2212 Those charged with governance

Oct-2012

CAS Guidance

Governance structures vary by jurisdiction and by entity, reflecting influences such as different cultural and legal backgrounds, and size and ownership characteristics. For example (CAS 260.A1):

• In some jurisdictions a supervisory (wholly or mainly non-executive) board exists that is legally separate from an executive (management) board (a “two-tier board” structure). In other jurisdictions, both the supervisory and executive functions are the legal responsibility of a single, or unitary, board (a “one-tier board” structure).
• In some entities, those charged with governance hold positions that are an integral part of the entity's legal structure, for example, company directors. In others, for example, some government entities, a body that is not part of the entity is charged with governance.
• In some cases, some or all of those charged with governance are involved in managing the entity. In others, those charged with governance and management comprise different persons.
• In some cases, those charged with governance are responsible for approving the entity's financial statements (in other cases management has this responsibility).

In most entities, governance is the collective responsibility of a governing body, such as a board of directors, a supervisory board, partners, proprietors, a committee of management, a council of governors, trustees, or equivalent persons. In some smaller entities, however, one person may be charged with governance, for example, the owner-manager where there are no other owners, or a sole trustee. When governance is a collective responsibility, a subgroup such as an audit committee or even an individual, may be charged with specific tasks to assist the governing body in meeting its responsibilities. Alternatively, a sub-group or individual may have specific, legally identified responsibilities that differ from those of the governing body (CAS 260.A2).

Such diversity means that it is not possible for this CAS to specify for all audits the person(s) with whom the auditor is to communicate particular matters. Also, in some cases the appropriate person(s) with whom to communicate may not be clearly identifiable from the applicable legal framework or other engagement circumstances, for example, entities where the governance structure is not formally defined, such as some family-owned entities, some not-for-profit organizations, and some government entities. In such cases, the auditor may need to discuss and agree with the engaging party the relevant person(s) with whom to communicate. In deciding with whom to communicate, the auditor's understanding of an entity's governance structure and processes obtained in accordance with CAS 315 is relevant. The appropriate person(s) with whom to communicate may vary depending on the matter to be communicated (CAS 260.A3).

CAS 600 includes specific matters to be communicated by group auditors with those charged with governance (OAG Audit 2344). When the entity is a component of a group, the appropriate person(s) with whom the component auditor communicates depends on the engagement circumstances and the matter to be communicated. In some cases, a number of components may be conducting the same businesses within the same system of internal control and using the same accounting practices. Where those charged with governance of those components are the same (e.g., common board of directors), duplication may be avoided by dealing with these components concurrently for the purpose of communication (CAS 260.A4).

CAS Guidance

When considering communicating with a subgroup of those charged with governance, the auditor may take into account such matters as (CAS 260.A5):

• the respective responsibilities of the subgroup and the governing body;
• the nature of the matter to be communicated;
• relevant legal or regulatory requirements; and
• whether the subgroup has the authority to take action in relation to the information communicated, and can provide further information and explanations the auditor may need.

When deciding whether there is also a need to communicate information, in full or in summary form, with the governing body, the auditor may be influenced by the auditor's assessment of how effectively and appropriately the subgroup communicates relevant information with the governing body. The auditor may make explicit in agreeing the terms of engagement that, unless prohibited by law or regulation, the auditor retains the right to communicate directly with the governing body (CAS 260.A6).

Audit committees (or similar subgroups with different names) exist in many jurisdictions. Although their specific authority and functions may differ, communication with the audit committee, where one exists, has become a key element in the auditor's communication with those charged with governance. Good governance principles suggest that (CAS 260.A7):

• the auditor will be invited to regularly attend meetings of the audit committee;
• the chair of the audit committee and, when relevant, the other members of the audit committee, will liaise with the auditor periodically; and
• the audit committee will meet the auditor without management present at least annually.

CAS Guidance

In some cases, all of those charged with governance are involved in managing the entity, and the application of communication requirements is modified to recognize this position. In such cases, communication with person(s) with management responsibilities may not adequately inform all of those with whom the auditor would otherwise communicate in their governance capacity. For example, in a company where all directors are involved in managing the entity, some of those directors (e.g., one responsible for marketing) may be unaware of significant matters discussed with another director (e.g., one responsible for the preparation of the financial statements) (CAS 260.A8).