FR01/2019 IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality

i IOSCO Report on Good Practices for Audit Committees in Supporting Audit Quality The Board OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FR01/2019 JANUARY 2019 ii The International Organization of Securities Commissions website www.iosco.org © International Organization of Securities Commissions 2019. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. iii Contents Chapter Page 1 Executive Summary 1 1.1 The Role of Audit Committees and Audit Quality 2 1.2 Good Practices 2 2 The Role of Audit Committees and Audit Quality 4 2.1 Introduction 4 2.2 About Governance Structures and Audit Committees 5 2.3 Why is Audit Quality Important? 5 2.4 What Factors Influence Audit Quality? 5 2.5 What are the Auditor’s Responsibilities? 6 2.6 Audit Committees and Auditors 6 2.7 What are the Roles of Directors and Audit Committees in Relation to Audit? 7 2.8 What are the Responsibilities of the Directors and Audit Committees in Overseeing Management on Financial Reporting as Relevant to Audit Quality? 8 2.9 Internal audit 9 3 Possible Good Practices for Audit Committees in Supporting Audit Quality 10 3.1 How can Audit Committees Support Audit Quality? 10 3.2 Features of Audit Committees that Support Audit Quality 10 3.3 Recommending the Appointment of an Auditor 13 3.4 Assessing Potential and Continuing Auditors 16 3.5 Setting Audit Fees 19 3.6 Facilitating the Audit Process 20 3.7 Assessing Auditor Independence 22 3.8 Communicating with the Auditor 24 3.9 Assessing Audit Quality 27 4 Other matters 30 4.1 Audit Committee Reporting 30 1 Chapter 1 – Executive Summary IMPORTANT NOTE: SCOPE OF THIS REPORT This report concerns the role of audit committees of listed companies1 in supporting and promoting external audit quality. The features of audit committees and the role of audit committees in relation to financial reporting are only covered to the extent these are relevant to audit quality. These two areas are not the focus of this report and it is not intended to provide a comprehensive list of good practices for audit committees in these areas. Further, this report is not intended to cover other matters such as the role of audit committees in relation to any internal audit function. Unless otherwise stated, “audit” in this report refers to external audit. This Report provides IOSCO’s views on good practices for audit committees of listed companies in supporting external audit quality. The quality of a company's financial report, supported by an independent external audit, is key to market confidence and informed investors, and to the effective functioning of capital markets. The audit committee has an important role in the quality of the financial report, since audit quality relates to an effective and independent audit function that is appropriately supported by the company. While the auditor has primary responsibility for audit quality, the audit committee should promote and support audit quality and thereby contribute to greater confidence in the quality of information in the listed company’s financial reports. The good practices report can therefore assist audit committees in considering ways in which they may be able to promote and support audit quality. Findings by audit regulators, for example, as reported by the International Forum of Independent Audit Regulators (IFIAR) 2. indicate a need to improve audit quality and the consistency of audit execution. Further, the practices of audit committees within the same jurisdiction, and across jurisdictions, can vary from one listed company to the next, leading to a lack of consistency in the way audit committees carry out their responsibilities. 1 The good practices in this report may also be relevant to other types of entities by analogy. References to listed companies and companies should be read to include their controlled entities, where appropriate. 2 IFIAR Report on 2017 Survey of Inspection Findings - https://www.ifiar.org/?wpdmdl=7970 2 1.1 The Role of Audit Committees and Audit Quality Chapter 2 of this Report gives details about the role of audit committees and audit quality. Chapter 2 also briefly summarises the role of some other key parties in the financial reporting cycle. 1.2 Good Practices Chapter 3 of this Report outlines good practices regarding the features an audit committee should have to be more effective in promoting and supporting audit quality. These features include