2801
OVERVIEW
Objective
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To summarise the form and content of effective communications with management and those charged with governance throughout the audit.MANAGEMENT
MANAGEMENT LETTERS
COMMUNICATIONS with
THOSE CHARGED WITH GOVERNANCE
¾ Definitions
¾ Matters communicated
¾ Matters discussed
¾ Scope
¾ Need for effective communication ¾ Basic principles
¾ Forms of communications
¾ Other considerations
1
COMMUNICATIONS WITH MANAGEMENT
Commentary
Most of what is within this session you will have already covered (in greater detail) in your studies so far. This session just summarises the elements of management communications under ISA 260 Communications of Audit Matters with Those Charged with Governance.
1.1
Definitions
Management − officers and others who also perform senior managerial
functions. Management includes directors and the audit committee only in those instances when they perform such functions.
Audit committee – a sub-committee of the main management board established
to assist the entity by reviewing financial reporting, auditing and internal control issues.
1.2
Matters communicated
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Throughout this study system, details of the main communications between management and auditors have been noted, eg: Terms of engagement (see Session 5); Control weaknesses (see Session 13)
Management representations (see Session 20); and
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Communications continuously take place with management, eg: whilst planning the audit; conducting the audit; and closing down the audit.
1.3
Matters discussed
1.3.1
During the audit
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An understanding of the business.¾
The audit plan.¾
The effect of new legislation or professional standards on the audit.¾
Information necessary for audit risk assessments.2803
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Any observations and suggestions arising from the audit on such matters as operationalor administrative efficiencies, business strategies and other items of interest.
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Unaudited information management is intending to publish with the audited financial statements which the auditor considers is inconsistent or appears to be misleading. (See also ISA 720 in Session 30.)1.3.2
At the end of the audit
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Any practical difficulties encountered in performing the audit.¾
Any disagreements with management relating to the financial statements.¾
Significant audit adjustments (whether or not reflected in the financial statements).¾
Significant concerns or problems relating to accounting policies and the disclosure ofitems in the financial statements.
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Any irregularities or suspected non-compliance with laws and regulations which came to the attention of the auditor.¾
Significant risks or exposures faced by the entity.¾
Recommendations (e.g. on internal control matters) arising from the audit.2
ISA 260 “COMMUNICATIONS OF AUDIT MATTERS
WITH THOSE CHARGED WITH GOVERNANCE”
2.1
Scope
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ISA 260 provides standards and guidance on communications relating to the audit of financial statements to those charged with governance of an entity.¾
It does not provide guidance on communications with outside parties (e.g. external regulatory or supervisory agencies) required by national professional accountancy bodies, legislation or regulation.2.2
Need for effective communication
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To reinforce auditors’ independence and objectivity and commitment to high quality auditing.¾
To provide auditors with the relevant information concerning, for example, the risks the entity faces.¾
To assist auditors in evaluating their findings.2.3
Basic principles
2.3.1
Audit matters of governance interest
Those matters which, in the opinion of the auditor, are important and relevant to those charged with governance that have come to the auditor’s attention whilst performing the audit should be communicated to those charged with governance of an entity.
This specifically includes uncorrected misstatements aggregated by the auditor but determined by the management as being immaterial.
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The auditor is not required to design procedures for the specific purpose of identifying matters of governance interest.Examples of matters:
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The general approach and overall scope of the audit, including any limitations.¾
Changes in significant accounting policies that could have a material effect on thefinancial statements.
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The potential effect on the financial statements of any significant risks and exposures (e.g. pending litigation).¾
Audit adjustments that could have a significant effect on the financial statements.¾
Material uncertainties that may cast significant doubt on the going concern basis.¾
Disagreements with management about matters that could be significant to the entity’sfinancial statements or the auditor’s report.
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Expected modifications to the auditor’s report.¾
Material weaknesses in internal control, doubts about management integrity, and management fraud.2.3.2
Relevant persons
The relevant persons charged with governance should be determined by the auditor.
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In some countries, the supervision function, and the management function are legally separated into different bodies, e.g.: a supervisory (wholly or mainly non-executive) board (e.g. audit committee); and a management (executive) board.
2805
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In establishing relevant person the auditor considers: governance structure of the entity; the circumstances of the engagement; any relevant legislation;
the legal responsibilities of such persons.
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When the entity’s governance structure is not well defined, or those charged with governance are not clearly identified the auditor should agree with the entity to whom audit matters of governance interest are to be communicated. This may apply, for example, to some: owner-managed entities;
not for profit organizations; and government agencies.
2.3.3
Audit engagement letter
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To avoid misunderstandings, an audit engagement letter may describe what, and with whom, matters of governance interest will be communicated (and the form of any communications).2.3.4
Timing
Audit matters of governance interest must be communicated on a timely basis to enable those charged with governance to take appropriate action.
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To achieve timely communications, the auditor discusses with those charged with governance the basis and timing of such communications.¾
In certain cases, because of the nature of the matter, the auditor may communicate that matter sooner than previously agreed.2.4
Forms of communications
May be made orally or in writing.
2.4.1
Factors to consider
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The size, operating structure, legal structure, and communications processes of the entity being audited.¾
The nature, sensitivity and significance of the audit matters of governance interest to be communicated.¾
The arrangements made with respect to periodic meetings or reporting of audit matters of governance interest.¾
Oral communications must be documented in the working papers together with any responses (e.g. in the form of minutes of the discussion2.5
Other considerations
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Such communications are not a substitute for a modification of the auditor’s report as required by ISA 701 (see Session 30).¾
Whether matters previously communicated may have an effect on the current year’s financial statements.¾
The auditor should consider taking legal advise there is a potential conflict between the auditor’s ethical and legal obligations of confidentiality and reporting.FOCUS
You should now be able to:
