PSA 260 (Revised and Redrafted) – Communication with Those Charged with Governance

Introduction

  • PSA 260 (Revised and Redrafted) deals with the auditor’s responsibility to communicate with those charged with governance in relation to an audit of financial statements.
  • Applies irrespective of the entity’s governance structure or size, but with particular considerations when all those charged with governance are involved in managing the entity, and for listed entities.
  • Does not establish requirements regarding communication with management or owners unless they are also charged with governance.
  • Drafted in terms of an audit of financial statements but may be applicable, with adaptation, to audits of other historical financial information where those charged with governance oversee preparation/presentation of the information.
  • Emphasizes effective two-way communication and provides an overarching framework with some specific matters to be communicated; additional matters may be identified in other PSAs (Appendix 1).
  • Laws/regulations, agreements, or specific engagement requirements may mandate broader communication; nothing in PSA 260 precludes communicating other matters.
  • References to explanatory material A1–A4 and Appendix 1 for integration with other standards.

Effective Date

  • This PSA is effective for audits of financial statements for periods beginning on or after December 15, 2009.

Objectives

  • The auditor’s objectives are to:
    • (a) Communicate clearly the auditor’s responsibilities in relation to the financial statement audit, and an overview of the planned scope and timing of the audit;
    • (b) Obtain from those charged with governance information relevant to the audit;
    • (c) Provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process; and
    • (d) Promote effective two-way communication between the auditor and those charged with governance.
    • (Ref: Para. A1–A4)

Definitions

  • Those charged with governance – The person(s) or organization(s) responsible for overseeing the strategic direction of the entity and obligations related to accountability, including overseeing the financial reporting process. This may include management personnel in some jurisdictions (e.g., executive members of a governance board or owner-manager). See paragraphs A5–A12 for discussion of governance diversity.
  • Management – The person(s) with executive responsibility for the conduct of the entity’s operations. Management is responsible for the preparation of the financial statements, overseen by those charged with governance; in some cases, management may also be responsible for approving the financial statements (in other cases, this is the responsibility of those charged with governance). See footnotes for context on responsibility distinctions.

Requirements

Those Charged with Governance

  • 7. The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to communicate. (Ref: Para. A5–A8)
  • 8. When the auditor communicates with a subgroup of those charged with governance (e.g., an audit committee or an individual), the auditor shall determine whether there is a need to communicate with the governing body as well. (Ref: Para. A9–A11)
  • 9. When all those charged with governance are involved in managing the entity, the application of communication requirements may be modified (see 12(c)). The auditor shall be satisfied that communication with persons with management responsibilities adequately informs all those who would otherwise be communicated with in their governance capacity. (Ref: Para. A12)

Matters to be Communicated

The Auditor’s Responsibilities in Relation to the Financial Statement Audit

    1. The auditor shall communicate with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, including:
    • (a) The auditor’s responsibility for forming and expressing an opinion on the financial statements prepared by management with the oversight of those charged with governance; and
    • (b) The fact that the audit does not relieve management or those charged with governance of their responsibilities. (Ref: Para. A13–A14)

Planned Scope and Timing of the Audit

    1. The auditor shall communicate with those charged with governance an overview of the planned scope and timing of the audit. (Ref: Para. A15–A19)

Significant Findings from the Audit

    1. The auditor shall communicate with those charged with governance:
    • (a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates, and financial statement disclosures. The auditor shall explain why a significant accounting practice, though acceptable under the applicable financial reporting framework, may not be the most appropriate for the entity, where applicable. (Ref: Para. A21)
    • (b) Significant difficulties, if any, encountered during the audit. (Ref: Para. A22)
    • (c) Unless all those charged with governance are involved in managing the entity:
    • (i) Material weaknesses in the design/implementation/operating effectiveness of internal control that have come to the auditor’s attention and have been communicated to management as required by PSA 315 (Redrafted) or PSA 330 (Redrafted);
    • (ii) Significant matters arising from the audit discussed or subject to correspondence with management; and
    • (iii) Written representations the auditor is requesting; and
    • (d) Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process. (Ref: Para. A24)

Auditor Independence

    1. In the case of listed entities, the auditor shall communicate with those charged with governance:
    • (a) A statement that the engagement team and others in the firm, as appropriate, have complied with relevant ethical requirements regarding independence; and
    • (b) 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. This includes total fees charged during the period for audit and non-audit services, allocated to appropriate categories; and the related safeguards applied to eliminate identified threats or reduce them to an acceptable level.
    • (Footnotes explain references to PSA 315/PSA 330 independence implications and broader applicability to other entities.)

The Communication Process

Establishing the Communication Process

    1. The auditor shall communicate with those charged with governance the form, timing, and expected general content of communications. (Ref: Para. A32–A40)

Forms of Communication

    1. The auditor shall communicate in writing with those charged with governance regarding significant findings when oral communication would not be adequate. Written communications need not include all matters that arose during the course of the audit. (Ref: Para. A41–A43)
    1. The auditor shall communicate in writing with those charged with governance regarding auditor independence when required by paragraph 13.

Timing of Communications

    1. The auditor shall communicate with those charged with governance on a timely basis. (Ref: Para. A44–A45)

Adequacy of the Communication Process

    1. The auditor shall evaluate whether two-way communication has been adequate. If not, the auditor shall assess the effect on the risk assessment and audit evidence, and take appropriate action. (Ref: Para. A46–A48)

Documentation

    1. If matters required by this PSA are communicated orally, the auditor shall document them and to whom they were communicated. If communicated in writing, a copy shall be retained as part of audit documentation. (Ref: Para. A49)

Application and Other Explanatory Material

The Role of Communication (Ref: Para. 5)

  • A1. The PSA focuses on communications from the auditor to those charged with governance but emphasizes two-way communication to: (a) develop mutual understanding within the audit context; (b) obtain information relevant to the audit; (c) assist governance in overseeing the financial reporting process and reducing misstatement risks.
  • A2. Management also has a responsibility to communicate governance-interest matters to those charged with governance; auditor communications do not relieve management of this responsibility.
  • A3. Clear communication of key matters is integral; PSAs do not require procedures to identify every other possible matter.
  • A4. Laws/regulations may restrict communications; potential conflicts between confidentiality and governance obligations may require legal advice.

Those Charged with Governance (Ref: Para. 7)

  • A5–A8. Governance structures vary by jurisdiction and entity; examples include two-tier vs one-tier boards, corporate trustees, government bodies, or owner-managers. When governance is collective, subgroups (e.g., an audit committee) may assist with responsibilities.
  • A9–A12. When all those charged with governance are involved in managing the entity, discussion on which matters to communicate is adjusted; the auditor should ensure communication remains adequate to inform governance.

Matters to be Communicated (Ref: Para. 12)

  • A13–A14. Engagement terms and responsibilities communicated via engagement letter or written agreement; communications may include broad or inclusive matters depending on the engagement and applicable laws/regulations.
  • A15–A19. Planning communications to aid governance understanding and auditor planning, without compromising audit effectiveness.
  • A20–A24. Significant findings, including: qualitative aspects (A21), difficulties (A22), significant matters with management (A23), and other matters relevant to governance (A24).
  • A25–A27. Auditor independence: ethical requirements, threats to independence, and safeguards; relevance to listed entities and other significant public-interest entities; examples to consider (e.g., not only listed but also not-for-profit, banking, insurance, public sector).
  • A28–A31. Supplementary matters: governance oversight of internal controls, governance deficiencies or significant decisions by senior management, and whether to discuss supplementary matters with management before communicating to governance.

The Communication Process (Ref: Para. 14–A31)

  • A32–A34. Establishing a clear two-way communication process includes: purpose, form, responsible parties, expectations of two-way dialogue, action/reporting mechanisms, and variability by entity size and structure.
  • A35. Smaller entities may allow less structured communication.
  • A36–A38. Communication with management may occur prior to governance communication; discussions with internal audit may occur before communications to governance; third-party copies may be provided in some cases with cautions.
  • A39–A40. In some jurisdictions, laws/regulations may require disclosure to regulators or public bodies; third-party disclosures usually require consent.
  • A41–A43. Forms of communication include presentations, written reports, and engagement letters; the form may vary by the significance of the matter and the status of management.
  • A44–A45. Timing considerations: early planning communications, initial engagements, addressing difficulties promptly, and coordinating general vs. group communications where applicable.

Appendix 1: Specific Requirements in [Proposed] ISQC 1 and Other PSAs that Refer to Communications with Those Charged with Governance

  • List of cross-references to ISQC 1 (Redrafted) and other PSAs that require governance communications (e.g., PSA 200, PSA 240, PSA 315, PSA 330, PSA 450, PSA 560, PSA 570, PSA 580, PSA 600, PSA 705, PSA 706 and others).
  • Note: The list is not a substitute for the full requirements and application material in those PSAs.

Appendix 2: Qualitative Aspects of Accounting Practices

  • Qualitative aspects to be communicated (Para. 12(a), A21):
    • Accounting Policies
    • Appropriateness of policies given entity circumstances; balance between information cost and user benefit.
    • Identification of items affected by policy choices when acceptable alternative policies exist; policies used by similar entities.
    • Initial selection and changes in significant accounting policies, including application of new accounting pronouncements; effects on current/future earnings and timing relative to new pronouncements.
    • Effects of significant policies in controversial or emerging areas or industry specifics.
    • Accounting Estimates
    • Management’s identification and process for estimates; risks of material misstatement; indicators of management bias; disclosure of estimation uncertainty.
    • Financial Statement Disclosures
    • Issues and judgments in formulating sensitive disclosures (e.g., revenue recognition, remuneration, going concern, subsequent events, contingencies); overall neutrality, consistency, and clarity of disclosures.
    • Related Matters
    • Significant risks, exposures, uncertainties (e.g., pending litigation) disclosed; unusual/non-recurring transactions and disclosures around them; factors affecting asset/liability carrying values and useful lives; selective correction of misstatements.

Appendix 1 (Additional context)

  • This PSA aligns with ISA 260 (Revised and Redrafted) and cross-references several other PSAs and proposed standards for broader application of governance communications.

Appendix 2 (Supplemental detail)

  • Detailed qualitative considerations mirror the indicative list above and provide guidance on how to discuss these matters with governance, including the implications for the audit approach and reporting.