In recent years, an increased emphasis has been placed on the quality, accuracy and transparency of the financial information an entity provides to equity holders, lenders, regulators, analysts and other users of this information. This has also put increased pressure on audit committees to ensure that this goal is met.

Responsibilities of the audit committee

For Canada's publically listed entities, the responsibilities of the audit committee when it comes to financial reporting are outlined in National Instrument 52-110 "Audit Committees" of the Canadian Securities Regulators ("NI 52-110"). It states that an audit committee, among other things, must perform the following tasks as they relate to the external auditor:

  1. Recommend to the board of directors
    1. the external auditor to be nominated for the purposes of preparing or issuing an auditor's report or performing other audit, review or attest services for the issuer
    2. the compensation of the external auditor
  2. be directly responsible for overseeing the work of the external auditor, including the resolution of disagreements between management and the external auditor regarding financial reporting
  3. pre approve all non-audit services to be provided by the issuer's external auditor

Tools for the audit committee

While the regulations outline what the audit committee has to do, there is no authoritative guidance telling audit committees how to do it or, for that matter, how much to do. This leaves audit committees searching for best practices and tools to help them fulfil their responsibilities. There are a number of publications in both Canada and the United States available that help out in this regard. Most of these publications outline key areas to assess and provide a template checklist(s) that can be modified as needed to fit the specifics of a given situation.

Key areas to consider in evaluating the external auditor normally include:

i. independence and objectivity of the external auditor

Things to consider include the size of the audit, the number of years that the lead partner and quality assurance partner have been on the audit and other non-assurance services provided by the external auditor's firm.

ii. quality of, and resources provided by, the audit engagement team

This includes the size of the audit firm, their experience with the specific industry and accounting issues and other services that can be provided within the constraints of independence rules.

Expected costs of the audit and other services are also evaluated here. It is important to keep in mind the balance between quality and cost, as well as assessing the long term costs, rather than only the first year's fee quote.

iii. quality of communications and interactions with the external auditor

This includes the clarity and specificity of both oral and written communications, the avoidance of boilerplate language and the candour with which the lead audit partner discusses issues with the audit committee (especially issues where there is significant management judgement being exercised). These communications can be in the context of formal audit committee meetings. If the need should arise, these meetings can also take place within a relationship developed between the audit committee chair and the lead audit partner to allow for open and frank communication outside of formal meetings.

As part of their Enhancing Audit Quality initiative, the Chartered Professional Accountants of Canada has published three useful guides that provide a starting point for audit committees:

  1. Annual Assessment of the External Auditor - Tool for Audit Committees;
  2. Periodic Comprehensive Review of the External Auditor – Tool for Audit Committees; and
  3. Oversight of the External Auditor – Guidance for Audit Committees

Regardless of the tools chosen by the audit committee, it is important to tailor the approach to the unique characteristics – whether it be size, complexity, industry or geographic location – of the entity.

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.