

The review should evaluate the relationship between

the auditor and executive management and ensure

that an appropriate balance exists. The relationship

should not be so close as to put at ris! the auditors’

independence

and ob#ectivity yet, at the same time, should be such that

management and auditors can wor! together in an

environment of constructive challenge. This paper suggests a

chec!list framewor! for an audit committee to carry out a

formal

review of the effectiveness and efficiency of their external

auditors, without an audit tender. 3uch a review provides

the audit committee with a disciplined approach to !eeping

the auditors’ performance under review. t will also help to

ensure that the auditors remain alert to the company’s

needs and to maintaining an appropriate relationship with

the executive management, the audit committee and the

board as a whole.


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Calibre of externalaudit firm

$hat is the reputation of

the external audit firm7

Are there recent or

current litigation cases

against the firm7 $hat

is the reputation and

presence of the external

audit firm in this

industry7

8oes the external audit firmhave the si5e, resources andgeographical coverage

required to audit thiscompany7

Quality ro!e""e"

Factors to be

considered include the

level and nature of

review procedures, the

approach to audit

judgments and issues,

independent quality

control reviews and the

external audit firms

approach to risk.


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$hat are thequality controlprocesses in theexternal auditfirm7

9ow are !ey

audit individuals

at the externalaudit firm

compensated

and evaluated,

and do these

compensation

and evaluation

schemes run the

ris! of impairing

the external

auditor’s

independence7

$hat is theexternal audit

firm’s process for

internal review of

accounting

#udgments,

including an

understanding of

the !ey issues7

$hat relevantspecialists doesthe external auditfirm employ andhow are theselin!ed to the auditprocess7

Audit team


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8o the

individuals

assigned to

the external

audit team

have the

requisite

expertise,

including industry

!nowledge, to

effectively audit this

company7

plans in place which

meet the relevant

audit partner rotation

requirements and

Audit "!oe Factors to be

s the

external

audit

scope

adequat

e to

address

all of

the

financia

l

reportin

g ris!s

facing

the

compan

y7

8oes

the

external

audit

firm

agree

the

audit

scope

and

plan

with the

audit

committ

ee7


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s specialist input to the audit in areas such as taxation, pensions, regulatory and environment at an

appropriate level7 Are all !ey operations covered by the external audit7

9ow are overseas and cross-border audits controlled and is audit effectiveness regarded as consistent

internationally7 Are the reporting processes for subsidiary audit teams effective7

$hat is the external audit firm’s approach to see!ing and assessing management

representations7 8oes the external auditor have an effective wor!ing relationship with internal

audit7


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A udit fee

s the external audit fee reasonable given the

scope of the external audit, and how does the audit

fee compare with other similarly-si5ed companies

in this industry /a fee that is either too high or too

low can be of concern27

9ow are differences between actual and estimated

fees handled7

s an assessment made of the amounts andrelationship of audit and non-audit fees andservices7


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8oes the external audit firm

advise the audit committee

about significant issues and

new developments regarding

ris! management, corporate

governance, financial

accounting and related ris!s

and controls on a timely basis7

8oes the external

auditor discuss the

critical accounting

policies and whether

the accounting

treatment is

conservative or

aggressive7

8oes the external

audit firm meet

freely, regularly, and

on a confidential

basis with the audit

committee7 8oes

the external audit

firm resolve

accounting issues in

a timely manner7

8oes the external audit firmsee! feedbac! on the qualityand effectiveness of theservice they are providing7


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s the

relationship

with the

external auditor

controlled by

the audit

committee ordoes

management

control the

relationship7

8oes the externalaudit firm have openlines ofcommunication andreporting with theaudit committee7

Are unad#usted audit

differences andsignificantwea!nesses ininternal controlsappropriatelycommunicated7

8o the individuals

assigned to the

audit

demonstrate a

high degree of

integrity in their

dealings with the

audit committee7

8oes the external

audit firm discuss

their internal process

for ensuring

independence with

the audit committee7

8oes management

respect the external

auditors as providers

of an ob#ective and

challenging audit

process7

s the level

and nature

of

entertainme

d

m

a

n

a

g

e

m

e

n

t

a

p

p

r

o

p

r

i

a

t

e

7

8

o

e

s

t

h

e

n

a

ture of

non-audit

services

provide

any

potential

to impair

audit

independe

nce7


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f you would li!e further information on any of the

matters discussed in this publication, please contact

your )*+ adviser or email )*+’s Audit

ommittee nstitute at a!i!anada#$m%&!a&

% &'(& )*+ *, a anadian limited liability partnership and a member firm of the

)*+ networ! of independent member firms affiliated with )*+ nternational

ooperative /0)*+ nternational12, a 3wiss entity. All rights reserved. :;


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$m%&!a'audit!ommittee
http://www.kpmg.ca/auditcommitteehttp://www.kpmg.ca/auditcommittee

aci toolkit evaluation of external auditor

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