Best Practice Principles for Audit Tendering

October 2, 2018

Published: IFAC

by Alice Telfer, Head of Business and Public Sector, ICAS and David Wood, Senior Policy Director, ICAS

What are best practices for audit tendering?

The Institute of Chartered Accountants of Scotland (ICAS) has distilled good practice principles on audit tendering for private companies and public sector organizations, including publicly funded, third sector and not-for-profit organizations. The guides share good practice and tips from experienced members across the public and private sectors to help audit committees (or equivalents) get the quality audits they need.

This guidance includes when and how to go about tendering for an external auditor, the characteristics of a successful tender process and the key assessment criteria for evaluating bids. It also explains some of the common pitfalls and highlight issues which audit committees (or their equivalents) need to be aware of.

Why an audit is important?

The auditor brings professional skepticism, critical appraisal and a questioning mind meant to highlight issues existing in the organization, which could represent an opportunity for the organization or a risk to be managed. Constructive challenge to management also strengthens governance and reduces the opportunity for ‘group think’ in an organization.

An audit can help to ensure the organization complies with applicable legislation and that management is kept abreast of relevant changes in accounting standards, tax regulations, etc. which could impact the organization. It can also identify potential misstatements due to error or fraud, as the auditor provides independent, professional judgement in evaluating the effective operation of procedures and controls, identifying control failures, and providing independent assurance.

Auditors have broad experience from providing services to a varied client base. This offers a professional and informed sounding board to question existing practices, offer external perspectives on the business model and management attitudes, and to understand comparative practice in other organizations.

Why it is a good idea to evaluate and tender an audit?

It is good business practice to periodically tender for the supply of many goods and services – this applies to audit as well as for any other significant purchase.  It is in the organization’s interests to be satisfied that the service it is paying for is fit for purpose and provides value.  Additionally, if the auditor has been in place for a long time, the (actual and perceived) risk of over-familiarity and potential for conflicts of interests increases, which could have a negative impact on audit quality.

Why and when to tender?

Regular evaluation of the auditor’s performance and tendering are means to ensure a high-quality audit.

Various events may act as triggers for retendering, such as:

– Approaching the final year of a fixed-term audit appointment;

– A significant change in the scale, strategy or operations of the organization;

– A long relationship with the audit firm which is starting to raise concerns about over-familiarity; and

– Concerns around the effectiveness of the audit.

There is a balance to strike in the length of tenure for an auditor.  While experience offers understanding and time to develop a professional working relationship, a long-standing auditor risks over-familiarity, which can threaten independence.  A fresh approach and new perspective can provide new insights and strengthen the degree of challenge and skepticism.

Key assessment criteria

At the heart of the assessment criteria must be audit quality.  The overriding objective of undertaking an audit tender should be to seek to ensure that the organization has the most appropriate auditor and the best quality audit for its needs.

Drivers for audit quality include:

  1. Cost and value – quality first at a fair price

Be aware of outliers offering either a particularly high or low price.  The audit committee (or equivalent) should be responsible for fee negotiations and should question firms about the ability to deliver audit quality if a low quote or justify a higher fee.

  1. Independence

Objectivity and independence of mind are crucial drivers of audit quality. Meeting audit independence requirements is an important criterion when it comes to deciding which firms should be invited to tender.  All audit firms should have processes in place as part of their own quality controls regarding the procurement of non-audit services to ensure their objectivity, integrity and independence is not threatened.

In the UK audit firms must comply with FRC Ethical Standard 2016, internationally it is the Code of Ethics for Professional Accountants’ issued by the International Ethics Standards Board for Accountants.

  1. A good working relationship

The ideal relationship between the audit committee/equivalent, finance director, the finance team and the auditors is founded on mutual professional respect without particular dominance.

  1. Approach and capacity

The effectiveness of the audit process – the proposed audit approach should demonstrate understanding of the organization, its sector, any key specialisms, major risks and how the auditor will respond to those risks. There is a balance – focusing on solely identical sector experience can mean missing out on good practice and insights from other sectors.

Capacity to undertake the work – firms should be able to identify key partners, managers and staff who possess the skills to provide a quality service in the sector, appropriate geographical coverage and training.

Firms’ audit quality records and reviews by external regulators may be available for review and discussion.

  1. Access to additional (non-audit) services

Depending on the organization’s needs, a firm’s capability to supply these to meet knowledge or skills gaps may be relevant.

There is a balance to achieve the benefits of rotation yet avoiding rotation which is so frequent that it incurs unnecessary cost (for the organization and audit firms).  It is good practice to periodically reassess and challenge what is an appropriate frequency for tendering.

http://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/best-practice-principles-audit-tendering

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