Download - 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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% &'(& )*+
*, a anadian
limited liability
partnership and a member firm
of the )*+ networ! of
independent member firms
nternational12, a 3wiss
entity. All rights
reserved.
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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