ISAs – Summaries and Application Guide ISA 260

ISA 260
COMMUNICATION WITH THOSE
CHARGED WITH GOVERNANCE

ISA Reference
LO # LEARNING OBJECTIVE

LO 1 INTRODUCTION (SCOPE, OBJECTIVE, AND DEFINITION) 1 – 10,

LO 2 THOSE CHARGED WITH GOVERNANCE 11 – 13, A1–A8

LO 3 MATTERS TO BE COMMUNICATED REQUIRED BY ISA 260 14 – 17, A9–A36

LO 4 THE COMMUNICATION PROCESS 18 – 22, A37–A53

LO 5 DOCUMENTATION 23, A54
SPECIFIC REQUIREMENTS IN OTHER ISAS TO
LO 6 APPENDIX 1
COMMUNICATIONS WITH TCWG
APPENDIX
APX 1 OBJECTIVE TYPE QUESTIONS
APX 2 HINTS AND COMMENTS TO PRACTICE QUESTIONS

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ISAs – Summaries and Application Guide ISA 260

LO 1: INTRODUCTION (SCOPE, OBJECTIVE, AND DEFINITION):

Management as well as Auditors are responsible to communicate certain matters with TCWG.
Communication by management does not relieve auditor of this responsibility (and vice-versa).

Matters to be communicated with TCWG by auditor may be either:

 Required [by ISAs, Law or Engagement Letter], or
 Supplementary [Deemed necessary by auditor]

Point to Note:
Law or regulations may restrict auditor to communicate certain matters to TCWG e.g. a communication which may disturb
an investigation of fraud or illegal act by TCWG.

Objectives of Communication with TCWG:

ISAs state four objectives of communication with TCWG i.e.
1. To communicate responsibility of auditor, and planned scope and timing of audit.
2. To communicate significant matters arising during audit, relating to oversight of financial
reporting process by TCWG.
3. To obtain information from TCWG relevant to audit.

Point to Note:
 There is difference between Communication and Obtaining Representation.

LO 2: THOSE CHARGED WITH GOVERNANCE:

Difference between Management and TCWG:

Management:
The persons with executive responsibility for the conduct of the operations.

Examples of Management:
 Chief Executive Officer (CEO)
 Chief Financial Officer (CFO)

Those charged with governance: (TCWG)

The persons responsible for overseeing the strategic direction and accountability of entity
(including overseeing the financial reporting process).

Examples of TCWG:
 Board of Directors (BOD) in a company,
 Owner-Manager in small entity.

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ISAs – Summaries and Application Guide ISA 260

Determination of to whom to communicate within governance structure:

Governance structure vary by entity and by jurisdiction e.g.
 Sometimes, TCWG may also be involved in management.
 Sometimes, a sub-group (e.g. audit committee, or risk management committee) may be
formed to assist TCWG.
 Sometimes governance structure may not be clear e.g. in family owned businesses, not-for-
profit organizations, government entities

Because of these variations, ISA requires auditor to identify the appropriate persons within the
entity to whom to communicate matters.

Examples:

 Example 1: If sub-groups are formed:

If the auditor communicates with a subgroup of TCWG (e.g. audit committee), the auditor
shall determine whether the auditor also needs to communicate with the governing body.

 Example 2: When all of TCWG are involved in Management:

This may happen in small entity. In such case, matters need not be communicated again
with those same persons.

LO 3: MATTERS TO BE COMMUNICATED REQUIRED BY ISA 260:

Matters required by ISA 260:

Auditor is required to communicate following matters to TCWG:

The Auditor’s Responsibilities in Relation to the Financial Statement Audit:

 The auditor is responsible for forming and expressing an opinion on the financial
statements

Planned Scope and Timing of the Audit:

 How the auditor plans to address significant and higher risk of material misstatements.
 The auditor’s approach to internal control
 application of the concept of materiality
 Planned use of work of internal auditor, or use of internal auditor to provide direct
assistance.
 Nature and use of specialized skills needed, include use of expert.
 Auditor’s preliminary views about Key Audit Matters.

Significant Audit Findings:

 Significant matters discussed with management, and requested written representation (if
TCWG are different from management).
 Significant difficulties, if any, encountered during the audit
 Circumstances affecting form and content of auditor’s report.
 The auditor’s views about qualitative aspects of the entity’s accounting practices.

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ISAs – Summaries and Application Guide ISA 260

Auditor Independence (for listed entities):

 A statement that engagement team has complied with ethical requirements including
independence.
 Situations creating threats to independence (e.g. fee for assurance and non-assurance
services), and related Safeguards.

LO 4: THE COMMUNICATION PROCESS:

Establishing the communication process:
Communication with TCWG:
The auditor shall communicate with TCWG
 Form of communication
 Who from auditors will communicate whom from TCWG.

Communication with Management:

 It may be necessary to discuss some matters to management (or internal auditors) before
communication with TCWG.
 No need to discuss with management if it is inappropriate (e.g. issues regarding competence
and integrity of management).

Communication with Third Parties:

 By TCWG:
TCWG may provide communication by auditor to third parties, therefore, auditor should
include in his communication:
 restriction on use and distribution, and
 disclaimer of responsibilities to third parties.

 By Auditor:
Auditor will need prior approval of TCWG to provide copy of communication to third
parties, unless required by law.

Forms of communication:
Matters relating to auditor’s independence will be communicated in writing.
Other matters may be communicated:
 orally or
 in writing (if oral communication is not adequate), considering significance of the matter,
legal requirement, or effect on report.

Timing of communication:
Matter(s) should be communicated on timely basis. What is appropriate timing, depends on nature
and significance of the matter, and other factors.

 Example 1:
Planning matters may be communicated at start of the engagement.

 Example 2:
Significant difficulties encountered during audit (e.g. significant misstatements, scope
limitations or deficiencies in internal control) are communicated as soon as practicable.

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ISAs – Summaries and Application Guide ISA 260

LO 5: DOCUMENTATION:
Where matters required by this ISA to be communicated are communicated orally, the auditor shall
include them in the audit documentation, and when and to whom they were communicated (e.g.
through minutes of the meeting prepared by entity).

Where matters have been communicated in writing, the auditor shall retain a copy of the
communication as part of the audit documentation

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ISAs – Summaries and Application Guide ISA 260

APX 1: SPECIFIC REQUIREMENTS IN OTHER ISAs TO COMMUNICATIONS WITH

TCWG:

Standard Required matter to communicate to TCWG

ISQC 1, “Quality Control for
Identity and role of engagement partner
Firms…..”
 Inquiring TCWG whether they have knowledge of any actual, suspected or alleged
fraud affecting the entity
ISA 240 “Fraud”.  If auditor identifies fraud or obtains information indicating fraud.
 Decision of withdrawal and reason of withdrawal if auditor withdraws from
engagement
 Inquiring TCWG whether they have knowledge of any non-compliance with laws
ISA 250 “Consideration of affecting the entity
laws…”  If auditor identifies non-compliance or obtains information indicating non-
compliance.
ISA 265 “Communicating
Significant deficiencies in internal control identified during the audit
deficiencies in …”.
ISA 450 “Evaluation of Uncorrected misstatements affecting opinion, individually (if individually material), or in
misstatements…” aggregate (if individually immaterial).
ISA 505 “External If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation” confirmation request is unreasonable
ISA 510 “Initial Audit
If misstatement in opening balance is identified which affects current period.
Engagement ….”
 Non-disclosure of significant related party or transaction.
 significant related party transactions that have not been appropriately approved
 Disagreement with management regarding the accounting for and disclosure of
ISA 550 “Related Parties”
significant related party transactions
 Non-compliance with applicable law or regulations prohibiting or restricting
specific types of related party transactions
 Inquiring TCWG whether they have knowledge of any subsequent event affecting
ISA 560 “Subsequent the entity
Event”  If auditor identifies subsequent event after the date of auditor’s report.
 If misstatement is identified after issuance of audit report or financial statements.
ISA 570 “Going Concern”. Events or conditions casting doubt on entity’s ability to continue as going concern.
Overview of work to be performed on components.
ISA 600 “Group Audit”
Planned use and involvement in work of component auditor
ISA 610 “Internal Auditor” how the external auditor has planned to use the work of the internal audit function
ISA 701 “Key Audit
KAMs to communicate in audit report.
Matters”
 If management imposes scope limitation.
ISA 705 “Modified Opinion”  If auditor expects to modify his opinion + wording.
 If auditor withdraws from engagement.
ISA 706 “EOM/OM
If auditor expects to include EOM/OM + wording.
Paragraphs”
ISA 710 “Comparative
If a misstatement is identified in prior period financial statements.
Information…”
ISA 720 “Other
Uncorrected misstatement in other information.
Information”

Point to Note:
 In a given case study, examiner may require you to identify which matters are required to be reported to TCWG.

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