The International Organization of Securities Commissions (IOSCO) has published the IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality. According to the a media release, the report aims to assist audit committees in promoting and supporting audit quality. The report provides IOSCO’s views on good practices for audit committees of listed companies in supporting external audit quality.
Good practices detailed. The report provides “good practices” that audit committees may consider when: recommending the appointment of an auditor; assessing potential and continuing auditors; setting audit fees; facilitating the audit process; assessing auditor independence; communicating with the auditor; and assessing audit quality. It also covers the features that an audit committee should have to be more effective in its role, including matters such as the qualifications and experience of audit committee members.
The role of audit committees and audit quality. The report provides details about the role of audit committees and audit quality. It briefly summarizes the role of other key parties in the financial reporting cycle and considers an entity’s governance structure, as well as noting that not all measures described in this paper may be able to be applied under the legal framework and governance structures in some jurisdictions. Audit quality is important because auditors play a critical role in ensuring that investors can be confident and informed when making investment decisions.
High-quality audits support the quality of financial reports and enable investors to rely on them, the report notes. The report goes on to discuss the factors that influence audit quality and the auditor’s responsibilities. It advises that audit committees should promote and support the quality of the audit through their various responsibilities and discusses the roles of directors and audit committees in relation to an audit and overseeing management on financial reporting as relevant to audit quality.
Good practices outlined. Good practices regarding the features an audit committee should have to more effectively promote and support audit quality are detailed. According to the report, these include the qualifications and experience of audit committee members, their level of knowledge in the field of financial reporting and audit, and whether they have questioning minds and appropriately challenge management and auditors, as well as adequate capacity and resources. Guidance on the following good practice topics are included in the report.
- Recommending the appointment of an auditor. Audit committees should develop a recommendation on the selection of auditors independently of management with selection criteria set up front and tenderers assessed against those criteria. The focus should be on audit quality and not fee reduction.
- Assessing potential and continuing auditors. In assessing the auditors audit committees should consider matters such as the auditor’s knowledge of the listed company´s business and industry, the extent of involvement of senior team members in the audit, use of other auditors, use of technical and specialist expertise, the capability accessible by the auditor in different geographical locations, coverage of internal systems and controls, and how the engagement partner and team are accountable within their firm for audit quality.
- What matters should be considered in setting audit fees. Audit committees should consider the extent to which audit fees are consistent with the audit plan and a quality audit.
- Facilitating the audit process. The role of audit committees is to promote quality and timely reporting by seeking explanations and advice on the appropriateness of accounting treatments and estimates, proper books and records, and systems and controls, which can facilitate a quality audit and avoid issues being missed or not adequately addressed due to deadline pressures.