- Scope of SA 260: To Deals with auditor’s responsibility to communicate with TCWG in an audit of financial statements.
- Who are “Those Charged with Governance” (TCWG): The Person(s) or Organization(s) with responsibilities of for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes those overseeing the financial reporting process and for some entities, TCWG may include the management personnel like Board Member.
- Who are Management: The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities, management includes some or all of TCWG, for example, executive members of a governance board, or an owner-manager.
- Objectives of the Auditor:
- To communicate clearly with TCWG the responsibilities of the auditor & overview of planned scope & timing of audit.
- To Obtain from TCWG information relevant to the audit;
- To Provide TCWG with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process; and
- To Promote effective two-way communication between the auditor and TCWG.
- What is the Significance of Communication with TCWG: An efficient Two Way Communication from Auditor is very important with TCWG:
- The auditor and TCWG in understanding matters related to the audit in context, and in developing a constructive working relationship while maintaining the auditor’s independence and objectivity;
- The auditor in obtaining from TCWG information relevant to the audit. For example, those charged with governance may assist the auditor in understanding the entity and its environment; and
- TCWG in fulfilling their responsibility to oversee the financial reporting process, thereby reducing the risks of material misstatement of the financial statements.
- Matters to be Communicated by the Auditor: Following matters required to be communicated by the Auditor with TCWG:
- The responsibilities of the auditor in relation to the financial audit.
- The planned scope & timing of audit including significant risks identified by the auditor.
- The auditor’s view about significant qualitative aspects of the entity’s accounting practices.
- Significant difficulties encountered during the audit.
- Written representation the auditor is requesting.
- Circumstances that affect the form & content of auditor’s report.
- Any other significant matter arising during the audit relevant to the oversight of financial reporting process.
- Communication of Auditor’s Independence in Case of Listed Entities: In case of listed entities, the auditor shall communicate with TCWG:
- A statement that the engagement team and others in the firm (including network firm) have complied with relevant ethical requirements regarding independence; and
- All relationships and other matters between the firm, network firms, and the entity that, in the auditor’s professional judgment, may reasonably be thought to bear on independence and The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.
- Communication Process: The Auditor should follow the adequate method of communication with TCWG and the communication process shall include the following:
- The auditor shall communicate with those charged with governance the form, timing and expected general content of communications,
- The auditor shall communicate in writing with TCWG regarding significant findings from the audit and for this the oral communication would not be adequate.
- The auditor shall communicate in writing with TCWG regarding auditor independence when required (i.e. in case of listed entity).
- The auditor shall communicate with TCWG a Two Way Communication on Timely Basis.
- Adequacy of Communication: 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. If it has not, the auditor shall evaluate the effect, if any, on the auditor’s assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit evidence, and shall take appropriate action.
Documentation: The auditor shall include the matters communicated to TCWG (whether orally or in writing) in audit documentation.
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