Audit Committee Bulletin: July 2013
Key issues for audit committees
In this bulletin, we summarize some of the latest issues that audit committee chairs of leading European companies are discussing with their peers and EY:
Increased engagement with the auditor promotes audit quality
Companies in Europe and the US are facing tougher regulations on their relationships with external audit firms. But could audit committees reduce the perceived need for regulatory action by taking a more formal approach to the evaluation of auditor performance?
Most audit committees already have a process in place to review the performance of their external audit firm. They are adamant that, when faced with a trade-off between fees and quality, their priority will always be quality.
When dealing with a potential fee reduction, they will seek a clear rationale for the lower cost to ensure that it is the result of efficiencies, process improvements or scope changes — on either the auditor or client side — and does not risk harming the quality of the audit.
Ultimately, the audit committee will have to rely on the lead audit firm’s ability to ensure that any work done as part of the audit is of the same standard, wherever it is performed. But there are questions that the audit committee can ask that will help them obtain assurance on quality.
How good is the lead audit partner?
When assessing the quality and performance of their audit firm, audit chairs put significant weight on the performance of the partner who leads the engagement.
Criteria they look at include:
- Accounting and audit skills. The lead partner is to make reasoned judgments based on a deep understanding of the principles that underpin accounting standards, not simply by reference to “the rule book.”
- Knowledge of the business. The lead partner should have a thorough, holistic view of the business, its strategies and the risks it faces.
- Independence and skepticism. The lead partner should be able to challenge management with skepticism and articulate the rationale for the accounting position to the audit committee. The audit firm should be able to explain the processes it has in place to ensure its independence.
- Relationships and reporting. The lead audit partner must have the ability to build strong relationships within the business and must communicate with the audit committee and the management in a timely, clear, consistent and insightful manner.
Questions to ask the auditor for overseas audit:
- Can we see your plan for the audit, showing where you expect to focus your audit resources, the extent of the review you have planned for each of our business entities and locations, and how this is driven by your assessment of audit risks?
- How does your firm capture and report audit concerns detected by your people in remote locations?
- What procedures or quality controls does your firm have in place to review the quality of audit work performed in its locations around the world and, where relevant, by affiliate firms?
- How do you ensure that all of your professional staff, and those working for any affiliate firms, are trained to the same standard and follow a common audit methodology?
- How do you ensure the professional independence and objectivity of your staff and of any staff employed by affiliate firms?