Guidelines for Effective Audit Committees

While the auditor has primary responsibility for the quality of an audit, audit committees can help ensure audit quality through performing their various duties effectively. Those duties include being primarily responsible for making recommendations to the board on the appointment, reappointment and removal of auditors, to approve the remuneration and terms of engagement of the auditors, and on any questions of resignation or removal of the auditors.

The Guidelines highlight two key factors that audit committees should consider in selecting and appointing auditors – audit quality and audit fees.

• Audit quality should be the key determinant when reappointing an incumbent auditor or selecting an auditor. When evaluating audit quality, audit committees should consider audit firm’s governance and leadership, compliance with relevant ethical requirements, industry knowledge and technical competence, engagement performance, communication and interaction with the audit committees, and internal and external inspections and regulatory outcomes. When reappointing an incumbent auditor, the audit committees should also consider the effectiveness of their previous audits.

• Audit fees should be at a level that would allow audit firms to allocate sufficient resources with appropriate expertise and experience to enable the audit to be performed in accordance with professional standards and applicable legal and regulatory requirements. They should also challenge audit firms charging lower audit fees compared to the incumbent auditor or competing firms and be satisfied that the audit firm does not intend to rely on obtaining additional or higher margin non-audit services to subsidise their costs of the audit.

The Guidelines also outline the key stages of an audit tender process with guidelines on how to run an effective audit tender, and some key issues and procedures that audit committees should consider or perform when auditors resign or when audit committees are considering whether to remove the auditor.