HKSA 260 - Communication with Those Charged with Governance (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Scope & Role of Communication | Two-way communication framework | Establishes auditor's responsibility to communicate with those charged with governance; promotes effective dialogue for audit quality |
| Objectives | Clear communication, obtain info, timely observations | Communicate responsibilities, planned scope/timing, significant findings; promote two-way communication |
| Definitions | Those charged with governance vs. management | Governance oversees strategy and financial reporting; management has executive responsibility |
| Requirements โ Who to Communicate With | Determine appropriate person(s) | Identify governance structure; consider subgroup vs. full body; special rules when all governance involved in management |
| Requirements โ Matters to Communicate | Auditor responsibilities, scope, findings, independence | Must communicate responsibilities, planned scope/timing, significant findings (qualitative aspects, difficulties, etc.), and independence (written for listed) |
| Requirements โ Communication Process | Form, timing, evaluation | Establish process; written for significant findings/independence; timely basis; evaluate adequacy of two-way communication |
| Documentation | Oral and written records | Document oral communications (content, when, to whom); retain copies of written communications |
Scope & Role of Communication
Scope (Paragraphs 1-3)
HKSA 260 (Revised) deals with the auditor's responsibility to communicate with those charged with governance in an audit of financial statements. It applies irrespective of an entity's governance structure or size.
- Does NOT establish requirements regarding communication with management or owners UNLESS they are also charged with a governance role
- Provides an overarching framework for communication
- HKSA 265 establishes specific requirements regarding communication of significant deficiencies in internal control
- Nothing precludes the auditor from communicating any other matters
The Role of Communication (Paragraphs 4-7)
Effective two-way communication is important in assisting:
| Party | Benefit |
|---|---|
| Auditor and those charged with governance | Understanding matters in context; developing constructive working relationship while maintaining auditor independence and objectivity |
| Auditor | Obtaining information relevant to the audit (understanding entity, identifying sources of audit evidence, information about transactions/events) |
| Those charged with governance | Fulfilling responsibility to oversee financial reporting process; reducing risks of material misstatement |
- Communication by the auditor does NOT relieve management of their responsibility to communicate
- Communication by management does NOT relieve the auditor of responsibility to also communicate
- Law or regulation may restrict communication of certain matters (e.g., may prohibit communication that might prejudice investigation into illegal acts)
Objectives & Definitions
Objectives (Paragraph 9)
The objectives of the auditor are:
- To communicate clearly with those charged with governance: the auditor's responsibilities and an overview of the planned scope and timing of the audit
- To obtain from those charged with governance information relevant to the audit
- To provide those charged with governance with timely observations arising from the audit that are significant and relevant to their oversight responsibility
- To promote effective two-way communication between the auditor and those charged with governance
Definitions (Paragraph 10)
| Term | Definition |
|---|---|
| Those charged with governance | The person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and obligations related to accountability, including overseeing the financial reporting process. May include management personnel (e.g., executive members of governance board, owner-manager). |
| Management | The person(s) with executive responsibility for the conduct of the entity's operations. May include some or all of those charged with governance. |
Requirements โ Those Charged with Governance
Determining the Appropriate Person(s) (Paragraph 11)
The auditor shall determine the appropriate person(s) within the entity's governance structure with whom to communicate.
Communication with a Subgroup (Paragraph 12)
If the auditor communicates with a subgroup of those charged with governance (e.g., audit committee, or an individual), the auditor shall determine whether the auditor also needs to communicate with the governing body.
- Respective responsibilities of subgroup and governing body
- Nature of the matter to be communicated
- Relevant legal or regulatory requirements
- Whether subgroup has authority to take action
- Whether subgroup can provide further information and explanations
When All of Those Charged with Governance Are Involved in Managing the Entity (Paragraph 13)
In cases where all of those charged with governance are involved in managing the entity (e.g., small business with single owner-manager):
- If matters required by this HKSA are communicated with person(s) with management responsibilities who also have governance responsibilities, the matters need NOT be communicated again with those same person(s) in their governance role
- The auditor shall nonetheless be satisfied that communication with person(s) with management responsibilities adequately informs all of those with whom the auditor would otherwise communicate in their governance capacity
Requirements โ Matters to Be Communicated
The Auditor's Responsibilities (Paragraph 14)
The auditor shall communicate:
- That the auditor is responsible for forming and expressing an opinion on the financial statements
- That the audit does NOT relieve management or those charged with governance of their responsibilities
Planned Scope and Timing (Paragraph 15)
The auditor shall communicate an overview of the planned scope and timing of the audit, including the significant risks identified.
Significant Findings from the Audit (Paragraph 16)
| Sub-paragraph | Matter to Communicate |
|---|---|
| (a) | Auditor's views about significant qualitative aspects of accounting practices (accounting policies, accounting estimates, financial statement disclosures). When applicable, explain why a significant accounting practice acceptable under the framework is NOT most appropriate. |
| (b) | Significant difficulties, if any, encountered during the audit |
| (c)(i) | Unless all of those charged with governance are involved in managing: Significant matters discussed or subject to correspondence with management |
| (c)(ii) | Unless all of those charged with governance are involved in managing: Written representations the auditor is requesting |
| (d) | Circumstances that affect the form and content of the auditor's report, if any |
| (e) | Any other significant matters arising during the audit that are relevant to oversight of the financial reporting process |
Auditor Independence (Paragraphs 17-18)
The auditor shall communicate the relevant ethical requirements, including those related to independence.
- A statement that the engagement team, firm, and network firms have complied with relevant ethical requirements regarding independence
- All relationships and other matters that may reasonably be thought to bear on independence, including total fees charged during the period for audit and non-audit services (allocated to appropriate categories)
- In respect of threats to independence that are not at an acceptable level: actions taken to address the threats, actions taken to eliminate circumstances creating threats, and safeguards applied
Requirements โ The Communication Process
Establishing the Communication Process (Paragraph 19)
The auditor shall communicate with those charged with governance the form, timing and expected general content of communications.
Forms of Communication (Paragraphs 20-21)
- The auditor shall communicate in writing regarding significant findings from the audit if, in the auditor's professional judgment, oral communication would not be adequate.
- The auditor shall communicate in writing regarding auditor independence when required by paragraph 18 (listed entities).
Timing of Communications (Paragraph 22)
The auditor shall communicate with those charged with governance on a timely basis.
Adequacy of the Communication Process (Paragraph 23)
The auditor shall evaluate whether the two-way communication between the auditor and those charged with governance has been adequate for the purpose of the audit.
- Evaluate the effect on assessment of risks of material misstatement
- Evaluate the effect on ability to obtain sufficient appropriate audit evidence
- Take appropriate action (e.g., modify opinion based on scope limitation, obtain legal advice, communicate with third parties or higher authority, withdraw from engagement where possible)
Documentation
Oral Communication (Paragraph 24)
Where matters required by this HKSA to be communicated are communicated orally, the auditor shall include them in the audit documentation, and when and to whom they were communicated.
Written Communication (Paragraph 24)
Where matters have been communicated in writing, the auditor shall retain a copy of the communication as part of the audit documentation.
Application & Other Explanatory Material (A1-A54)
Application & Other Explanatory Material
Those Charged with Governance (A1-A8)
| Structure Type | Description |
|---|---|
| Two-tier board | Supervisory (non-executive) board legally separate from executive (management) board |
| One-tier board | Both supervisory and executive functions are legal responsibility of a single board |
| Collective responsibility | Board of directors, supervisory board, partners, proprietors, committee of management, council of governors, trustees |
| Individual responsibility | In smaller entities, one person may be charged with governance (e.g., owner-manager, sole trustee) |
Matters to Be Communicated (A9-A36)
Planned Scope and Timing (A11-A16): Benefits include helping those charged with governance understand consequences of auditor's work and assisting auditor in understanding entity and environment. Communication does NOT change auditor's sole responsibility for audit strategy and plan.
Significant Difficulties (A21): May include significant delays by management, unavailability of entity personnel, unwillingness by management to provide information, unreasonably brief time to complete audit, extensive unexpected effort required, restrictions imposed by management, management's unwillingness to make going concern assessment.
Circumstances Affecting Auditor's Report (A23-A25): Modified opinion (HKSA 705), material uncertainty related to going concern (HKSA 570), key audit matters (HKSA 701), Emphasis of Matter or Other Matter paragraphs (HKSA 706), uncorrected material misstatement of other information (HKSA 720).
The Communication Process (A37-A53)
Factors affecting form of communication (A46-A48): Whether matter will be included in auditor's report, whether matter has been satisfactorily resolved, whether management has previously communicated the matter, size, operating structure, control environment, legal structure, legal requirements, expectations of those charged with governance, amount of ongoing contact and dialogue, significant changes in membership of governing body.
Timing (A49-A50): Planning matters โ early in engagement; significant difficulties โ as soon as practicable; independence โ whenever significant judgments are made; findings from audit โ as part of concluding discussion.
Observations for evaluating adequacy (A51-A53): Appropriateness and timeliness of actions taken by those charged with governance, apparent openness in communications, willingness and capacity to meet without management present, apparent ability to comprehend matters raised, difficulty in establishing mutual understanding, awareness of how matters affect governance responsibilities, compliance with legal and regulatory requirements.
Appendices & Key Takeaways
Appendices & Key Takeaways
Appendix 1: Specific Requirements in Other HKSAs
Key standards with communication requirements include:
| Standard | Topic |
|---|---|
| HKSA 240 | Fraud |
| HKSA 250 (Revised) | Laws and Regulations |
| HKSA 265 | Internal Control Deficiencies |
| HKSA 450 | Evaluation of Misstatements |
| HKSA 570 (Revised) | Going Concern |
| HKSA 701 | Key Audit Matters |
| HKSA 705 (Revised) | Modified Opinions |
| HKSA 720 (Revised) | Other Information |
Appendix 2: Qualitative Aspects of Accounting Practices
- Accounting Policies: Appropriateness to circumstances, initial selection and changes, effect in controversial or emerging areas, effect of timing of transactions
- Accounting Estimates and Related Disclosures: Refer to Appendix 2 of HKSA 540 (Revised)
- Financial Statement Disclosures: Issues in formulating sensitive disclosures, overall neutrality, consistency, and clarity
- Related Matters: Potential effect of significant risks, exposures, and uncertainties; extent of significant transactions outside normal course of business; factors affecting asset and liability carrying values; selective correction of misstatements
Key Takeaways Summary
| Area | Key Requirement |
|---|---|
| Scope | Communication with those charged with governance in financial statement audits |
| Objectives | Communicate responsibilities, obtain information, provide timely observations, promote two-way communication |
| Who to communicate with | Determine appropriate person(s); consider subgroup vs. governing body |
| What to communicate | Auditor responsibilities, planned scope/timing, significant findings, independence matters |
| Communication process | Establish form, timing, and content; written for significant findings and independence |
| Timing | Timely basis throughout the audit |
| Evaluation | Assess adequacy of two-way communication |
| Documentation | Oral โ document when and to whom; Written โ retain copy |
| Independence (Listed) | Statement of compliance, relationships, fees, actions to address threats |
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