A key element of effective audit committees is the existence of a strong and robust relationship with external audit.
This relationship should be built on open, regular and frank communication between the committee and the auditors.
The benefits of a strong relationship between the committee and the auditors can be two-fold:
- it can enhance audit quality
- the committee can use the technical knowledge and experience of the external auditors to help facilitate discussion on key issues at committee meetings.
Supporting and promoting audit quality
While audit committees do not possess the power to direct how an audit is performed, audit committee meetings should provide a forum for promoting, supporting, and where appropriate, challenging audit quality. This can be achieved through monitoring, facilitating discussion and providing feedback on:
- the proposed audit strategy, including assessment of key risks and materiality
- key deliverables and milestones
- the progress of the audit throughout the year
- findings and recommendations raised in audit reports
- the relationship between internal and external audit.
In discussing the above matters the committee should consider:
- if the auditors demonstrated commitment to audit quality.
- whether the auditors have devoted sufficient resources to the audit including an appropriate level of involvement and commitment from the engagement lead and senior team members
- whether the auditors have demonstrated a sufficient understanding of the entity, its operations and key risks to be able to plan and conduct the audit efficiently and effectively
- whether key milestones for financial reporting agreed by management and the auditors are appropriate and in line with the committee’s expectations.
- the significance of issues raised by the auditors, including
- any likely impact on the financial statements and the auditor’s opinion
- the appropriateness and practicality of any actions recommended by the auditors
- management’s commitment to addressing issues raised, including the current status of any outstanding issues.
Further, an audit committee can assist in facilitating a quality audit process by ensuring:
- that any concerns or risks identified by the committee are raised with the auditors in a timely manner.
- that management are providing the auditors with all information and explanations required to conduct the audit in a timely and effective manner
- there is a positive and helpful attitude toward the audit process maintained by management and key staff.
Utilisation of the auditor’s knowledge and experience
The external auditors may be able to use their knowledge and experience to assist the committee in facilitating broader discussion on matters at committee meetings. This could include providing insights and contributing to discussions on:
- the entity’s financial operations
- the quality of internal control systems and governance frameworks
- key developments and better practices identified across sectors or industries
- emerging accounting issues and financial reporting processes
- sector-wide learnings identified from Auditor-General’s reports to parliament.
Communication between audit committees and external audit
Regular, two-way communication where relevant information is exchanged in a timely manner is important in ensuring both auditors and committee members can effectively discharge their roles.
It is considered better practice that external auditors are invited to attend all audit committee meetings for the whole of the meeting. Attendance by the external auditors should allow enough time to facilitate an appropriate discussion on key audit activities as relevant to that meeting.
Inviting the auditors to attend the whole meeting also allows them to contribute to discussions on other key matters discussed at the meeting. Further, while the auditors may be able to access audit committee papers and minutes outside of the meeting, attendance at the meeting allows them to obtain a fuller understanding of the matters discussed and actions proposed. It also ensures that all relevant information is available to them in a timely manner.
To ensure there is effective two-way communication, it is important that the auditors submit appropriate reports to the committee in a timely manner. In preparing and submitting these reports, auditors should provide the committee members with:
- relevant information in an appropriate format
- enough time to review the reports prior to the meeting.
to enable them to understand the content of the report and identify potential lines of questioning for the meeting.
In addition to the normal attendance at audit committee meetings, the relationship between the committee and the external auditors can be enhanced through:
- the auditors having open access to the chair and other members of the committee outside of meetings
- in-camera sessions at meetings where the committee can talk freely with the auditors without management or other observers present.