How much of a role do companies play in ensuring the quality of external audits? A big one, according to the Center for Audit Quality.

The public advocacy organization on Tuesday released its updated external auditor assessment tool, which was last published in 2017.

In the intro to the 32-page document, the CAQ makes clear that “audit committees should regularly evaluate the external auditor … in order to make an informed recommendation to the board whether to retain the [audit firm].” An assessment should be conducted “at least annually,” according to the CAQ.

The evaluation should encompass the following:

  • quality of services and sufficiency of resources provided by the engagement team
  • quality of services and sufficiency of resources provided by the audit firm
  • quality of communication and interaction with the external auditor
  • auditor independence, objectivity, and professional skepticism

The tool provides 20 or so sample questions in each of those areas.

For example, in the section on communication and interaction with the external auditor, the CAQ suggests asking the following about candor:

“In executive sessions, did the external auditor discuss sensitive issues candidly and professionally, such as any concerns about management’s reporting processes; internal control over financial reporting (e.g., management review controls); or the quality of the company’s financial management team?”

The CAQ also recommends the audit committee ask if “the lead audit engagement partner promptly alerted the audit committee if he or she did not receive sufficient cooperation from management including management in other jurisdictions.”

Given recent PCAOB rules providing for greater transparency to investors, media, and other stakeholders, the CAQ emphasizes that “the quality of communication between the external auditor and the audit committee is increasingly important as audit committee members or management may be asked questions about the audit process.”

Regarding the auditor assessment, even though the audit committee is in charge, the CAQ says it should collect observations about the external auditor from others within the company, including management and internal audit.

However, particularly with regard to management, “audit committees should be alert to whether management displays a strong preference for or a strong opposition to retaining the external auditor—and follow up as appropriate to understand the reasons.”

Finally, the CAQ recommends the audit committee consider advising shareholders that it performs an annual evaluation of the auditor. “The audit committee … should consider explaining its process, the scope of the assessment, and factors considered in selecting or recommending the audit firm or assessing its performance.”

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