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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions