Communications Between the Auditor and Those Charged with .../media/site/business-and-accounting-res… · those charged with governance about any significant audit findings in writing

1Canadian Auditing Standards Implementation — Practitioner Support

Communications Between the Auditor and Those Charged with Governance: What, When and How?

This Implementation Tool for Auditors (Tool) will help you implement the Canadian Auditing Standards (CASs) requirements related to communica-tion with those charged with governance. This Tool provides you in a practical tabular format a list of required matters to be communicated with those charged with governance, and includes relevant references to CASs, required form of communication and suggested timing for your communication of required matters of audit relevance. You need to adapt the Tool to your audit engagement; not all CASs will necessarily apply to your engagement. Effective two-way communication can assist you and those charged with governance with your respective responsibilities; discover how in the Tool!

Before going to the Tool you may want to see the answers to the following questions:

1. My client is an owner-managed entity. Do I have to apply CAS requirements for communication with those charged with governance?

2. Who are those charged with governance?

3. How can I identify those charged with governance?

4. How can I apply the requirements for communication with those charged with governance to my audit of a small non-complex entity?

5. How do I use the Tool?

CANADIAN AUDITING STANDARDS IMPLEMENTATION PRACTITIONER SUPPORT

Implementation Tool for Auditors

STANDARDS DISCUSSEDCAS 260, Communication with those charged

with governance

CAS 265, Communicating deficiencies in internal control to those charged with governance and management




1. My client is an owner-managed entity. Do I have to apply CAS requirements for communication with those charged with governance?

Yes. Even when your client is a small entity managed and governed by an owner-manager, CAS communication requirements apply to your audit engagement. These requirements are intended to be scalable and will help you achieve an effective two-way communication between you as the auditor and the owner-manager client (i.e., those charged with gov-ernance). The communication process does not need to be complicated. This Tool can guide you in your communications with your owner- manager clients.

2. Who are those charged with governance?

“Those charged with governance” are the persons or organizations with responsibility for overseeing the strategic direction of an entity and deal-ing with the obligations related to the accountability of that entity. They are also responsible for overseeing the financial reporting process.

3. How can I identify those charged with governance?

Because CAS 260 is meant to apply to all sizes and types of entities and a variety of governance structures, it does not specify for all audits the per-sons with whom the auditor must communicate. Accordingly, identifying those charged with governance depends on the circumstances of each entity. In many cases, those charged with governance may be specifically identified in an entity’s incorporating or other governing legislation, or in other documents, such as a formal organizational structure. Where the

legislative or organizational structure is not clearly defined, as is the case in many not-for-profit organizations and family-owned entities, you may need to discuss and agree with whomever is engaging you as to whom you are to communicate with.

There are also situations in which the auditor has to communicate with a subgroup of those charged with governance, for example, an audit com-mittee. If this is the case, the auditor is required to determine whether to communicate with the entire governing body as well.

4. How can I apply the requirements for communication with those charged with governance to my audit of a small non-complex entity?

The requirements for communication with those charged with govern-ance are intended to be scalable. For example, when auditing smaller enti-ties, the auditor may communicate in a less structured manner with those charged with governance than when auditing listed or larger entities.

Generally, oral communication is adequate, particularly when there is ongoing contact and dialogue with those charged with governance. In your audit engagement, if you don’t have to provide communication on independence, the only written communication required would be about significant deficiencies in internal control. You need to communicate with those charged with governance about any significant audit findings in writing only if, in your professional judgment, oral communication would not be adequate. Oral communication may not be adequate, for example, when a matter is complex or controversial or has legal implications.

When you perform an audit under CASs, no matter the type or size of the entity, you are required to communicate with those charged with governance certain matters of audit relevance on a timely basis!





In addition, when all of those charged with governance are also involved in managing the entity, you may have already communicated many mat-ters to management that do not need to be communicated again to the same persons in their governance role. You do, however, need to be satis-fied that communication with those in management informs all those who would otherwise be informed in their governance role.

5. How do I use the Tool?

The Tool illustrates your communications with those charged with gov-ernance under Canadian Auditing Standards (CASs) with a focus on the “what,” “when” and “how.”

The “WHAT” column — Matters to be communicated

The Tool lists the matters that you, as the auditor, must communicate with those charged with governance on a timely basis. You may also have cer-tain other communications and reporting responsibilities to those charged with governance established by applicable laws or regulations in relation to matters arising from the audit, which are not covered in this Tool.

The “WHEN” column — Suggested timing

Suggested timing for communication is indicated in the Tool under the phases of the audit process1. The appropriate timing for communications will vary with the significance and nature of the matter involved, and the action expected to be taken by those charged with governance. Those charged with governance may also suggest the appropriate timing for

certain communications. Accordingly, in some circumstances specific to your audit engagement, you may decide that it is more appropriate to communicate a matter earlier than the suggested timing indicated in the Tool.

The “HOW” column — Form of communication

Generally, oral communication is adequate as long as it takes place on a timely basis. The form of communication will vary with the circumstances, including the size and governance structure of the entity, how those charged with governance operate and your view of the significance of matters to be communicated. For example, the auditor’s communication with those charged with governance about fraud may be made orally or in writing. But, due to the nature and sensitivity of fraud involving senior management, or if fraud results in a material misstatement in the financial statements, the auditor may consider it necessary to report such matters in writing. The Tool indicates where written communication is required.

The Tool lists also the relevant references to CAS 260, CAS 265 and other CASs that contain requirements for communication with those charged with governance.

Communication requirements are spread throughout the CASs and apply to audits of all entities. These communication requirements are scalable and aim to promote effective two-way communication between the audit-or and those charged with governance. Effective two-way communication can assist you and those charged with governance with your respective

1 For details related to the phases of the audit process, refer to the “CAS Support Tool” on the CICA Web site at www.cica.ca/cas.





responsibilities in many ways as described in the following table:

Effective two-way communication can assist:

both the auditor and those charged with governance in:

the auditor in:

those charged with governance in:

Don’t forget to document your file!Where required matters are communicated orally, the auditor must include them in the audit documentation, as well as specify when and to whom they were communicated. Where matters have been communicated in writing, the auditor must retain a copy of the communication as part of the audit documentation. Refer to CAS 230 paragraphs 8 to 11 for form, content and extent of audit documentation.





“WHAT” Suggested timing “WHEN” “HOW”Topic CAS reference Matters to be communicated with those charged with

governance on a timely basisPre-audit Planning Performing Conclusions

and reportingForm of

communication

Auditor’s responsibili-ties

CSQC 1 paragraph 30(a)

The identity and role of the engagement partner. 9 Oral or written communication

CAS 260 paragraph 14

The responsibilities of the auditor in the financial state-ment audit, including:

• The auditor is responsible for forming and express-ing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance; and

• The audit of the financial statements does not relieve management or those charged with govern-ance of their responsibilities.

Oral or written communication

(For example, providing those charged with governance with a copy of the engagement letter may be an ap-propriate way to communicate with them.)








communication

Auditor independence

CAS 260 paragraphs 17, 20

(In the case of listed entities) matters related to auditor independence, which include:

• A statement that the engagement team and others in the firm, as appropriate, the firm and, when applicable, network firms have complied with the relevant ethical requirements on independence;

• All relationships and other matters between the firm, network firms and the entity that, in the aud-itor’s professional judgment, may reasonably be thought to affect independence. This will include total fees charged during the period covered by the financial statements for audit and non-audit services provided by the firm and network firms to the entity and to components controlled by the entity. These fees will be allocated to categories that are appropriate for assisting those charged with governance in assessing the effect of services on the independence of the auditor; and

• The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.

9 9 Written communi-cation required








communication

Planning and timing of the audit or group audit


The form, timing and expected general content of communications.

9 Oral or written communication

CAS 600 paragraphs 49a) – 49b)

Matters related to the planning of a group audit, which include:

• An overview of the type of work to be performed on the financial information of the components.

• An overview of the nature of the group engage-ment team’s planned involvement in the work to be performed by the component auditors on the financial information of significant components.


CAS 260 paragraphs 15, A13

Refer also to CAS 260 paragraph A14

An overview of the planned scope and timing of the audit, such as:

• How the auditor proposes to address the signifi-cant risks of material misstatement, whether due to fraud or error.

• The auditor’s approach to internal control relevant to the audit.

• The application of the concept of materiality in the context of an audit.









communication

Fraud CAS 240 paragraphs 21, 38c)i), 40 – 42, A61

Matters related to fraud, which include:

Identified or suspected fraud (involving manage-ment, employees who have significant roles in internal control, or others where the fraud results in a material misstatement in the financial statements).

Nature, timing and extent of audit procedures neces-sary to complete the audit in the case of suspected fraud involving management.

The auditor’s withdrawal from the engagement and the reasons for the withdrawal (when the auditor is unable to continue the engagement as a result of a misstate-ment resulting from fraud or suspected fraud).

Any other matters related to fraud that are, in the audi-tor’s judgment, relevant to those charged with gover-nance responsibilities.

9 9 Oral or written communication

(Due to the nature and sensitivity of fraud involving se-nior management, or when fraud results in a mate-rial misstatement in the financial statements, the auditor reports such matters on a timely basis and may consider it necessary to also report such mat-ters in writing.)

Non-com-pliance with laws and regulations

CAS 250 paragraphs 14, 19, 22 – 24

Matters related to non-compliance with laws and regulations, which include:

Suspected non-compliance with laws and regulations.

Non-compliance with laws and regulations, other than when it is clearly inconsequential.









communication

Significant deficiencies in internal control

CAS 265 paragraphs 9, 11, A14

Refer also to CAS 260 paragraph A40

Significant deficiencies in internal control identified during the audit, including the following:

A description of the deficiencies and an explanation of their potential effects.

Explanation that:

The purpose of the audit was for the auditor to express an opinion on the financial statements;

The audit included consideration of internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropri-ate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control; and

The matters being reported are limited to those defi-ciencies that the auditor has identified during the audit and has concluded are of sufficient importance to merit being reported to those charged with governance.

9 9 Written communi-cation required

(Regardless of the timing of the written communi-cation of signifi-cant deficiencies, the auditor may communicate these orally in the first instance to management and, when appropriate, to those charged with governance to assist them in taking timely remedial action to minimize the risks of material misstatement. Do-ing so, however, does not relieve the auditor of the responsibility to communicate the significant defi-ciencies in writ-ing.)








communication

Significant findings from the audit

CAS 260 paragraph 16a)

Refer also to CAS 260 Appendix 2

The auditor’s views about significant qualitative as-pects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures. Explanation of why the audi-tor considers a significant accounting practice that is acceptable under the applicable financial reporting framework may not to be the most appropriate for the particular circumstances of the entity.

9 9 9 Written commu-nication if, in the auditor’s profes-sional judgment, oral communica-tion would not be adequate.

CAS 505 paragraph 9

Unreasonable management’s refusal to allow the audi-tor to send a confirmation request, or the inability to obtain relevant and reliable audit evidence from alter-native audit procedures.

9 9 Written commu-nication if, in the auditor’s profes-sional judgment, oral communica-tion would not be adequate.

CAS 260 paragraphs 16b), A18

CAS 705 paragraphs 11, 12

Significant difficulties encountered during the audit, such as significant delays in management provid-ing required information, an unnecessarily brief time within which to complete the audit, the unavailability of expected information and restrictions imposed on the auditor by management.

Limitation to the scope of the audit imposed by man-agement after the auditor has accepted the engage-ment (such limitation that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements).









communication

Significant findings from the audit

CAS 260 paragraphs 16c)i), A19

Significant matters arising from the audit that were discussed, or subject to correspondence, with manage-ment. Such matters may include:

Business conditions affecting the entity, and business plans and strategies that may affect the risks of mate-rial misstatement.

Concerns about management’s consultations with other accountants on accounting or auditing matters.

Discussions or correspondence in connection with the initial or recurring appointment of the auditor regard-ing accounting practices, the application of auditing standards or fees for audit or other services.


CAS 260 paragraph 16c)ii)

Written representations that the auditor has requested from management.

9 Written commu-nication if, in the auditor’s profes-sional judgment, oral communica-tion would not be adequate.

CAS 260 paragraphs 16d), A20

Other matters arising from the audit that, in the audi-tor’s professional judgment, are significant to the oversight of the financial reporting process (e.g., mate-rial misstatements of fact or material inconsistencies in information accompanying the audited financial state-ments that have been corrected).

9 Written commu-nication if, in the auditor’s profes-sional judgment, oral communica-tion would not be adequate.

Findings from the group audit

CAS 600 paragraphs 49c) – 49e), A66

Matters related to a group audit which include: Oral or written communication








communication

• Instances where the group engagement team’s evaluation of the work of a component auditor gave rise to a concern about the quality of that auditor’s work.

9

• Any limitations on the group audit, for example, where the group engagement team’s access to information may have been restricted.

9 9

• Fraud or suspected fraud involving group manage-ment, component management, employees who have significant roles in group-wide controls or others where the fraud resulted in a material mis-statement of the group financial statements.

9








communication

Uncorrected misstatements

CAS 450 paragraphs 12 – 13

CAS 510 paragraph 7


Refer also to CAS 260 paragraph 7

Matters related to uncorrected misstatement which include:

Uncorrected misstatements2 and the effect that they, individually or in aggregate, may have on the opinion in the auditor’s report.

Individual material uncorrected misstatements.

The effect of uncorrected misstatements related to prior periods on the relevant classes of transactions, ac-count balances or disclosures, and the financial state-ments as a whole.

Misstatements in the opening balances that could ma-terially affect the current period’s financial statements (initial audit engagement).

The auditor must request that uncorrected misstate-ments be corrected.

(If the auditor withdraws from an engagement, as contemplated by CAS 705 paragraph 13b)i), before withdrawing, the auditor must communicate with those charged with governance about any matters regarding misstatements identified during the audit that would have given rise to a modification of the opinion.)


Related parties


Significant matters arising during the audit in connec-tion with the entity’s related parties.


2 Misstatements, other than those that are clearly trivial, that the auditor has accumulated during the audit and that have not been corrected by management.








communication

Subsequent events

CAS 560 paragraphs 7b) –7 c), 10a), 13b), 14a) and 17

Refer also to CAS 560 paragraph 10

Matters related to facts that become known to the auditor after the date of the auditor’s report that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report. These include:

Appropriate action to be taken by the auditor if finan-cial statements are not amended for facts that became known to the auditor after the date of the auditor’s report but before the date the financial statements are issued or if an amended auditor’s report is not issued, where necessary.

Appropriate action to be taken by the auditor to prevent reliance on the auditor’s report for facts that became known to the auditor after the financial state-ments have been issued.

(The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report.)

When an auditor be-comes aware of a fact that, had it been known at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report.

Oral or written communication

Going concern


Events or conditions identified that may cast significant doubt on the entity’s ability to continue as a going con-cern. Such communication must include the following:

Whether the events or conditions constitute a material uncertainty.

Whether the use of the going concern assumption is appropriate in the preparation of the financial state-ments.

The adequacy of related disclosures in the financial statements.









communication

Modified opinion

CAS 705 paragraphs 19a), 28

Matters related to a modified opinion, which include:

Material misstatement of the financial statements that relates to the non-disclosure of information required to be disclosed.

Proposed wording of the modification of opinion and the circumstances that led to the expected modifica-tion.


Emphasis of Matter and Other Matter paragraphs

CAS 706 paragraph 9

Expectation and proposed wording of an “emphasis of matter” or an “other matter” paragraph in the auditor’s report.


Material mis-statement that affects prior pe-riod financial statements


Material misstatements that affect the prior period financial statements on which the predecessor auditor had previously reported without modification.

The auditor must request that the predecessor auditor be informed. (Auditors should refer to their Rules of Professional Conduct/Code of Ethics of Chartered Ac-countants for further appropriate actions to take.)









communication

Other infor-mation in documents containing au-dited financial statements

CAS 720 paragraphs 10, 13, 16

Matters related to other information, which is included, either by law, regulation or custom, in a document con-taining audited financial statements and the auditor’s report. These matters include:

Necessary correction of a material misstatement of fact in the other information and the auditor’s concerns about the other information.

If the material inconsistencies (i.e., the other informa-tion contradicts information contained in the audited financial statements) become known to the auditor:

Prior to the date of auditor’s report:

Necessary revision of the other information due to material inconsistencies and appropriate action that needs to be taken by the auditor (i.e., to include in the auditor’s report an “other matter” paragraph describing the material inconsistency, withhold the auditor’s report or withdraw from the engagement, where withdrawal is possible under applicable law or regulation).

Subsequent to the date of the auditor’s report:

Necessary revision of the other information due to ma-terial inconsistencies and the auditor’s concerns about the other information.






Resources on Communication with Those Charged with Governance

Visit the Canadian Institute of Chartered Accountants CAS website at www.cica.ca/CAS, where you will find companion resources and other resources on communication with those charged with governance:

• Companion resources:

— FAQ for Auditors — Questions Auditors Frequently Ask When Implementing CAS Requirements Related to Communications with Those Charged with Governance

— Client Briefing for Auditors — The Importance of Effective Two-Way Communication Between the Auditor and the Client (i.e., Those Charged with Governance)

• Other resources:

— CAS — Support Tool

— Communicating Successfully with Your Stakeholders (guide)

— Director Alert — New Canadian Auditing Standards – questions for directors to ask





About this publication

The Canadian Institute of Chartered Accountants (CICA) through its Guidance and Support group undertakes initiatives to support practitioners and their clients in the implementation of standards. As part of these initia-tives, the CICA has created the Advisory Group on Implementation of Canadian Auditing Standards to advise in the identification of issues related to the implementation of the Canadian Auditing Standards (CASs) and in the development of non-authoritative implementation guidance related to these issues.

This publication has been prepared by the CICA’s Guidance and Support group staff with the advice of the advisory group. It provides non-authoritative guidance and has not been adopted, endorsed, approved or otherwise acted upon by the Auditing and Assurance Standards Board, any CICA board or committee, the governing body or membership of the CICA or any provincial institute/Ordre or the organizations represented by the advisory group members.

Auditors are expected to use professional judgment in determining whether the material in this publication is both appropriate and relevant to the circumstances of each audit engagement. This publication is based on the CASs as updated in May 2011.

The CICA expresses its appreciation to the members of the Advisory Group on Implementation of Canadian Auditing Standards and to CICA staff for preparing this publication.

Gordon Beal, CA Director, Guidance and Support group The Canadian Institute of Chartered Accountants

Advisory Group on Implementation of Canadian Auditing Standards

Julie Corden, CADeloitte LLP

Johanna Field, CAGrant Thornton LLP

Stacy Hammett, CAPwC LLP

Nazia Lakhani, CABDO Canada LLP

Anilisa Sainani, CAErnst & Young LLP

Robert G. Young, FCAKPMG LLP

Andrée Lavigne, CACICA

Hélène Marcil, CACICA

Eric R. Turner, CACICAThis publication was originally published by The Canadian Institute of Chartered Accountants (CICA) in 2012. It has been reissued by the

Chartered Professional Accountants of Canada (CPA Canada) as originally published non-authoritative guidance.

CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.


Documents

Communications Between the Auditor and Those Charged with .../media/site/business-and-accounting-res… · those charged with governance about any significant audit findings in writing