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Clarified Auditing Standards: Working with Those Charged with Governance

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Jan 14th 2015
CPA Firm Support Services, LLC
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The objectives of the auditor’s communications with those charged with governance  (AU-C Section 260) are to:

  • Communicate clearly the responsibilities of the auditor in relation to the financial statement audit and the overview of the planned scope and timing of the audit, and to obtain information relevant to the audit from those charged with governance.
  • Provide timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process.
  • Promote effective two-way communication.

Two Key Definitions

  • Those charged with governance. The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Those charged with governance may include management personnel, such as executive members of a governance board or an owner-manager.
  • 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, such as executive members of a governance board or an owner-manager.

Audit Requirements

This SAS contains the following requirements:

Determine who is charged with governance of the entity. Communications with the audit committee or other subgroup of those charged with governance may need to be supplemented by communications to the entire governing body. When all of those charged with governance are involved in managing the entity, the communications do not need to be repeated to the same persons.

Matters to be communicated should include:

  • Planning phase—The auditor’s responsibilities in relation to the financial statement audit and the planned scope and timing of the audit.
  • Completion phase—Significant findings or issues from the audit and uncorrected misstatements

When not all of those charged with governance are involved in management, the auditor should also communicate to the governing body:

  • Material corrected misstatements that were brought to the attention of management through the audit process.
  • Significant findings or issues (including the auditor’s views) that arose through audit procedures and were discussed with or communicated to management.
  • Written representations that the auditor is requesting.

The Communication Process

  • Establishing the communication process. The form, timing, and expected content of the auditor’s communication should be communicated.
  • Forms of communication. The auditor should communicate the significant findings or issues from the audit, orally or in writing. The significance of the matters (whether they have been resolved) and legal or regulatory requirements may affect whether the communication is oral or written. Matters arising during the performance of the audit that were communicated to those charged with governance and resolved need not be communicated again.
  • Restricted use. The communication is a by-product report and the auditor should indicate that its use is restricted to those charged with governance and management and that it should not be used by anyone other than the specified parties (AU-C Section 905).
  • Timing of communications. Communications should be timely; practically, they should occur before the audit report is released.
  • Adequacy of the communication process. The auditor should evaluate if the two-way communication has been adequate. If it has not been adequate, the auditor should evaluate the effect on any auditing procedures performed and take appropriate action.
  • Documentation. Documentation of the oral and written communications with management and the governing body should be included in engagement files.

Practical Notes:

Communication of the auditor’s responsibilities should include:

  • A discussion of the reasonable assurance (not absolute) provided by an audit in accordance with GAAS.
  • That internal control is considered in designing an audit strategy but that no opinion of offered as to its effectiveness.
  • That significant matters related to the audit, determined by the auditor’s professional judgment, will be communicated to those charged with governance.

Matters related to the planned scope and timing of the audit to be communicated may include:

  • How the auditor plans to address significant risks of material misstatement.
  • The impact of risks of material misstatement on the consideration of materiality levels.
  • Other matters related to the structure and responsibilities of the board of governance.

Significant audit findings concerning accounting estimates and qualitative aspects of significant accounting practices may be communicated. Also, significant difficulties encountered during the audit, such as delayed or unavailable expected information, management restrictions and additional time necessary to obtain appropriate audit evidence, may be communicated.

My next article will include an illustrative written communication for those persons charged with governance.

My exclusive presentation of webcasts and self-study courses covering various applications of auditing standards can be accessed by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com. Registered users on my website receive a 20 percent discount on CPE materials presented by myself and numerous other authors on a variety of professional topics. My assistance in CPA firm quality control consulting, audit planning and peer review preparation can be obtained by sending an email using the “Contact Us” tab on my home page.

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