Selecting an external auditor is one of the most important financial decisions a company can make. A thorough, reliable audit provides validation and assurance for stakeholders, lenders, and the public while helping the company uncover risks and opportunities for improvement. However, the auditor selection process requires careful due diligence to ensure a proper match. This comprehensive guide will walk you through the key steps to take when choosing an external auditor.

Define Your Audit Objectives and Scope

Before reaching out to auditing firms, have a clear understanding of what you want to achieve in the audit. Some questions to consider:

– What is the purpose of the audit? Financial statement audit, compliance audit, operational audit etc.?

– Which segments, locations or functions need to be covered? 

– Are there specific regulations, accounting standards or frameworks you need to comply with?

– Do you have a required deadline or specific reporting requirements?

– What level of audit opinion are you seeking – reasonable or limited assurance?

Clearly conveying your objectives, scope constraints, and deliverables will help auditors provide an appropriate proposal and fee estimate.

Research and Create a Shortlist of Qualified Auditing Firms 

Cast a wide net and research several firms that have experience serving companies in your industry and of similar size and complexity. Some places to look include:

– Your business and personal networks – ask for referrals

– Trade associations for your industry

– Accounting industry publications and rankings for top firms

– State CPA society directories

– Regulator databases of approved licensees 

Narrow down your list based on credentials, technical abilities, business footprint, and industry expertise. The auditor should demonstrate thorough knowledge of regulations and accounting standards pertaining to your operations. Give special consideration to firms with dedicated industry niches that match yours.

Check that shortlisted firms do not have prohibitive conflicts of interest related to other services, financial interests or relationships that could compromise their objectivity regarding your company. Auditor independence is required by regulation and critical for reliability.

Request and Evaluate Audit Proposals

Issue a request for proposal (RFP) to your shortlist of qualified firms. The RFP provides key details about your company and outlines your audit requirements, objectives, timeline and other specifications to guide proposals.

To evaluate RFP responses and select your auditor, consider the following factors:

Technical expertise and experience

– Depth of knowledge regarding your industry and relevant accounting standards/regulations

– Experience conducting similar audits 

– Qualifications of the proposed audit team members – education, certifications, industry expertise

Audit approach and methodology

– Does their audit plan and testing strategy adequately address your audit objectives and scope?

– Do they incorporate data analytics and technology to enhance efficiency?

– Will their approach provide the assurance and value you expect?

Firm resources and capabilities 

– Size and structure of the audit team

– Access to specialists as needed – IT, tax, valuation etc. 

– Global reach, if required

– Investment in infrastructure, cybersecurity, and technical resources

Audit fees 

– Are the proposed fees competitive and aligned with the firm’s capabilities and auditing hours?

– What is included? Out-of-pocket expenses? Ongoing consultation?

– How are fees determined and billed? What is the policy for overages?

Service commitment and compatibility

– Responsiveness and availability throughout the audit process

– Ability to deliver within your required time frame 

– Communication style and transparency  

– Willingness to invest in understanding your business

– Does the firm philosophy align with your corporate culture? 

Check references to validate firms’ expertise, audit quality, client service, and communications skills. Hold interviews and review proposals in detail before making a selection.

Perform Due Diligence on the Top Auditor Candidate

Conduct thorough due diligence before finalizing your auditor selection. Dig deeper into their qualifications, reputation, and operating practices:

– Verify credentials and licenses – Ensure CPA accreditation, public accounting licenses, and PCAOB registration status. Check for disciplinary histories.

– Review inspection reports – Read the latest PCAOB and peer review inspection reports to see feedback on the firm’s quality controls and audit procedures. 

– Background check – Search for news, litigation, or regulatory actions involving the firm. Assess potential business risks.

– Understand their client base – Ask about their roster of audit clients by industry, size, and location. Look for compatible peers to your company.

– Check capacity – Gauge their ability to handle your audit amid their existing client commitments. Ensure staffing continuity. 

– Interview the lead partner – Meet with the partner directing your audit for assurance they can fulfill expectations. Assess communication fit.

– Visit their office – Tour the nearest firm office to view operations firsthand and meet your potential team. Evaluate resources.

Thorough vetting reduces the odds of turnover, disputes, or unsatisfactory work. Confirm your top choice has the proper mix of skills, experience, and bandwidth to meet your ongoing audit needs.

Define the Audit Engagement 

The auditor selection process concludes with defining the engagement and its terms:

Formalize the agreement – The engagement letter documents your agreed audit scope, timeline, deliverables, fee structure, and other details in writing. Read it thoroughly before signing.

Discuss expectations and logistics – Have a kickoff meeting to outline communications, schedules, required documents, facility and technology access, and other planning items.

Introduce the auditors – Issue staff emails announcing your new auditors and describing how groups across your company will collaborate during fieldwork. 

Share information – Provide auditors with requested schedules, contracts, policies, financial records, and operational data to help them develop audit plans.

Coordinate timing – Agree on dates for fieldwork, meetings, preliminary/final reports, and review processes. Enable auditors to perform key procedures and capture accurate data.

Monitor progress – Maintain an open dialogue through regular status meetings and queries. Be responsive to auditor requests to keep the engagement moving.

Laying the groundwork for a productive working relationship with your new auditors right from the start enables an efficient audit and quicker delivery of assurance for stakeholders.

Selecting the right external auditor requires thoughtful analysis – but it brings long-term value. A reputable auditor aligned with your compliance needs and corporate culture acts as a trustworthy partner for years to come. Follow these best practices for an auditor selection process that meets your company’s needs.