Assessing external audit
effectiveness
Audit Committee Questions
Audit Committee Institute
The evaluation of external audit effectiveness is subject to increased regulator
and investor focus. Not only is it core to the audit committee role – the committee
must be satisfied that the audit is effective – but it can have an impact on any
recommendations around audit tendering and/or rotation.
Transparency Audit
Ensuring a Relationships
audit Appointment objectivity
high quality with the
committee of the auditor and
audit auditor
activities independence
Audit committee oversight essentials …
The audit committee has responsibility for managing - Information provided to the audit committee on this area.
the relationship with the auditor and ensuring that the
By the time any disputed issues are alerted to the audit
auditor is directly accountable to the audit committee.
committee, these may have already been resolved
The audit committee should maintain a strong and candid
between executive management and the auditor,
relationship with the auditor – otherwise this will limit the
therefore it may be difficult for the audit committee
oversight the audit committee has of the external audit
to observe this challenge. This is something that the
process – and should review the relationship between
audit committee should consider and question. The
the auditor and executive management to ensure that an
most effective way to understand this may be through
appropriate balance exists.
holding private meetings with the auditor. The audit
The competence and qualifications of the auditor should committee should also keep in mind the degree to which
also be addressed. Some considerations to this effect the relationship with executive management and the
include the: committee itself may affect the objectivity of the auditor.
- Auditor’s understanding of the risks facing the company Evaluation of the external auditor on an annual basis is
and their response to these in their audit plan. considered best practice. The process not only helps
- Performance and delivery against the audit plan. to optimise the performance of the auditor, it also
- Robustness and perceptiveness of the auditor in encourages good communication between the auditor
handling the key accounting and audit judgements and the audit committee.
identified.
A questionnaire is often considered a good way of
- How the auditor responds to questions from the audit
performing the evaluation, and this can also provide
committee.
opportunities to track progress and improvements from
- Comments provided by the auditor on the systems of
prior years. However, it is also good practice to deploy
internal control.
other mechanisms and to ensure all relevant views are
The evaluation should also assess the auditor’s considered.
independence, objectivity and professional scepticism.
Evaluations of external auditors is an area that is subject
This part of the evaluation might include consideration of:
to increased attention from regulators and investors.
-The level of challenge provided by the auditor as Audit committees may want to consider the level of
observed through conversations with and reporting to transparency they provide in regards to the evaluation
the audit committee. process: how it is performed; who it includes; what areas
- Safeguards to independence implemented by the auditor. of performance it covers; the results and any actions.
Key questions for audit committees to consider:
Evaluation approach Quality of service provided
-- Have the following mechanisms for evaluating the -- Did the lead engagement partner discuss the audit
effectiveness of the audit been considered: plan and how it addressed company/industry-specific
-- Review of audit presentations and areas of audit risk (including fraud risk) with the audit
communications committee?
-- Review of risk identification and delivery against -- In multi-location audits, did the lead engagement
the audit plan / tender document. partner provide information about the technical skills,
experience and professional objectivity of other audit
-- Assessment of professional skepticism
teams?
throughout the audit.
-- Did the auditor meet the agreed upon and audit plan
-- Review of quality of staff, resources, geographic
and objective performance criteria? Did the auditor
footprint etc.
adjust the audit plan to respond to changing risks and
-- Reviewing of the auditor’s internal quality circumstances?
control procedures and reports?
-- Did the lead engagement partner advise the audit
-- Are the results of the evaluation process discussed committee of the results of consultations with the
with the external auditor and any areas for firm’s professional practice office?
improvement agreed upon?
-- If the company’s audit was subject to inspection by
regulators, did the auditor advise the audit committee
of the inspection findings and their impact on the
Judgments and estimates: audit results?
-- Was the cost of the audit reasonable and sufficient
process and assumptions for the size, complexity and risks of the company?
Were the reasons for any changes to cost (e.g.,
-- Did the audit team have the necessary knowledge change in scope of work) communicated to the audit
and skills to meet the company’s audit requirements? committee?
How did the auditor respond to feedback? Was the
lead engagement partner accessible to the audit
committee and company management?
-- Does the audit firm have the necessary industry
experience, specialized expertise in the company’s
Communication and
critical accounting policies, and geographical reach interaction
required to continue to serve the company?
-- Did the audit engagement team have sufficient -- Did the audit engagement partner maintain a
access to specialized expertise during the audit? professional and open dialogue with the audit
committee chair? Were discussions frank and
complete?
-- Did the auditor adequately discuss the quality
Independence and of the company’s financial reporting, including
professional scepticism the reasonableness of accounting estimates
and judgments? Did the auditor discuss how the
company’s accounting policies compare with industry
-- Did the audit firm report to the audit committee all trends and leading practices?
matters that might reasonably be thought to bear on
the firm’s independence? Did the audit firm discuss -- In executive sessions, did the auditor discuss sensitive
safeguards in place to detect independence issues? issues candidly and professionally – including his/
her views and concerns about reporting processes,
-- Were there any significant differences in views internal controls (e.g., internal whistle blower policy)
between management and the auditor? If so, did the and the quality of the finance function?
auditor present a clear point of view on accounting
issues where management’s initial perspective -- Did the auditor ensure that the audit committee was
differed? informed of current developments in accounting
principles and auditing standards and the potential
-- If the auditor is placing reliance on management and impact on the audit?
internal audit testing, did the audit committee agree
with the extent of such reliance?
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