Grade A? Giving your auditor an annual performance appraisal

Most audit committees know that evaluating the external auditor is part of their oversight responsibilities for the financial reporting process. But excelling in this area is no simple undertaking.

Most audit committees know that evaluating the external auditor is part of their oversight responsibilities for the financial reporting process. But excelling in this area is no simple undertaking. Here’s one approach…

There is increasing focus these days on how well audit committees are performing their oversight role. Part of that oversight involves evaluating the auditor, a key player in the financial reporting process; in other words, conducting a “performance appraisal” of the auditor relationship. A robust auditor evaluation process is important for audit committees to demonstrate the rigour of their oversight.

Performing an auditor evaluation is challenging. It involves not only assessing the strength of the auditor’s communications and interactions with the audit committee itself, but also whether the auditor and management have a healthy relationship. By healthy, I mean the auditor is objective and professionally skeptical while maintaining an effective working relationship with management. Strong relationships between the auditor, management and the audit committee are essential to audit quality.

The US Center for Audit Quality (CAQ) has issued an assessment questionnaire to assist audit committees in evaluating their auditors (i.e., the audit firm, as well as the lead audit engagement partner, audit team and engagement quality control reviewer). The assessment focuses on the following key areas:

  • the qualifications and performance of the auditor;
  • the quality and candour of the auditor’s communications with the audit committee and the company; and
  • the auditor’s independence, objectivity and professional skepticism.

The CAQ provides 17 sample questions that highlight some of the more important points for consideration in each area, but the CAQ warns that the questions will need to be adapted to the circumstances of each company.

An interesting feature of the CAQ questionnaire is that it includes a suggested survey for obtaining observations from others within the company, and for them to rate the auditor on a five-point scale against certain attributes. Obviously, audit committees using such a survey will need to consider the results carefully. For example, if management gives the auditor a very negative rating is this because the auditor is doing a good job of challenging management’s views on complex issues, or is this evidence that there is not an open relationship between the auditor and management?

In my view, the CAQ questionnaire is a useful starting point for a Canadian audit committee to evaluate its auditor. However, audit committees would likely need to consider adapting the sample questions to the Canadian environment to reflect such things as Canadian auditing standards, securities regulatory, auditor independence and audit inspection requirements, as well as the company’s own corporate governance process.

Keep the conversation going…are audit committees in Canada performing robust evaluations of their auditors? Does Canada need to develop its own assessment guidance?

Post a comment below; or email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada