External Auditor Assessment Tool Us 2019-04

A TOOL FOR AUDIT COMMITTEES
EXTERNAL
AUDITOR
ASSESSMENT
TOOL
ABOUT THE CENTER FOR AUDIT QUALITY Please note that this publication is intended as general
information and should not be relied upon as being
The Center for Audit Quality (CAQ) is an autonomous definitive or all-inclusive. As with all other CAQ resources,
public policy organization dedicated to enhancing this is not authoritative, and readers are urged to refer
investor confidence and public trust in the global capital to relevant rules and standards. If legal advice or other
markets. The CAQ fosters high-quality performance by expert assistance is required, the services of a competent
public company auditors; convenes and collaborates professional should be sought. The CAQ makes no
with other stakeholders to advance the discussion of representations, warranties, or guarantees about, and
critical issues that require action and intervention; assumes no responsibility for, the content or application
and advocates policies and standards that promote of the material contained herein. The CAQ expressly
public company auditors’ objectivity, effectiveness, and disclaims all liability for any damages arising out of the
responsiveness to dynamic market conditions. Based in use of, reference to, or reliance on this material. This
Washington, DC, the CAQ is affiliated with the American publication does not represent an official position of the
Institute of CPAs. CAQ, its board, or its members.
EXTERNAL
AUDITOR
ASSESSMENT
TOOL
EXTERNAL AUDITOR ASSESSMENT TOOL
INTRODUCTION
Among other important duties, audit committees Robust, two-way dialogue that includes providing
of US public companies and registered constructive feedback to the external auditor may
investment companies have direct responsibility improve audit quality and enhance the relationship
to oversee the integrity of a company’s financial between the audit committee and the external
statements and to hire, compensate, and oversee auditor. The evaluation should encompass:
the external auditor. There continues to be
interest from investors, regulators, and others + an assessment of the qualifications and
regarding how audit committees perform their performance of the external auditor;
responsibilities, including their oversight of the
external auditor. + the firm-level approach to promoting and
monitoring audit quality;
Audit committees should regularly (at least
annually) evaluate the external auditor in + the quality and candor of the external auditor’s
fulfilling their duty in order to make an informed communications with the audit committee and
recommendation to the board whether to retain the company; and
the external auditor. We are pleased to update
this tool, which was last published in 2017, with + the external auditor’s independence, objectivity,
additional questions related to firm-level audit and professional skepticism.
quality considerations, including leadership,
culture, engagement team management, audit To this end, the assessment questionnaire included
engagement performance, and monitoring, in this tool can be used by audit committees to
among other topics. Our update also addresses inform their evaluation of the external auditor.
(1) changes in accounting standards and (2) The term “external auditor” is intended broadly
considerations regarding new and emerging and comprises the lead audit engagement partner,
risks. the engagement team, and the audit firm. The
CENTER FOR AUDIT QUALITY | THECAQ.ORG 1

lead audit engagement partner1 is responsible for

proper supervision of the work of engagement
team members and for compliance with Public
Company Accounting Oversight Board (PCAOB)
standards, including standards regarding using
the work of specialists,2 other auditors,3 internal
auditors,4 and others who are involved in testing
controls.5,6
The sample questions highlight some of the

more important areas for consideration; they are
suggested for consideration and not intended
to cover all areas that might be relevant to a
particular audit committee’s evaluation of its
external auditor, nor do they suggest a “one- size-
fits-all” approach. Moreover, this assessment
tool is not meant to provide a summary of legal
or regulatory requirements for audit committees
or external auditors. An overview of portions
of the relevant standards on required external
auditor communications with the audit committee
(appendix I) and sources of additional information
on hiring and evaluating the external auditor
(appendix II) are included at the end of this
document. •
1 Throughout this publication, the term lead audit engagement partner is generally used to refer to the member of the engagement team with primary
responsibility for the audit. AS 1201, Supervision of the Audit Engagement, uses the term engagement partner.
2 AS 1210, Using the Work of a Specialist.
3 AS 1205, Part of the Audit Performed by Other Independent Auditors.
4 AS 2605, Consideration of the Internal Audit Function.
5 Paragraphs .16-.19 of AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements.
6 AS 1201.03.
2 CENTER FOR AUDIT QUALITY | THECAQ.ORG

ASSESSMENT
PROCESS
The external auditor assessment should draw Audit committee members can assess the external
on the audit committee’s experience with the auditor throughout the audit process via both
external auditor during the current engagement formal and informal assessments. Informal
(presentations, reports, and dialogue during formal assessments can be made based on private
meetings; ad hoc meetings; and executive sessions) meetings between the audit committee chair and
and should be informed by prior-year evaluations, the lead audit engagement partner, which can
as applicable. Further, each assessment is more help build a constructive and mutually respectful
meaningful when informed by the risks the working relationship. These contemporaneous
company faces and the external auditor’s views assessments provide important input into the
regarding how management is addressing those annual assessment. Audit committees may wish
risks. It is appropriate to obtain observations to consider those contemporaneous observations
on the external auditor from others within the during a more formal assessment process,
company, including management and internal perhaps by using a questionnaire or guide, such
audit, accompanied by discussions with other as the one included in this tool. To ensure that
key managers. A suggested survey for obtaining multiple views are considered, audit committees
observations from others within the company may wish to finalize their assessment in group
follows the assessment questionnaire. In evaluating discussions (as opposed to collecting audit
information obtained from management, the audit committee member comments separately) during
committee should be sensitive to the need for the formal committee meetings or conference calls.
external auditor to be objective and skeptical while
still maintaining an effective and open relationship Other sources of input into the audit committee’s
with management. Accordingly, audit committees assessment of the external auditor may include
should be alert to whether management displays discussions with the external auditor regarding its
a strong preference for or a strong opposition to firm-level approach to promoting and monitoring
retaining the external auditor—and follow up as audit quality, as well as information published by
appropriate to understand the reasons. the firms that addresses audit quality issues (such

as firm transparency and audit quality reports),

regulator inspection reports, and peer review
findings, as applicable.
Finally, the audit committee should consider

advising shareholders that it performs an annual
evaluation of the external auditor. The audit
committee also should consider explaining its
process, scope of the assessment, and factors
considered in selecting or recommending the audit
firm or assessing its performance.7 •
7 2018 Audit Committee Transparency Barometer, an annual report issued jointly by the Center for Audit Quality and Audit Analytics.
The Barometer provides year-over-year comparisons of key audit committee disclosure areas for companies of all sizes.

PART 1
QUALITY OF SERVICES AND
SUFFICIENCY OF RESOURCES PROVIDED
BY THE EXTERNAL AUDITOR – THE
ENGAGEMENT TEAM
The audit committee’s evaluation of the external identified and responded to any significant auditing
auditor begins with considering the quality of the and accounting issues that arose from changes
services provided by the engagement team during in the company or its industry, or changes in
the audit and throughout the financial reporting applicable accounting and auditing requirements.
year.
Understanding the nature and extent of other
Because audit quality is highly dependent on accounting firm(s) participation in the audit in
the individuals who conduct the audit, the audit various domestic locations, or in other countries
committee should assess whether the primary through the audit firm’s global network or by other
members of the engagement team demonstrated audit firms, allows the audit committee to monitor
the knowledge, skills, and experience necessary the quality of audit work in those jurisdictions.9 •
to address the company’s risks of material
misstatement.8 The engagement team should have
provided details regarding its risk assessment at
the outset of the audit, including an assessment
and discussion regarding fraud risks. During
the engagement, the engagement team should
have demonstrated a good understanding of the
company’s business, industry, and the impact
of the economic environment on the company.
Moreover, the engagement team should have
8 Such consideration includes the impact of any recently issued US generally accepted accounting principles (GAAP).
9 PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants, requires disclosure of the engagement partner name and the extent of participation
of other accounting firm(s) on Form AP, which is filed with the PCAOB.

PART 1: QUALITY OF SERVICES AND SUFFICIENCY OF RESOURCES PROVIDED BY THE EXTERNAL AUDITOR – THE
ENGAGEMENT TEAM
SAMPLE QUESTIONS OBSERVATIONS
Engagement team skill and responsiveness
+ Did the lead audit engagement partner and engagement team

have the necessary knowledge, skills, and experience (company-
specific, industry, accounting, auditing) to perform the audit of the
company’s financial statements?
+ Did the engagement team have sufficient access to specialized

expertise during the audit?
+ Were additional and appropriate resources available to complete

1 the audit timely and efficiently?
+ Was the lead audit engagement partner accessible to the audit

committee and company management?
+ Did the lead audit engagement partner devote sufficient attention

and leadership to the audit?
+ Did the external auditor seek feedback on the quality of the services
provided?
+ How did the external auditor respond to feedback?
Engagement team hours and workload
+ Did the lead audit engagement partner discuss trends in

engagement hours and related timing such as:
(1) total audit hours by various levels, including partner(s),

manager(s), and staff (e.g., percentage of planned hours for the
current year and actual audit hours for the prior year);
2 (2) changes in audit hours from year to year (i.e., comparing the
current year’s planned hours with the prior year’s actual
hours); and
(3) the breakdown of audit hours incurred by phase of the audit

cycle, particularly the allocation for planning, execution, and
completion?
+ Did the lead audit engagement partner discuss key engagement

team members’ workloads and workload information (compared to
a standard workload by level as determined by the audit firm)?

ENGAGEMENT TEAM
Audit plan and risks
+ Did the lead audit engagement partner discuss the audit plan,
including the use of technology and how it addressed company- and
industry-specific areas of accounting and audit risk (including fraud
risk and other significant risks) with the audit committee?
+ Did the lead audit engagement partner identify the appropriate

risks in planning the audit?
3
+ Did the external auditor use technology and analytics to identify risks?
+ Did the lead audit engagement partner discuss any risks of fraud in
the financial statements that were factored into the audit plan?
+ Did the external auditor adjust the audit plan to respond to

changing risks and circumstances?
+ Did the audit committee understand the changes in risk and agree
that they were appropriate?
Audit participants
+ If other accounting firm(s) participated in the audit in various

domestic locations, or in other countries through the audit firm’s
global network or other audit firms, did the lead audit engagement
partner provide information about the technical skills, experience,
and professional objectivity of those external auditors?
4
+ Did the lead audit engagement partner explain how he or she
reviews and supervises those other auditors, specialists, or
personnel at shared service center(s), if applicable?
+ Did the lead audit engagement partner and/or engagement team

provide information on significant interactions with other audit
participants?
Engagement team succession
5 + If applicable, has the audit firm sufficiently explained how the
changes or rotations of lead audit engagement partner or senior
engagement team personnel would be managed? (See part 4 for
more questions related to compliance with independence rules.)

ENGAGEMENT TEAM
Complex accounting and auditing matters, including consultations
+ Did the lead audit engagement partner bring the resources of his or
her firm to the audit and advise the audit committee of the results
of any consultations with the audit firm’s national professional
practice office or other technical resources on accounting or
6 auditing matters?
+ Were such consultations executed in a timely and transparent

manner?
+ Were planned and actual allocation of resources associated with

significant risks appropriate?
Scope and cost considerations
+ Were the scope, hours, and cost of the audit reasonable and
sufficient for the size, complexity, and risks of the company?
7
+ Were the reasons for any changes to scope, hours, and cost
communicated to the audit committee?
+ Did the audit committee agree with the reasons?

PART 2
QUALITY OF SERVICES AND
SUFFICIENCY OF RESOURCES PROVIDED
BY THE EXTERNAL AUDITOR – THE
AUDIT FIRM
Audit quality is broader than the engagement for the following six elements that are important
team. Important considerations for an audit to audit quality:
committee include:
(1) Leadership, Culture, and Firm Governance
+ whether the audit firm has the relevant
industry expertise, geographical reach, (2) Ethics and Independence
sufficient resources, appropriate specialists
and/or national office resources necessary to (3) Acceptance and Continuance of Clients and
continue to serve the company; and Engagements
+ the audit firm’s system of quality control (4) Engagement Team Management
designed to deliver timely, efficient, effective
audits in accordance with applicable (5) Audit Engagement Performance
professional standards.
(6) Monitoring
A key part of the assessment process is the
audit committee’s understanding of how The Framework also includes example firm-level
an audit firm promotes and monitors audit audit quality indicators (AQIs) and builds on prior
quality. The CAQ released its Audit Quality work of the CAQ related to AQIs.10
Disclosure Framework in January 2019. This
voluntary Framework can help promote an Audit committees are encouraged to read a firm’s
important dialogue between audit firms and audit quality report, if applicable, and use the
audit committees related to how audit quality is Framework to assist in asking questions about
supported and monitored at the firm-level. The a firm’s approach to promoting and monitoring
Framework provides illustrative Points of Focus audit quality. •
10 CAQ’s Audit Quality Indicators: The Journey and Path Ahead (January 2016) and The CAQ Approach to Audit Quality Indicators (April 2014).

ELEMENTS IMPORTANT TO AUDIT to assess whether the firm has the necessary
QUALITY capabilities and has appropriately considered
associated risks, among other considerations.
In its Audit Quality Disclosure Framework, the
CAQ describes six elements important to audit Engagement Team Management. Engagement
quality: team management encompasses policies
and procedures associated with recruitment,
Leadership, Culture, and Firm Governance. retention, and promotion; professional
The firm’s leadership sets the tone for the development; and assignment of engagement
effectiveness of the firm’s system of quality personnel and resources. These policies
control and emphasizes the importance of and procedures are designed to mobilize an
audit quality and the auditor’s role in providing engagement team that has the appropriate
trust in the capital markets. Together with mix of knowledge, relevant experience by staff
firm leadership, the foundation of audit level and industry, and sufficient time to design
quality is the establishment of policies and and execute a quality audit under professional
procedures designed to promote an internal standards.
culture that recognizes that quality is essential
in performing audit engagements. The Audit Engagement Performance. Audit
composition of a firm’s governing body and engagement performance encompasses
leadership structure give insight into who processes such as the audit firm’s audit
is responsible for oversight of audit quality methodology that guides the planning and
initiatives. performance of the audit; supervision and
review, including engagement quality review;
Ethics and Independence. Ethics and and communicating audit results. These
independence are foundational qualities processes help professionals perform audit
underlying the auditing profession. In procedures in accordance with the applicable
recognition of this, professional standards professional standards.
require firms to establish policies and
procedures to provide reasonable assurance Monitoring. Monitoring activities provide
that firm personnel maintain independence a firm with reasonable assurance that the
(in fact and in appearance) in all required policies and procedures relating to the system
circumstances, perform professional of quality control are suitably designed and
responsibilities with integrity, and maintain are being effectively applied. Monitoring
objectivity in discharging professional procedures may include such procedures
responsibilities. as inspections and root-cause analyses.
These processes are performed by qualified
Acceptance and Continuance of Clients and individuals who are not directly associated
Engagements. Firms establish policies and with the performance of the engagement. The
procedures to determine whether the firm nature and extent of monitoring procedures
should accept or continue a client relationship may vary given the nature and complexity of a
or specific engagement. These policies are used firm’s operations. •

AUDIT FIRM
Audit quality report
8 + Does the firm’s audit quality report, if applicable, provide

transparency into how the audit firm promotes and monitors
audit quality and how trends and disclosures are calculated?
Leadership, culture, and firm governance
+ Does the audit firm’s leadership, culture, and firm governance

9 promote audit quality?
+ Do the firm’s core values, principles, and code of conduct

emphasize audit quality?
Engagement team management
+ Does the audit firm have the necessary industry and specialized
accounting and reporting expertise relevant to the company’s
primary operations?
+ Does the audit firm have the resources and geographical reach
10 required to continue to serve the company?
+ Does the audit firm support effective engagement team

performance through recruitment, retention, and promotion?
+ Does the audit firm’s approach to professional development and

coaching at both the firm and engagement team level promote
audit quality?
Audit engagement performance
11 + Do audit firm policies reinforce planning and performing the audit
to avoid surprises, promote early detection of issues, and achieve
the timely completion of the audit?

AUDIT FIRM
Monitoring
+ If the audit was subject to inspection by the PCAOB or other

regulators—or other internal quality review—did the external
auditor advise the audit committee in a timely manner of the
selection of the audit findings, and the impact, if any, on the audit
results?
+ Did the lead audit engagement partner communicate relevant

12 results of the firm’s inspection or internal quality review that
may be pertinent to the company, such as themes and types of
findings regarding companies in similar industries with similar
accounting or audit issues?
+ Did the lead audit engagement partner explain the audit firm’s
root-cause analysis, if applicable, and remediation processes
and how, as a result, the audit firm planned to respond to the
inspection findings and to internal findings regarding its quality
control program?

PART 3
COMMUNICATION AND INTERACTION
WITH THE EXTERNAL AUDITOR
Frequent and open communication between communication between the external auditor and
the audit committee and the external auditor is the audit committee is increasingly important as
essential for the audit committee to obtain the audit committee members or management may be
information it needs to fulfill its responsibilities to asked questions about the audit process.
oversee the company’s financial reporting process.
The quality of communications also provides PCAOB standards, Securities and Exchange
opportunities to assess the external auditor’s Commission (SEC) rules, and stock exchange
performance. In addition to communicating with listing requirements identify a number of matters
the audit committee as significant issues arise, the external auditor is required to discuss with
the external auditor should also meet with the the audit committee. Audit committees should be
audit committee on a basis frequent enough familiar with those required communications and
to ensure the audit committee has a complete consider not only whether the external auditor met
understanding of the stages of the audit cycle (e.g., all the requirements, but, importantly, the level
planning, completion of final procedures, and, if of openness and quality of these communications,
applicable, completion of interim procedures). whether held with management present or in
Such communications should focus on the key executive session. •
accounting or auditing issues that, in the external
auditor’s judgment, give rise to a greater risk of
material misstatement of the financial statements,
as well as any questions or concerns of the audit
committee. Audit committees should consider if
implementation of new accounting standards is
being adequately discussed by the company and
the external auditor. Recent PCAOB rules provide
for greater transparency to investors, media, and
other stakeholders, and therefore the quality of

PART 3: COMMUNICATION AND INTERACTION WITH THE EXTERNAL AUDITOR
Openness of communications
+ Did the lead audit engagement partner maintain a professional

and open dialogue with the audit committee and audit committee
13 chair?
+ Were discussions frank and complete?
+ Did the external auditor explain accounting and auditing issues in

an understandable manner?
Nature of communications
+ Did the external auditor adequately discuss the quality of the

company’s financial reporting, including the reasonableness of
accounting estimates and judgments?
+ Did the external auditor discuss how the company’s accounting

policies compare with industry trends and leading practices?
+ Did the external auditor discuss with the audit committee current
14 developments in accounting principles and auditing standards
relevant to the company’s financial statements and the potential
impact on the audit?
+ Did the lead audit engagement partner explain the external

auditor’s responsibilities related to other information in
documents containing audited financial statements, such as non-
GAAP financial information?11
+ Did the external auditor discuss critical audit matters (CAMs)

communicated in the auditor’s report and how CAMs were
identified?12
11 AS 2701, Other Information in Documents Containing Audited Financial Statements.

12 The CAQ released Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example in December 2018. This publication
shares early observations from dry runs performed by certain firms, providing valuable perspective for audit committees, auditors, and others in the
financial reporting ecosystem. In December 2017, the CAQ published The Auditor’s Report: Considerations for Audit Committees, which explains key
changes required by AS 3101 and lists key questions for audit committees to consider. See page 16 regarding effective dates.

PART 3: COMMUNICATION AND INTERACTION WITH THE EXTERNAL AUDITOR
Communication of concerns
+ In executive sessions, did the external auditor discuss sensitive

issues candidly and professionally, such as:
• any concerns about management’s reporting processes;
15 • internal control over financial reporting (e.g., management

review controls); or
• the quality of the company’s financial management team?
+ Did the lead audit engagement partner promptly alert the audit
committee if he or she did not receive sufficient cooperation from
management including management in other jurisdictions?

ACCOUNTING AND AUDITING Estimates, Including Fair Value Measurements,

DEVELOPMENTS AND POTENTIAL and related amendments and amendments
RISKS to the auditing standards regarding the
requirements that apply when auditors use
1. Implementation of Recently Issued Accounting the work of specialists in an audit. Subject to
Standards the approval of the SEC, the new standard and
related amendments will take effect for audits
Calendar year-end public companies recently of financial statements for fiscal years ending on
adopted the new revenue recognition and leases or after December 15, 2020.
standards. The new credit losses standard is
effective as of January 1, 2020, for calendar 3. Other Potential Risks
year-end public companies and is significant in
scope.13 Audit committees should have a clear Although outside the scope of audits of the
understanding of how management is assessing financial statements and internal control over
the impact of the new standard and forging a financial reporting, audit committees also have,
successful path to its implementation. in many instances, been called on to understand
other potential business and regulatory risks
2. Recently Issued and Proposed PCAOB facing the company, such as:
Standards
+ Non-GAAP Financial Information. In recent
+ Form AP. PCAOB Rule 3211, Auditor Reporting years, the presentation of non-GAAP financial
of Certain Audit Participants (Form AP), information has increased, and regulators
requires the lead audit engagement partner and others have expressed concerns that
name and participation of other accounting investors could be misled or confused by this
firm(s) to be publicly disclosed. information, if it is not presented appropriately.
Audit committees may wish to review the
+ Auditor’s Reporting Model. AS 3101, The transparency, consistency, and comparability
Auditor’s Report on an Audit of Financial of their company’s presentation of non-GAAP
Statements When the Auditor Expresses financial measures and other performance
an Unqualified Opinion, includes significant metrics.
changes to the current auditor’s report,
including the communication of CAMs. + Cybersecurity. Awareness continues to grow
Communicating CAMs in audit reports is about evolving cybersecurity threats to
effective for large accelerated filers for companies. Understanding cybersecurity as an
periods ending on or after June 30, 2019, enterprise-wide risk management issue and
and for periods ending on or after December considering the use of existing board resources,
15, 2020, for audits of all other companies such as outside counsel and external auditors,
to which the CAM requirements apply. Audit may assist audit committees in gaining helpful
committees should discuss the impact of the perspectives on cyber-risk trends.
implementation of this new auditing standard
with their external auditor in advance of the + Emerging Technologies. Although emerging
effective date. technologies present opportunities to increase
efficiency and the quality of financial reporting,
+ Auditing Accounting Estimates, Including Fair these opportunities are not risk-free. To
Value Measurements and Using the Work of inform their oversight activities related to
the Auditor-Engaged Specialist. On December management, audit committees should have
20, 2018, the PCAOB Board adopted a new discussions with their auditors about emerging
standard, AS 2501, Auditing Accounting technologies used in financial reporting.14 •
13 Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
14 CAQ’s Emerging Technologies: An Oversight Tool for Audit Committees.

PART 4
AUDITOR INDEPENDENCE, OBJECTIVITY,
AND PROFESSIONAL SKEPTICISM
The external auditor must be independent of The external auditor should be able to evaluate the
the issuer and—in the case of mutual funds— methods and assumptions used by management
independent of the investment company to develop accounting estimates and to
complex. Audit committees should be familiar challenge those assumptions and application of
with the statutory and regulatory independence accounting policies, including the completeness
requirements for external auditors—including and transparency of the related disclosures as
requirements that the external auditor advise the appropriate.
audit committee of any services or relationships
that reasonably can be thought to bear on the An important part of evaluating the external
audit firm’s independence—and evaluate the auditor’s objectivity and professional skepticism
external auditor in light of those requirements. is for the audit committee to gauge the
frankness and informative nature of responses
The technical competence of the external auditor to open-ended questions asked of the lead
alone is not sufficient to ensure a high-quality audit engagement partner (and members of the
audit. The external auditor also must exercise engagement team as appropriate). Examples of
a high level of objectivity and professional appropriate topics include: the financial reporting
skepticism. The audit committee’s interactions challenges posed by the company’s business
with the external auditor during the audit provide model, the quality of the financial management
opportunities to evaluate whether the external team, the robustness of the internal control
auditor demonstrates integrity, objectivity, and environment, changes in accounting methods or
professional skepticism. For example, the use key assumptions underlying critical estimates,
of estimates and judgments in the financial and the range of accounting issues discussed
statements and related disclosures (e.g., fair with management during the audit (including
value, impairment) continues to be an important alternative accounting treatments in which the
component of financial reporting. external auditor and management differed). The
external auditor also should be able to clearly

articulate the processes followed and summarize

the evidence used to evaluate management’s
significant estimates and judgments, and to form
an opinion as to whether the financial statements,
taken as a whole, were fairly presented in
accordance with US GAAP. •
PART 4: AUDITOR INDEPENDENCE, OBJECTIVITY, AND PROFESSIONAL SKEPTICISM
Independence compliance
+ Did the external auditor report to the audit committee all

matters that might reasonably be thought to bear on the audit
16 firm’s independence, including exceptions to its compliance with
independence requirements?
+ Did the external auditor discuss processes in place to monitor

and remediate independence violations?
Disagreements with management
+ Were there any significant differences in views between

management and the external auditor?
17 + If so, did the external auditor present a clear point of view on
accounting issues for which management’s initial perspective
differed?
+ Was the process of reconciling views achieved in a timely and

professional manner?
Promotion of professional skepticism
18 + Did the external auditor promote the application of professional

judgment and exercise of professional skepticism in executing the
audit?

PART 4: AUDITOR INDEPENDENCE, OBJECTIVITY, AND PROFESSIONAL SKEPTICISM
Internal audit reliance
+ If the external auditor is placing reliance on management and

internal audit testing, did the audit committee agree with the
extent of such reliance?
19 + Were there any significant differences in views between the

internal auditors and the external auditor?
+ If so, were they resolved in a professional manner?
+ Did the external auditor change or increase their testing due to

internal audit findings, if applicable?
Non-audit services
20 + In obtaining pre-approval from the audit committee for all non-
audit services, did the lead audit engagement partner discuss
safeguards in place to protect the independence, objectivity, and
professional skepticism of the external auditor?

SAMPLE FORM
OBTAINING INPUT FROM COMPANY
PERSONNEL ABOUT THE EXTERNAL
AUDITOR
Because you have substantial contact with the external auditor throughout the year, the audit committee
is interested in your views on the quality of service provided, and the independence, objectivity, and
professional skepticism demonstrated throughout the engagement by the external auditor and audit firm.
Please rate the external auditor’s performance on each of the following attributes using the following five-
point scale:
1 = Very Low/Completely Dissatisfied

5 = Very High/Completely Satisfied
QUALITY OF SERVICES PROVIDED BY THE EXTERNAL AUDITOR RATING
1 Meets commitments (e.g., by meeting agreed-on performance delivery dates

and being available and accessible to management and the audit committee).
Is responsive and communicative (e.g., by soliciting input relative to business

2 risks or issues that might impact the audit plan, identifying and resolving
issues in a timely fashion, and adapting to changing risks quickly).

QUALITY OF SERVICES PROVIDED BY THE EXTERNAL AUDITOR (CONTINUED) RATING
Proactively identifies opportunities and risks (e.g., by anticipating and

3 providing insights and approaches for potential business issues, bringing
appropriate expertise to bear, and identifying meaningful alternatives and
discussing their impacts).
Delivers value for money (e.g., audit fees fairly reflect the cost of the services
4 provided and the audit team is thoughtful about ways to achieve a cost-
effective quality audit).
5 Engages in periodic discussion regarding how the audit firm promotes and
monitors audit quality.
SUFFICIENCY OF AUDIT FIRM AND NETWORK RESOURCES RATING
Is technically competent and able to translate knowledge into practice (e.g., by

6 delivering quality services within the scope of the engagement, using technical
knowledge and independent judgment to provide realistic analysis of issues,
and providing appropriate levels of competence across the engagement team).
Understands our business and our industry (e.g., demonstrating an

7 understanding of our specific business risks, processes, systems, and
operations; sharing relevant industry experience; and providing access to firm
experts on industry and technical matters).
Assigns sufficient resources to complete work in a timely manner (e.g., by

8 providing an engagement team with the appropriate mix of experience, access
to specialized expertise during the audit, and assigning additional resources to
the audit as necessary to complete work in a timely manner).
COMMUNICATION AND INTERACTION RATING
Communicates effectively (e.g., by maintaining appropriate levels of contact/

dialogue throughout the year, effectively communicating verbally and in
9 writing, being constructive and respectful in all interactions, and providing
timely and informative communications about accounting and other relevant
developments).

COMMUNICATION AND INTERACTION (CONTINUED) RATING
Communicates about matters affecting the external auditor or its reputation

(e.g., by advising us on significant matters pertaining to the external auditor
while respecting the confidentiality of other clients’ information, and complying
10 with professional standards and legal requirements, including informing us
when the audit is subject to inspection by the PCAOB or other regulatory
review and sharing the results of the review that are pertinent to the
company’s accounting or auditing issues).
INDEPENDENCE, OBJECTIVITY, AND PROFESSIONAL SKEPTICISM RATING
Demonstrates integrity and objectivity (e.g., by maintaining a respectful but

11 questioning approach throughout the audit, proactively raising important
issues to appropriate levels of the organization until resolution is reached, and
articulating a point of view on issues).
Demonstrates independence (e.g., by proactively discussing independence

12 matters and reporting exceptions to its compliance with independence
requirements).
Is forthright in dealing with difficult situations (e.g., by proactively identifying,

13 communicating, and resolving technical issues; raising important issues
to appropriate levels in the organization; and handling sensitive issues
constructively).
RECOMMENDATIONS
Should the external auditor take any actions to improve its delivery of a quality audit?
Please sign, date, and return the form to
by . Questions may be directed to . Thank you.
Signature Title Date

APPENDIX I
RELEVANT US REQUIREMENTS AND
STANDARDS
PROHIBITED NON-AUDIT SERVICES +B

roker or dealer, investment adviser, or
investment banking services;
There are nine statutory categories of non-audit
services that may not be provided to companies +L
egal services and expert services unrelated to
by the external auditors (Section 10A (g) to the the audit; and
Securities Exchange Act of 1934). For investment
companies, these non-audit services may not +A
ny other service that the PCAOB determines, by
be provided to any company in the investment regulation, is impermissible.
company complex (as defined in 210.2-01(f)(14)):
Audit committees must pre-approve the provision
+ Bookkeeping or other services related to the of all other non-audit services by the external
accounting records or financial statements of the auditor.
audit client;
+ Financial information systems design and

implementation;
+ Appraisal or valuation services, fairness

opinions, or contribution-in-kind reports;
+ Actuarial services;
+ Internal audit outsourcing services;
+ Management functions or human resources;

OVERVIEW OF EXTERNAL AUDITOR +T

he overall audit strategy, timing of the audit
COMMUNICATIONS WITH AUDIT and significant risks, including the participation
COMMITTEES of specialists, firms besides the principal auditor,
or others involved in the audit;
SEC Rule 2-07 requires the external auditor to
communicate the following to the audit committee +T
he following with respect to the entity’s
prior to the filing of the company’s Form 10-K. For accounting policies and practices, estimates
investment companies that file Form N-CSR, these and significant unusual transactions, and the
communications must take place annually, except external auditor’s evaluation of the quality of a
that if the annual communication takes place more company’s financial reporting:
than 90 days prior to the filing, the external auditor
must provide an update describing any changes to • Significant accounting policies and practices –
the previously reported information. Management’s initial selection of, or changes
in the current period; the effect on financial
+ Critical accounting policies and practices used statements or disclosures for policies that are
by the issuer; considered controversial, or where there is a
lack of guidance or diversity in practice; and
+ Alternative accounting treatments within US the external auditor’s qualitative assessment
GAAP for accounting policies and practices of such policies and practices. Specifically,
related to material items that have been the quality, not just the acceptability, of the
discussed with management during the current company’s accounting principles as applied
audit period, including the ramifications of in its financial reporting and disclosures,
the use of such alternative disclosures and including situations in which the external
treatments and the treatment preferred by the auditor identified bias in management’s
independent auditor; judgments and the external auditor’s
evaluation of the differences between (i)
+ Material written communications between the estimates best supported by the audit evidence
independent auditor and management of the and (ii) estimates included in the financial
issuer; and statements which are individually reasonable,
that indicate a possible bias on the part of
+ If the audit client is an investment company, company management;
all non-audit services provided to any entity in
the investment company complex that were not • Critical accounting policies and practices –
pre-approved by the investment company’s audit The reasons such policies and practices are
committee pursuant to 210.2-01(c)(7). considered critical, how current and anticipated
events could affect this determination, and
AS 1301, Communications with Audit Committees, the external auditor’s assessment of related
requires the following communications with the management disclosures;
audit committee:
• Critical accounting estimates – A description
+ The independent auditor’s responsibilities in of the process used to develop such estimates,
relation to the audit under the standards of the management’s significant assumptions
PCAOB as part of establishing an understanding in the estimates that have a high degree
with the audit committee on the terms of the of subjectivity, any significant changes in
engagement, preferably through a written management’s process to develop an estimate,
communication (i.e., engagement letter); and the external auditor’s conclusion as to the
reasonableness of such estimates;
+ Communication of major issues discussed with
management prior to the initial selection or • Significant unusual transactions – Significant
retention as external auditors; transactions outside the normal course of
business—or that are unusual due to timing,
+ Whether the audit committee is aware of any size, or nature—and the external auditor’s
matters relevant to the audit, particularly any understanding for the business rationale of
violations of laws or regulations; such transactions;

• Financial statement presentation – The including qualitative assessment, (ii)

evaluation of whether the financial statements uncorrected misstatements or underlying
and related disclosures are presented fairly matters that could potentially cause future-
in accordance with the applicable financial period financial statements to be materially
reporting framework; misstated, and (iii) corrected misstatements
other than those deemed trivial, that might
• New accounting pronouncements – Any not have been detected other than through the
concern identified by the external auditor audit procedures;
related to management’s application of
pronouncements that have been issued but are • Disagreements with management, whether
not yet effective in relation to future periods; or not satisfactorily resolved that individually
or in the aggregate could be significant to the
• Alternative accounting treatments – All entity’s financial statements or the audit report;
alternative treatments permissible under the
applicable financial reporting framework for • Significant difficulties encountered with
policies and practices related to material items management in performing the audit.
that have been discussed with management,
including the ramifications of the use of such PCAOB standards require the independent auditor
alternative disclosures and treatments and the to communicate all material weaknesses and
treatment preferred by the external auditor. significant deficiencies identified during the audit
to the audit committee. If the independent auditor
+O
ther communications from the external auditor concludes that the audit committee’s oversight
including the following: of the company’s external financial reporting
and internal control over financial reporting is
• Other information – The external auditor’s ineffective, the external auditor is required to
responsibility with respect to and results inform the board of directors.
of audit procedures performed on other
information accompanying the audited financial PCAOB rules also require, at least annually, a
statements; written statement delineating all relationships
between the independent auditor and the company,
• Difficult or contentious matters for which the including individuals in financial reporting
external auditor consulted; oversight roles at the company that reasonably
can be thought to bear on independence.
• Management consultation with other
accountants; New York Stock Exchange Rule 303A.07(b),
from its Listed Company Manual, requires audit
• Going concern – (i) If the external auditor committees to have a written charter that sets
believes there is substantial doubt about forth the committee’s purpose, including, at a
the company’s ability to continue as a going minimum, certain provisions of SEC Rule 10A-3(b)
concern, including related events or conditions, (2), (3), (4), and (5), as well as other specific duties
(ii) substantial doubt has been alleviated due and responsibilities, to assist board oversight of
to management’s plan, (iii) substantial doubt the integrity of the company’s financial statements,
remains despite management’s plans, and iv) and the independent auditor’s qualifications,
the related effect on the financial statements independence, and performance. Pertinent to
and the auditor’s report; external auditor oversight, the rule includes the
following audit committee requirements:
• Corrected and uncorrected misstatements and
omitted disclosures – Requires the external +O
btain and review at least annually a report by
auditor to provide the audit committee with a the independent auditor which describes (i) the
written schedule of uncorrected misstatements firm’s internal quality-control procedures, (ii)
that was provided to management. The any material issues raised by the most recent
standard also requires communication internal quality-control review or peer review
of: (i) the basis for the determination that of the firm, or by any inquiry or investigation
uncorrected misstatements were immaterial, by governmental or professional authorities

within the preceding five years respecting one

or more independent audits carried out by the
firm (and any steps taken to deal with any such
issues), and to assess the external auditor’s
independence, considering all relationships
between the independent auditor and the listed
company;
+ Meet to review and discuss the listed company’s

annual audited financial statements and
quarterly financial statements with management
and the independent auditor, including reviewing
the listed company’s (i) specific disclosures
under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,”
and (ii) policies with respect to risk assessment
and risk management, the company’s earnings
press releases, as well as financial information
and earnings guidance provided to analysts and
rating agencies;
+ Meet separately, periodically, with management,

with internal auditors (or other personnel
responsible for the internal audit function) and
with independent auditors;
+ Review with the independent auditor any audit

problems or difficulties and management’s
response;
+ Set clear hiring policies for employees or former

employees of the independent auditors; and
+ Report regularly to the board of directors.
Commentary to the rule pertinent to the

assessment of the independent auditor further
provides that after reviewing the external
auditor’s quality control report and the external
auditor’s work throughout the year, the audit
committee will be in a position to evaluate the
external auditor’s qualifications, performance, and
independence (including a review and evaluation
of the lead audit engagement partner) taking into
account the opinions of management and the
company’s internal auditors. The commentary
further provides that, in addition to assuring the
regular rotation of the lead audit engagement
partner as required by law, the audit committee
should consider whether, in order to assure
continuing auditor independence, there should
be regular rotation of the audit firm itself. Finally,
audit committees are instructed to present their
conclusions to the full board of directors. •

APPENDIX II
RESOURCES AND SUGGESTED READING
BDO. Effective Audit Committees for Nonprofit PwC. Overseeing the External Auditors. 2018.
Organizations. 2012.
RSM. Audit Committee Guide for Financial
Chartered Professional Accountants Canada. Institutions. 2015.
Annual Assessment of the External Auditor: Tool
for Audit Committees. 2018.
Crowe LLP. Corporate Governance for Public Related CAQ Resources

Companies: The Audit Committee. 2019
Audit Committee Collaboration. Enhancing the
Deloitte Center for Board Effectiveness. Audit Audit Committee Report: A Call to Action. 2013.
Committee Resource Guide. 2018.
Center for Audit Quality and Audit Analytics. 2018
EY Center for Board Matters. Staying on Course: A Audit Committee Transparency Barometer.
Guide for Audit Committees. 2014.
Center for Audit Quality. Audit Quality Disclosure
Grant Thornton LLP. Not-for-Profit Audit Framework. 2019.
Committee Guidebook. 2016.
Center for Audit Quality. Audit Quality Indicators:
KPMG Audit Committee Institute. 2017 Global Journey and Path Ahead. 2016.
Audit Committee Pulse Survey. Audit Committee
Guide. 2017. Center for Audit Quality. The CAQ Approach to
Audit Quality Indicators. 2014.
New York Stock Exchange. New York Stock
Exchange Listed Company Manual. 2019.

EXTERN
AUDITO
ASSESS
TOOL
NAL
OR
SMENT
Published April 2019
THECAQ.ORG
WE WELCOME
YOUR FEEDBACK
Please send comments
or questions to
info@thecaq.org

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A TOOL FOR AUDIT COMMITTEES

CENTER FOR AUDIT QUALITY | THECAQ.ORG 1

lead audit engagement partner1 is responsible for

The sample questions highlight some of the

2 CENTER FOR AUDIT QUALITY | THECAQ.ORG

CENTER FOR AUDIT QUALITY | THECAQ.ORG 3

as firm transparency and audit quality reports),

Finally, the audit committee should consider

4 CENTER FOR AUDIT QUALITY | THECAQ.ORG

CENTER FOR AUDIT QUALITY | THECAQ.ORG 5

SAMPLE QUESTIONS OBSERVATIONS

Engagement team skill and responsiveness

+ Did the lead audit engagement partner and engagement team

+ Did the engagement team have sufficient access to specialized

+ Were additional and appropriate resources available to complete

+ Was the lead audit engagement partner accessible to the audit

+ Did the lead audit engagement partner devote sufficient attention

+ How did the external auditor respond to feedback?

Engagement team hours and workload

+ Did the lead audit engagement partner discuss trends in

(1) total audit hours by various levels, including partner(s),

(3) the breakdown of audit hours incurred by phase of the audit

+ Did the lead audit engagement partner discuss key engagement

6 CENTER FOR AUDIT QUALITY | THECAQ.ORG

SAMPLE QUESTIONS OBSERVATIONS

Audit plan and risks

+ Did the lead audit engagement partner identify the appropriate

+ Did the external auditor adjust the audit plan to respond to

+ If other accounting firm(s) participated in the audit in various

+ Did the lead audit engagement partner and/or engagement team

Engagement team succession

CENTER FOR AUDIT QUALITY | THECAQ.ORG 7

SAMPLE QUESTIONS OBSERVATIONS

Complex accounting and auditing matters, including consultations

+ Were such consultations executed in a timely and transparent

+ Were planned and actual allocation of resources associated with

Scope and cost considerations

+ Did the audit committee agree with the reasons?

8 CENTER FOR AUDIT QUALITY | THECAQ.ORG

CENTER FOR AUDIT QUALITY | THECAQ.ORG 9

10 CENTER FOR AUDIT QUALITY | THECAQ.ORG

SAMPLE QUESTIONS OBSERVATIONS

Audit quality report

8 + Does the firm’s audit quality report, if applicable, provide

Leadership, culture, and firm governance

+ Does the audit firm’s leadership, culture, and firm governance

+ Do the firm’s core values, principles, and code of conduct

Engagement team management

+ Does the audit firm support effective engagement team

+ Does the audit firm’s approach to professional development and

Audit engagement performance

CENTER FOR AUDIT QUALITY | THECAQ.ORG 11

SAMPLE QUESTIONS OBSERVATIONS

+ If the audit was subject to inspection by the PCAOB or other

+ Did the lead audit engagement partner communicate relevant

12 CENTER FOR AUDIT QUALITY | THECAQ.ORG

CENTER FOR AUDIT QUALITY | THECAQ.ORG 13

PART 3: COMMUNICATION AND INTERACTION WITH THE EXTERNAL AUDITOR

SAMPLE QUESTIONS OBSERVATIONS

+ Did the lead audit engagement partner maintain a professional

+ Did the lead audit engagement partner and engagement team

+ Did the engagement team have sufficient access to specialized

+ Were additional and appropriate resources available to complete

+ Was the lead audit engagement partner accessible to the audit

+ Did the lead audit engagement partner devote sufficient attention

+ How did the external auditor respond to feedback?

+ Did the lead audit engagement partner discuss trends in

(1) total audit hours by various levels, including partner(s),

(3) the breakdown of audit hours incurred by phase of the audit

+ Did the lead audit engagement partner discuss key engagement

+ Did the lead audit engagement partner identify the appropriate

+ Did the external auditor adjust the audit plan to respond to

+ If other accounting firm(s) participated in the audit in various

+ Did the lead audit engagement partner and/or engagement team

+ Were such consultations executed in a timely and transparent

+ Were planned and actual allocation of resources associated with

+ Did the audit committee agree with the reasons?

8 + Does the firm’s audit quality report, if applicable, provide

+ Does the audit firm’s leadership, culture, and firm governance

+ Do the firm’s core values, principles, and code of conduct

+ Does the audit firm support effective engagement team

+ Does the audit firm’s approach to professional development and

+ If the audit was subject to inspection by the PCAOB or other

+ Did the lead audit engagement partner communicate relevant

PART 3: COMMUNICATION AND INTERACTION WITH THE EXTERNAL AUDITOR

+ Did the lead audit engagement partner maintain a professional

+ Were discussions frank and complete?

+ Did the external auditor explain accounting and auditing issues in

+ Did the external auditor adequately discuss the quality of the

+ Did the external auditor discuss how the company’s accounting

+ Did the lead audit engagement partner explain the external

+ Did the external auditor discuss critical audit matters (CAMs)

PART 3: COMMUNICATION AND INTERACTION WITH THE EXTERNAL AUDITOR

+ In executive sessions, did the external auditor discuss sensitive

15 • internal control over financial reporting (e.g., management

PART 4: AUDITOR INDEPENDENCE, OBJECTIVITY, AND PROFESSIONAL SKEPTICISM

+ Did the external auditor report to the audit committee all

+ Did the external auditor discuss processes in place to monitor

+ Were there any significant differences in views between

+ Was the process of reconciling views achieved in a timely and

18 + Did the external auditor promote the application of professional

PART 4: AUDITOR INDEPENDENCE, OBJECTIVITY, AND PROFESSIONAL SKEPTICISM

+ If the external auditor is placing reliance on management and

19 + Were there any significant differences in views between the

+ If so, were they resolved in a professional manner?

+ Did the external auditor change or increase their testing due to

+ Financial information systems design and

+ Appraisal or valuation services, fairness

+ Internal audit outsourcing services;

+ Management functions or human resources;

• Financial statement presentation – The including qualitative assessment, (ii)