ISA 260 (Revised)
Communication with Those Charged with Governance
1Objective and scope
ISA 260 (Revised) deals with the auditor's responsibility to communicate with those charged with governance in an audit of financial statements. Although it applies regardless of an entity's governance structure or size, particular considerations apply where all of those charged with governance are involved in managing the entity (owner-managed companies) and for listed entities. It provides a framework; other ISAs identify specific matters to communicate (ISA 240 fraud, ISA 250 non-compliance, ISA 265 control deficiencies, ISA 450 misstatements, ISA 570 going concern, ISA 701 key audit matters, ISA 705 and 706 modifications and additional paragraphs, ISA 720 other information). The 2015 revision added communication about significant risks and about the circumstances affecting the form and content of the auditor's report.
The objectives are to communicate clearly the responsibilities of the auditor and an overview of the planned scope and timing of the audit; to obtain from those charged with governance information relevant to the audit; to provide them with timely observations arising from the audit that are significant and relevant to their oversight of financial reporting; and to promote effective two-way communication. Effective communication assists both sides in understanding matters in the context of the audit and helps the auditor obtain information and helps those charged with governance fulfil their oversight responsibility.
2Key definitions
3Requirements
Identifying the right people
The auditor determines the appropriate person(s) within the entity's governance structure with whom to communicate. Where a subgroup such as an audit committee is used, the auditor determines whether the full governing body also needs to be informed. Where all those charged with governance are involved in managing the entity, matters communicated to a person in a management capacity need not be communicated again to the same person in a governance capacity, but the auditor must be satisfied that communication with the management representative adequately informs all those charged with governance.
Matters to be communicated
| Matter | Content |
|---|---|
| The auditor's responsibilities | That the auditor is responsible for forming and expressing an opinion on the financial statements prepared by management under the oversight of TCWG, and that the audit does not relieve management or TCWG of their responsibilities. Usually covered by the engagement letter. |
| Planned scope and timing | An overview, including the significant risks identified, the approach to internal control, the concept of materiality in planning and executing the audit, the use of internal audit and experts, and, for listed entities, any plans to involve the engagement quality reviewer. Care is taken not to compromise the audit by making procedures too predictable. |
| Significant findings from the audit | The auditor's views about significant qualitative aspects of accounting practices (policies, estimates, disclosures); significant difficulties encountered (delays, unavailability of staff, unreasonable timetables, restrictions imposed); significant matters discussed or subject to correspondence with management; written representations requested; circumstances that affect the form and content of the report (key audit matters, modifications, Emphasis of Matter); and any other significant matter relevant to oversight. |
| Auditor independence (listed entities) | A statement that the engagement team and the firm have complied with relevant ethical requirements regarding independence; all relationships and other matters between the firm, network firms and the entity that may reasonably be thought to bear on independence, including total fees for audit and non-audit services; and the related safeguards applied. |
| Uncorrected misstatements and control deficiencies | Required by ISA 450 and ISA 265 respectively, and delivered through the ISA 260 process. |
The communication process
- Communicate the form, timing and expected general content of communications, and establish the process with TCWG, including whether communications will be with the audit committee or the full board.
- Communicate in writing regarding significant findings when, in the auditor's judgement, oral communication would not be adequate; written communications need not include every matter arising. Independence matters for listed entities are always communicated in writing.
- Communicate on a timely basis: planning matters early, significant findings before the report is issued (often at the audit committee meeting approving the statements), and matters of urgency as they arise.
- Evaluate whether the two-way communication has been adequate for the purpose of the audit; if not, evaluate the effect on the risk assessment and the ability to obtain evidence, and take appropriate action.
4Documentation and reporting
Where matters are communicated orally, the auditor documents them, when and to whom they were communicated (minutes of the audit committee meeting prepared by the entity may be retained as part of the documentation). Where matters are communicated in writing, a copy of the communication is kept in the audit file. The management letter (report to those charged with governance) is the usual vehicle for the written communication of significant findings and control deficiencies; it is a private document, not part of the published financial statements, and is separate from the auditor's report. Law or regulation may restrict communication of certain matters (for example a tipping-off offence under anti-money-laundering legislation), and the auditor considers such restrictions before communicating.
5Examinable focus
What KASNEB tests
Expect 'explain the matters the auditor should communicate to those charged with governance' as a stand-alone question and as the final part of a scenario on control weaknesses, uncorrected misstatements or an independence threat (fees, a former partner joining the client). Know who TCWG are in a company, an owner-managed business and a public body, and what changes for a listed entity (written independence communication, fees for non-audit services, engagement quality reviewer). Distinguish the management letter from the auditor's report: audience, confidentiality, content, timing. The purposes of two-way communication and why the auditor must not make the audit predictable are common short parts.