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ISA 260 Communications of Audit Matters with Those Charged with Governance

ISA 260 Communications of Audit Matters with Those Charged with Governance
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ISA 260, “Communication with Those Charged with Governance,” is an auditing standard issued by the International Auditing and Assurance Standards Board (IAASB). It provides guidance to auditors on how to communicate audit matters with those charged with governance, such as the board of directors or audit committee. Effective communication with those charged with governance is critical to ensure that they are informed of significant audit findings and can fulfill their oversight responsibilities.

 

Definitions:

Those Charged with Governance: Refers to the individuals or entities that are responsible for overseeing the strategic direction, performance, and financial reporting of an entity. This may include the board of directors, audit committee, or other similar governing bodies.

Communications of Audit Matters:

Refers to the written or oral communication of significant audit findings, including deficiencies in internal control, suspected or actual fraud, and other matters that are relevant to those charged with governance.

 

Explanations:

ISA 260 requires auditors to communicate certain matters related to the audit with those charged with governance. These communications are intended to provide those charged with governance with relevant information to fulfill their oversight responsibilities and make informed decisions. The standard sets out the following requirements for auditors:

Timing and Frequency of Communications:

Auditors are required to communicate audit matters with those charged with governance in a timely manner, as soon as practicable after they are identified. The frequency and timing of these communications may vary depending on the nature and significance of the matters being communicated.

Nature of Communications:

Communications with those charged with governance should be clear, concise, and focused on matters that are significant to the audit. They should include relevant details and explanations to help those charged with governance understand the implications of the matters being communicated.

Form and Medium of Communications:

Communications with those charged with governance may be in writing or oral form, depending on the circumstances. Written communications may include audit reports, letters, or other written correspondence, while oral communications may be in the form of presentations, meetings, or discussions.

 

Examples:

Communication of Deficiencies in Internal Control: If the auditor identifies significant deficiencies in the entity’s internal control system during the audit, they are required to communicate these findings to those charged with governance. For example, if the auditor identifies that the entity’s controls over financial reporting are not effective in preventing or detecting material misstatements, they should communicate this to the audit committee or the board of directors. The communication should include details of the deficiencies identified, their potential impact on the financial statements, and any recommendations for improvement.

Communication of Suspected or Actual Fraud: If the auditor identifies suspected or actual fraud during the audit, they are required to communicate this to those charged with governance. For example, if the auditor becomes aware of a potential fraud scheme involving management, they should communicate this to the audit committee or the board of directors. The communication should include details of the suspected or actual fraud, the potential impact on the financial statements, and any recommendations for further investigation or action.

Communication of Significant Accounting Estimates and Disclosures: If the auditor identifies significant accounting estimates or disclosures during the audit, they are required to communicate these matters to those charged with governance. For example, if the auditor identifies a significant estimate related to the valuation of inventory, they should communicate this to the audit committee or the board of directors. The communication should include details of the estimate or disclosure, the potential impact on the financial statements, and any significant assumptions or uncertainties involved.

 

Case Studies:

XYZ Corporation is a publicly listed company. During the audit, the auditor identifies significant deficiencies in the entity’s internal control system, particularly in the area of revenue recognition. The deficiencies are identified as weaknesses in the design and operation of controls, which could potentially result in material misstatements in the financial statements. The auditor communicates these findings in writing to the audit committee, providing detailed information on the deficiencies identified, their potential impact on the financial statements, and recommendations for improvement. The communication also includes a request for a meeting with the audit committee to further discuss the findings and recommendations.

ABC Non-profit organization is undergoing an audit of its financial statements. During the audit, the auditor becomes aware of a suspected fraud scheme involving the organization’s executive director, who is suspected of misappropriating funds for personal use. The auditor immediately communicates this suspected fraud to the board of directors in an oral communication, providing details of the suspected scheme and the potential impact on the financial statements. The communication also includes a recommendation for further investigation and appropriate action to be taken by the board of directors.

DEF Ltd is a privately held company. During the audit, the auditor identifies a significant accounting estimate related to the valuation of intangible assets. The estimate involves significant management judgment and is based on assumptions that are subjective and sensitive to changes in market conditions. The auditor communicates this significant accounting estimate to the board of directors in writing, providing details of the estimate, the potential impact on the financial statements, and the key assumptions and uncertainties involved. The communication also includes a recommendation for enhanced disclosures in the financial statements to provide users with a better understanding of the estimate.

In each of these case studies, the auditor complies with the requirements of ISA 260 by communicating significant audit matters with those charged with governance. The communications are timely, clear, and focused on matters that are relevant and significant to the audit. They include relevant details, explanations, and recommendations to help those charged with governance understand the implications of the matters being communicated and take appropriate actions.

 

In conclusion, ISA 260, “Communication with Those Charged with Governance,” is a critical auditing standard that guides auditors in communicating audit matters with those charged with governance. Effective communication is essential to ensure that those charged with governance are informed of significant audit findings and can fulfill their oversight responsibilities. Examples of such matters include deficiencies in internal control, suspected or actual fraud, and significant accounting estimates and disclosures. Case studies highlight real-world scenarios where auditors comply with the requirements of ISA 260 by communicating these matters in a timely, clear, and focused manner. By adhering to the requirements of ISA 260, auditors can enhance the transparency and reliability of the audit process and contribute to the overall quality of financial reporting.