SA 260, “Communication with Those Charged with Governance,” governs what the auditor must tell the people who oversee the entity — not the people who run it. That distinction is the whole standard, and it is where most exam answers go wrong.
Who are “those charged with governance”?
TCWG are the persons or organisations responsible for overseeing the strategic direction of the entity and its obligations of accountability — including oversight of the financial reporting process. In a company this is typically the Board of Directors or the Audit Committee.
Management is different. Management has executive responsibility for the conduct of the entity’s operations. In many organisations the two overlap; in some, they are the same people entirely. That case is dealt with below, and it is examined more often than students expect.
Objectives of SA 260
- Communicate clearly the auditor’s responsibilities in relation to the audit, and the planned scope and timing
- Obtain from TCWG information relevant to the audit
- Provide TCWG with timely observations arising from the audit that are significant to their oversight of financial reporting
- Promote effective two-way communication
What must be communicated
1. The auditor’s responsibilities
That the auditor is responsible for forming and expressing an opinion, and that the audit does not relieve management or TCWG of their responsibilities.
2. Planned scope and timing of the audit
Including the approach to significant risks and to internal control. Care is needed here — too much detail can make procedures predictable and reduce their effectiveness.
3. Significant findings from the audit
- The auditor’s views on qualitative aspects of accounting practices, policies, estimates and disclosures
- Significant difficulties encountered during the audit
- Significant matters discussed with management
- Written representations being requested
- Circumstances affecting the form and content of the auditor’s report
- Other significant matters relevant to oversight of the financial reporting process
4. Auditor independence
In the case of listed entities, the auditor must communicate a statement that the engagement team and others have complied with relevant ethical requirements regarding independence, along with related safeguards.
When TCWG and management are the same people
This is the question that comes up every year. In many organisations the same individuals both run the business and supervise it — so TCWG equals management.
Students assume that in such cases communication becomes pointless, since management already knows everything. That assumption is wrong. Where TCWG and management are the same, the auditor must still make all the communications required by SA 260. Being told something in your capacity as manager is not the same as being told in your capacity as governor. The standard requires the communication to be made in the governance capacity, and it must be made.
What the standard does allow is practicality: if a matter has already been communicated to a person who has both roles, it need not be communicated again to that same person in their governance role — but the auditor must be satisfied that communicating with them as management adequately informs all of those with whom he would otherwise communicate in their governance capacity.
The communication process
- Form: significant findings should be communicated in writing where oral communication would not be adequate. Some matters, for listed entities in particular, must be in writing.
- Timing: on a sufficiently timely basis to enable TCWG to take appropriate action.
- Adequacy: the auditor must evaluate whether the two-way communication has been adequate for the purpose of the audit. If not, he must evaluate the effect on his assessment of risks, and on his ability to obtain sufficient appropriate evidence — and take appropriate action.
Documentation
Where matters have been communicated orally, the auditor documents them and when and to whom they were communicated. Where communicated in writing, a copy is retained in the audit documentation.
Frequently asked questions
Is SA 260 about communication with management?
No. SA 260 deals specifically with those charged with governance — the oversight body. Communication of internal control deficiencies to management is governed by SA 265.
If TCWG and management are the same, is communication still required?
Yes. The obligation does not disappear. The auditor must still make the required communications, and must be satisfied that communicating with those persons as management adequately reaches everyone he would otherwise address in their governance capacity.
Must SA 260 communications be in writing?
Not all. Significant findings must be in writing where oral communication would not be adequate, and independence matters for listed entities must be in writing. Oral communications must still be documented.
What is the difference between SA 260 and SA 265?
SA 260 covers communication with those charged with governance generally. SA 265 covers communicating deficiencies in internal control — significant deficiencies to TCWG, and other deficiencies to management.
Studying CA Inter or CA Final Audit?
SA 260 is usually examined as a case study on what must be communicated and to whom. Practice those from the CA Inter PARAM Question Bank or the CA Final PARAM Question Bank.
Mast raho. Smart padho. — CA Ravi Taori