2213 Communication process

Dec-2023

CAS Guidance

Clear communication of the auditor’s responsibilities, the planned scope and timing of the audit, and the expected general content of communications helps establish the basis for effective two-way communication (CAS 260.A37).

Matters that may also contribute to effective two-way communication include discussion of (CAS 260.A38):

• The purpose of communications. When the purpose is clear, the auditor and those charged with governance are better placed to have a mutual understanding of relevant issues and the expected actions arising from the communication process.

• The form in which communications will be made.

• The person(s) in the audit team and among those charged with governance who will communicate regarding particular matters.

• 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, for example, strategic decisions that may significantly affect the nature, timing and extent of audit procedures, the suspicion or the detection of fraud, and concerns with 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.

The communication process will vary with the circumstances, including the size and governance structure of the entity, how those charged with governance operate, and the auditor’s view of the significance of matters to be communicated. Difficulty in establishing effective two-way communication may indicate that the communication between the auditor and those charged with governance is not adequate for the purpose of the audit (CAS 260.A39).

Many matters may be discussed with management in the ordinary course of an audit, including matters required by this CAS to be communicated with those charged with governance. Such discussions recognize management’s executive responsibility for the conduct of the entity’s operations and, in particular, management’s responsibility for the preparation of the financial statements (CAS 260.A41).

Before communicating matters with those charged with governance, the auditor may discuss them with management, unless that is inappropriate. For example, it may not be appropriate to discuss questions of management’s competence or integrity with management. In addition to recognizing management’s executive responsibility, these initial discussions may clarify facts and issues, and give management an opportunity to provide further information and explanations. Similarly, when the entity has an internal audit function, the auditor may discuss matters with the internal auditor before communicating with those charged with governance (CAS 260.A42).

Those charged with governance may be required by law or regulation, or may wish, to provide third parties, for example, bankers or certain regulatory authorities, with copies of a written communication from the auditor. In some cases, disclosure to third parties may be illegal or otherwise inappropriate. When a written communication prepared for those charged with governance is provided to third parties, it may be important in the circumstances that the third parties be informed that the communication was not prepared with them in mind, for example, by stating in written communications with those charged with governance (CAS 260.A43):

(a) that the communication has been prepared for the sole use of those charged with governance and, where applicable, the group management and the group auditor, and is not to be relied upon by third parties;

(b) that no responsibility is assumed by the auditor to third parties; and

(c) any restrictions on disclosure or distribution to third parties.

In some jurisdictions the auditor may be required by law or regulation to, for example (CAS 260.A44):

• Notify a regulatory or enforcement body of certain matters communicated with those charged with governance. For example, in some countries the auditor has a duty to report misstatements to authorities where management and those charged with governance fail to take corrective action.

• Submit copies of certain reports prepared for those charged with governance to relevant regulatory or funding bodies, or other bodies such as a central authority in the case of some public sector entities.

• Make reports prepared for those charged with governance publicly available.

Unless required by law or regulation to provide a third party with a copy of the auditor’s written communications with those charged with governance, the auditor may need the prior consent of those charged with governance before doing so (CAS 260.A45).

CAS Guidance

In the case of audits of smaller entities, the auditor may communicate in a less structured manner with those charged with governance than in the case of listed or larger entities (CAS 260.A40).

CAS Guidance

Effective communication may involve structured presentations and written reports as well as less structured communications, including discussions. The auditor may communicate matters other than those identified in CAS 260 paragraphs 19-20 either orally or in writing. Written communications may include an engagement letter that is provided to those charged with governance (CAS 260.A46).

In addition to the significance of a particular matter, the form of communication (e.g., whether to communicate orally or in writing, the extent of detail or summarization in the communication, and whether to communicate in a structured or unstructured manner) may be affected by such factors as (CAS 260.A47):

• Whether a discussion of the matter will be included in the auditor’s report. For example, when key audit matters are communicated in the auditor’s report, the auditor may consider it necessary to communicate in writing about the matters determined to be key audit matters.

• Whether the matter has been satisfactorily resolved.

• Whether management has previously communicated the matter.

• The size, operating structure, control environment, and legal structure of the entity.

• In the case of an audit of special purpose financial statements, whether the auditor also audits the entity’s general purpose financial statements.

• Legal requirements. In some jurisdictions, a written communication with those charged with governance is required in a prescribed form by local law.

• The expectations of those charged with governance, including arrangements made for periodic meetings or communications with the auditor.

• The amount of ongoing contact and dialogue the auditor has with those charged with governance.

• Whether there have been significant changes in the membership of a governing body.

When a significant matter is discussed with an individual member of those charged with governance, for example, the chair of an audit committee, it may be appropriate for the auditor to summarize the matter in later communications so that all of those charged with governance have full and balanced information (CAS 260.A48).

The engagement partner uses professional judgment in determining which written communications to review, taking into account the nature and circumstances of the audit engagement. For example, it may not be necessary for the engagement partner to review communications between the engagement team and management in the ordinary course of the audit (CAS 220.A98).

CAS Guidance

Timely communication throughout the audit contributes to the achievement of robust two-way dialogue between those charged with governance and the auditor. However, the appropriate timing for communications will vary with the circumstances of the engagement. Relevant circumstances include the significance and nature of the matter, and the action expected to be taken by those charged with governance. For example (CAS 260.CA49):

• Communications regarding planning matters may often be made early in the audit engagement and, for an initial engagement, may be made as part of agreeing the terms of the engagement.

• It may be appropriate to communicate a significant difficulty encountered during the audit as soon as practicable if those charged with governance are able to assist the auditor to overcome the difficulty, or if it is likely to lead to a modified opinion. Similarly, the auditor may communicate orally to those charged with governance as soon as practicable significant deficiencies in internal control that the auditor has identified, prior to communicating these in writing as required by CAS 265.9(1).

• When CAS 701 applies, the auditor may communicate preliminary views about key audit matters when discussing the planned scope and timing of the audit (see paragraph A13), and the auditor also may have more frequent communications to further discuss such matters when communicating about significant audit findings.

• Communications regarding independence may be appropriate whenever significant judgments are made about threats to independence and related safeguards, for example, when accepting an engagement to provide non audit services, and at a concluding discussion. [In ISA 260, this bullet states: Communications regarding independence may be appropriate whenever significant judgments are made about threats to independence and how threats to independence that are not at an acceptable level will be addressed, for example, when accepting an engagement to provide non‑audit services, and at a concluding discussion.]

• Communications regarding findings from the audit, including the auditor’s views about the qualitative aspects of the entity’s accounting practices, may also be made as part of the concluding discussion.

• When auditing both general purpose and special purpose financial statements, it may be appropriate to coordinate the timing of communications.

Other factors that may be relevant to the timing of communications include (CAS 260.A50):

• The size, operating structure, control environment, and legal structure of the entity being audited.

• Any legal obligation to communicate certain matters within a specified timeframe.

• The expectations of those charged with governance, including arrangements made for periodic meetings or communications with the auditor.

• The time at which the auditor identifies certain matters, for example, the auditor may not identify a particular matter (e.g., noncompliance with a law) in time for preventive action to be taken, but communication of the matter may enable remedial action to be taken.

CAS Guidance

The auditor need not design specific procedures to support the evaluation of the two-way communication between the auditor and those charged with governance; rather, that evaluation may be based on observations resulting from audit procedures performed for other purposes. Such observations may include (CAS 260.A51):

• The appropriateness and timeliness of actions taken by those charged with governance in response to matters raised by the auditor. Where significant matters raised in previous communications have not been dealt with effectively, it may be appropriate for the auditor to inquire as to why appropriate action has not been taken, and to consider raising the point again. This avoids the risk of giving an impression that the auditor is satisfied that the matter has been adequately addressed or is no longer significant.

• The apparent openness of those charged with governance in their communications with the auditor.

• The willingness and capacity of those charged with governance to meet with the auditor without management present.

• The apparent ability of those charged with governance to fully comprehend matters raised by the auditor, for example, the extent to which those charged with governance probe issues, and question recommendations made to them.

• Difficulty in establishing with those charged with governance a mutual understanding of the form, timing and expected general content of communications.

• Where all or some of those charged with governance are involved in managing the entity, their apparent awareness of how matters discussed with the auditor affect their broader governance responsibilities, as well as their management responsibilities.

• Whether the two-way communication between the auditor and those charged with governance meets applicable legal and regulatory requirements.

As noted in paragraph 4, effective two-way communication assists both the auditor and those charged with governance. Further, CAS 315 identifies participation by those charged with governance, including their interaction with the internal audit function, if any, and external auditors, as an element of the entity’s control environment. Inadequate two-way communication may indicate an unsatisfactory control environment and influence the auditor’s assessment of the risks of material misstatement. There is also a risk that the auditor may not have obtained sufficient appropriate audit evidence to form an opinion on the financial statements (CAS 260.A52).

If the two-way communication between the auditor and those charged with governance is not adequate and the situation cannot be resolved, the auditor may take such actions as (CAS 260.A53):

• modifying the auditor’s opinion on the basis of a scope limitation;

• obtaining legal advice about the consequences of different courses of action;

• communicating with third parties (e.g., a regulator), or a higher authority in the governance structure that is outside the entity, such as the owners of a business (e.g., shareholders in a general meeting), or the responsible government minister or parliament in the public sector; and

• withdrawing from the engagement, where withdrawal is possible under applicable law or regulation.

CAS Guidance

Documentation of oral communication may include a copy of minutes prepared by the entity retained as part of the audit documentation where those minutes are an appropriate record of the communication (CAS 260.A54).