The audit committee has become the primary focus for the company's relationship with the external auditor.
The role of the audit committee involves making recommendations to the board about the appointment of the auditor, agreeing audit fees, reviewing the scope of external audit work, and holding private meetings with the auditor to discuss its findings. It also includes reviewing, with the external auditor, the external auditor's independence.
The objective of an external audit of financial statements is to determine whether, in the auditor's opinion, the statements present fairly in all material respects - that is, they show a true and fair view in all material respects of the company's financial position, results of operations, and cash flows, in conformity with national or international generally accepted accounting principles (GAAP).
This covers a range of matters, many of which are a part of the audit committee's responsibilities. Hence, regular communication with the external auditor can be extremely valuable in assisting the audit committee's work.
Broadly, discussions with the external auditor can cover four key areas, which range from specifics about the auditor and its relationship with the company, to discussion about the industry, business and control environment of the company. These areas can be summarised as follows:
- service approach (the auditor's qualifications, including independence, to perform the work, and its approach to the audit)
- audit plan (the key risks identified by the auditor in relation to the financial statements and the company's controls, and the resulting audit plan and response to the risks)
- financial reporting (accounting policies, disclosures and observations about the overall quality of financial reporting)
- governance matters (matters noted by the auditor in the course of its work that it believes should be brought to the audit committee's attention).
These areas are discussed further in this chapter.