Arif Mahmood FCA,
REPORTING (CHAPTER 13) ACA (ICAEW), CFE
Partner
A. Qasem & Co.
COMMUNICATION WITH THOSE CHARGED
WITH GOVERNANCE (ISA 260)
Those charged with governance –
The person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing
the strategic direction of the entity and obligations related to the accountability of the entity.
This includes overseeing the financial reporting process.
For some entities in some jurisdictions, those charged with governance may include
management personnel, for example, executive members of a governance board of a private
or public sector entity, or an owner-manager.
Management –
The person(s) with executive responsibility for the conduct of the entity’s operations. For some
entities in some jurisdictions, management includes some or all of those charged with
governance, for example, executive members of a governance board, or an owner-manager.
COMMUNICATION WITH THOSE CHARGED
WITH GOVERNANCE (CONTINUATION)
The engagement letter should explain that auditors will only communicate matters
that come to their attention as a result of the performance of the audit. It should
state that the auditors are not required to design procedures for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.
The letter may also:
• Describe the form which any communications on governance matters will take
• Identify the appropriate persons with whom such communications will be made
• Identify any specific matters of governance interest which it has agreed are to be
communicated
MATTERS TO BE COMMUNICATED
The Auditor’s (a) The auditor is responsible for forming and expressing an
Responsibilities in Relation opinion on the financial statements that have been prepared by
management with the oversight of those charged with governance;
to the Financial Statement and
Audit (b) The audit of the financial statements does not relieve
management or those charged with governance of their
responsibilities.
Planned Scope and Timing The auditor shall communicate with those charged with governance
of the Audit an overview of the planned scope and timing of the audit, which
includes communicating about the significant risks identified by the
auditor.
MATTERS TO BE COMMUNICATED (CON..)
Significant Findings from the Audit
(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including
accounting policies, accounting estimates and financial statement disclosures.
(b) Significant difficulties, if any, encountered during the audit;
(c) Significant matters arising during the audit that were discussed, or subject to correspondence, with
management; and
(d) Written representations the auditor is requesting;
(e) Circumstances that affect the form and content of the auditor’s report, if any;
(f) Any other significant matters arising during the audit
MATTERS TO BE COMMUNICATED (CON..)
Auditor Independence
In the case of listed entities, the auditor shall communicate with those charged
with governance
❑Confirm that the engagement team have complied with ethical requirements
relating to independence.
❑Declare all relationships between the firm and the entity that may have a
bearing on independence, including details of fees for non-audit services.
❑Detail the related safeguards that have been applied to eliminate
identified threats to independence or reduce them to an acceptable level.
COMMUNICATING DEFICIENCIES IN
INTERNAL CONTROL
❑ Deficiencies in internal control
❑ Where deficiencies have been identified, the auditor shall determine whether those deficiencies are
significant.
❑ Significant deficiencies shall be communicated in writing to those charged with governance.
❑ Significant deficiencies shall be communicated in writing to management.
❑ Other deficiencies shall be communicated to management if the auditor considers them important.
❑ Written communication shall include a description of the deficiencies and their potential effects
❑ The written communication shall include sufficient information to enable those charged with governance and
management to understand the context, in particular:
– The purpose of the audit was for the auditor to express an opinion on the financial statements.
– The audit included consideration of internal controls relevant to the preparation of financial
statements, in order to design audit procedures, not in order to express an opinion on those controls.
– The matters being reported are limited to those deficiencies that the auditor has identified during the
audit that merit being reported to those charged with governance.
HOW?
❑Matters may be communicated orally or in writing
❑Certain matters must be communicated in writing, for example significant
deficiencies in internal controls.
❑Auditors should make clear that the audit is not designed to identify all relevant
matters connected with governance and they should have regard to local laws and
regulations, and local guidance on confidentiality when communicating with
management.
ATTRIBUTES FOR EFFECTIVE
COMMUNICATION TO THOSE CHARGED WITH
GOVERNANCE
❑ Timing: It should be sufficiently prompt to enable those charged with governance to take appropriate
action, for example, items relating to the financial statements should be reported before the financial
statements are approved.
❑ Extent, form and frequency: Should be appropriate. What is appropriate will depend on the size of the
entity and the way in which those charged with governance operate.
❑ Expectations: It should fulfil the expectations of the auditors and those charged with governance, and
therefore, the nature of the communication should be agreed early in the audit process, for example, in the
letter of engagement, so that misunderstandings are minimised.
❑ Management comments: Should be included where they are relevant and will aid the understanding of
those charged with governance.
❑ Previous year’s points: Should be repeated if no action has been taken and the auditors believe that they
are still relevant. If there are no new points to be made, the auditors should make that point.
❑ Disclaimer: Should be included so that third parties do not seek to rely on the information given within the
report.
UNMODIFIED AUDITOR’S REPORTS
Unmodified opinion Modified opinion
The auditor is satisfied that the evidence The auditor is either not satisfied with the
obtained is sufficient and appropriate and sufficiency or appropriateness of the
supports the view presented in the financial evidence that has been obtained,
statements prepared by the company’s compared with what could reasonably be
management. expected, or has issues with the content of
the financial statements.
TYPES OF MODIFIED OPINIONS
Nature of Matter Giving Rise to the Auditor’s Judgment about the Pervasiveness of the Effects or Possible
Modification Effects on the Financial Statements
Material but Not Pervasive Material and Pervasive
Financial statements are materially Qualified opinion Adverse opinion
misstated
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit
Evidence
AUDITING STANDARDS AND THE
AUDITOR’S REPORT
ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent
THE KEY REQUIREMENTS OF ISA 701
❑Key audit matters (KAMs) are selected from those matters communicated
with those charged with governance, taking into account significant risks,
auditor judgements, and events or transactions.
❑A description of each KAM is provided.
❑KAMs are not a substitute for a modified opinion as required by ISA 705.
❑An explanation of how the concept of materiality was applied in
planning and performing the audit is provided in the overview of the
scope of the audit with specific reference to KAMs.
SUSTAINABILITY IMPACT
✓ Climate-related risks that could give rise to material misstatements which (if uncorrected)
may relate to:
• Appropriateness or adequacy of disclosures. For example, the entity may not have
appropriately disclosed the effect of climate-related risks.
• Application of the entity’s accounting policies. For example, inappropriate recognition and
measurement of assets due to the effect of climate-related risks.
✓ The auditor would also need to consider the implications of non-compliance with any
relevant laws or regulations (such as the Companies Act requirements for climate-related risks
and any other information).
✓ The degree to which climate-related risks require auditor attention may result in determining
such a matter to be a key audit matter which may be affected by significant climate-related
auditor judgments or specific climate-related events or transactions.