Best Practices in Monitoring the External Audit


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In monitoring the company’s external audit, the audit committee could consider the following “best practices:

  1. 1. Participate in the Retention, Review and Discharge of the Independent Auditors
  • participate in hiring, firing and changing of the independent auditors;
  • review the independent auditors’ audit plan;
  • review the amount of estimated audit fees to be charged by the independent auditors and any other significant compensation to be paid to the independent auditors;
  • inquire about the adequacy of staffing, experience levels and qualifications of the auditors assigned to the company(including experience with the company’s industry) and the adequacy of time being spent by the more experienced partner or manager (including total hours and their time as a percentage of total audit hours spent on the company);
  • inquire about the adequacy of the time being spent on areas that require judgment or represent the greatest reporting risk, including by the more experienced partner or manager (including total hours);
  • review the performance of the independent auditors;
  • communicate with the company’s independent auditors about the company’s expectations regarding its relationship with the auditors, including the following:
    • the independent auditors’ ultimate accountability to the Board and the audit committee, as representatives of the company’s stockholders;
    • the ultimate authority and responsibility of the Board and the audit committee to select, evaluate and, where appropriate, replace the independent auditors;
  1. 2. Discuss  the  Company’s  Financial  Statements  and  Accounting  Policies  with  the Independent  Auditors

-       before public release, review with the independent auditors both the quarterly financial statements (after the independent auditors have completed their review under Statement on Auditing Standards No. 71), and the audited financial statements;

-       in connection with quarterly and annual reviews, obtain the independent auditors’ explanation and analysis of any questions or concerns involving the accounting policies and resulting financial statements, including:

  • whether management’s approach to accounting is conservative, moderate or aggressive;
  • whether management’s methods are common best practices in the industry;
  • the reasoning behind the independent auditors’ determinations of the approach and methods used by the company;
  • the quality, completeness and clarity of the overall financial disclosure under GAAP; and
  • what were the key items that management and the independent auditors focused on during the quarterly and annual reviews;

-       in connection with the quarterly and annual review of the company’s financial statements, discuss with the independent auditors the matters set forth under Statement on Auditing Standards No. 61, including:

  • the auditors’ responsibility under generally accepted auditing standards;
  • the company’s significant accounting policies and any new or different accounting policies it has adopted;
  • the impact of any significant or unusual transactions and the accounting for such transactions;
  • management’s judgments and accounting estimates;
  • significant audit adjustments that may have an effect on the financial reporting process;
  • any disagreements with management;
  • the auditors’ judgments about the quality, not just the acceptability, of the company’s accounting principles;
  • major issues discussed with management prior to retention;
  • any difficulties encountered in performing the annual audit or conducting the quarterly review;

-       require the independent auditors to provide the audit committee with a copy of the management letter provided to management, and discuss the letter with the independent auditors;

-       discuss with the independent auditors their periodic reviews of the adequacy of the company’s accounting and financial reporting processes, staffing and systems of internal control;

-       discuss the independent auditors’ methods for risk assessments and the results of those assessments and any changes in the scope of the audit as a result of such risk assessments;

  1. 3. Monitor  the  Independence  of  the  Independent  Auditors

-       monitor at least quarterly the independence of the independent auditors by:

  • obtaining from the auditors written disclosure of all relation ships between the auditor sand the company, including the nature of the services provided to the company and the fees charged for each type of service provided;
  • confirming that the auditors believe that they are independent from the company;
  • discussing independence issues with the auditors, scrutinizing consulting services provided by the auditors, reviewing the relationships between the auditors and the company’s management and finance staff (including any prior employment relationships), evaluating whether any of the company’s internal functions have been outsourced to the auditors and evaluating the relative importance of the company’s business to the audit firm;

- consider whether fees billed for information technology services and other non- audit services are compatible with maintaining the auditors’ independence;

- consider requiring pre-approval by the audit committee of non-audit services provided by outside auditors, or those above a specified dollar threshold or involving certain types of services (such as information technology services);

- inquire about the manner in which the audit partner is compensated for his work on the company, including whether the partner receives any compensation based on the non-audit services provided to the company.

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