Talking to audit committees about auditor oversight | KPMG | CA

Talking to audit committees about auditor oversight

Talking to audit committees about auditor oversight

New auditor assessment guidance yields new learnings for ACs.

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Canadian Managing Partner, Audit

KPMG in Canada

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Talking to audit committees about auditor oversight

In 2013, the Enhancing Audit Quality (EAQ) initiative was completed by CPA (Chartered Professional Accountants) Canada and CPAB (the Canadian Public Accountability Board). In 2014, leveraging findings and conclusions from this project, CPA Canada, CPAB and ICD (Institute of Corporate Directors) went on to develop detailed guidance intended to help audit committees (ACs) effectively assess the performance of the external auditor. The guidance, issued with the ultimate goal of improving audit quality, includes both annual and comprehensive assessments, of which the latter adds an auditor self-assessment to the process which is recommended at least every five years.

In the spring of 2015, KPMG interviewed AC chairs across the country to gauge whether and how the new voluntary Guidance on Oversight of the External Auditor was being implemented in its first year. This process generated not only valuable insights and opinions from individual respondents, but a number of learnings based on overall response trends.

Auditor assessments enhanced AC understanding and audit process transparency

Clearly, ACs saw value in the process, as all but one interviewee had conducted an annual assessment based on the guidance (the one exception had implemented it informally), with plans to conduct the comprehensive assessment in three to five years. Overall, ACs tried to assess the actual quality of the audit itself rather than the quality of service the auditor provided. One key aspect of audit quality that was addressed—and emphasized in the guidance—was the level of auditor skepticism being exercised.

To test the level of skepticism, some ACs asked auditors about their relationship with management and what questions they asked management as part of the audit, to determine, for example, how much “push back” auditors were doing. The AC then would ask the same questions of management to corroborate the auditors’ answers. The AC found this helpful in determining whether appropriate skepticism was present in the audit process.

All ACs stated that auditors provided them with appropriate information on CPAB and PCAOB (Public Company Accounting Oversight Board) inspections—in many cases too much detailed information for all committee members to understand fully, leading ACs to suggest auditors consider other ways to present this material.

Interestingly, respondents believed the biggest impact of the assessments would not be to improve actual audit quality—which they felt was driven by both the auditors' and managements' internal processes and competencies—but to improve the AC’s insight into the audit process and understanding of what actually constitutes audit quality. Generally speaking, while ACs viewed the assessment as an additional responsibility, they also believed the experience was positive, despite being quite time consuming.

“It can be difficult for audit committee members to fully appreciate the difference between audit quality and quality of service if they have never worked in an audit capacity. The assessment process has gone a long way toward remedying that.”

– Audit Committee Chair

Lessons learned—keys to an effective external auditor assessment

Respondent answers suggest several factors that may contribute to conducting more robust, constructive assessments:

Audit committees

  • Recognize that the assessment templates included in the guidance should be tailored to the company and its specific circumstances.
  • Begin the annual assessment sooner rather than later to establish the broadest possible information baseline and distribute the work over time.
  • When doing the comprehensive assessment, meet with the auditor's Canadian Managing Partner to determine which audit personnel should be included in the assessment.
  • It may be most efficient to have management collect and summarize the required information for the AC to reach its own conclusions.
  • In virtually all cases, fees were not a part of the assessment process.

Auditors

  • Ensure evaluation results are reflected in the next year's planning documents.
  • Have a pre-self-assessment discussion with the AC chair to understand the chair's views on the quality of the audit before the self-assessment is completed.
  • Perform realistic self-assessments, so the audit committee sees value in the process.
  • Translate regulatory findings into higher-level discussions that non-auditors can understand.

Committing to an evolving process

While not mandatory, larger organizations that eschew the assessment process will almost certainly be looked at askance by regulators. Accordingly, and given the potential positive outcomes, ACs that have not conducted an annual auditor assessment should consider doing so and a comprehensive assessment should be in the planning stages. Audit committee respondents generally understood that the assessment is an evolving process, one that should improve as AC members become more knowledgeable about audit quality and that should enhance audit accountability, transparency and quality going forward.

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