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Audit committees can contribute further to audit quality, IFIAR

Audit committees around the globe should focus on more and better communication as well as defining better criteria that determines their independence and requires skills and expertise in order to improve audit quality, according to a report by the International Fo­rum of In­de­pen­dent Au­dit Regu­la­tors (IFIAR).

The IFIAR's report stressed that audit committees had already greatly contributed to audit quality, however it suggested that there is room for improvement and it has made a number of recommendations.

While audit committees are expected to be independent, IFIAR recommended that the maximum terms of services as well as the maximum share of ownership percentage for audit committee members should be defined. Further the relationships and other functions that members of audit committees are allowed to maintain while in the committee should be determined.

IFIAR's report recommended that required ‘competencies’ for audit committee members include a university degree in economics or finance, a professional qualification from a pertinent professional entity or extensive professional and practical experience in accounting and auditing.

The report also recommended a further exploration of approaches where various forms of communication can be valuable to audit committees in supervising audit quality. For example, with respect to communication between audit committee and audit regulator, the report stated that audit regulators are not able to draw statistically significant conclusions on the complete set of audit that large global audit firms conduct. There is inconsistency about inspection findings due to weakness of internal control as well as lack of duty of care applied within audit firms. The lack or dis-functionality of checks and balances may negatively impact upon any engagement. Thus, it can be beneficial for all quality inspections of audit committees to discuss the audit regulators’ findings as well as any risk mitigating approaches they have proposed or taken, even in cases where audit regulators have not selected the audit.

The report suggests the questions of whether it would be beneficial if inspection findings of audit regulators are directly shared with audit committees and whether this could provide audit committees with useful source of objective information about auditors’ performance as well as putting them in better position to improve their assessment functions. It also asks the question of whether this information can be shared with an individual audit or at a higher level about the firm itself, and not with any specific issuer audit.

With respect to communication between audit committees and audit firms, the report also asks whether sharing inspection results and information on audit firms’ quality control to audit committee can reduce the information vacuum as well as putting the audit committees in better position to improve their assessment function.

Finally, the report raises the question of whether it can be worthwhile for audit committee to establish some sort of communication with shareholders about the audit and the auditor’s performance. The audit committees may also need to maintain communication with internal auditors to benefit from receiving information on internal auditors’ activities which can mainly focus on the effectiveness of internal risk management and control system.

The report can be accessed here.

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