Audit committees’ responsibilities in evaluating audit quality

The Financial Reporting Council (FRC) has updated its publication Audit Quality – Practice aid for audit committees. The guide provides details to help audit committee assess the effectiveness of the external audit process. It also covers the responsibilities of audit committee in tendering, evaluating and reporting on their external audit and auditor. These are summarised below.

While the Practice Aid is designed for audit committees of Premium Listed companies it may assist audit committees of other entities, particularly those adopting the UK Corporate Governance Code voluntarily.

Audit committee responsibilities

The audit committee has responsibility for overseeing the company’s relationship with the external auditor and reviewing the effectiveness of the external audit process.

The ultimate clients of a statutory audit are investors and other stakeholders, not companies, and audit committees are acting on their behalf. The audit committee should support the auditor in appropriate challenge of management and feedback from management should be assessed in that context, especially where the auditor raised significant concerns.

The 2018 UK Corporate Governance Code requires that members of an audit committee have a range of recent and relevant business and financial experience, so they can challenge the auditor to demonstrate that they have performed a high-quality audit and evaluate the responses.

Involvement in tenders

All members of the audit committee should be involved throughout the audit tender process, not just attending the audit firms’ final presentations. The audit committee may take support and advice from management but is responsible for the key decisions including which firms and audit partners are invited to tender and which options are submitted to the Board including the audit committee’s justified preference.

The audit committee should prioritise the auditor’s independence, technical competence and the ability to deliver a high quality, robust, sceptical and appropriately challenging audit over cultural fit and relationships with management.

Audit committees should conduct the fee negotiation, rather than management. Fees should not be excessive, but sufficient for the firm to be able to provide a high-quality audit and ensure access to any specialised resources that are required.

Evaluation

The assessment of the external audit should not be a separate compliance exercise, or an annual one-off exercise, but rather should form an integral part of the audit committee’s activities. This allows the audit committee to form its own view on audit quality and on the effectiveness of the external audit process, based on the evidence it obtains during the year.

Audit committees should obtain evidence of quality throughout the audit and particularly at the planning stage and not just focus on outputs.

• The most direct evidence to support the committee’s assessment can be obtained by the audit committee asking open questions of the auditor, management and others.
• Obtaining external inputs from investors and other stakeholders could also help to inform the audit committee’s views on audit quality.
• The FRC’s audit quality inspection reports should be a key source of external evidence on aspects of audit quality. Audit committees should discuss any issues with the auditor.
• Before concluding and reporting on its assessment in the annual report the audit committee should consider whether the evidence it has obtained is sufficient for it to draw reasonable conclusions about the quality and the effectiveness of the external audit.

In addition, the audit committee should consider:

• how well the auditor has contributed to enhancing the quality of the company’s financial reporting (including whether they have exercised professional scepticism, made appropriate challenges of management and discussed issues with the audit committee);
• how well the ’key audit matters’ are addressed in the auditor’s external report (including the auditor’s risk assessment; the consistency with matters communicated to the audit committee; and with the audit committee’s own views);
• how well written the auditor’s report is; and
• whether it gives helpful information to readers, specific to the company and avoids ’boiler plate’ text.

Reporting

The UK Corporate Governance Code requires the audit committee to report to the Board on how it has discharged its responsibilities. The annual report of the company should describe the work of the audit committee, including:

• an explanation of how it has assessed the independence and effectiveness of the external audit process;
• where relevant, an explanation of how it has driven any changes in the audit process;
• an explanation of its approach to the approval of any non-audit services provided by the auditor and how it has considered the impact on the auditor’s independence; and
• the approach taken to the appointment or reappointment of the external auditor, information on the length of tenure of the current audit firm, when a tender was last conducted and advance notice of any retendering plans.

If you require any further information, please contact Rachel Fleming.