SA 260*

COMMUNICATION WITH THOSE CHARGED WITH

GOVERNANCE
(Effective for audits of financial statements
for periods beginning on or after April 1, 2009)

Contents
Paragraph(s)
Introduction
Scope of this SA ....................................................................................1-3
Effective Date ........................................................................................... 4
Objectives ................................................................................................ 5
Definitions ............................................................................................... 6
Requirements
Those Charged with Governance ..........................................................7-9
Matters to be Communicated ............................................................10-13
The Communication Process ............................................................14-18
Documentation ....................................................................................... 19
Application and Other Explanatory Material
The Role of Communication ............................................................. A1-A4
Those Charged with Governance ................................................... A5-A12
Matters to be Communicated ....................................................... A13-A31
The Communication Process ....................................................... A32-A48
Documentation .....................................................................................A49
Material Modifications to ISA 260, “Communication with Those Charged
with Governance”
Appendix: Qualitative Aspects of Accounting Practices

* Published in December, 2008 issue of the Journal.

Handbook of Auditing Pronouncements-I.A

Standard on Auditing (SA) 260, “Communication with Those Charged with

Governance”, should be read in the context of the “Preface to the Standards on
Quality Control, Auditing, Review, Other Assurance and Related Services”1,
which sets out the authority of SAs and SA 200, “Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards
on Auditing”2.

1 Published in July, 2007 issue of the Journal.

2 Published in March, 2010 issue of the Journal.

SA 260 2
 Communication with Those Charged with Governance

Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibility to
communicate with those charged with governance in relation to an audit of
financial statements. Although this SA applies irrespective of an entity’s
governance structure or size, particular considerations apply where all of those
charged with governance are involved in managing an entity, and for listed
entities. This SA does not establish requirements regarding the auditor’s
communication with an entity’s management or owners unless they are also
charged with a governance role.
2. This SA has been drafted in terms of an audit of financial statements, but
may also be applicable, adapted as necessary in the circumstances, to audits of
other historical financial information when those charged with governance have a
responsibility to oversee the preparation and presentation of the other historical
financial information.
3. Recognising the importance of effective two-way communication during an
audit of financial statements, this SA provides an overarching framework for the
auditor’s communication with those charged with governance, and identifies
some specific matters to be communicated with them. Additional matters to be
communicated, which complement the requirements of this SA, are identified in
other SAs. In addition, SA 2653 establishes specific requirements regarding the
communication of significant deficiencies in internal control the auditor has
identified during the audit to those charged with governance. Further matters, not
required by this or other SAs, may be required to be communicated by laws or
regulations, by agreement with the entity, or by additional requirements
applicable to the engagement. Nothing in this SA precludes the auditor from
communicating any other matters to those charged with governance. (Ref: Para.
A28-A31)
Effective Date
4. This SA is effective for audits of financial statements for periods beginning
on or after April 1, 2009.
Objectives
5. The objectives of the auditor are to:

3SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management”.

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(a) Communicate clearly with those charged with governance the

responsibilities of the auditor 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
6. For purposes of the SAs, the following terms have the meanings attributed
below:
(a) Those charged with governance – The person(s) or organisation(s) (e.g.,
a corporate trustee) with responsibility for overseeing the strategic direction
of the entity and obligations related to the accountability of the entity. This
includes overseeing the financial reporting process. For some entities those
charged with governance may include management personnel, for
example, executive members of a governance board of a private or public
sector undertakings or an owner-manager. For discussion of the diversity of
governance structures, see paragraphs A5-A12.
(b) Management – The person(s) with executive responsibility for the conduct
of the entity’s operations. For some entities, management includes some or
all of those charged with governance, for example, executive members of a
governance board, or an owner-manager.
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)
Communication with a Subgroup of Those Charged with Governance
8. When the auditor communicates with a subgroup of those charged with
governance, for example, an audit committee, or an individual, the auditor shall
determine whether the auditor also needs to communicate with the governing
body. (Ref: Para. A9-A11)

SA 260 4
 Communication with Those Charged with Governance

When All of Those Charged with Governance are Involved in Managing the
Entity
9. In some cases, all of those charged with governance are involved in
managing the entity, for example, a small business where a single owner
manages the entity and no one else has a governance role. In these cases, if
matters required by this SA are communicated with person(s) with management
responsibilities, and those person(s) also have governance responsibilities, the
matters need not be communicated again with those same person(s) in their
governance role. These matters are noted in paragraph 12(c). 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. (Ref: Para. A12)
Matters to be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit
10. The auditor shall communicate with those charged with governance the
responsibilities of the auditor in relation to the financial statement audit, including
that:
(a) The auditor is responsible for forming and expressing an opinion on the
financial statements that have been prepared by management with the
oversight of those charged with governance; and
(b) The audit of the financial statements does not relieve management or
those charged with governance of their responsibilities. (Ref: Para. A13-
A14)
Planned Scope and Timing of the Audit
11. 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
12. The auditor shall communicate with those charged with governance: (Ref:
Para. A20)
(a) The auditor’s views about significant qualitative aspects of the entity’s
accounting practices, including accounting policies, accounting estimates
and financial statement disclosures. When applicable, the auditor shall
explain to those charged with governance why the auditor considers a
significant accounting practice, that is acceptable under the applicable

5 SA 260
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financial reporting framework4, not to be most appropriate to the particular

circumstances of the entity; (Ref: Para. A21)
(b) Significant difficulties, if any, encountered during the audit; (Ref: Para.
A22)
(c) Unless all of those charged with governance are involved in managing the
entity:
(i) Significant matters, if any, arising from the audit that were discussed,
or subject to correspondence with management; and (Ref: Para. A23)
(ii) 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
13. In the case of listed entities, the auditor shall communicate with those
charged with governance: (Ref: Para. A25-A27)
(a) A statement that the engagement team and others in the firm as
appropriate, the firm and, when applicable, network firms5 have complied
with relevant ethical requirements regarding independence; and
(b) (i) 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 shall 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
components controlled by the entity. These fees shall be allocated to
categories that are appropriate to assist those charged with governance in
assessing the effect of services on the independence of the auditor; and
(ii) The related safeguards that have been applied to eliminate identified
threats to independence or reduce them to an acceptable level.

4 SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Standards on Auditing”, Paragraph 13(a).
5 SQC 1, definition of “Network firm”, paragraph, 6 (j).

SA 260 6
 Communication with Those Charged with Governance

The Communication Process

Establishing the Communication Process
14. 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
15. The auditor shall communicate in writing with those charged with
governance regarding significant findings from the audit when, in the auditor’s
professional judgment, 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)
16. The auditor shall communicate in writing with those charged with
governance regarding auditor independence when required by paragraph 13.
Timing of Communications
17. The auditor shall communicate with those charged with governance on a
timely basis. (Ref: Para. A44-A45)
Adequacy of the Communication Process
18. 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.
(Ref: Para. A46-A48)
Documentation
19. Where matters required by this SA to be communicated are communicated
orally, the auditor shall document them, and when and to whom they were
communicated. Where matters have been communicated in writing, the auditor
shall retain a copy of the communication as part of the audit documentation.6
(Ref: Para. A49)
***

6 SA 230, “Audit Documentation”, paragraphs 8-11, and paragraph A6.

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Application and Other Explanatory Material

The Role of Communication (Ref: Para. 5)
A1. This SA focuses primarily on communications from the auditor to those
charged with governance. Nevertheless, effective two-way communication is
important in assisting:
(a) The auditor and those charged with governance in understanding matters
related to the audit in context, and in developing a constructive working
relationship. This relationship is developed while maintaining the auditor’s
independence and objectivity;
(b) The auditor in obtaining from those charged with governance information
relevant to the audit. For example, those charged with governance may
assist the auditor in understanding the entity and its environment, in
identifying appropriate sources of audit evidence, and in providing
information about specific transactions or events; and
(c) Those charged with governance in fulfilling their responsibility to oversee
the financial reporting process, thereby reducing the risks of material
misstatement of the financial statements.
A2. Although the auditor is responsible for communicating matters required by
this SA, management also has a responsibility to communicate matters of
governance interest to those charged with governance. Communication by the
auditor does not relieve management of this responsibility. Similarly,
communication by management with those charged with governance of matters
that the auditor is required to communicate does not relieve the auditor of the
responsibility to also communicate them. Communication of these matters by
management may, however, affect the form or timing of the auditor’s
communication with those charged with governance.
A3. Clear communication of specific matters required to be communicated by
SAs is an integral part of every audit. SAs do not, however, require the auditor to
perform procedures specifically to identify any other matters to communicate with
those charged with governance.
Legal or Regulatory Restrictions on Communicating with Those Charged
with Governance
A4. Laws or regulations may restrict the auditor’s communication of certain
matters with those charged with governance. For example, laws or regulations
may specifically prohibit a communication, or other action, that might prejudice
an investigation by an appropriate authority into an actual, or suspected, illegal
act. In some circumstances, potential conflicts between the auditor’s obligations

SA 260 8
 Communication with Those Charged with Governance

of confidentiality and obligations to communicate may be complex. In such

cases, the auditor may consider obtaining legal advice.
Those Charged with Governance (Ref: Para. 7)
A5. Governance structures may vary reflecting different size and ownership
characteristics. For example:
 In most of the entities, those charged with governance hold positions that
are an integral part of the entity’s legal structure, for example, company
directors. In others, for example, some government undertakings a body
that is not part of the entity is charged with governance.
 In some cases, some or all of those charged with governance are involved
in managing the entity. In others, those charged with governance and
management comprise different persons.
 In some cases, those charged with governance are responsible for
approving the entity’s financial statements (in other cases management has
this responsibility).
A6. In most entities, governance is the collective responsibility of a governing
body, such as a board of directors, a supervisory board, partners, proprietors, a
committee of management, a council of governors, trustees, or equivalent
persons. In some smaller entities, however, one person may be charged with
governance, for example, the owner-manager where there are no other owners,
or a sole trustee. When governance is a collective responsibility, a subgroup
such as an audit committee or even an individual, may be charged with specific
tasks to assist the governing body in meeting its responsibilities. Alternatively, a
subgroup or individual may have specific, legally identified responsibilities that
differ from those of the governing body.
A7. Such diversity means that it is not possible for this SA to specify for all
audits the person(s) with whom the auditor is to communicate particular matters.
Also, in some cases the appropriate person(s) with whom to communicate may
not be clearly identifiable from the applicable legal framework or other
engagement circumstances, for example, entities where the governance
structure is not formally defined, such as some family-owned entities, some not-
for-profit organisations, and some government entities. In such cases, the auditor
may need to discuss and agree with the engaging party the relevant person(s)
with whom to communicate. In deciding with whom to communicate, the auditor’s
understanding of an entity’s governance structure and processes obtained in

9 SA 260
Handbook of Auditing Pronouncements-I.A

accordance with SA 3157 is relevant. The appropriate person(s) with whom to

communicate may vary depending on the matter to be communicated.
A8. Proposed Revised SA 600, “Special Considerations- Audits of Group
Financial Statements (Including the Work of Component Auditors)8”, includes
specific matters to be communicated by group auditors with those charged with
governance. When the entity is a component of a group, the appropriate
person(s) with whom the component auditor communicates depends on the
engagement circumstances and the matter to be communicated. In some cases,
a number of components may be conducting the same businesses within the
same system of internal control and using the same accounting practices. Where
those charged with governance of those components are the same (e.g.,
common board of directors), duplication may be avoided by dealing with these
components concurrently for the purpose of communication.
Communication with a Subgroup of Those Charged with Governance (Ref:
Para. 8)
A9. When considering communicating with a subgroup of those charged with
governance, the auditor may take into account such matters as:
 The respective responsibilities of the subgroup and the governing body.
 The nature of the matter to be communicated.
 Relevant legal or regulatory requirements.
 Whether the subgroup has the authority to take action in relation to the
information communicated, and can provide further information and
explanations the auditor may need.
A10. When deciding whether there is also a need to communicate information, in
full or in summary form, with the governing body, the auditor may be influenced
by the auditor’s assessment of how effectively and appropriately the subgroup
communicates relevant information with the governing body. The auditor may
make explicit in agreeing the terms of engagement that, unless prevented by
laws or regulations, the auditor retains the right to communicate directly with the
governing body.
A11. Audit committees (or similar subgroups with different names) exist in many
jurisdictions. Although their specific authority and functions may differ,

7 SA 315, “Identifying and Assessing the Risk of Material Misstatement Through Understanding the
Entity and its Environment”.
8
Currently, SA 600, ‘Using the Work of Another Auditor’ is in force. The standard is being revised
in light of the corresponding international standard.

SA 260 10
 Communication with Those Charged with Governance

communication with the audit committee, where one exists, has become a key
element in the auditor’s communication with those charged with governance.
Good governance principles suggest that:
 The auditor will be invited to regularly attend meetings of the audit
committee.
 The chair of the audit committee and, when relevant, the other members of
the audit committee, will liaise with the auditor periodically.
 The audit committee will meet the auditor without management present at
least annually.
When All of Those Charged with Governance are Involved in Managing the
Entity (Ref: Para. 9)
A12. In some cases, all of those charged with governance are involved in
managing the entity, and the application of communication requirements is
modified to recognise this position. In such cases, communication with person(s)
with management responsibilities may not adequately inform all of those with
whom the auditor would otherwise communicate in their governance capacity.
For example, in a company where all directors are involved in managing the
entity, some of those directors (e.g., one responsible for marketing) may be
unaware of significant matters discussed with another director (e.g., one
responsible for the preparation of the financial statements).
Matters to be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit
(Ref: Para. 10)
A13. The auditor’s responsibilities in relation to the financial statement audit are
often included in the engagement letter or other suitable form of written
agreement that records the agreed terms of the engagement. Providing those
charged with governance with a copy of that engagement letter or other suitable
form of written agreement may be an appropriate way to communicate with them
regarding such matters as:
 The auditor’s responsibility for performing the audit in accordance with SAs,
which is directed towards the expression of an opinion on the financial
statements. The matters that SAs require to be communicated, therefore,
include significant matters arising from the audit of the financial statements
that are relevant to those charged with governance in overseeing the
financial reporting process.

11 SA 260
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 The fact that SAs do not require the auditor to design procedures for the
purpose of identifying supplementary matters to communicate with those
charged with governance.
 When applicable, the auditor’s responsibility for communicating particular
matters required by laws or regulations, by agreement with the entity or by
additional requirements applicable to the engagement.
A14. Laws or regulations, an agreement with the entity or additional
requirements applicable to the engagement may provide for broader
communication with those charged with governance. For example, (a) an
agreement with the entity may provide for particular matters to be communicated
when they arise from services provided by a firm or network firm other than the
financial statement audit; or (b) the mandate of a public sector auditor may
provide for matters to be communicated that come to the auditor’s attention as a
result of other work, such as performance audits.
Planned Scope and Timing of the Audit (Ref: Para. 11)
A15. Communication regarding the planned scope and timing of the audit may:
(a) Assist those charged with governance to understand better the
consequences of the auditor’s work, to discuss issues of risk and the
concept of materiality with the auditor, and to identify any areas in which
they may request the auditor to undertake additional procedures; and
(b) Assist the auditor to understand better the entity and its environment.
A16. Care is required when communicating with those charged with governance
about the planned scope and timing of the audit so as not to compromise the
effectiveness of the audit, particularly where some or all of those charged with
governance are involved in managing the entity. For example, communicating
the nature and timing of detailed audit procedures may reduce the effectiveness
of those procedures by making them too predictable.
A17. Matters communicated may include:
 How the auditor proposes to address the significant 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.9
A18. Other planning matters that it may be appropriate to discuss with those
charged with governance include:

9 SA 320, “Materiality in Planning and Performing an Audit”.

SA 260 12
 Communication with Those Charged with Governance

 Where the entity has an internal audit function, the extent to which the
auditor will use the work of internal audit, and how the external and internal
auditors can best work together in a constructive and complementary
manner.
 The views of those charged with governance of:
 The appropriate person(s) in the entity’s governance structure with
whom to communicate.
 The allocation of responsibilities between those charged with
governance and management.
 The entity’s objectives and strategies, and the related business risks
that may result in material misstatements.
 Matters, which those charged with governance, consider warrant
particular attention during the audit, and any areas where they
request additional procedures to be undertaken.
 Significant communications with regulators.
 Other matters, which, those charged with governance, consider may
influence the audit of the financial statements.
 The attitudes, awareness, and actions of those charged with governance
concerning (a) the entity’s internal control and its importance in the entity,
including how those charged with governance oversee the effectiveness of
internal control, and (b) the detection or possibility of fraud.
 The actions of those charged with governance in response to
developments in accounting standards, corporate governance practices,
exchange listing rules, and related matters.
 The responses of those charged with governance to previous
communications with the auditor.
A19. While communication with those charged with governance may assist the
auditor to plan the scope and timing of the audit, it does not change the auditor’s
sole responsibility to establish the overall audit strategy and the audit plan,
including the nature, timing and extent of procedures necessary to obtain
sufficient appropriate audit evidence.
Significant Findings from the Audit (Ref: Para. 12)
A20. The communication of findings from the audit may include requesting
further information from those charged with governance in order to complete the
audit evidence obtained. For example, the auditor may confirm that those

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charged with governance have the same understanding of the facts and
circumstances relevant to specific transactions or events.
Significant Qualitative Aspects of Accounting Practices (Ref: Para. 12(a))
A21. Financial reporting frameworks ordinarily allow for the entity to make
accounting estimates, and judgments about accounting policies and financial
statement disclosures. Open and constructive communication about significant
qualitative aspects of the entity’s accounting practices may include comment on
the acceptability of significant accounting practices. Appendix 1 identifies matters
that may be included in this communication.
Significant Difficulties Encountered During the Audit (Ref: Para. 12(b))
A22. Significant difficulties encountered during the audit may include such
matters as:
 Significant delays in management providing required information.
 An unnecessarily brief time within which to complete the audit.
 Extensive unexpected effort required to obtain sufficient appropriate audit
evidence.
 The unavailability of expected information.
 Restrictions imposed on the auditor by management.
 Management’s unwillingness to make or extend its assessment of the
entity’s ability to continue as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that
leads to a modification of the auditor’s opinion.10
Significant Matters Discussed, or Subject to Correspondence with Management
(Ref: Para. 12(c)(ii))
A23. Significant matters discussed, or subject to correspondence with
management may include such matters as:
 Business conditions affecting the entity, and business plans and strategies
that may affect the risks of material misstatement.
 Concerns about management’s consultations with other accountants on
accounting or auditing matters.

10 SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”.

SA 260 14
 Communication with Those Charged with Governance

 Discussions or correspondence in connection with the initial or recurring

appointment of the auditor regarding accounting practices, the application
of auditing standards, or fees for audit or other services.
Other Significant Matters Relevant to the Financial Reporting Process (Ref: Para.
12(d))
A24. Other significant matters arising from the audit that are directly relevant to
those charged with governance in overseeing the financial reporting process may
include such matters as material misstatements of fact or material
inconsistencies in information accompanying the audited financial statements
that have been corrected.
Auditor Independence (Ref: Para. 13)
A25. The auditor is subject to independence and other ethical requirements as
enunciated in the Code of Ethics issued by the ICAI11.
A26. The relationships and other matters, and safeguards to be communicated,
vary with the circumstances of the engagement, but generally address:
(a) Threats to independence, which may be categorised as: self-interest
threats, self-review threats, advocacy threats, familiarity threats, and
intimidation threats; and
(b) Safeguards created by the profession, legislation or regulation, safeguards
within the entity, and safeguards within the firm’s own systems and
procedures.
The communication required by paragraph 13(a) may include an inadvertent
violation of relevant ethical requirements as they relate to auditor independence,
and any remedial action taken or proposed.
A27. The communication requirements relating to auditor independence that
apply in the case of listed entities may also be relevant in the case of some other
entities, particularly those that may be of significant public interest because, as a
result of their business, their size or their corporate status, they have a wide
range of stakeholders. Examples of entities that are not listed entities, but where
communication of auditor independence may be appropriate, include public
sector entities, credit institutions, insurance companies, and retirement benefit
funds. On the other hand, there may be situations where communications
regarding independence may not be relevant, for example, where all of those
charged with governance have been informed of relevant facts through their

11Attention of the members is also invited, for instance, to the Guidance Note on Independence of
Auditors, issued by the ICAI.

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Handbook of Auditing Pronouncements-I.A

management activities. This is particularly likely where the entity is owner-

managed, and the auditor’s firm and network firms have little involvement with
the entity beyond a financial statement audit.
Supplementary Matters (Ref: Para. 3)
A28. Those charged with governance are responsible for ensuring, through
oversight of management, that the entity establishes and maintains internal
control to provide reasonable assurance with regard to reliability of financial
reporting, effectiveness and efficiency of operations and compliance with
applicable laws and regulations.
A29. The auditor may become aware of supplementary matters that do not
necessarily relate to the oversight of the financial reporting process but which
are, nevertheless, likely to be significant to the responsibilities of those charged
with governance in overseeing the strategic direction of the entity or the entity’s
obligations related to accountability. Such matters may include, for example,
significant issues regarding governance structures or processes, and significant
decisions or actions by senior management that lack appropriate authorisation.
A30. In determining whether to communicate supplementary matters with those
charged with governance, the auditor may discuss matters of this kind, of which
the auditor has become aware, with the appropriate level of management, unless
it is inappropriate to do so in the circumstances.
A31. If a supplementary matter is communicated, it may be appropriate for the
auditor to make those charged with governance aware that:
(a) Identification and communication of such matters is incidental to the
purpose of the audit, which is to form an opinion on the financial
statements;
(b) No procedures were carried out with respect to the matter other than any
that were necessary to form an opinion on the financial statements; and
(c) No procedures were carried out to determine whether other such matters
exist.
The Communication Process
Establishing the Communication Process (Ref: Para. 14)
A32. Clear communication of the auditor’s responsibilities, the planned scope
and timing of the audit, and the expected general content of communications
helps establish the basis for effective two-way communication.
A33. Matters that may also contribute to effective two-way communication
include discussion of:
SA 260 16
 Communication with Those Charged with Governance

 The purpose of communications. When the purpose is clear, the auditor

and those charged with governance are better placed to have a mutual
understanding of relevant issues and the expected actions arising from the
communication process.
 The form in which communications will be made.
 The person(s) in the audit team and amongst those charged with
governance who will communicate regarding particular matters.
 The auditor’s expectation that communication will be two-way, and that
those charged with governance will communicate with the auditor, matters
they consider relevant to the audit, for example, strategic decisions that
may significantly affect the nature, timing and extent of audit procedures,
the suspicion or the detection of fraud, and concerns with the integrity or
competence of senior management.
 The process for taking action and reporting back on matters communicated
by the auditor.
 The process for taking action and reporting back on matters communicated
by those charged with governance.
A34. The communication process will vary with the circumstances, including the
size and governance structure of the entity, how those charged with governance
operate, and the auditor’s view of the significance of matters to be
communicated. Difficulty in establishing effective two-way communication may
indicate that the communication between the auditor and those charged with
governance is not adequate for the purpose of the audit (see paragraph A48).
Considerations Specific to Smaller Entities
A35. In the case of audits of smaller entities, the auditor may communicate in a
less structured manner with those charged with governance than in the case of
listed or larger entities.
Communication with Management
A36. Many matters may be discussed with management in the ordinary course of
an audit, including matters required by this SA to be communicated with those
charged with governance. Such discussions recognise management’s executive
responsibility for the conduct of the entity’s operations and, in particular,
management’s responsibility for the preparation of the financial statements.
A37. Before communicating matters with those charged with governance, the
auditor may discuss them with management, unless that is inappropriate. For
example, it may not be appropriate to discuss questions of management’s

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competence or integrity with management. In addition to recognising

management’s executive responsibility, these initial discussions may clarify facts
and issues, and give management an opportunity to provide further information
and explanations. Similarly, when the entity has an internal audit function, the
auditor may discuss matters with the internal auditor before communicating with
those charged with governance.
Communication with Third Parties
A38. Those charged with governance may wish to provide third parties, for
example, bankers or certain regulatory authorities, with copies of a written
communication from the auditor. In some cases, disclosure to third parties may
be illegal or otherwise inappropriate. When a written communication prepared for
those charged with governance is provided to third parties, it may be important in
the circumstances that the third parties be informed that the communication was
not prepared with them in mind, for example, by stating in written
communications with those charged with governance:
a) That the communication has been prepared for the sole use of those
charged with governance and, where applicable, the group management
and the group auditor, should not be relied upon by third parties;
(b) That no responsibility is assumed by the auditor to third parties; and
(c) Any restrictions on disclosure or distribution to third parties.
A39. The auditor may be required by laws or regulations to, for example:
 Notify a regulatory or enforcement body of certain matters communicated
with those charged with governance. The auditor has a duty to report
misstatements to authorities where management and those charged with
governance fail to take corrective action;
 Submit copies of certain reports prepared for those charged with
governance to relevant regulatory or funding bodies, or other bodies such
as Central Government in the case of some public sector undertakings; or
 Make reports prepared for those charged with governance publicly
available.
A40. Unless required by laws or regulations to provide a third party with a copy
of the auditor’s written communications with those charged with governance, the
auditor may need the prior consent of those charged with governance before
doing so.

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 Communication with Those Charged with Governance

Forms of Communication (Ref: Para. 15-16)

A41. Effective communication may involve structured presentations and written
reports as well as less structured communications, including discussions. The
auditor may communicate matters other than those identified in paragraphs 15
and 16 either orally or in writing. Written communications may include an
engagement letter that is provided to those charged with governance.
A42. In addition to the significance of a particular matter, the form of
communication (e.g., whether to communicate orally or in writing, the extent of
detail or summarisation in the communication, and whether to communicate in a
structured or unstructured manner) may be affected by such factors as:
 Whether the matter has been satisfactorily resolved.
 Whether management has previously communicated the matter.
 The size, operating structure, control environment, and legal structure of
the entity.
 In the case of an audit of special purpose financial statements, whether the
auditor also audits the entity’s general purpose financial statements.
 Legal requirements. In some jurisdictions, a written communication with
those charged with governance is required in a prescribed form by local
law.
 The expectations of those charged with governance, including
arrangements made for periodic meetings or communications with the
auditor.
 The amount of ongoing contact and dialogue the auditor has with those
charged with governance.
 Whether there have been significant changes in the membership of a
governing body.
A43. When a significant matter is discussed with an individual member of those
charged with governance, for example, the chair of an audit committee, it may be
appropriate for the auditor to summarise the matter in later communications so
that all of those charged with governance have full and balanced information.
Timing of Communications (Ref: Para. 17)
A44. The appropriate timing for communications will vary with the circumstances
of the engagement. Relevant circumstances include the significance and nature
of the matter, and the action expected to be taken by those charged with
governance. For example:

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Handbook of Auditing Pronouncements-I.A

 Communications regarding planning matters may often be made early in

the audit engagement and, for an initial engagement, may be made as part
of agreeing the terms of the engagement.
 It may be appropriate to communicate a significant difficulty encountered
during the audit as soon as practicable if those charged with governance
are able to assist the auditor to overcome the difficulty, or if it is likely to
lead to a modified opinion. Similarly, the auditor may communicate orally to
those charged with governance as soon as practicable significant
deficiencies in internal control that the auditor has identified prior to
communicating these in writing as required by SA 265.12
 Communications regarding independence may be appropriate whenever
significant judgments are made about threats to independence and related
safeguards, for example, when accepting an engagement to provide non-
audit services, and at a concluding discussion. A concluding discussion
may also be an appropriate time to communicate findings from the audit,
including the auditor’s views about the qualitative aspects of the entity’s
accounting practices.
 When auditing both general purpose and special purpose financial
statements, it may be appropriate to co-ordinate the timing of
communications.
A45. Other factors that may be relevant to the timing of communications include:
 The size, operating structure, control environment, and legal structure of
the entity being audited.
 Any legal obligation to communicate certain matters within a specified
timeframe.
 The expectations of those charged with governance, including
arrangements made for periodic meetings or communications with the
auditor.
 The time at which the auditor identifies certain matters, for example, the
auditor may not identify a particular matter (e.g., non-compliance with a
law) in time for preventive action to be taken, but communication of the
matter may enable remedial action to be taken.
Adequacy of the Communication Process (Ref: Para. 18)
A46. The auditor need not design specific procedures to support the evaluation
of the two-way communication between the auditor and those charged with

12SA 265, “Communicating Deficiencies in Internal Control to Those Charged with Governance
and Management,” paragraphs 9 and A14.

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 Communication with Those Charged with Governance

governance; rather, that evaluation may be based on observations resulting from

audit procedures performed for other purposes. Such observations may include:
 The appropriateness and timeliness of actions taken by those charged with
governance in response to matters raised by the auditor. Where significant
matters raised in previous communications have not been dealt with
effectively, it may be appropriate for the auditor to inquire as to why
appropriate action has not been taken, and to consider raising the point
again. This avoids the risk of giving an impression that the auditor is
satisfied that the matter has been adequately addressed or is no longer
significant.
 The apparent openness of those charged with governance in their
communications with the auditor.
 The willingness and capacity of those charged with governance to meet
with the auditor without management present.
 The apparent ability of those charged with governance to fully comprehend
matters raised by the auditor, for example, the extent to which those
charged with governance probe issues, and question recommendations
made to them.
 Difficulty in establishing with those charged with governance a mutual
understanding of the form, timing and expected general content of
communications.
 Where all or some of those charged with governance are involved in
managing the entity, their apparent awareness of how matters discussed
with the auditor affect their broader governance responsibilities, as well as
their management responsibilities.
 Whether the two-way communication between the auditor and those
charged with governance meets applicable legal and regulatory
requirements.
A47. As noted in paragraph A1, effective two-way communication assists both
the auditor and those charged with governance. Further, SA 315 identifies
participation by those charged with governance, including their interaction with
internal audit, if any, and external auditors, as an element of the entity’s control
environment.13 Inadequate two-way communication may indicate an
unsatisfactory control environment and influence the auditor’s assessment of the

13SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding
the Entity and Its Environment”, paragraph A70.

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Handbook of Auditing Pronouncements-I.A

risks of material misstatements. There is also a risk that the auditor may not have
obtained sufficient appropriate audit evidence to form an opinion on the financial
statements.
A48. If the two-way communication between the auditor and those charged with
governance is not adequate and the situation cannot be resolved, the auditor
may take such actions as:
 Modifying the auditor’s opinion on the basis of a scope limitation.
 Obtaining legal advice about the consequences of different courses of
action.
 Communicating with third parties (e.g., a regulator), or a higher authority in
the governance structure that is outside the entity, such as the owners of a
business (e.g., shareholders in a general meeting), or the responsible
government minister or parliament in the public sector.
 Withdrawing from the engagement where permitted in the relevant
jurisdiction.
Documentation (Ref: Para. 19)
A49. Documentation of oral communication may include a copy of minutes
prepared by the entity retained as part of the audit documentation where those
minutes are an appropriate record of the communication.
Material Modifications to ISA 260, Communication with
Those Charged with Governance
The SA 260, “Communication with Those Charged with Governance” does not
contain any material modifications vis-a-vis ISA 260.

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 Communication with Those Charged with Governance

Appendix
(Ref: Para. 12(a), and A21)
Qualitative Aspects of Accounting Practices
The communication required by paragraph 12(a), and discussed in paragraph
A21, may include such matters as:
Accounting Policies
 The appropriateness of the accounting policies to the particular
circumstances of the entity, having regard to the need to balance the cost
of providing information with the likely benefit to users of the entity’s
financial statements. Where acceptable alternative accounting policies
exist, the communication may include identification of the financial
statement items that are affected by the choice of significant accounting
policies as well as information on accounting policies used by similar
entities.
 The initial selection of, and changes in significant accounting policies,
including the application of new accounting pronouncements. The
communication may include: the effect of the timing and method of
adoption of a change in accounting policy on the current and future
earnings of the entity; and the timing of a change in accounting policies in
relation to expected new accounting pronouncements.
 The effect of significant accounting policies in controversial or emerging
areas (or those unique to an industry, particularly when there is a lack of
authoritative guidance or consensus).
 The effect of the timing of transactions in relation to the period in which they
are recorded.
Accounting Estimates
 For items for which estimates are significant, issues discussed in SA 54014
including, for example:
 Management’s identification of accounting estimates.
 Management’s process for making accounting estimates.
 Risks of material misstatement.

14SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”.

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Handbook of Auditing Pronouncements-I.A

 Indicators of possible management bias.

 Disclosure of estimation uncertainty in the financial statements.
Financial Statement Disclosures
 The issues involved, and related judgments made, in formulating
particularly sensitive financial statement disclosures (e.g., disclosures
related to revenue recognition, remuneration, going concern, subsequent
events, and contingency issues).
 The overall neutrality, consistency, and clarity of the disclosures in the
financial statements.
Related Matters
 The potential effect on the financial statements of significant risks,
exposures and uncertainties, such as pending litigation, that are disclosed
in the financial statements.
 The extent to which the financial statements are affected by unusual
transactions, including non-recurring amounts recognised during the period,
and the extent to which such transactions are separately disclosed in the
financial statements.
 The factors affecting asset and liability carrying values, including the entity’s
bases for determining useful lives assigned to tangible and intangible
assets. The communication may explain how factors affecting carrying
values were selected and how alternative selections would have affected
the financial statements.
 The selective correction of misstatements, for example, correcting
misstatements with the effect of increasing reported earnings, but not those
that have the effect of decreasing reported earnings.

SA 260 24