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
Recommend to the board of directors
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
the compensation of the external auditor
be directly responsible for overseeing the work of the external
auditor, including the resolution of disagreements between
management and the external auditor regarding financial
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
i. independence and objectivity of the external
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
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
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
Annual Assessment of the External Auditor - Tool for Audit
Periodic Comprehensive Review of the External Auditor –
Tool for Audit Committees; and
Oversight of the External Auditor – Guidance for Audit
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.
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Over the past year, we have watched the Canadian dollar drop relative to its U.S. counterpoint impacting Canadian businesses. U.S. goods and services are now more expensive, U.S. sales make a premium and errors when recording foreign exchange transactions can cost you more money.
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