Scope and objectives
The Auditing standard that outlines the auditor’s responsibility to communicate with those charged with governance during an audit of financial statements. The SA applies regardless of an entity’s governance structure or size, but specific considerations apply for entities where all those charged with governance are involved in managing the entity, and for listed entities.
The SA 260 establishes an overarching framework for the auditor’s communication with those charged with governance and identifies specific matters to be communicated. Other SA’s provide additional matters to be communicated, and there may be other requirements applicable to the engagement that require communication. The SA emphasizes the importance of effective two-way communication between the auditor and those charged with governance in developing a constructive working relationship while maintaining the auditor’s independence and objectivity.
The objectives of the auditor are to communicate the responsibilities of the auditor in relation to the financial statement audit, obtain relevant information from those charged with governance, provide timely observations arising from the audit, and promote effective two-way communication between the auditor and those charged with governance.
SA 260 also defines “those charged with governance” as the person(s) or organization(s) responsible for overseeing the strategic direction of the entity and obligations related to its accountability, including overseeing the financial reporting process. This includes a diverse range of governance structures that reflect influences such as different cultural and legal backgrounds, size, and ownership characteristics.
The SA is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Communication with a Subgroup of Those Charged with Governance
The auditor’s communication with those charged with governance (TCWG) in various situations. The auditor’s communication with TCWG is an important aspect of the audit, as it enables the auditor to provide assurance to the TCWG regarding the accuracy and completeness of the financial statements.
The first part deals with communication with a subgroup of TCWG. In some cases, a subgroup of TCWG may be responsible for specific areas of the entity’s operations, and the auditor may need to communicate with them separately. When deciding whether to communicate with a subgroup, the auditor should consider factors such as the subgroup’s responsibilities, the nature of the matter to be communicated, relevant legal or regulatory requirements, and whether the subgroup has the authority to take action in relation to the information communicated.
The auditor’s decision on whether to communicate information to the governing body as a whole, in addition to the subgroup. The auditor may choose to communicate with the governing body if they believe that the subgroup may not effectively communicate relevant information to the governing body. In such cases, the auditor may explicitly state in the terms of engagement that they retain the right to communicate directly with the governing body, unless prohibited by law or regulation.
An audit committee exists to provide oversight of the audit process. The auditor may be invited to regularly attend meetings of the audit committee and liaise with the chair and other members of the committee periodically. The audit committee should meet with the auditor without management present at least annually.
Finally, they note that in some cases, all of those charged with governance may also be involved in managing the entity. In such cases, the auditor’s communication requirements may be modified, as communication with management may not adequately inform all of those with whom the auditor would otherwise communicate in their governance capacity. For example, if all directors of a company are involved in managing the entity, some directors may be unaware of significant matters discussed with another director.
Requirements
The International Standards on Auditing (ISA) require auditors to communicate with those charged with governance, which refers to the individuals or group responsible for overseeing the direction, management, and performance of an organization. The auditor must determine who the appropriate person(s) within the entity’s governance structure is with whom to communicate.
If the auditor communicates with a subgroup of those charged with governance, such as an audit committee or an individual, the auditor must also determine whether they need to communicate with the governing body as a whole.
In cases where all those charged with governance are involved in managing the entity, such as a small business where a single owner manages the entity and has no other governance role, the auditor must communicate matters required by the ISA with the person(s) with management responsibilities. The auditor must ensure that communication with person(s) with management responsibilities adequately informs all of those with whom the auditor would otherwise communicate in their governance capacity.
The matters that the auditor must communicate with those charged with governance include the auditor’s responsibilities in relation to the financial statement audit. This includes that the auditor is responsible for forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance, and that the audit of the financial statements does not relieve management or those charged with governance of their responsibilities.
The auditor’s responsibilities in relation to the financial statement audit are often included in the engagement letter or other suitable form of written agreement that records the agreed terms of the engagement. Law, regulation, or the governance structure of the entity may require those charged with governance to agree to the terms of the engagement with the auditor. The auditor may provide those charged with governance with a copy of the engagement letter or other suitable form of written agreement to communicate these matters.
Additionally, the matters that the auditor must communicate with those charged with governance may include significant matters arising during the audit of the financial statements that are relevant to those charged with governance in overseeing the financial reporting process, the fact that SAs do not require the auditor to design procedures for the purpose of identifying supplementary matters to communicate with those charged with governance, the auditor’s responsibilities to determine and communicate key audit matters in the auditor’s report when SA 7016 applies, and the auditor’s responsibility for communicating particular matters required by law or regulation, by agreement with the entity or by additional requirements applicable to the engagement.
Planned Scope and Timing of the Audit
The International Standards on Auditing (ISA) discusses the importance of communication between the auditor and those charged with governance about the planned scope and timing of the audit. This communication is essential as it allows the auditor to understand better the entity and its environment and assists those charged with governance in fulfilling their responsibility to oversee the financial reporting process.
The auditor is required to communicate an overview of the planned scope and timing of the audit, including significant risks identified by the auditor. This communication may assist those charged with governance to understand better the consequences of the auditor’s work, discuss issues of risk and the concept of materiality with the auditor, and identify any areas in which they may request the auditor to undertake additional procedures. Furthermore, it assists the auditor in understanding better the entity and its environment.
The auditor is also required to communicate significant risks identified by the auditor to help those charged with governance understand why they require special audit consideration. This communication about significant risks may assist those charged with governance in fulfilling their responsibility to oversee the financial reporting process. The auditor is required to communicate matters such as how the auditor plans to address the significant risks of material misstatement, whether due to fraud or error, how the auditor plans to address areas of higher assessed risks of material misstatement, and the auditor’s approach to internal control relevant to the audit.
The auditor is also required to communicate planning matters that it may be appropriate to discuss with those charged with governance, including how the external auditor and internal auditors can work together in a constructive and complementary manner, the views of those charged with governance on the allocation of responsibilities between those charged with governance and management, and the entity’s objectives and strategies.
The auditor is also required to communicate the attitudes, awareness, and actions of those charged with governance concerning the entity’s internal control and its importance in the entity, the detection or possibility of fraud, and the actions of those charged with governance in response to developments in accounting standards, corporate governance practices, exchange listing rules, and related matters.
It is important to note that while communication with those charged with governance may assist the auditor to plan the scope and timing of the audit, it does not change the auditor’s sole responsibility to establish the overall audit strategy and the audit plan, including the nature, timing, and extent of procedures necessary to obtain sufficient appropriate audit evidence. Care is necessary when communicating with those charged with governance about the planned scope and timing of the audit so as not to compromise the effectiveness of the audit, particularly where some or all of those charged with governance are involved in managing the entity.
Significant Findings from the Audit
The auditors need to have with those charged with governance regarding significant findings from the audit. The auditor is required to communicate with those charged with governance regarding matters such as the qualitative aspects of the entity’s accounting practices, significant difficulties encountered during the audit, significant matters arising during the audit that were discussed with management, and circumstances that affect the form and content of the auditor’s report.
The communication may include requesting further information from those charged with governance to complete the audit evidence obtained. For instance, the auditor may confirm that those charged with governance have the same understanding of the facts and circumstances relevant to specific transactions or events. When SA 701 applies, the communication is particularly relevant to the auditor’s determination of matters that required significant auditor attention and which may be key audit matters.
The auditor’s views on the subjective aspects of the financial statements may be particularly relevant to those charged with governance in discharging their responsibilities for oversight of the financial reporting process. Open and constructive communication about significant qualitative aspects of the entity’s accounting practices also may include comment on the acceptability of significant accounting practices.
The auditor should also communicate significant difficulties encountered during the audit, such as significant delays by management, an unreasonably brief time within which to complete the audit, extensive unexpected effort required to obtain sufficient appropriate audit evidence, or restrictions imposed on the auditor by management.
The auditor should communicate significant matters discussed, or subject to correspondence with management, such as significant events or transactions that occurred during the year, business conditions affecting the entity, and business plans and strategies that may affect the risks of material misstatement, or concerns about management’s consultations with other accountants on accounting or auditing matters.
Finally, the auditor should communicate circumstances that affect the form and content of the auditor’s report, such as when the auditor expects to modify the opinion in the auditor’s report, a material uncertainty related to going concern is reported, key audit matters are communicated, or when the auditor concludes that there is an uncorrected material misstatement of the other information.
Auditor Independence
This excerpt relates to the communication requirements of an auditor with those charged with governance, particularly in the context of auditor independence. The auditor is required to comply with relevant ethical requirements, including those related to independence, and communicate to those charged with governance any relationships or matters between the auditor’s firm, network firms, and the entity that may reasonably affect independence.
The communication should also include the total fees charged for audit and non-audit services, allocated to categories appropriate to assist those charged with governance in assessing the effect of services on auditor independence. The auditor must also communicate the related safeguards that have been applied to eliminate or reduce identified threats to independence.
The relationships and matters, and safeguards to be communicated, may vary depending on the engagement’s circumstances, including the threats to independence and safeguards created by the profession, legislation or regulation, and within the entity and firm’s systems and procedures.
Relevant ethical requirements, laws or regulations may also specify particular communications in case of breaches of independence requirements. Additionally, the auditor may become aware of supplementary matters that may be significant to the responsibilities of those charged with governance, such as significant issues regarding governance structures or processes or significant decisions by senior management that lack appropriate authorization.
In such cases, the auditor may discuss matters of this kind with the appropriate level of management, unless it is inappropriate to do so. If a supplementary matter is communicated, the auditor must inform those charged with governance that it is incidental to the audit’s purpose, and no procedures were carried out with respect to the matter, other than those necessary to form an opinion on the financial statements.
The Communication Process
The auditor is required to establish a communication process with those charged with governance, which includes clear communication of the auditor’s responsibilities, the planned scope and timing of the audit, and the expected general content of communications. The communication process should also include discussions on the purpose of communications, the form in which communications will be made, the person(s) in the engagement team and among those charged with governance who will communicate regarding particular matters, the process for taking action and reporting back on matters communicated by the auditor, and the process for taking action and reporting back on matters communicated by those charged with governance.
The communication process may vary depending on the circumstances, such as the size and governance structure of the entity, how those charged with governance operate, and the auditor’s view of the significance of matters to be communicated. In the case of audits of smaller entities, the auditor may communicate in a less structured manner with those charged with governance than in the case of listed or larger entities.
Before communicating matters with those charged with governance, the auditor may discuss them with management, unless that is inappropriate. In addition, when the entity has an internal audit function, the auditor may discuss matters with the internal auditor before communicating with those charged with governance.
Those charged with governance may be required by law or regulation, or may wish, to provide third parties with copies of a written communication from the auditor. In such cases, the auditor should inform third parties that the communication was not prepared with them in mind and that no responsibility is assumed by the auditor to third parties. The auditor may also be required by law or regulation to report certain matters to authorities or make reports publicly available, but unless required by law or regulation to provide a third party with a copy of the auditor’s written communications, the auditor may need the prior consent of those charged with governance before doing so.
Forms of Communication
The forms of communication that an auditor should use when communicating with those charged with governance (such as a company’s board of directors) regarding significant findings from an audit. The auditor should generally communicate in writing when oral communication would not be adequate. However, written communications need not include all matters that arose during the course of the audit.
The auditor may communicate matters other than those identified, either orally or in writing. The form of communication used may be affected by various factors such as the significance of the matter, whether it has been resolved, whether management has previously communicated the matter, the size and structure of the entity being audited, legal requirements, and the expectations of those charged with governance.
SA 260 also notes that when a significant matter is discussed with an individual member of those charged with governance, such as the chair of an audit committee, it may be appropriate for the auditor to summarize the matter in later communications so that all members of those charged with governance have full and balanced information.
SA 260 provides examples of when certain types of communications may be appropriate, such as when communicating about planning matters early in the engagement, communicating significant difficulties encountered during the audit, communicating preliminary views about key audit matters when discussing the planned scope and timing of the audit, and communicating findings from the audit as part of a concluding discussion.
Finally, they note that the auditor should communicate in writing with those charged with governance regarding auditor independence when required in certain objectives.
Timing of Communications
The importance of timely communication between the auditor and those charged with governance during an audit. Effective and timely communication helps to establish a strong two-way dialogue between the auditor and the governance body. However, the appropriate timing for communications will vary depending on the circumstances of the engagement.
SA 230 also highlights other factors that may influence the timing of communications, such as the size, operating structure, control environment, and legal structure of the entity being audited. The auditor may also have a legal obligation to communicate certain matters within a specified timeframe.
Moreover, the expectations of those charged with governance should also be taken into consideration, including any arrangements made for periodic meetings or communications with the auditor. The auditor may not identify a particular matter in time for preventive action to be taken, but communication of the matter may enable remedial action to be taken.
Overall, SA 260 emphasizes the importance of timely and effective communication throughout the audit process to ensure that the governance body is informed of any issues or concerns in a timely manner, and appropriate actions can be taken to address them.
Adequacy of the Communication Process
The importance of effective communication between the auditor and those charged with governance (TCWG) and the need for the auditor to evaluate the adequacy of the communication process. The auditor is required to assess the effectiveness of the two-way communication process to ensure that both parties can work together effectively to achieve the audit objectives.
The auditor should assess whether the communication process is adequate for the purpose of the audit, and if it is not, the auditor should evaluate the effect, if any, on the auditor’s assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit evidence, and take appropriate action.
The adequacy of the communication process can be evaluated based on observations resulting from audit procedures performed for other purposes. The observations may include the appropriateness and timeliness of actions taken by those charged with governance in response to matters raised by the auditor, the openness of those charged with governance in their communications with the auditor, and the willingness and capacity of those charged with governance to meet with the auditor without management present.
Ineffective two-way communication may indicate an unsatisfactory control environment and influence the auditor’s assessment of the risks of material misstatements. The auditor may take various actions if the two-way communication between the auditor and TCWG is not adequate and the situation cannot be resolved, such as modifying the auditor’s opinion on the basis of a scope limitation, obtaining legal advice, communicating with third parties, or withdrawing from the engagement.
Overall, effective communication between the auditor and those charged with governance is essential for the success of the audit and the achievement of audit objectives.
Documentation
This documentation in the communication process between the auditor and those charged with governance. It states that if matters required by the auditing standard to be communicated are done so orally, the auditor must still document them and include information on when and to whom they were communicated. If the communication is in writing, the auditor must retain a copy of the communication as part of the audit documentation.
Documentation of oral communication can be accomplished by retaining a copy of minutes prepared by the entity as part of the audit documentation, provided that those minutes are an appropriate record of the communication. In summary, this section emphasizes the importance of documenting all communication in the audit process, whether it is verbal or written, to support the audit work and provide evidence of the auditor’s communication with those charged with governance.
Specific Requirements in SQC 1 and Other SAs that Refer to Communications with Those Charged with Governance
The auditing standard provides a list of specific paragraphs within various auditing standards that require auditors to communicate specific matters with those charged with governance. The standards include SQC 1 (Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements), SA 240 (The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements), SA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), SA 265 (Communicating Deficiencies in Internal Control to Those Charged with Governance and Management), SA 450 (Evaluation of Misstatements Identified during the Audit), SA 505 (External Confirmations), SA 510 (Initial Audit Engagements―Opening Balances), SA 550 (Related Parties), SA 560 (Subsequent Events), SA 570 (Revised) (Going Concern), SA 610 (Revised) (Using the Work of Internal Auditors – paragraphs 20 and 31), SA 701 (Communicating Key Audit Matters in the Independent Auditor’s Report), SA 705 (Revised) (Modifications to the Opinion in the Independent Auditor’s Report), SA 706 (Revised) (Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report), SA 710 (Comparative Information—Corresponding Figures and Comparative Financial Statements), and SA 720 (Revised) (The Auditor’s Responsibilities Relating to Other Information).
SA 260 also emphasizes that the list is not a substitute for understanding the requirements and related explanatory material in the standards. This means that auditors should review the entire standards and related material to ensure they understand the requirements for communicating with those charged with governance on specific matters. In summary, the text provides a useful reference for auditors who need to identify specific paragraphs in various auditing standards that require communication with those charged with governance, but it is not a substitute for reading and understanding the full standards and related material.
Qualitative Aspects of Accounting Practices
The various qualitative aspects of accounting practices, including accounting policies, accounting estimates, financial statement disclosures, and related matters. It highlights the need for appropriate accounting policies based on the circumstances of the entity, including identification of financial statement items affected by significant accounting policies. It also emphasizes the importance of communication related to the initial selection and changes in significant accounting policies and their impact on current and future earnings of the entity. The text further discusses the effect of accounting policies in controversial or emerging areas and the timing of transactions in relation to the period in which they are recorded.
Regarding accounting estimates, the text discusses issues related to the identification of transactions, events, and conditions that may require recognition or disclosure of accounting estimates in financial statements, changes in circumstances that may require new or revised accounting estimates, and the selection of appropriate measurement basis for accounting estimates. The text emphasizes the need for reasonable assumptions and adequate disclosure of estimation uncertainty in financial statements.
In terms of financial statement disclosures, the text highlights the issues involved in sensitive disclosures related to revenue recognition, remuneration, going concern, subsequent events, and contingency issues. It emphasizes the need for overall neutrality, consistency, and clarity of disclosures in financial statements.
Finally, SA 260 also discusses related matters such as the potential effect of significant risks, exposures, and uncertainties on financial statements, the impact of significant transactions outside the normal course of business, and the factors affecting asset and liability carrying values. It emphasizes the importance of selective correction of misstatements and the need for clear communication regarding such corrections.
Quiz: Communication with Those Charged with Governance
1. What is the purpose of communication between the auditor and those charged with governance?
a) To ensure compliance with auditing standards
b) To provide assurance to those charged with governance regarding the accuracy and completeness of the financial statements
c) To establish the overall audit strategy and plan
d) To allocate responsibilities between those charged with governance and management
Answer: b)
2. Who are considered “those charged with governance”?
a) Individuals responsible for overseeing the financial reporting process
b) Management of the entity
c) Internal auditors of the entity
d) Shareholders of the entity
Answer: a)
3. What matters must the auditor communicate with those charged with governance?
a) Responsibilities of the auditor in relation to the financial statement audit
b) Significant risks identified by the auditor
c) Planning matters related to the audit
d) All of the above
Answer: d)
4. What is the auditor’s responsibility regarding communication with those charged with governance related to auditor independence?
a) Communicate the total fees charged for audit and non-audit services
b) Communicate any relationships or matters that may affect independence
c) Communicate the related safeguards applied to reduce threats to independence
d) All of the above
Answer: d)
5. When communicating significant findings from an audit, what forms of communication should the auditor use?
a) Written communication only
b) Oral communication only
c) Either oral or written communication, depending on the circumstances
d) No communication is necessary for significant findings
Answer: c)
6. When communicating with a subgroup of those charged with governance, what factors should the auditor consider?
a) Nature of the matter to be communicated
b) Relevant legal or regulatory requirements
c) Subgroup’s responsibilities and authority to take action
d) All of the above
Answer: d)
7. What should the auditor do if the two-way communication process with those charged with governance is not adequate?
a) Modify the auditor’s opinion on the basis of a scope limitation
b) Obtain legal advice
c) Communicate with third parties
d) All of the above
Answer: d)
8. What is the importance of effective and timely communication between the auditor and those charged with governance?
a) Establish a strong two-way dialogue
b) Enable timely actions to address issues or concerns
c) Support the achievement of audit objectives
d) All of the above
Answer: d)
9. What should the auditor do if those charged with governance wish to provide a written communication to third parties?
a) Obtain prior consent from those charged with governance
b) Inform third parties that the communication was not prepared with them in mind
c) Assume responsibility to third parties for the communication
d) All of the above
Answer: a)
10. What observations may help evaluate the adequacy of the communication process between the auditor and those charged with governance?
a) Actions taken by those charged with governance in response to matters raised by the auditor
b) Openness of those charged with governance in their communications with the auditor
c) Willingness and capacity of those charged with governance to meet with the auditor without management present
d) All of the above
Answer: d)
Additional question:
11. When communicating with a subgroup of those charged with governance, what factors should the auditor consider?
a) The subgroup’s responsibilities and authority to take action
b) Legal or regulatory requirements
c) Nature of the matter to be communicated
d) All of the above
Answer: d)
12. What is the auditor’s responsibility if all those charged with governance are involved in managing the entity?
a) Communicate directly with management only
b) Modify the communication requirements
c) Request additional audit procedures
d) None of the above
Answer: b)
13. What are some examples of matters that the auditor must communicate with those charged with governance?
a) The auditor’s responsibilities in relation to the financial statement audit
b) Significant difficulties encountered during the audit
c) Circumstances that affect the form and content of the auditor’s report
d) All of the above
Answer: d)
14. What are some factors that may influence the timing of communications between the auditor and those charged with governance?
a) Size and governance structure of the entity
b) Operating structure and control environment of the entity
c) Legal requirements and obligations of the auditor
d) All of the above
Answer: d)
15. Why is it important for the auditor to establish a communication process with those charged with governance?
a) To ensure a strong two-way dialogue between the auditor and the governance body
b) To clarify the auditor’s responsibilities and the expected content of communications
c) To facilitate discussions on the purpose and form of communications
d) All of the above
Answer: d)
16. When communicating significant difficulties encountered during the audit, what should the auditor include in the communication?
a) Reasons for the difficulties and their impact on the audit
b) Actions taken or proposed to address the difficulties
c) Requests for additional information or cooperation from management
d) All of the above
Answer: d)
17. What should the auditor consider when determining the appropriate form of communication?
a) Significance of the matter being communicated
b) Resolution status of the matter
c) Legal requirements and expectations of those charged with governance
d) All of the above
Answer: d)
18. What types of communications may be appropriate when discussing planning matters early in the engagement?
a) Communication of the planned scope and timing of the audit
b) Discussion of significant risks identified by the auditor
c) Explanation of the auditor’s approach to internal control relevant to the audit
d) All of the above
Answer: d)
19. How should the auditor communicate with those charged with governance regarding auditor independence?
a) Provide a written communication disclosing all relationships and matters affecting independence
b) Discuss the relevant relationships and matters in person during meetings
c) Use a combination of written and oral communication to address independence concerns
d) Both a) and b)
Answer: c)
20. What should the auditor do if a significant matter is discussed with an individual member of those charged with governance?
a) Summarize the matter in later communications to ensure all members have full information
b) Consult with management before communicating the matter to the governance body
c) Report the matter directly to external regulatory authorities
d) Both a) and b)
Answer:a)
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