● The actions of those charged with governance in response to developments in financial reporting, laws, accounting standards, corporate governance practices, and other related matters.
● The actions of those charged with governance in response to previous communications with the auditor.
(AU-C 260.A20-A21)
Significant Findings
The auditor should communicate the following matters:
● The auditor's views about qualitative aspects of the entity's significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures.
● Significant difficulties, if any, encountered during the audit.
● Disagreements with management, if any.
● Other findings or issues, if any, arising from the audit that are significant and relevant to those charged with governance.
(AU-C 260.12)
The auditor should communicate significant difficulties, if any, encountered during the audit; these may include:
● Significant delays in management providing required information.
● An unnecessarily brief time within which to complete the audit.
● Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
● The unavailability of expected information.
● Restrictions imposed on the auditors by management.
● Management's unwillingness to provide information about management's plans for dealing with the adverse effects of the conditions or events that lead the auditor to believe there is substantial doubt about the entity's ability to continue as a going concern.
(AU-C 260.A26)
The auditor should also communicate uncorrected misstatements, other than those the auditor believes are trivial. This information should include the effect they may have, individually or in the aggregate, on the auditor's opinion. Material uncorrected misstatements should be identified individually, and the auditor should request that they be corrected. So, too, the auditor should communicate the effect of uncorrected misstatements related to prior periods. (AU-C 260.13)
Unless all of those charged with governance are involved in managing the entity, the auditor also should communicate:
● Material corrected misstatements that were brought to the attention of management as a result of audit procedures.
● Written representations the auditor is requesting from management.
● The auditor's view of management's consultations with other accountants.
● Significant issues, if any, that were discussed, or the subject of correspondence, with management.
(AU-C 260.14)
Communication Process
The auditor should communicate, on a timely basis, with those charged with governance regarding the timing and expected general content of communications. (AU-C 260.15) The auditor may also communicate matters such as:
● The purpose of communications. When the purpose is clear, the auditor and those charged with governance are in a better position to have a mutual understanding of relevant issues and the expected actions arising from the communication process.
● The person(s) on the audit team and among those charged with governance who will communicate regarding particular matters.
● The form of communication.
● The auditor's expectation that communication will be two-way, and that those charged with governance will communicate with the auditor matters they consider relevant to the audit. Such matters might include strategic decisions that may significantly affect the nature, timing, and the extent of audit procedures; the suspicion or the detection of fraud; or concerns about the integrity or competence of senior management.
● The process for taking action and reporting back on matters communicated by the auditor.
● The process for taking action and reporting back on matters communicated by those charged with governance.
(AU-C 260.A35)
The auditor may discuss matters with management before approaching those charged with governance. In some circumstances, for instance where management's competence or integrity are involved, it would be appropriate to go directly to those charged with governance. In other circumstances, it might be helpful to go to management or to those in the internal audit function to clarify facts. (AU-C 260.A38)
Form of Communication
If it is the auditor's judgment that communication is not adequate, the auditor should communicate in writing significant findings from the audit (see “Matters to be Communicated”). If matters are communicated during the audit and satisfactorily resolved, those matters do not have to be documented. (AU-C 260.16) All other communications may be oral or in writing. When matters are communicated orally, the auditor should document them.
Timing of Communication
The auditor should communicate with those charged with governance on a sufficiently timely basis to enable those charged with governance to take appropriate action. (AU-C 260.18)
Evaluating the Communication Process
The auditor should evaluate whether the two-way communication between the auditor and those charged with governance has been adequate for the purpose of the audit. If the communication between the auditor and those charged with governance has not been adequate, the auditor should assess the effect on risk and the ability to obtain sufficient audit evidence, and should take appropriate action. (AU-C 216.19)
Qualitative Aspects of Accounting Practices
Auditors should seek to have an open and constructive communication with those charged with governance about the qualitative aspects of the entity's significant accounting practices. This communication may include comment on the acceptability of significant accounting practices.
When making this communication, the auditor should explain why he or she considers the practice not to be appropriate. When necessary, the auditor should request changes. If requested changes are not made, the auditor should inform those charged with governance that the auditor will consider the effect of this on the financial statements of the current and future years, and on the auditor's report.
The AU-C 260.A48 Appendix includes matters that may be communicated, such as the following:
Accounting Policies
● The appropriateness of the accounting policies to the particular circumstances of the entity, considering the need to balance the cost of providing information with the likely benefit to users of the entity's financial statements. Where acceptable alternative accounting policies exist, the communication may include identification of the financial statement items that are affected by the choice of significant policies as well as information on accounting policies used by similar entities.
● The initial selection of, and changes in, significant accounting policies, including the application of new accounting pronouncements. The communication may include the effect of the timing and method of adoption of a change in accounting policy on the current and future earnings of the entity, and the timing of a change in accounting policies in relation to expected new accounting pronouncements.
● The effect of significant accounting policies in controversial or emerging areas (or those unique to an industry, particularly when there is a lack of authoritative guidance or consensus).
● The effect of the timing of transactions in relation to the period in which they are recorded.
Accounting Estimates
For items for which estimates are significant, issues discussed in AU-C 540, Auditing Accounting Estimates, Including Fair Value Accounting