annual assessment of the external auditor - ey · pdf fileannual assessment of the external...

Annual assessment of the external auditor

We’re pleased to share with you this template to assist the audit committee in completing the annual assessment of the external auditor in accordance with the recommendations of the Enhancing Audit Quality (EAQ) initiative, a collaboration of the Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board.We’ve designed this template to be a user-friendly document to assist audit committees in performing the key elements of an annual assessment of the external auditor, and it’s based on the guidance and tool issued by CPA Canada.This template is organized in the following sections:• Professional skepticism, independence and objectivity• Quality of engagement team• Quality of communication and interaction with the audit firm• Quality of service• External audit inspection findings• Audit committee conclusionAppendix 1 of the template maps the specific questions from the CPA Canada Annual assessment tool to this template.

Suggested approach for completing this template:1. Audit committee to determine the

scope, timing and process for the annual assessment.

2. Audit committee to tailor questions in template as appropriate for the entity.

3. Collect background information and input from management, the external auditor and audit committee members using the template. Note- This template and the external auditor assessment process should be owned by the audit committee with input from management and the external auditor.

4. Provide the template, with management and external auditor input sections completed, to the audit committee for review, discussion and completion.

5. Audit committee to conclude on its assessment and complete the conclusion section of the template.

6. Develop and approve action points for the auditor to improve future performance and effectiveness.

7. Conclude on the annual assessment and communicate results.

Audit committee observations The Audit Committee's considerations, observations and assessment are summarized for each of the relevant areas under consideration when conducting an annual assessment of the external auditor. The points of consideration for the Audit Committee are not intended to be all inclusive; rather they are intended to represent key points of reflection. The Audit Committee also obtains input from other relevant personnel, including management and internal audit, in order to complete this assessment.

Annual assessment of the external auditor | 1

Audit quality considerations

A. Professional skepticism, independence and objectivity

Questions to consider

1. What evidence is there that EY challenges significant judgements made by management in preparing the financial statements?

2. How would you assess the quality of significant professional judgements made by EY?

3. Does EY identify areas of greatest risk and how do they address these in the audit?

4. How has EY responded to indicators, if any, of possible management bias/potential fraud risks during the audit?

5. Does the lead audit partner involve key technical personnel outside of the engagement team, including the engagement quality control reviewer? Have difficult issues been brought forward for consideration of the audit committee?

6. How does EY inform the audit committee about matters that might reasonably be thought to bear on the firm’s independence?

7. In obtaining the audit committee’s pre-approval for non-audit services, what safeguards are in place to protect EY’s independence?

EY Input

[To be completed by EY]

Management Input

[To be completed by Management]

Audit Committee Assessment

[To be completed by Audit Committee]

2 | Annual assessment of the external auditor

Audit quality considerations (cont’d)

B. Quality of engagement team


1. Does the EY team exhibit the appropriate knowledge of the business, industry and technical skill? Does EY involve industry and technical specialists in areas where specialized skills are required?

2. What evidence was there that the engagement partner devoted sufficient attention and leadership to the audit?

3. Does the EY team work effectively and provide consistent quality across different countries? How is quality control maintained?

4. Are the internal and external auditors working effectively together?

EY Input


Management Input





C. Quality of communication and interaction with the audit firm


1. Is there candid and complete dialogue between the engagement partner, the audit committee and the audit committee chair?

2. Is reporting to the audit committee clear when dealing with complex matters? How effective was the resolution of issues?

3. How would you assess the engagement partner’s discussion about the quality of the entity’s financial reporting, including the reasonableness of accounting estimates, appropriateness of accounting policies and adequacy of disclosures? Is the impact of changes or bias clearly presented?

4. Does the EY team keep you up-to date on regulatory, reporting and accounting/auditing standards developments?

EY Input


Management Input





D. Provide input on the quality of service provided by the external auditor


1. To what extent is EY effective in completing the audit on a timely basis and meeting the agreed-upon performance criteria?

2. How would you assess the professionalism of the audit partner and engagement team?

3. To what extent is EY proactive in identifying opportunities and risks, for example, by anticipating and providing insights and approaches for potential business issues and improving internal controls?

4. After giving consideration to the unique aspects of your business, are the audit fees fair in relation to costs incurred and to your peer companies?

EY Input


Management Input




Quality of service


E. Assess the implications of CPAB inspection findings on the external audit’s quality


1. How has EY responded to audit quality issues raised in CPAB’s annual public report on the inspections of the quality of audits by the Big Four audit firms?

2. If CPAB performed an inspection of the entity’s audit file, were there any significant inspection findings? If so, what was the cause of these findings and how has EY responded?

EY Input


Management Input




External audit inspection findings

EY annually sends audit committees of Canadian reporting issuer audit clients with a copy of CPAB’s Public Report on the inspections of the quality of audits conducted by the Big Four audit firms. In the event that CPAB inspects the Company’s audit file, the audit committee will also obtain an understanding of the focus areas selected for inspection by CPAB, any significant inspection findings and if applicable, actions undertaken by EY in response to CPAB’s inspection findings.


F. Conclude on the results of the annual assessment and recommend to the Board whether to reappoint the auditor for the following year


1. Has the audit committee obtained sufficient information in order to reach a conclusion? Are there any outstanding items that are required from EY prior to finalizing the assessment?

2. What implications, if any, are there for the timing of the next comprehensive review?

3. How will the audit committee communicate the results to the board?

4. How are the results to be recorded for future reference during an annual assessment or comprehensive review?



Audit committee conclusion


Appendix 1 Mapping of questions from

CPA Canada Tool to EY Annual Assessment Template


Points to consider Mapping to EY Comprehensive

Review Template

1. Assess the auditor’s independence, objectivity and professional skepticism. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) How does the external auditor inform the audit committee about matters that might reasonably be thought to bear on the firm’s independence, including exceptions to its compliance with independence requirements and its safeguards in place to detect independence issues?

A6

b) In obtaining the audit committee's pre-approval for non-audit services, what safeguards were in place to protect the external auditor's independence?

A7

c) How did the external auditor adjust the audit plan to respond to changing risks and circumstances? A3

d) What steps does the engagement partner take to ensure that the engagement team exhibits the values, ethics and attitudes necessary to support a quality audit?

B2

e) How were significant differences in views, if any, between management and the external auditor resolved?

A5 / C2

f) What evidence is there that the engagement team challenges significant judgments made by management in preparing the financial statements?

A1

g) How has the engagement team addressed potential risks of fraud (for example, incorporating an element of unpredictability into audit procedures during the period)?

A4

h) How has the engagement team responded to indicators, if any, of possible management bias in the preparation of the financial statements (for example, to achieve performance-based or incentive remuneration)?

A4

i) How would you assess the quality of the significant professional judgments made by the engagement team during the audits?

A2

j) Which of the entity's accounting policies or disclosures, if any, have been questioned by regulators such that the external auditor's independence, professional skepticism or judgment has been questioned?

A1 / A2

k) Did the engagement quality control reviewer (EQCR) raise specific concerns over any matters when assessing the significant judgments made by the engagement team? Would it be helpful to meet with the EQCR?

A5

l) Are the audit fees appropriate in relation to costs incurred to enable the performance of a quality audit? D4

Audit quality considerationsAppendix 1



Review Template

2. Assess the quality of the engagement team provided by the external auditor. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) How did the engagement partner and audit team ensure that the necessary knowledge and skills (entity-specific, industry, accounting, auditing) were dedicated to the audit?

B1

b) What evidence was there that the engagement partner devoted sufficient attention and leadership to the audit? How involved was the EQCR in the audit?

B2 / A5

c) If portions of the audit were performed by other teams in various domestic locations, or abroad by the firm's global network or other audit firms, how did the engagement partner assess their technical skills, experience and professional objectivity and maintain quality control over their work?

B3

d) To what extent are audit activities performed through offshoring arrangements? How did the engagement partner maintain quality control over the parties performing the activities?

B3

e) To what extent are the external and internal auditors working together constructively? B4

3. Assess the communication and interaction with the external auditor. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) How candid and complete was the dialogue between the engagement partner, the audit committee and the audit committee chair? How well did the engagement partner explain accounting and auditing issues? How effective was the resolution of issues?

C1/C2

b) How would you assess the external auditor's discussion about the quality of the entity's financial reporting, including the reasonableness of accounting estimates and judgments, appropriateness of the accounting policies and adequacy of the disclosures?

C3

c) During in camera sessions, what is your assessment of how the external auditor discussed sensitive issues (for example, were concerns about management's reporting processes, internal control over financial reporting or the quality of the entity's financial management team discussed in a timely, candid and professional manner)?

C1/C2

d) How promptly did the audit engagement partner alert the audit committee if the engagement team did not receive sufficient cooperation?

C1

e) How well did the external auditor inform the audit committee of current developments in accounting and auditing standards relevant to the entity's financial statements and their potential impact on the audit?

C4



Review Template

4. Assess the quality of service provided by the external auditor. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) During the audit, how well did the external auditor meet the agreed-upon performance criteria, such as the engagement letter and audit scope? How well did the external auditor meet its commitments, for example, by meeting agreed-upon performance delivery dates and multiple reporting deadlines and by being available and accessible to management and the audit committee?

D1

b) How would you assess the professionalism of the audit partner and the engagement team? D2

c) How responsive and communicative is the external auditor, for example, in soliciting input relative to business risks or issues that might impact the audit plan?

C1 / D3

d) How proactive is the external auditor in identifying opportunities and risks, for example, by anticipating and providing insights and approaches for potential business issues and improving internal controls?

D3

e) How would you assess the value for money delivered by the external audit; for example, do the audit fees fairly reflect the cost of the services provided given the size, complexity and risks of the entity and a cost-effective quality audit?

D4

f) How would you assess the reasonableness of the explanations for any changes to fees (for example, change in scope of work) communicated to the audit committee?

D4


Review Template

5. Assess the implications of CPAB inspection findings on the external audit’s quality. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) What evidence is there that the external auditor demonstrated an appropriate level of focus on audit quality arising from CPAB inspection findings?

E1

b) How have any systemic audit quality issues identified by CPAB in its public report been considered by the audit firm and the engagement team?

E1

c) If CPAB performed an inspection of the entity's audit file, were there significant inspection findings? If so, how has the external auditor responded? Has there been an appropriate response to address the key issues in the current year? Has the auditor changed the future audit approach to improve the audit in future years?

E2

Quality of service considerations

CPAB inspection findings

Appendix 1



Review Template

Conclude on the results of the annual assessment and recommend to the board whether to reappoint the auditor for a further year. Consider how the results will be recorded and communicated. Consider the following questions:

1. Has sufficient information been obtained to reach a conclusion? F1

2. What implications, if any, are there for the timing of the next comprehensive review? F2

3. How should the audit committee communicate the results to the board – in written or oral form? F3

4. How are the results to be recorded for future reference during an annual assessment or comprehensive review?

F4

Conclude on annual assessment


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About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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For more information about our organization, please visit ey.com/ca.

© 2015 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited.

1748329 ED NoneThis publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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