Audit committees ("ACs") have taken on new roles since new regulation took effect earlier this year. In light of new questions that may arise, we've put together a 6-part series on the effects on ACs of the law of 23 July 2016 on the audit profession ("Law") and Regulation (EU) N° 537/2014 ("Regulation"). Read on for part 5, or browse our other articles first:
Step 5 – What kind of relationship should the AC
maintain with the external auditor?
Step 6 – What should the additional report of the external auditor to the AC include?
In this article, we'll focus on step 5.
The tasks of the AC
In relation to the statutory audit, ACs are usually tasked with:
- making recommendations to the Board of Directors on the appointment, reappointment and removal of the statutory auditor ( see step 3), in addition to the compensation to be paid to the statutory auditor
- assessing and monitoring the statutory auditor's independence, in particular with regards to the provision of non-audit services by the statutory auditor ( see step 4)
- monitoring the effectiveness of the audit process and informing the Board of Directors about the outcome of the audit
Maintaining an effective relationship with the statutory auditor is therefore paramount for the AC in exercising its oversight responsibilities. To obtain the statutory auditor's critical judgement, as well as insights that add value to the entity, the AC's responsibility overseeing the statutory auditor must consist of concrete actions (e.g. specific requests and communications) rather than just words in its terms of reference or items on its agenda.
On the statutory auditors' side
In addition to the usual communications made to the AC, like the management letter, statutory auditors of public interest entities ("PIEs") are now required to give more insights on the audits they carry out. New requirements include an enhanced audit report for financial statement users and an additional report for the AC.
In its audit report, the statutory auditor will now have to provide:
- a description of key audit matters, including fraud-related key audit matters; this description must explain why the topic is a key audit matter, what kind of audit procedures were used to address it and, where relevant, what the key observations are
- a statement on any material uncertainty relating to going concern
Although much of the audit report—including the above items—is consistent with applicable professional standards, there are also some unique EU disclosures. For instance, the audit report must also include a declaration that no prohibited non-audit services have been provided to the audited entity, and a separate indication of the duration of the auditor-client relationship.
(For the content of the additional report to the AC, please watch this space for step 6!)
Last but not least, the statutory auditor is required to inform the entity if he/she has reasonable grounds to suspect that irregularities, including fraud with regard to the financial statements, may occur or have occurred.
The AC should therefore interact comprehensively with the statutory auditor from the audit planning stage through to the finalisation of the audit report. The AC is the one that must make the link, and facilitate the communication, between the management of the entity and the statutory auditor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.