APPENDIX 3: LETTER OF COMMENT

HKSA 260 (Revised), Communication with Those Charged with Governance requires the
auditor to communicate certain matters concerning the audit to those charged with
governance. Those matters concerning the auditor’s responsibilities, the planned scope and
timing of the audit and the communication process are addressed in the engagement letter.

For purposes of this Audit Practice Manual, significant findings from the audit and auditor
independence issues are addressed in the letter of comment.

Paragraph 19 of HKSA 260 (Revised) allows, in certain circumstances, oral communication

of significant findings from the audit. Where this approach is adopted, it is recommended that
a letter of comment is still drafted and used as an agenda for a telephone conversation or
meeting. However, it should be noted that written communication is required where:

 Oral communication would not be adequate (paragraph 19 of HKSA 260(Revised)); or

 Significant deficiencies in internal controls (paragraph 9 of HKSA 265)

The following letter summarizes matters that written communications with those charged
with governance may be necessary according to HKSAs. It is should be prepared according
to the specific facts and circumstances of the engagement and with reference to HKSAs’
requirements.

Matters for inclusion in the letter of comment Reference to HKSA

(e.g., 260(R).16(a) refers to
paragraph 16(a) of HKSA
260 (Revised))

In accordance with our normal practices and further to our

meeting last week, we are writing to draw your attention to the
various matters which arose during the course of the audit of the
ABC Company’s financial statements for the year ended [insert
date].

1 [Comments on significant qualitative aspects of the entity’s

accounting practices, including accounting policies, 260(R).16(a)
accounting estimates and financial statement disclosures.]

2 [Where applicable, an explanation of why the auditor

considers a significant accounting practice acceptable under
260(R).16(a)
the applicable financial reporting framework is not the most
appropriate for the entity’s circumstances.]

3 [Significant difficulties, if any, encountered during the audit.] 260(R).16(b)

4 [Significant findings from the audit:]

[Note: The following must be included, if any]

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  [Identified fraud or information that indicates that a fraud 240.41
may exist.]

 [Any other matters related to fraud that are, in the

auditor’s judgment, relevant to the responsibilities of 240.43
management and those charged with governance.]

 [Significant deficiencies in internal control that have or 265.9

will be reported to those charged with governance 265.10(a)
including a description of the deficiencies and an
265 11(a)
explanation of their potential effects.]

 [Other deficiencies in internal control of sufficient 265.10(b)

importance to be reported to management]

 [Uncorrected misstatements for the current period 450.12

together with a request that they be corrected.]

 [The effect of uncorrected misstatements related to prior 450.13

periods.] 510.7

 [For audit of group financial statements only: Instances

where the group engagement team’s evaluation of the 600.49(c)
work of a component auditor gave rise to a concern
about the quality of that auditor’s work.]

 [For audit of group financial statements only: Any

limitations on the group audit, for example, where the 600.49(d)
group engagement team’s access to information may
have been restricted.]

 [For audit of group financial statements only: Fraud or

suspected fraud involving group management,
component management, employees who have 600.49(e)
significant roles in group-wide controls or others where
the fraud resulted in a material misstatement of the
group financial statements.]

 [For listed entities only: those matters determined as key

audit matters; or a statement that there are no key audit 701.17
matters.]

 [Any material misstatement of the financial statements

that relates to the non-disclosure of information required 705(R).23
to be disclosed.]

[The following items are applicable if those charged with

governance are not all involved in management:]

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  [Fraud involving management or employees who have
significant roles in internal control or others where the 240.42
fraud results in material misstatements in the financial
statements.]

 [Matters involving non-compliance with laws and

regulations other than when the matters are clearly 250(R).23
inconsequential.]

 [Any refusal by management to allow the sending of a 505.9

confirmation request that is unreasonable.]

 [Significant matters in connection with the entity’s related 550.27

parties.]

 [Events or conditions identified that may cast significant

doubt on the entity’s ability to continue as a going
concern including:
- Whether the events or conditions constitute a
material uncertainty;
- Whether management’s use of the going concern 570(R).25
assumption is appropriate in the preparation and
presentation of the financial statements;
- The adequacy of related disclosures in the financial
statements; and
- Where applicable, the implication for the auditor’s
report.]

 [Any management imposed limitation on the scope of the 705(R).12

audit that is likely to result in a qualified opinion.]

 [Any material misstatement found in the prior period

financial statements on which a predecessor auditor had 710.18
previously reported without modification.]

 [Management’s refusal to correct a material

misstatements of fact or inconsistencies included in 720(R).17
other information issued with the financial statements
and to request that the correction be made.]

5 [The following item is applicable if those charged with

governance are not all involved in management:]
Significant matters arising from the audit that were discussed,
260(R).16(c)(i)
or subject to correspondence with management.

6 [The following items are applicable if those charged with

governance are not all involved in management:]

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Appendix 3
 Written representations requested from management. 260(R).16(c)(ii)

Circumstances that affect the form and content of the

260(R).16(d)
auditor’s report, if any.

Any other significant matters arising during the audit that, in

the auditor’s professional judgment, are relevant to the 260(R).16(e)
oversight of the financial reporting process.

For listed entities only: A statement that the engagement

team and others in the firm as appropriate, the firm and, when
applicable, network firms have complied with relevant ethical
requirements regarding independence. This should include
details of:

 All relationships and other matters between the firm,

network firms, and the entity that, in the auditor’s 260(R).17,
professional judgment, may reasonably be thought to
260(R).A31
bear on independence.
 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
components controlled by the entity, allocated to
categories that are appropriate.
 For threats to independence that are not at an
acceptable level, actions taken to address the threats,
including actions that were taken to eliminate the
circumstances that create the threats, or applying
safeguards to reduce the threats to an acceptable level.
 Any breaches to independence requirements.

8 Circumstances that led to a modified opinion, the inclusion of

an Emphasis of Matter or an Other Matter paragraph, and the 705(R).30
proposed wording of the modification or the relevant 706(R).12
paragraph.

9 Any other relevant matters.

We would like to take this opportunity of expressing our thanks to

your staff for their assistance during the course of our audit.

Please note that this report has been prepared for the sole use of
[Name of Company Limited]. It must not be disclosed to third
parties, quoted or referred to, without our prior written consent. No
responsibility is assumed by us to any other person.

The purpose of the audit was to enable us to express an opinion 265.11(b)(i)

on the financial statements;

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The audit included consideration of internal control relevant to the
preparation of the financial statements in order to design audit 265.11(b)(ii)
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of
internal control; and
The matters reported above are limited to those deficiencies that 265.11(b)(iii)
the auditor has identified during the audit and that the auditor has
concluded are of sufficient importance to merit being reported to
those charged with governance.

If we can be of any further assistance, please contact [insert

name].

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Appendix 3