As indicated previously, the audit committee’s oversight responsibility for the audit function covers work performed by both external and internal auditors.
In addition to the questions posed earlier regarding continually evaluating the capabilities of the external auditors and communications, the audit committee should:
Interview and evaluate the external auditors from the following perspectives:
- Audit and tax approach – how the firm plans the audit, the timeliness of its services, the efficiency of its performance and how effectively it coordinates the work of other offices, both domestic and international. Also, how it polices its own performance, internal review approach and consulting procedures.
- Accessibility and location – the ability of the firm to respond to issues in a timely manner, including the relative proximity of the auditors to the organization’s operating facilities and corporate headquarters. This can facilitate cooperation, understanding and face-to-face contact.
- The management letter – the content of the firm’s letter of recommendations to management, including insights into the organization’s business and internal accounting control needs, and the completeness of its approach.
- Working with the audit committee – the degree of initiative, cooperation and effectiveness of the firm’s work with the audit committee.
- Major litigation – the likely effect on its business of any significant pending lawsuits against the audit firm.
Obtain agreement from the auditors that the board (and, therefore, the audit committee), rather than management, is the auditors’ primary client. To that end, the audit committee needs to make sure the auditors understand the need for a diligent, unbiased audit and an honest appraisal of management. This agreement can help provide free-flowing, candid discussions between the audit committee and the auditors.
Review the audit fee to ensure that it is in line with the scope of the audit. Based on the review of the auditors’ scope and auditing techniques, subsequent discussions with management about problems encountered and the auditors’ efficiency in handling the audit, the audit committee should be in a good position to evaluate whether the engagement time and resulting fees are reasonable. While it may be natural to review the fee solely from the perspective of being “too high,” a fee that is too low may actually provide more risk to the organization. An “overly aggressive” negotiated fee can put significant pressure on the auditors when determining an appropriate audit scope that adequately addresses the higher risk areas.
Much of the following can be likened to the responsibilities of the audit committee for external auditors, in that the audit committee should:
- Be apprised of the scope of internal auditors’ work and their specific responsibilities. This would include review and approval of the internal audit department charter, which should describe the mission, accountabilities, independence, responsibilities, authority and standards for the department.
- Be involved in the hiring/termination, selection and compensation of the internal audit department
- Evaluate the adequacy of the internal audit department personnel, the department budget, as well as when appropriate changes in audit coverage should be made
- Review any plans to outsource the internal audit function. Challenge the pros and cons of such a proposal.
In addition, the audit committee should review the degree of coordination between the activities of the external and internal auditors. The audit committee should feel confident that the combined audit scope can be relied on to identify weaknesses in internal controls that could expose the organization to fraud or material financial reporting errors. Moreover, the committee should encourage open and direct communications with the auditors. Internal auditors, as well as external auditors, must feel free to report control weaknesses (particularly those resisted by management) to the audit committee on a confidential basis without fear of reprisal.
The AICPA’s Audit Committee Toolkit contains two tools that may facilitate the audit committee’s evaluations: “Evaluating the Independent Auditor – Questions to Consider” (see prior discussion) and “Evaluating the Internal Audit Team – Guidelines and Questions.”1
Communication is a two-way street that should be designed to ensure that all of the parties involved understand each other’s responsibilities and that each receive relevant and timely information to allow those responsibilities to be fulfilled.
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(1) Refer to AICPA’s Audit Committee Toolkit: Not-for-Profit Organizations, 2nd Edition available for purchase at: https://www.aicpa.org/home.