United States: Help Is Here For Audit Committees—CAQ Offers Updated Auditor Assessment Tool

Last Updated: April 5 2019
Article by Cydney Posner

To fulfill their oversight responsibilities, audit committees typically evaluate the outside auditor at least annually to determine, in part, whether the auditor should be engaged for the subsequent fiscal year. The Center for Audit Quality has just published a new updated External Auditor Assessment Tool, which is "designed to assist audit committees in carrying out their responsibilities of appointing, overseeing, and determining compensation for the external auditor." Beyond oversight, the CAQ observes that a "[r]obust, two-way dialogue that includes providing constructive feedback to the external auditor may improve audit quality and enhance the relationship between the audit committee and the external auditor." Like many other helpful CAQ tools, this tool provides a number of sample questions to help audit committees satisfy their oversight obligations with regard to the outside auditor. (The discussion below includes only a sampling of the CAQ's questions provided in the Assessment Tool.) The CAQ also provides a sample form that can be used to solicit input about the outside auditor from company personnel who have had substantial contact with the auditor.

The updated CAQ assessment tool provides sample questions for the audit committee to elicit information related to these four topics, considered key to the evaluation:

  • "quality of services and sufficiency of resources provided by the engagement team;
  • quality of services and sufficiency of resources provided by the audit firm;
  • communication and interaction with the external auditor; and
  • auditor independence, objectivity, and professional skepticism."

Engagement team quality of services and sufficiency of resources

With regard to assessment of the engagement team, the CAQ maintains, the audit committee will need to consider "whether the primary members of the engagement team demonstrated the knowledge, skills, and experience necessary to address the company's risks of material misstatement. The engagement team should have provided details regarding its risk assessment at the outset of the audit, including an assessment and discussion regarding fraud risks." The committee should also expect the engagement team to show a "good understanding of the company's business, industry, and the impact of the economic environment on the company," including responding effectively to significant audit issues that relate to the company and its industry, such as relevant changes in accounting standards. To monitor the quality of the work performed, the committee will also need to monitor the nature and extent of participation by other firms in the audit firm's global network.

Below are some of the CAQ's sample questions in this area:

  • Did the engagement team have sufficient access to specialized expertise during the audit?
  • Were additional and appropriate resources available to complete the audit timely and efficiently?
  • Was the lead audit engagement partner accessible to the audit committee and company management?
  • Did the lead audit engagement partner devote sufficient attention and leadership to the audit?
  • Did the external auditor seek feedback on the quality of the services provided?
  • Did the lead audit engagement partner discuss the audit plan, including the use of technology and how it addressed company- and industry-specific areas of accounting and audit risk (including fraud risk and other significant risks) with the audit committee?
  • Did the lead audit engagement partner discuss any risks of fraud in the financial statements that were factored into the audit plan?
  • If other accounting firm(s) participated in the audit in various domestic locations, or in other countries through the audit firm's global network or other audit firms, did the lead audit engagement partner provide information about the technical skills, experience, and professional objectivity of those external auditors?
  • Did the lead audit engagement partner bring the resources of his or her firm to the audit and advise the audit committee of the results of any consultations with the audit firm's national professional practice office or other technical resources on accounting or auditing matters?
  • Were the scope, hours, and cost of the audit reasonable and sufficient for the size, complexity, and risks of the company?

Audit firm quality of services and sufficiency of resources

The CAQ identifies two key issues for audit committees to consider in assessing the audit firm:

  • "whether the audit firm has the relevant industry expertise, geographical reach, sufficient resources, appropriate specialists and/or national office resources necessary to continue to serve the company; and
  • the audit firm's system of quality control designed to deliver timely, efficient, effective audits in accordance with applicable professional standards."

Essentially, the CAQ asks how the firm "promotes and monitors audit quality," and identifies six elements as key to quality: leadership, culture and firm governance, which together set the tone for quality control; ethics and independence, which are foundational qualities for professional responsibility, integrity and objectivity; acceptance and continuance of clients and engagements, which are used to assess the adequacy of the firm's capabilities and consideration of associated risk; engagement team management, which is designed to mobilize an appropriate engagement team; audit engagement performance, which involves processes to help perform audit procedures in accordance with the applicable professional standards; and monitoring, which provides reasonable assurance that the system of quality control is "suitably designed" and "effectively applied." (See the CAQ's January 2019 Audit Quality Disclosure Framework.)

Below are some of the CAQ's sample questions in this area:

  • Does the audit firm's leadership, culture, and firm governance promote audit quality?
  • Does the audit firm have the necessary industry and specialized accounting and reporting expertise relevant to the company's primary operations?
  • Does the audit firm have the resources and geographical reach required to continue to serve the company?
  • Do audit firm policies reinforce planning and performing the audit to avoid surprises, promote early detection of issues, and achieve the timely completion of the audit?
  • If the audit was subject to inspection by the PCAOB or other regulators—or other internal quality review—did the external auditor advise the audit committee in a timely manner of the selection of the audit findings, and the impact, if any, on the audit results?

Communication and interaction with the outside auditor

To enable the audit committee to satisfy its oversight responsibilities, the CAQ advocates "frequent and open communication between the audit committee and the external auditor." In addition to the status of the audit or review, these communications should "focus on the key accounting or auditing issues that, in the external auditor's judgment, give rise to a greater risk of material misstatement of the financial statements, as well as any questions or concerns of the audit committee. Audit committees should consider if implementation of new accounting standards is being adequately discussed by the company and the external auditor." With regard to communications required by the PCAOB, SEC or the exchanges, the CAQ advises, audit committees should not only be familiar with the requirements but also consider "the level of openness and quality of these communications, whether held with management present or in executive session."

Below are some of the CAQ's sample questions in this area:

  • Did the external auditor adequately discuss the quality of the company's financial reporting, including the reasonableness of accounting estimates and judgments?
  • Did the external auditor discuss how the company's accounting policies compare with industry trends and leading practices?
  • Did the external auditor discuss with the audit committee current developments in accounting principles and auditing standards relevant to the company's financial statements and the potential impact on the audit?
  • Did the external auditor discuss critical audit matters (CAMs) communicated in the auditor's report and how CAMs were identified? [See this PubCo post and this PubCo post.]
  • In executive sessions, did the external auditor discuss sensitive issues candidly and professionally, such as:
    • any concerns about management's reporting processes;
    • internal control over financial reporting (e.g., management review controls); or
    • the quality of the company's financial management team?
  • Did the lead audit engagement partner promptly alert the audit committee if he or she did not receive sufficient cooperation from management including management in other jurisdictions?

Auditor independence, objectivity and professional skepticism

To enable the audit committee to evaluate the level of the outside auditor's independence, objectivity and professional skepticism, the CAQ advises, the committee will need to be familiar with the statutory and regulatory independence requirements—in particular, the requirement that outside auditor "advise the audit committee of any services or relationships that reasonably can be thought to bear on the audit firm's independence." The audit committee's interactions with the auditor can provide opportunities for this evaluation. For example, the CAQ notes the importance to financial reporting of estimates and judgments; objectivity and professional skepticism enable the outside auditor

"to evaluate the methods and assumptions used by management to develop accounting estimates and to challenge those assumptions and application of accounting policies, including the completeness and transparency of the related disclosures as appropriate. An important part of evaluating the external auditor's objectivity and professional skepticism is for the audit committee to gauge the frankness and informative nature of responses to open-ended questions asked of the lead audit engagement partner (and members of the engagement team as appropriate). Examples of appropriate topics include: the financial reporting challenges posed by the company's business model, the quality of the financial management team, the robustness of the internal control environment, changes in accounting methods or key assumptions underlying critical estimates, and the range of accounting issues discussed with management during the audit (including alternative accounting treatments in which the external auditor and management differed). The external auditor also should be able to clearly articulate the processes followed and summarize the evidence used to evaluate management's significant estimates and judgments, and to form an opinion as to whether the financial statements, taken as a whole, were fairly presented in accordance with US GAAP."

Below are some of the CAQ's sample questions in this area:

  • Did the external auditor report to the audit committee all matters that might reasonably be thought to bear on the audit firm's independence, including exceptions to its compliance with independence requirements?
  • Were there any significant differences in views between management and the external auditor?
  • If so, did the external auditor present a clear point of view on accounting issues for which management's initial perspective differed?
  • Was the process of reconciling views achieved in a timely and professional manner?
  • If the external auditor is placing reliance on management and internal audit testing, did the audit committee agree with the extent of such reliance?
  • In obtaining pre-approval from the audit committee for all non-audit services, did the lead audit engagement partner discuss safeguards in place to protect the independence, objectivity, and professional skepticism of the external auditor?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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