Periodic Comprehensive Review of the external auditor - EY€¦ · Periodic Comprehensive Review of the external auditor | 1 Audit quality considerations A. Professional skepticism,

Periodic Comprehensive Review of the external auditor

We’re pleased to share with you this template to assist the audit committee in completing the Periodic Comprehensive Review 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 a periodic comprehensive review, and it’s based on the guidance and tool issued by CPA Canada.The template is organized in the following sections:1. Audit quality considerations2. Quality of service considerations3. External audit inspection findings4. Audit committee conclusionAppendix 1 of the template maps the specific questions from the CPA Canada comprehensive review tool to this template.

Suggested approach for completing this template1. Hold an education session with

the audit committee to provide background on the periodic comprehensive review (“review”) process and factors to consider in scoping, timing and process for performing the review.

2. Audit committee to tailor questions in this template as appropriate for the entity. Note- This template and the review process should be owned by the audit committee with input from the external auditor and management.

3. Determine resources required to assist in the review and determine members of management that will provide input to the review process.

4. Appoint project leader, develop and approve review project plan with timelines.

5. Subsequent to tailoring the template questions the audit committee asks management and the external auditor to populate the template with their input.

6. Provide the template with the management and external auditor sections completed, to the audit committee for review and discussion of the questions (this may lead to additional requests for information and input). Audit committees may find it helpful to rate the external auditor’s performance for each question to stimulate dialogue in addition to providing their comments.

7. Audit committee to conclude on the review and complete the conclusion section of this template.

8. Develop and approve an action plan with any areas for improvement among the audit firm, management, and the audit committee.

9. Audit committee to make its recommendation to the Board.

10. Audit committee to approve public disclosure of the review.

Periodic Comprehensive Review of the external auditor | 1

Audit quality considerations

A. Professional skepticism, independence and objectivity

Questions to consider Scale Audit Committee Comments

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 during the audits?

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

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

5. Does EY involve industry and technical specialists in areas where specialized skills are required?

EY Input

(To be completed by EY)

Management Input

(To be completed by CEO and/or CFO with input from Internal audit, noting any significant observations or trends identified during the period of the comprehensive review.)

Assessment Scale 1 > Does not meet expectations 2 > Occasionally below expectations 3 > Meets expectations 4 > Occasionally exceeds expectations 5 > Constantly exceeds expectations

2 | Periodic Comprehensive Review of the external auditor

Audit quality considerations (cont’d)

B. Safeguard against institutional Independence familiarity threats


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

2. What type of relationship have you observed between members of management and the key audit partners? Have difficult issues been brought forward for consideration of the audit committee?

3. Does the lead audit partner involve key technical personnel outside of the engagement team, including the engagement quality control reviewer, to provide advice and technical decision support?

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

5. If EY has served the company on a long-term basis, are mechanisms in place to ensure that any institutional independence familiarity threats are mitigated?

EY Input


Management Input

(To be completed by CEO and/or CFO with input from Internal audit)



C. Quality of engagement team


1. Does the EY team exhibit the appropriate knowledge of the business, industry and technical skills?

2. Do the engagement leaders inspire confidence and have they demonstrated the commitment to address difficult issues and disagreements?

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

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

5. How does EY provide appropriate continuity of team members and perform an orderly transition when key members of the team change?

6. To what extent are the external auditors and internal auditors working together constructively?

EY Input


Management Input




Audit quality considerations (cont’d)

D. Quality of communication and interaction with EY


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 EY provide useful, constructive comments regarding financial reporting issues, internal controls and other items of significance?

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

EY Input


Management Input




Quality of service considerations

E. Provide input on the quality of service provided by EY


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

2. 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?

3. 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




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. 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



Audit Committee Conclusion

G. Conclude on the results of the comprehensive review, develop an action plan and communicate the results

Questions to consider Audit Committee Comments

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

2. Has the audit committee considered trends observed from past annual assessments of EY and looked ahead at how EY will continue to meet their needs?

3. Based on the results of the comprehensive review has an action plan been developed with recommended improvements for the EY audit team?

4. What recommendations for action should be made to the board/ audit committee, including changes to existing policies and processes?

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

6. What should be the form, timing and locations of public disclosure of the comprehensive review? (Consider obtaining legal advice)

Audit Committee Final Conclusion

(To be completed by Audit Committee)



Appendix 1 Mapping of questions from

CPA Canada Tool to EY Comprehensive Review Template


Points to consider Mapping to EY Comprehensive

Review Template

1. Assess the independence, objectivity and professional skepticism of the auditor throughout the review period. 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?

B1

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?

B4

c) How did the external auditor adjust the audit plan to respond to changing risks and circumstances? A3 / A4

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?

C3

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

B2

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?

B3

l) Are the audit fees appropriate in relation to costs incurred to enable the performance of a quality audit? E3

Audit quality considerations

Appendix 1

A. Review for significant observations and trends during the review period, including the most recent audit



Review Template

2. Assess the quality of the engagement team provided by the auditor throughout the review period. 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?

C1

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?

B3 / C3

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?

C4

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?

C4

e) To what extent are the external and internal auditors working together constructively? C6

f) How does the audit firm provide appropriate continuity of team members and perform an orderly transition when key members of the engagement team change?

C5

3. Assess the communication and interaction with the external auditor throughout the review period. 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?

D1 / D2

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?

D3

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)?

D1 / D3

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

D1

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?

D5



Review Template

4. Assess the quality of service provided by the external auditor throughout the review period. 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?

E1

b) How would you assess the professionalism of the audit partner and the engagement team? C2 / C3

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?

E2

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?

E2

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?

E3

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?

E3


Review Template

5. Assess whether there are any significant institutional familiarity threats and, if so, the related safeguards. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) What institutional familiarity threats has the audit firm identified? What steps have been taken to address them?

B5

b) To what extent has the entity employed former audit firm staff in key financial reporting positions? B5

c) What personnel changes, if any, in the audit firm or the entity could create a perception that the external auditor is no longer independent?

B5

d) What corporate hospitality has been provided to the audit firm/management by management/the audit firm that could bring the external auditor's independence into question?

B5

e) What reputational damage or regulatory action, if any, has the audit firm suffered that could bring into question its professionalism, independence, or financial stability?

B5

f) To what extent does the policy for non-audit work by the external auditor adequately assure the external auditor does not: audit its own work, involve it in management decisions, act in an advocacy role or create conflicts of interest? Has the policy been complied with?

B4

Quality of service considerationsAppendix 1

B. Safeguards against institutional independence familiarity threats



Review Template

6. Assess the appropriateness of the external auditor’s response to suggestions for improvements in audit quality arising from CPAB inspection findings. Some or all of the following questions may be relevant in the circumstances of the entity and the audit:

a) How has the audit firm responded to audit quality issues raised in CPAB's public reports? F1

b) If CPAB has inspected the audit file related to the entity during the review period and made significant inspection findings, what was the cause of these findings and how has the audit firm responded?

F2


Review Template

7. Conclude on the results of the comprehensive review and make a recommendation to the board whether to retain the current audit firm or put the audit out for tender. Determine how the results will be recorded and communicated. Consider the following questions:

a) Has sufficient information been obtained to reach a conclusion? G1

b) What recommendations for action should be made to the board and/or audit committee, including changes to existing policies and processes?

G4 / G3

c) Should the audit committee present a written report to the board? If not, how will the review's results be recorded for the audit committee's future use?

G5

d) Does the audit committee need to formally discuss the results of the comprehensive review with the board?

G5

e) What should be the form, timing and locations of public disclosure of the comprehensive review? G6

f) Is legal advice required in respect of such public disclosure? G6

C. Results of CPAB inspection findings since the previous review and how the audit firm has responded

D. Comprehensive review - Audit committee conclusions

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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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Periodic Comprehensive Review of the external auditor - EY€¦ · Periodic Comprehensive Review of the external auditor | 1 Audit quality considerations A. Professional skepticism,