The UK’s Financial Reporting Council (FRC) issued a practice aid to assist UK audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process. In the US, the PCAOB and the Audit Committee Collaboration issued similar documents for American public companies.
The FRC practice aid is in response to requests for guidance in this area. It follows the UK Corporate Governance Code provision, introduced in 2012, that suggests that the audit committee report should include a description of how it has assessed the effectiveness of the external audit process.
The practice aid reflects feedback from audit committee members, investors, financial management and auditors. As well as setting a framework for the committee’s evaluation, the practice aid sets out practical suggestions on how audit committees might tailor their evaluation in the context of the company’s business model and strategy; the business risks it faces; and the perception of the reasonable expectations of the company’s investors and other stakeholders.
The framework detailed in the practice aid focuses on understanding and challenging how the auditor demonstrates the effectiveness of key professional judgments made throughout the audit and how they might be supported by evidence of the following critical auditor competencies:
On May 28, the PCAOB issued a staff consultation paper that seeks input on potential changes related to the auditor's use of the work of specialists.
The Auditor's Use of the Work of Specialists discusses the increase in the use and importance of specialists in recent years due, in part, to the increasing complexity of business transactions reported in a company's financial statements.
"The use of the work of specialists is important to investors because it can help an auditor detect material misstatements in complex areas of a company's financial statements," said PCAOB Chairman James R. Doty. "We want our standards to keep pace with realities in the marketplace, and I look forward to receiving public comment on this important topic."
The paper raises questions about whether PCAOB standards adequately address the auditor's use of the work of specialists, and whether more rigorous standards and specific procedures are needed to help the auditor respond to the risks of material misstatement in financial statements. The staff is seeking input on possible alternatives to address the issues discussed in the paper.
Comments on the consultation paper are due to the PCAOB by July 31, 2015.