Audit committees and the external audit

The vast majority of the Standard’s content is taken from existing FRC publications including the Corporate Governance Code, Guidance on Audit Committees and Audit Tenders: Notes on Best Practice. However, new text has been included primarily to reflect the Government’s / FRC’s focus on diversity in the audit market.

The FRC believe there is a strong public interest in audit market diversity, and in the market as a whole having sufficient resilience, capacity and choice.

While audit committees cannot directly control the supply of audits, the FRC believe they do – as the buyers of audits – influence supply, and are crucial to realising a well-functioning audit market.

New provisions in this area include:

• Companies should manage their relationships with audit firms to allow them sufficient choice in a future audit tender and to take account of the need to expand market diversity and any market opening measures that may be introduced.
• The audit committee should communicate with any eligible audit firms that are unwilling to tender to understand why they are unwilling to tender and whether there is anything that could be done to change that.
• The audit committee should ask any eligible audit firms that are unwilling to tender how such action is in the public interest.
• The audit committee should remind eligible firms that refuse to tender that they may as a result be ineligible to bid for non-audit services work.

Other notable provisions include:

• Clarification that the tendering process should be led by the audit committee and not by executive management.
• The choice of auditor should be based on quality, including independence, challenge and technical competence, not price or perceived cultural fit.
• All members of the audit committee should be involved throughout the tender process, not just attending the audit firms’ final presentations.
• The audit committee should consider running a price-blind audit tender.

From our discussions with audit committee chairs, we believe there are a number of additional issues, not addressed in the Standard, that are important elements of an audit committee’s role in relation to the external audit.

• Skills and experience: Effective oversight of audit starts with an ‘audit competent’ audit committee i.e., one with both financial literacy and appropriate experience in audit.
  As an aside, one of the emerging themes from our recent Global audit committee survey is that as the committee’s role and responsibilities have expanded and evolved beyond the core oversight role, the skill sets of many audit committees have changed, or are in the process of changing. As audit committees look to add members with experience in IT, cybersecurity, climate and other areas critical to the business, many audit committees (50 percent) are now noting that they are relying on just one or two members to do the ‘heavy lifting’ in the oversight of audit and financial reporting.
• Oversight of management: Management, including the Chief Financial Officer and finance function, also have a role to play in ensuring a high-quality audit. Audit committees have a responsibility to ensure:
  • management provides quality and timely information to the auditor during the audit.
  • management are open to challenge during an audit and respond promptly to queries and information requests.
  • management understand and fully promote the public interest purpose of the audit.
• Audit process: As noted in the recent FRC paper, ‘What Makes a Good... Environment for Auditor Scepticism and Challenge’, a well- planned audit reaps many benefits, including ensuring that audit efforts are directed at the most significant areas where there is an increased need for scepticism and challenge.
  The audit committee’s role in ensuring that appropriate plans are in place for the audit is vital, including consideration of whether the planned levels of materiality and proposed resources to execute the audit plan, are consistent with the scope of the audit engagement.
• Communication: Audit committees should agree the formal and informal means of communication with the auditors at the start of the audit, including the plan for how any unexpected matters arising can be escalated in a timely manner. Such communication provides a strong foundation for establishing an effective working relationship between the auditor, management, and the Audit Committee.
  Audit Committees should also set clear expectations and boundaries of what is desired of an auditor to deliver a good quality audit, such as the extent of constructive challenge that stakeholders expect to see between the audit firm and the audited entity’s management, including how this would best be achieved and evidenced.