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Exposure Draft Revised Std. on Auditing (SA) 260 “Communication with Those Charged with Governance
Posted Date: 17 Apr 2008 Resource Type: News/Announcements Category: Education
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Posted By: Ishq Member Level: Gold
Rating:  Points: 5
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Explanatory Memorandum to the Exposure Draft
Revised Standard on Auditing (SA) 260
Communication with Those Charged with Governance
Background
The Institute of Chartered Accountants of India had in January, 2003 issued the Auditing and Assurance Standard
(AAS) 27, “Communications of Audit Matters with Those Charged with Governance”. The AAS 27 was effective for
all audits commencing on or after 1st April, 2003. The Institute being a member of the International Federation of
Accountants (IFAC), as a part of its membership obligations, while formulating any Auditing and Assurance
Standard is required to harmonise with the corresponding International Standards on Auditing, if any, issued by the
International Auditing and Assurance Standards Board (IAASB) of the IFAC. The AAS 27 was, therefore, based on
the corresponding International Standard on Auditing (ISA) 260 of the same name issued by the International
Auditing and Assurance Standards Board (IAASB).
IAASB’s Clarity Project
The IAASB in December 2007, issued the revised and redrafted ISA 260 written pursuant to the style adopted
under the Clarity Project. As a part of its Clarity Project, an International Standard on Auditing is divided into two
sections, one the Requirements part containing the fundamental principles of the Standard and second, the
Application and Other Explanatory Materials section and Appendices, detailing the implementation aspects of the
principles. Attention of the readers is also drawn to, “A Guide for National Standard Setters that Adopt IAASB’s
International Standards but Find it Necessary to Make Limited Modifications”1, issued by the IAASB in July, 2006.
ICAI’s Response
The Council of the Institute, at its 267th meeting held in April, 2007 has also decided to adopt this approach for
writing Standards. The Council, at the said meeting, also decided to rename, re-categorise and re-number the
existing Auditing and Assurance Standards on the lines followed by the IAASB. The readers are also requested to
refer to the Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related
Services2 published in the July, 2007 issue of the Journal.
1 The full text of the Policy Position can be downloaded free of charge at http://www.ifac.org/IAASB/downloads/Modification_Policy_
Position.pdf .
2 The full text of the Preface can be downloaded free of charge at http://www.icai.org/icairoot/announcements/ announ1050.pdf
2
Highlights of the New Preface
I. Engagement Standards
The new Preface introduces the concept of Engagement Standards. The term “Engagement Standards” comprises
the following Standards:
(a) Standards on Auditing (SAs), to be applied in the audit of historical financial information.
(b) Standards on Review Engagements (SREs), to be applied in the review of historical financial information.
(c) Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with
subject matters other than historical financial information.
(d) Standards on Related Services (SRSs), to be applied to engagements involving application of agreed
upon procedures to information, compilation engagements, and other related services engagements, as
may be specified by the ICAI .
The new Preface therefore, does away with the terminology “Auditing and Assurance Standards” in use till date.
The Standards on Quality Control (SQCs) are to be applied to all services covered by the Engagement
Standards.
II. Standards on Auditing
The Standards on Auditing (SAs) referred to in I. above are formulated in the context of an audit of financial
statements by an independent auditor. They are to be adapted as necessary in the circumstances when applied to
audits of other historical financial information.
III. New Format of Presenting the Standards on Auditing
In line with the format adopted by the IAASB under its Clarity Project, the Standards on Auditing would now contain
two distinct sections, one, the Requirements section and, two, the Application Guidance section.
Requirements Section
The fundamental principles of the Standard are contained in the Requirements section and represented by use of
“shall”. Hitherto, the word, “should” was used in the Standards, for this purpose. Further, this format also does away
with the need to present the principles laid down by the Standard in bold text.
3
Application and Other Explanatory Material
The application and other explanatory material contained in an SA is an integral part of the SA as it provides further
explanation of, and guidance for carrying out, the requirements of an SA, along with the background information on
the matters addressed in the SA. It may include examples of procedures, some of which the auditor may judge to be
appropriate in the circumstances. Such guidance is, however, not intended to impose a requirement.
In view of this format of writing, the standard portion or principles enunciated in a Standard are no longer given in
bold face.
The new presentation format is, however, not as yet being followed in drafting the Standards on Quality
Control and other Standards.
The Preface also contains the principles as to when a Standard on Auditing would be inapplicable as also the
reporting responsibilities of the members in case of non-compliance with any of the Standards.
There is no change in the authority attached to the Standards, i.e., they are mandatory in nature,
notwithstanding the new format of writing the Standards.
This Exposure Draft
This Exposure Draft of the Revised Standard on Auditing (SA) 2603, “Communication with Those Charged with
Governance”, is based on the Revised and Redrafted ISA 260 issued by the IAASB in December, 2007 and follows
the same writing style. The first, i.e., the Introduction and Requirements section contains the principles. The
second, i.e., the Application and Other Explanatory Material section contains implementation guidance on the topics
discussed in the Requirements section. Cross reference to the relevant paragraphs of the Application Material is
built within the Requirements section. The paragraphs in the Requirements section have been numbered as 1 to
19, whereas the paragraphs in the Application and Other Explanatory Material are numbered as A1 to A49.
Topics Covered by Revised SA 260
The Standard contains the following main aspects:
(i) Scope
(ii) Effective date
(iii) Objectives
(iv) Definitions
(v) Requirements
(a) Those Charged with Governance
(b) Matters to be Communicated
3 Revises the existing Auditing and Assurance Standard (AAS) 27, “Communications of Audit Matters withThose Charged with Governance”,
issued in January, 2003.
4
(c) The Communication Process
(d) Documentation
Highlights of Revised SA 260
1. This SA, in addition to the audit of financial statements, may also be applicable, to audits of other historical
financial information, when those charged with governance have a responsibility to oversee the preparation
and presentation of the other historical financial information.
2. Recognizing the importance of effective two-way communication during an audit of financial statements, this
SA provides an overarching framework for the auditor’s communication with those charged with governance,
and identifies some specific matters to be communicated with them.
3. As per the revised SA 260, the auditor shall communicate with those charged with governance, auditor’s
responsibilities in relation to the financial statements audit.
4. According to this SA, the auditor shall also communicate with those charged with governance, significant
difficulties encountered during the audit.
5. The revised SA 260, envisages auditor’s independence and in the case of listed entities, requires the auditor
to communicate with those charged with governance, a statement that the engagement team and others in
the firm as appropriate, have complied with the relevant ethical requirements regarding independence.
6. The revised SA 260 also envisages adequacy of the communication process between the auditor and those
charged with governance.
Your comments on the Exposure Draft should reach us by June 15, 2008. Comments are most helpful if they
indicate the specific paragraph(s) to which they relate, contain a clear rationale and, where applicable, provide a
suggestion for alternative wording. The comments should be sent to:
Secretary, Auditing and Assurance Standards Board
The Institute of Chartered Accountants of India
ICAI Bhawan, C-1, Sector-1,
NOIDA,
Uttar Pradesh – 201 301.
Comments can also be emailed at: aasb@icai.org
5
Exposure Draft
Revised Standard On Auditing (SA) 260
Communication With Those Charged with Governance
CONTENTS
Paragraph(s)
Introduction
Scope of this ISA ................................................................................................................................... 1-3
Effective Date ............................................................................................................................................4
Objectives .................................................................................................................................................5
Definitions ................................................................................................................................................6
Requirements
Those Charged with Governance ........................................................................................................... 7-9
Matters to be Communicated .............................................................................................................. 10-13
The Communication Process .............................................................................................................. 14-18
Documentation ........................................................................................................................................19
Application and Other Explanatory Material
The Role of Communication ...............................................................................................................A1-A4
Those Charged with Governance .....................................................................................................A5-A12
Matters to be Communicated ..........................................................................................................A13-A31
The Communication Process ..........................................................................................................A33-A48
Documentation ..................................................................................................................................... A49
Material Modifications to ISA 260, Communication with Those charged with Governance
Appendix 1: Qualitative Aspects of Accounting Practices
Revised Standard on Auditing (SA) 260, “Communication with Those Charged with Governance” should
be read in the context of the “Preface to the Standards on Quality Control, Auditing, Review, Other
Assurance and Related Services” which sets out the authority of SAs.
6
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibility to communicate with those charged
with governance in relation to an audit of financial statements. Although this SA applies irrespective of an
entity’s governance structure or size, particular considerations apply where all of those charged with
governance are involved in managing an entity, and for listed entities. This SA does not establish
requirements regarding the auditor’s communication with an entity’s management or owners unless they are
also charged with a governance role.
2. This SA has been drafted in terms of an audit of financial statements, but may also be applicable, adapted as
necessary in the circumstances, to audits of other historical financial information when those charged with
governance have a responsibility to oversee the preparation and presentation of the other historical financial
information.
3. Recognizing the importance of effective two-way communication during an audit of financial statements, this
SA provides an overarching framework for the auditor’s communication with those charged with governance,
and identifies some specific matters to be communicated with them. Additional matters to be communicated,
which complement the requirements of this SA, are identified in other SAs . Further matters, not required by
this or other SAs, may be required to be communicated by laws or regulations, by agreement with the entity,
or by additional requirements applicable to the engagement. Nothing in this SA precludes the auditor from
communicating any other matters to those charged with governance. (Ref: Para. A28-A31)
Effective Date
4. This SA is effective for audits of financial statements for periods beginning on or after ________[date].
Objectives
5. The objectives of the auditor are to:
(a) Communicate clearly with those charged with governance the responsibilities of the auditor in relation
to the financial statement audit, and an overview of the planned scope and timing of the audit;
(b) Obtain from those charged with governance information relevant to the audit;
(c) Provide those charged with governance with timely observations arising from the audit that are
significant and relevant to their responsibility to oversee the financial reporting process; and
(d) Promote effective two-way communication between the auditor and those charged with governance.
(Ref: Para. A1-A4)
7
Definitions
6. For purposes of the SAs, the following terms have the meanings attributed below:
(a) Those charged with governance – The person(s) or organization(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process. For some
entities, those charged with governance may include management personnel, for example, executive
members of a governance board of a private or public sector undertakings or an owner-manager. In
some cases, those charged with governance are responsible for approving4 the entity’s financial
statements (in other cases management has this responsibility). For discussion of the diversity of
governance structures, see paragraphs A5-A12.
(b) Management – The person(s) with executive responsibility for the conduct of the entity’s operations.
For some entities, management includes some or all of those charged with governance, for example,
executive members of a governance board, or an owner-manager. Management is responsible for the
preparation of the financial statements, overseen by those charged with governance, and in some
cases management is also responsible for approving5 the entity’s financial statements (in other cases
those charged with governance have this responsibility).
Requirements
Those Charged with Governance
7. The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to
communicate. (Ref: Para. A5-A8)
Communication with a Sub-group of Those Charged with Governance
8. When the auditor communicates with a subgroup of those charged with governance, for example, an audit
committee, or an individual, the auditor shall determine whether the auditor also needs to communicate with
the governing body. (Ref: Para. A9-A11)
When All of Those Charged with Governance are Involved in Managing the Entity
9. In some cases, all of those charged with governance are involved in managing the entity, for example, a
small business where a single owner manages the entity and no one else has a governance role. In these
cases, if matters required by this SA are communicated with person(s) with management responsibilities, and
4 As described at paragraph [A43] of [Proposed Revised] SA 700, (hitherto known as AAS 28) “The Independent Auditor’s Report on General
Purpose Financial Statements,” having responsibility for approving in this context means having the authority to conclude that all the
statements that comprise the financial statements, including the related notes, have been prepared.
5 See foot note 3.
8
those person(s) also have governance responsibilities, the matters need not be communicated again with
those same person(s) in their governance role. These matters are noted in paragraph 12(c). The auditor shall
nonetheless be satisfied that communication with person(s) with management responsibilities adequately
informs all of those with whom the auditor would otherwise communicate in their governance capacity. (Ref:
Para. A12)
Matters to be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit
10. The auditor shall communicate with those charged with governance the responsibilities of the auditor in
relation to the financial statement audit, including that:
(a) 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
(b) The audit of the financial statements does not relieve management or those charged with governance
of their responsibilities. (Ref: Para. A13-A14)
Planned Scope and Timing of the Audit
11. The auditor shall communicate with those charged with governance an overview of the planned scope and
timing of the audit. (Ref: Para. A15-A19)
Significant Findings from the Audit
12. The auditor shall communicate with those charged with governance: (Ref: Para. A20)
(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including
accounting policies, accounting estimates and financial statement disclosures. When applicable, the
auditor shall explain to those charged with governance why the auditor considers a significant
accounting practice, that is acceptable under the applicable financial reporting framework, not to be
most appropriate to the particular circumstances of the entity; (Ref: Para. A21)
(b) Significant difficulties, if any, encountered during the audit; (Ref: Para. A22)
(c) Unless all of those charged with governance are involved in managing the entity:
(i) Material weaknesses, if any, in the design, implementation or operating effectiveness of
internal control that have come to the auditor’s attention and have been communicated to
management as required by SA 3156 or SA 3307;
6 SA 315 “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”, paragraph
32. SA 315 is published in the February, 2008 issue of the Journal.
7 SA 330 “The Auditor’s Responses to Assessed Risks”, paragraph 19. SA 330 is published in the February, 2008 issue of the Journal.
9
(ii) Significant matters, if any, arising from the audit that were discussed, or subject to
correspondence with management; and (Ref: Para. A23)
(iii) Written representations the auditor is requesting; and
(d) Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are significant
to the oversight of the financial reporting process. (Ref: Para. A24)
Auditor Independence
13. In the case of listed entities, the auditor shall communicate with those charged with governance: (Ref: Para.
A25-A27)
(a) A statement that the engagement team and others in the firm as appropriate, the firm and, when
applicable, network firms have complied with relevant ethical requirements regarding independence;
and
(b) (i) All relationships and other matters between the firm, network firms, and the entity that, in the
auditor’s professional judgment, may reasonably be thought to bear on independence. This shall
include total fees charged during the period covered by the financial statements for audit and nonaudit
services provided by the firm and network firms to the entity and components controlled by the
entity.
These fees shall be allocated to categories that are appropriate to assist those charged with
governance in assessing the effect of services on the independence of the auditor; and
(ii) The related safeguards that have been applied to eliminate identified threats to independence
or reduce them to an acceptable level.
The Communication Process
Establishing the Communication Process
14. The auditor shall communicate with those charged with governance the form, timing and expected general
content of communications. (Ref: Para. A32-A40)
Forms of Communication
15. The auditor shall communicate in writing with those charged with governance regarding significant findings
from the audit when, in the auditor’s professional judgment, oral communication would not be adequate.
Written communications need not include all matters that arose during the course of the audit. (Ref: Para.
A41-A43)
16. The auditor shall communicate in writing with those charged with governance regarding auditor
independence when required by paragraph 13.
10
Timing of Communications
17. The auditor shall communicate with those charged with governance on a timely basis. (Ref: Para. A44-A45)
Adequacy of the Communication Process
18. The auditor shall evaluate whether the two-way communication between the auditor and those charged with
governance has been adequate for the purpose of the audit. If it has not, the auditor shall 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 shall take appropriate action. (Ref: Para. A46-A48)
Documentation
19. Where matters required by this SA to be communicated are communicated orally, the auditor shall document
them, and when and to whom they were communicated. Where matters have been communicated in writing,
the auditor shall retain a copy of the communication as part of the audit documentation. (Ref: Para. A49)
***
Application and Other Explanatory Material
The Role of Communication (Ref: Para. 5)
A1. This SA focuses primarily on communications from the auditor to those charged with governance.
Nevertheless, effective two-way communication is important in assisting:
(a) The auditor and those charged with governance in understanding matters related to the audit in
context, and in developing a constructive working relationship. This relationship is developed while
maintaining the auditor’s independence and objectivity;
(b) The auditor in obtaining from those charged with governance information relevant to the audit. For
example, those charged with governance may assist the auditor in understanding the entity and its
environment, in identifying appropriate sources of audit evidence, and in providing information about
specific transactions or events; and
(c) Those charged with governance in fulfilling their responsibility to oversee the financial reporting
process, thereby reducing the risks of material misstatement of the financial statements.
A2. Although the auditor is responsible for communicating matters required by this SA, management also has a
responsibility to communicate matters of governance interest to those charged with governance.
Communication by the auditor does not relieve management of this responsibility. Similarly, communication
by management with those charged with governance of matters that the auditor is required to communicate
does not relieve the auditor of the responsibility to also communicate them. Communication of these matters
11
by management may, however, affect the form or timing of the auditor’s communication with those charged
with governance.
A3. Clear communication of specific matters required to be communicated by SAs is an integral part of every
audit. SAs do not, however, require the auditor to perform procedures specifically to identify any other
matters to communicate with those charged with governance.
Legal or Regulatory Restrictions on Communicating with Those Charged with Governance
A4. Laws or regulations may restrict the auditor’s communication of certain matters with those charged with
governance. For example, laws or regulations may specifically prohibit a communication, or other action, that
might prejudice an investigation by an appropriate authority into an actual, or suspected, illegal act. In some
circumstances, potential conflicts between the auditor’s obligations of confidentiality and obligations to
communicate may be complex. In such cases, the auditor may consider obtaining legal advice.
Those Charged with Governance (Ref: Para. 7)
A5. Governance structures may vary, reflecting different size and ownership characteristics. For example:
?? In most of the entities, those charged with governance hold positions that are an integral part of the
entity’s legal structure, for example, company directors. In others, for example, some government
undertakings, a body that is not part of the entity, is charged with governance.
?? In some cases, some or all of those charged with governance are involved in managing the entity. In
others, those charged with governance and management comprise different persons.
A6. In most entities, governance is the collective responsibility of a governing body, such as a board of directors,
a supervisory board, partners, proprietors, a committee of management, a council of governors, trustees, or
equivalent persons. In some smaller entities, however, one person may be charged with governance, for
example, the owner-manager where there are no other owners, or a sole trustee. When governance is a
collective responsibility, a subgroup such as an audit committee or even an individual, may be charged with
specific tasks to assist the governing body in meeting its responsibilities. Alternatively, a subgroup or
individual may have specific, legally identified responsibilities that differ from those of the governing body.
A7. Such diversity means that it is not possible for this SA to specify for all audits the person(s) with whom the
auditor is to communicate particular matters. Also, in some cases the appropriate person(s) with whom to
communicate may not be clearly identifiable from the applicable legal framework or other engagement
circumstances, for example, entities where the governance structure is not formally defined, such as some
family-owned entities, some not-for-profit organizations, and some government entities. In such cases, the
auditor may need to discuss and agree with the engaging party the relevant person(s) with whom to
communicate. In deciding with whom to communicate, the auditor’s understanding of an entity’s governance
structure and processes obtained in accordance with SA 315, “Identifying and Assessing the Risks of
12
Material Misstatement through Understanding the Entity and Its Environment” is relevant. The appropriate
person(s) with whom to communicate may vary depending on the matter to be communicated.
A8. SA 600 “Special Considerations- Audits of Group Financial Statements (Including the Work of Competent
Auditors)8”, includes specific matters to be communicated by group auditors with those charged with
governance. When the entity is a component of a group, the appropriate person(s) with whom the component
auditor communicates depends on the engagement circumstances and the matter to be communicated. In
some cases, a number of components may be conducting the same businesses within the same system of
internal control and using the same accounting practices. Where those charged with governance of those
components are the same (e.g., common board of directors), duplication may be avoided by dealing with
these components concurrently for the purpose of communication.
Communication with a Subgroup of Those Charged with Governance (Ref: Para. 8)
A9. When considering communicating with a subgroup of those charged with governance, the auditor may take
into account such matters as:
?? The respective responsibilities of the subgroup and the governing body.
?? The nature of the matter to be communicated.
?? Relevant legal or regulatory requirements.
?? Whether the subgroup has the authority to take action in relation to the information communicated,
and can provide further information and explanations the auditor may need.
A10. When deciding whether there is also a need to communicate information, in full or in summary form, with the
governing body, the auditor may be influenced by the auditor’s assessment of how effectively and
appropriately the subgroup communicates relevant information with the governing body. The auditor may
make explicit in agreeing the terms of engagement that, unless prevented by laws or regulations, the auditor
retains the right to communicate directly with the governing body.
A11. Audit committees (or similar subgroups with different names) exist in many jurisdictions. Although their
specific authority and functions may differ, communication with the audit committee, where one exists, has
become a key element in the auditor’s communication with those charged with governance. Good
governance principles suggest that:
?? The auditor will be invited to regularly attend meetings of the audit committee.
?? The chair of the audit committee and, when relevant, the other members of the audit committee, will
liaise with the auditor periodically.
?? The audit committee will meet the auditor without management present at least annually.
8 Hitherto known as AAS 10, “Using the Work of Another Auditor”. The Standard is being revised in the light of the corresponding International
Standard.
13
When All of Those Charged with Governance are Involved in Managing the Entity (Ref: Para. 9)
A12. In some cases, all of those charged with governance are involved in managing the entity, and the application
of communication requirements is modified to recognize this position. In such cases, communication with
person(s) with management responsibilities may not adequately inform all of those with whom the auditor
would otherwise communicate in their governance capacity. For example, in a company where all directors
are involved in managing the entity, some of those directors (e.g., one responsible for marketing) may be
unaware of significant matters discussed with another director (e.g., one responsible for the preparation of
the financial statements).
Matters to be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit (Ref: Para. 10)
A13. 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. Providing
those charged with governance with a copy of that engagement letter or other suitable form of written
agreement may be an appropriate way to communicate with them regarding such matters as:
?? The auditor’s responsibility for performing the audit in accordance with SAs, which is directed towards
the expression of an opinion on the financial statements. The matters that SAs require to be
communicated, therefore, include significant matters arising from 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.
?? When applicable, the auditor’s responsibility for communicating particular matters required by laws or
regulations, by agreement with the entity or by additional requirements applicable to the engagement.
A14. Laws or regulations, an agreement with the entity or additional requirements applicable to the engagement
may provide for broader communication with those charged with governance. For example, (a) an
agreement with the entity may provide for particular matters to be communicated when they arise from
services provided by a firm or network firm other than the financial statement audit; or (b) the mandate of a
public sector auditor may provide for matters to be communicated that come to the auditor’s attention as a
result of other work, such as performance audits.
Planned Scope and Timing of the Audit (Ref: Para. 11)
A15. Communication regarding the planned scope and timing of the audit may:
(a) Assist those charged with governance to understand better the consequences of the auditor’s work, to
discuss issues of risk and materiality with the auditor, and to identify any areas in which they may
request the auditor to undertake additional procedures; and
(b) Assist the auditor to understand better the entity and its environment.
14
A16. Care is required 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. For example, communicating the nature
and timing of detailed audit procedures may reduce the effectiveness of those procedures by making them
too predictable.
A17. Matters communicated may include:
?? How the auditor proposes to address the significant risks of material misstatement, whether due to
fraud or error.
?? The auditor’s approach to internal control relevant to the audit.
?? The application of materiality in the context of an audit.9
A18. Other planning matters that it may be appropriate to discuss with those charged with governance include:
?? Where the entity has an internal audit function, the extent to which the auditor will use the work of
internal audit, and how the external and internal auditors can best work together in a constructive and
complementary manner.
?? The views of those charged with governance of:
?? The appropriate person(s) in the entity’s governance structure with whom to communicate.
?? The allocation of responsibilities between those charged with governance and management.
?? The entity’s objectives and strategies, and the related business risks that may result in
material misstatements.
?? Matters, which those charged with governance, consider, warrant particular attention during
the audit, and any areas where they request additional procedures to be undertaken.
?? Significant communications with regulators.
?? Other matters, which, those charged with governance, consider, may influence the audit of the
financial statements.
?? The attitudes, awareness, and actions of those charged with governance concerning (a) the entity’s
internal control and its importance in the entity, including how those charged with governance oversee
the effectiveness of internal control, and (b) the detection or possibility of fraud.
?? The actions of those charged with governance in response to developments in accounting standards,
corporate governance practices, exchange listing rules, and related matters.
?? The responses of those charged with governance to previous communications with the auditor.
9 [Proposed] SA 320 “Materiality in Planning and Performing an Audit”. Hitherto known as AAS 13, “Audit Materiality”. The Standard is being
revised in the light of the corresponding Proposed International Standard, ISA 320.
15
A19. 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.
Significant Findings from the Audit (Ref: Para. 12)
A20. The communication of findings from the audit may include requesting further information from those charged
with governance in order to complete the audit evidence obtained. For example, the auditor may confirm that
those charged with governance have the same understanding of the facts and circumstances relevant to
specific transactions or events.
Significant Qualitative Aspects of Accounting Practices (Ref: Para. 12(a))
A21. Financial reporting frameworks ordinarily allow for the entity to make accounting estimates, and judgments
about accounting policies and financial statement disclosures. Open and constructive communication about
significant qualitative aspects of the entity’s accounting practices may include comment on the acceptability
of significant accounting practices. Appendix 1 identifies matters that may be included in this communication.
Significant Difficulties Encountered During the Audit (Ref: Para. 12(b))
A22. Significant difficulties encountered during the audit may include such matters as:
?? Significant delays by management in providing the required information.
?? An unnecessarily brief time within which to complete the audit.
?? Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
?? The unavailability of expected information.
?? Restrictions imposed on the auditor by management.
?? Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a
going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification of the
auditor’s opnion.10
Significant Matters Discussed, or Subject to Correspondence with Management (Ref: Para. 12(c)(ii))
A23. Significant matters discussed, or subject to correspondence with management may include such matters as:
?? Business conditions affecting the entity, and business plans and strategies that may affect the risks of
material misstatement.
10 The concept of modification of the auditor’s opinion has been dealt in SA 700, “The Auditor’s Report on Financial Statements” (hitherto
known as AAS 28). The AASB is however also in the process of developing a Standard corresponding to ISA 705, “Modifications to the
Opinion in the Independent Auditor’s Report”.
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?? Concerns about management’s consultations with other accountants on accounting or auditing
matters.
?? Discussions or correspondence in connection with the initial or recurring appointment of the auditor
regarding accounting practices, the application of auditing standards, or fees for audit or other
services.
Other Significant Matters Relevant to the Financial Reporting Process (Ref: Para. 12(d))
A24. Other significant matters arising from the audit that are directly relevant to those charged with governance in
overseeing the financial reporting process may include such matters as material misstatements of fact or
material inconsistencies in information accompanying the audited financial statements that have been
corrected.
Auditor Independence (Ref: Para. 13)
A25. The auditor is subject to independence and other ethical requirements as enunciated in the Code of Ethics
issued by the ICAI*.
A26. The relationships and other matters, and safeguards to be communicated, vary with the circumstances of the
engagement, but generally address:
(a) Threats to independence, which may be categorized as: self-interest threats, self-review threats,
advocacy threats, familiarity threats, and intimidation threats; and
(b) Safeguards created by the profession, legislation or regulation, safeguards within the entity, and
safeguards within the firm’s own systems and procedures.
The communication required by paragraph 13(a) may include an inadvertent violation of relevant ethical
requirements as they relate to auditor independence, and any remedial action taken or proposed.
A27. The communication requirements relating to auditor independence that apply in the case of listed entities
may also be relevant in the case of some other entities, particularly those that may be of significant public
interest because, as a result of their business, their size or their corporate status, they have a wide range of
stakeholders. Examples of entities that are not listed entities, but where communication of auditor
independence may be appropriate, include public sector entities, credit institutions, insurance companies,
and retirement benefit funds. On the other hand, there may be situations where communications regarding
independence may not be relevant, for example, where all of those charged with governance have been
informed of relevant facts through their management activities. This is particularly likely where the entity is
* Attention of the members is also invited, for instance, to the Guidance Note on Independence of Auditors, issued by the ICAI.
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owner-managed, and the auditor’s firm and network firms have little involvement with the entity beyond a
financial statement audit.
Supplementary Matters (Ref: Para. 3)
A28. Those charged with governance are responsible for ensuring, through oversight of management, that the
entity establishes and maintains internal control to provide reasonable assurance with regard to reliability of
financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and
regulations.
A29. The auditor may become aware of supplementary matters that do not necessarily relate to the oversight of
the financial reporting process but which are, nevertheless, likely to be significant to the responsibilities of
those charged with governance in overseeing the strategic direction of the entity or the entity’s obligations
related to accountability. Such matters may include, for example, significant deficiencies in governance
structures or processes, and significant decisions or actions by senior management that lack appropriate
authorization.
A30. In determining whether to communicate supplementary matters with those charged with governance, the
auditor may discuss matters of this kind, of which the auditor has become aware, with the appropriate level of
management, unless it is inappropriate to do so in the circumstances.
A31. If a supplementary matter is communicated, it may be appropriate for the auditor to make those charged with
governance aware that:
(a) Identification and communication of such matters is incidental to the purpose of the audit, which is to
form an opinion on the financial statements;
(b) No procedures were carried out with respect to the matter other than any that were necessary to form
an opinion on the financial statements; and
(c) No procedures were carried out to determine whether other such matters exist.
The Communication Process
Establishing the Communication Process (Ref: Para. 14)
A32. Clear communication of the auditor’s responsibilities, the planned scope and timing of the audit, and the
expected general content of communications helps establish the basis for effective two-way communication.
A33. Matters that may also contribute to effective two-way communication include discussion of:
?? The purpose of communications. When the purpose is clear, the auditor and those charged with
governance are better placed to have a mutual understanding of relevant issues and the expected
actions arising from the communication process.
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?? The form in which communications will be made.
?? The person(s) in the audit team and amongst those charged with governance who will communicate
regarding particular matters.
?? The auditor’s expectation that communication will be two-way, and that those charged with
governance will communicate with the auditor matters they consider relevant to the audit, for
example, strategic decisions that may significantly affect the nature, timing and extent of audit
procedures, the suspicion or the detection of fraud, and concerns with the integrity or competence of
senior management.
?? The process for taking action and reporting back on matters communicated by the auditor.
?? The process for taking action and reporting back on matters communicated by those charged with
governance.
A34. The communication process will vary with the circumstances, including 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. Difficulty in establishing effective two-way communication may indicate that the
communication between the auditor and those charged with governance is not adequate for the purpose of
the audit (see paragraph A48).
Considerations Specific to Smaller Entities
A35. 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.
Communication with Management
A36. Many matters may be discussed with management in the ordinary course of an audit, including matters
required by this SA to be communicated with those charged with governance. Such discussions recognize
management’s executive responsibility for the conduct of the entity’s operations and, in particular,
management’s responsibility for the preparation of the financial statements.
A37. Before communicating matters with those charged with governance, the auditor may discuss them with
management, unless that is inappropriate. For example, it may not be appropriate to discuss questions of
management’s competence or integrity with management. In addition to recognizing management’s
executive responsibility, these initial discussions may clarify facts and issues, and give management an
opportunity to provide further information and explanations. Similarly, when the entity has an internal audit
function, the auditor may discuss matters with the internal auditor before communicating with those charged
with governance.
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Communication with Third Parties
A38. Those charged with governance may wish to provide third parties, for example, bankers or certain regulatory
authorities, with copies of a written communication from the auditor. In some cases, disclosure to third parties
may be illegal or otherwise inappropriate. When a written communication prepared for those charged with
governance is provided to third parties, it may be important in the circumstances that the third parties be
informed that the communication was not prepared with them in mind, for example, by stating in written
communications with those charged with governance:
(a) That the communication has been prepared for the sole use of those charged with governance and,
where applicable, the group management and the group auditor, should not be relied upon by third
parties;
(b) That no responsibility is assumed by the auditor to third parties; and
(c) Any restrictions on disclosure or distribution to third parties.
A39. The auditor may be required by laws or regulations to, for example:
?? Notify a regulatory or enforcement body of certain matters communicated with those charged with
governance. The auditor has a duty to report misstatements to authorities where management and
those charged with governance fail to take corrective action;
?? Submit copies of certain reports prepared for those charged with governance to relevant regulatory or
funding bodies, or other bodies such as Central Government in the case of some public sector
undertakings; or
?? Make reports prepared for those charged with governance publicly available.
A40. Unless required by laws or regulations to provide a third party with a copy of the auditor’s written
communications with those charged with governance, the auditor may need the prior consent of those
charged with governance before doing so.
Forms of Communication (Ref: Para. 15-16)
A41. Effective communication may involve structured presentations and written reports as well as less structured
communications, including discussions. The auditor may communicate matters other than those identified in
paragraphs 15 and 16 either orally or in writing. Written communications may include an engagement letter
that is provided to those charged with governance.
A42. In addition to the significance of a particular matter, the form of communication (e.g., whether to
communicate orally or in writing, the extent of detail or summarization in the communication, and whether to
communicate in a structured or unstructured manner) may be affected by such factors as:
?? Whether the matter has been satisfactorily resolved.
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?? Whether management has previously communicated the matter.
?? The size, operating structure, control environment, and legal structure of the entity.
?? In the case of an audit of special purpose financial statements, whether the auditor also audits the
entity’s general purpose financial statements.
?? Legal requirements. In some jurisdictions, a written communication with those charged with
governance is required in a prescribed form by local law.
?? The expectations of those charged with governance, including arrangements made for periodic
meetings or communications with the auditor.
?? The amount of ongoing contact and dialogue the auditor has with those charged with governance.
?? Whether there have been significant changes in the membership of a governing body.
A43. When a significant matter is discussed with an individual member of those charged with governance, for
example, the chair of an audit committee, it may be appropriate for the auditor to summarize the matter in
later communications so that all of those charged with governance have full and balanced information.
Timing of Communications (Ref: Para. 17)
A44. The appropriate timing for communications will vary with the circumstances of the engagement. Relevant
circumstances include the significance and nature of the matter, and the action expected to be taken by
those charged with governance. For example:
?? Communications regarding planning matters may often be made early in the audit engagement and,
for an initial engagement, may be made as part of agreeing the terms of the engagement.
?? It may be appropriate to communicate a significant difficulty encountered during the audit as soon as
practicable if those charged with governance are able to assist the auditor to overcome the difficulty,
or if it is likely to lead to a modified opinion.
?? Similarly, it may be appropriate to communicate material weaknesses in the design, implementation
or operating effectiveness of internal control that have come to the auditor’s attention as soon as
practicable.
?? Communications regarding independence may be appropriate whenever significant judgments are
made about threats to independence and related safeguards, for example, when accepting an
engagement to provide non-audit services, and at a concluding discussion. A concluding discussion
may also be an appropriate time to communicate findings from the audit, including the auditor’s views
about the qualitative aspects of the entity’s accounting practices.
?? When auditing both general purpose and special purpose financial statements, it may be appropriate
to co-ordinate the timing of communications.
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A45. Other factors that may be relevant to the timing of communications include:
?? The size, operating structure, control environment, and legal structure of the entity being audited.
?? Any legal obligation to communicate certain matters within a specified timeframe.
?? The expectations of those charged with governance, including arrangements made for periodic
meetings or communications with the auditor.
?? The time at which the auditor identifies certain matters, for example, the auditor may not identify a
particular matter (e.g., non-compliance with a law) in time for preventive action to be taken, but
communication of the matter may enable remedial action to be taken.
Adequacy of the Communication Process (Ref: Para. 18)
A46. The auditor need not design specific procedures to support the evaluation of the two-way communication
between the auditor and those charged with governance; rather, that evaluation may be based on
observations resulting from audit procedures performed for other purposes. Such observations may include:
?? The appropriateness and timeliness of actions taken by those charged with governance in response
to matters raised by the auditor. Where significant matters raised in previous communications have
not been dealt with effectively, it may be appropriate for the auditor to inquire as to why appropriate
action has not been taken, and to consider raising the point again. This avoids the risk of giving an
impression that the auditor is satisfied that the matter has been adequately addressed or is no longer
significant.
?? The apparent openness of those charged with governance in their communications with the auditor.
?? The willingness and capacity of those charged with governance to meet with the auditor without
management present.
?? The apparent ability of those charged with governance to fully comprehend matters raised by the
auditor, for example, the extent to which those charged with governance probe issues, and question
recommendations made to them.
?? Difficulty in establishing with those charged with governance a mutual understanding of the form,
timing and expected general content of communications.
?? Where all or some of those charged with governance are involved in managing the entity, their
apparent awareness of how matters discussed with the auditor affect their broader governance
responsibilities, as well as their management responsibilities.
?? Whether the two-way communication between the auditor and those charged with governance meets
applicable legal and regulatory requirements.
A47. As noted in paragraph A1, effective two-way communication assists both the auditor and those charged with
governance. Further, SA 315 identifies participation by those charged with governance, including their
interaction with internal audit, if any, and external auditors, as an element of the entity’s control
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environment.11 Inadequate two-way communication may indicate an unsatisfactory control environment and
influence the auditor’s assessment of the risks of material misstatements. There is also a risk that the auditor
may not have obtained sufficient appropriate audit evidence to form an opinion on the financial statements.
A48. If the two-way communication between the auditor and those charged with governance is not adequate and
the situation cannot be resolved, the auditor may take such actions as:
?? Modifying the auditor’s opinion on the basis of a scope limitation.
?? Obtaining legal advice about the consequences of different courses of action.
?? Communicating with third parties (e.g., a regulator), or a higher authority in the governance structure
that is outside the entity, such as the owners of a business (e.g., shareholders in a general meeting),
or the responsible government minister or parliament in the public sector.
?? Withdrawing from the engagement where permitted.
Documentation (Ref: Para. 19)
A49. Documentation of oral communication may include a copy of minutes prepared by the entity retained as part
of the audit documentation where those minutes are an appropriate record of the communication.
Material Modifications to ISA 260, Communication with Those Charged with
Governance
The SA 260, “Communication with Those Charged with Governance” does not contain any material modifications vis
a vis ISA 260.
11 SA 315, “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, paragraph A66.
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Appendix 1
(Ref: Para. 12(a), and A21)
Qualitative Aspects of Accounting Practices
The communication required by paragraph 12(a), and discussed in paragraph A21, may include such matters as:
Accounting Policies
?? The appropriateness of the accounting policies to the particular circumstances of the entity, having regard to
the need to balance the cost of providing information with the likely benefit to users of the entity’s financial
statements. Where acceptable alternative accounting policies exist, the communication may include
identification of the financial statement items that are affected by the choice of significant accounting policies
as well as information on accounting policies used by similar entities.
?? The initial selection of, and changes in significant accounting policies, including the application of new
accounting pronouncements. The communication may include: the effect of the timing and method of
adoption of a change in accounting policy on the current and future earnings of the entity; and the timing of a
change in accounting policies in relation to expected new accounting pronouncements.
?? The effect of significant accounting policies in controversial or emerging areas (or those unique to an
industry, particularly when there is a lack of authoritative guidance or consensus).
?? The effect of the timing of transactions in relation to the period in which they are recorded.
Accounting Estimates
?? For items for which estimates are significant, issues discussed in SA 540, “Audit of Accounting Estimates” 12
including, for example:
? Management’s identification of accounting estimates.
? Management’s process for making accounting estimates.
? Risks of material misstatement.
? Indicators of possible management bias.
? Disclosure of estimation uncertainty in the financial statements.
12 Hitherto known as AAS 18 “Audit of Accounting Estimates”. This Standard is being revised in the light of the corresponding International
Standard, ISA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”.
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Financial Statement Disclosures
?? The issues involved, and related judgments made, in formulating particularly sensitive financial statement
disclosures (e.g., disclosures related to revenue recognition, remuneration, going concern, subsequent
events, and contingency issues).
?? The overall neutrality, consistency, and clarity of the disclosures in the financial statements.
Related Matters
?? The potential effect on the financial statements of significant risks, exposures and uncertainties, such as
pending litigation, that are disclosed in the financial statements.
?? The extent to which the financial statements are affected by unusual transactions, including non-recurring
amounts recognized during the period, and the extent to which such transactions are separately disclosed in
the financial statements.
?? The factors affecting asset and liability carrying values, including the entity’s bases for determining useful
lives assigned to tangible and intangible assets. The communication may explain how factors affecting
carrying values were selected and how alternative selections would have affected the financial statements.
?? The selective correction of misstatements, for example, correcting misstatements with the effect of increasing
reported earnings, but not those that have the effect of decreasing reported earnings.
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