PROPOSED INTERNATIONAL STANDARD ON AUDITING (ISA) 260 (REVISED) COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

PROPOSED INTERNATIONAL STANDARD ON AUDITING (ISA) 260 (REVISED) COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (Effective fr audits f financial statements fr perids [beginning/ending n r after date December 15, 2009]) Intrductin CONTENTS [MARKED FROM EXTANT ISA 260] Paragraph Scpe f this ISA... The Rle f Cmmunicatin... 1 3 4 7 Effective Date... 8 Objectives... 9 Definitins... 10 Requirements Thse Charged with Gvernance... Matters t Be Cmmunicated... The Cmmunicatin Prcess... 11 13 14 17 18 22 Dcumentatin... 23 Applicatin and Other Explanatry Material Thse Charged with Gvernance... Matters t Be Cmmunicated... The Cmmunicatin Prcess... Dcumentatin... A1 A8 A9 A27 A28 A44 A45 Appendix 1: Specific Requirements in ISQC 1 and Other ISAs that Refer t Cmmunicatins with Thse Charged with Gvernance Appendix 2: Qualitative Aspects f Accunting Practices Prpsed Internatinal Standard n Auditing (ISA) 260 (Revised), Cmmunicatin with Thse Charged with Gvernance, shuld be read in cnjunctin with ISA 200, Overall Objectives f the Independent Auditr and the Cnduct f an Audit in Accrdance with Internatinal Standards n Auditing. 1

Intrductin Scpe f this ISA 1. This Internatinal Standard n Auditing (ISA) deals with the auditr s respnsibility t cmmunicate with thse charged with gvernance in an audit f financial statements. Althugh this ISA applies irrespective f an entity s gvernance structure r size, particular cnsideratins apply where all f thse charged with gvernance are invlved in managing an entity, and fr listed entities. This ISA des nt establish requirements regarding the auditr s cmmunicatin with an entity s management r wners unless they are als charged with a gvernance rle. 2. This ISA is written in the cntext f an audit f financial statements, but may als be applicable, adapted as necessary in the circumstances, t audits f ther histrical financial infrmatin when thse charged with gvernance have a respnsibility t versee the preparatin f the ther histrical financial infrmatin. 3. Recgnizing the imprtance f effective tw-way cmmunicatin in an audit f financial statements, this ISA prvides an verarching framewrk fr the auditr s cmmunicatin with thse charged with gvernance, and identifies sme specific matters t be cmmunicated with them. Additinal matters t be cmmunicated, which cmplement the requirements f this ISA, are identified in ther ISAs (see Appendix 1). In additin, ISA 265 1 establishes specific requirements regarding the cmmunicatin f significant deficiencies in internal cntrl the auditr has identified during the audit t thse charged with gvernance. Further matters, nt required by this r ther ISAs, may be required t be cmmunicated by law r regulatin, by agreement with the entity, r by additinal requirements applicable t the engagement, fr example, the standards f a natinal prfessinal accuntancy bdy. Nthing in this ISA precludes the auditr frm cmmunicating any ther matters t thse charged with gvernance. (Ref: Para. A24 A27) The Rle f Cmmunicatin 4. This ISA fcuses primarily n cmmunicatins frm the auditr t thse charged with gvernance. Nevertheless, effective tw-way cmmunicatin is imprtant in assisting: (a) (b) (c) The auditr and thse charged with gvernance in understanding matters related t the audit in cntext, and in develping a cnstructive wrking relatinship. This relatinship is develped while maintaining the auditr s independence and bjectivity; The auditr in btaining frm thse charged with gvernance infrmatin relevant t the audit. Fr example, thse charged with gvernance may assist the auditr in understanding the entity and its envirnment, in identifying apprpriate surces f audit evidence, and in prviding infrmatin abut specific transactins r events; and Thse charged with gvernance in fulfilling their respnsibility t versee the financial reprting prcess, thereby reducing the risks f material misstatement f the financial statements. 5. Althugh the auditr is respnsible fr cmmunicating matters required by this ISA, management als has a respnsibility t cmmunicate matters f gvernance interest t thse charged with gvernance. Cmmunicatin by the auditr des nt relieve management f this respnsibility. 1 ISA 265, Cmmunicating Deficiencies in Internal Cntrl t Thse Charged with Gvernance and Management 2

Similarly, cmmunicatin by management with thse charged with gvernance f matters that the auditr is required t cmmunicate des nt relieve the auditr f the respnsibility t als cmmunicate them. Cmmunicatin f these matters by management may, hwever, affect the frm r timing f the auditr s cmmunicatin with thse charged with gvernance. 6. Clear cmmunicatin f specific matters required t be cmmunicated by ISAs is an integral part f every audit. ISAs d nt, hwever, require the auditr t perfrm prcedures specifically t identify any ther matters t cmmunicate with thse charged with gvernance. 7. Law r regulatin may restrict the auditr s cmmunicatin f certain matters with thse charged with gvernance. Fr example, laws r regulatins may specifically prhibit a cmmunicatin, r ther actin, that might prejudice an investigatin by an apprpriate authrity int an actual, r suspected, illegal act. In sme circumstances, ptential cnflicts between the auditr s bligatins f cnfidentiality and bligatins t cmmunicate may be cmplex. In such cases, the auditr may cnsider btaining legal advice. Effective Date 8. This ISA is effective fr audits f financial statements fr perids [beginning/ending n r after datedecember 15, 2009]. Objectives 9. The bjectives f the auditr are: (a) (b) (c) (d) T cmmunicate clearly with thse charged with gvernance the respnsibilities f the auditr in relatin t the financial statement audit, and an verview f the planned scpe and timing f the audit; T btain frm thse charged with gvernance infrmatin relevant t the audit; T prvide thse charged with gvernance with timely bservatins arising frm the audit that are significant and relevant t their respnsibility t versee the financial reprting prcess; and T prmte effective tw-way cmmunicatin between the auditr and thse charged with gvernance. Definitins 10. Fr purpses f the ISAs, the fllwing terms have the meanings attributed belw: (a) (b) Thse charged with gvernance The persn(s) r rganizatin(s) (fr example, a crprate trustee) with respnsibility fr verseeing the strategic directin f the entity and bligatins related t the accuntability f the entity. This includes verseeing the financial reprting prcess. Fr sme entities in sme jurisdictins, thse charged with gvernance may include management persnnel, fr example, executive members f a gvernance bard f a private r public sectr entity, r an wner-manager. Fr discussin f the diversity f gvernance structures, see paragraphs A1 A8. Management The persn(s) with executive respnsibility fr the cnduct f the entity s peratins. Fr sme entities in sme jurisdictins, management includes sme r all f 3

Requirements thse charged with gvernance, fr example, executive members f a gvernance bard, r an wner-manager. Thse Charged with Gvernance 11. The auditr shall determine the apprpriate persn(s) within the entity s gvernance structure with whm t cmmunicate. (Ref: Para. A1 A4) Cmmunicatin with a Subgrup f Thse Charged with Gvernance 12. If the auditr cmmunicates with a subgrup f thse charged with gvernance, fr example, an audit cmmittee, r an individual, the auditr shall determine whether the auditr als needs t cmmunicate with the gverning bdy. (Ref: Para. A5 A7) When All f Thse Charged with Gvernance Are Invlved in Managing the Entity 13. In sme cases, all f thse charged with gvernance are invlved in managing the entity, fr example, a small business where a single wner manages the entity and n ne else has a gvernance rle. In these cases, if matters required by this ISA are cmmunicated with persn(s) with management respnsibilities, and thse persn(s) als have gvernance respnsibilities, the matters need nt be cmmunicated again with thse same persn(s) in their gvernance rle. These matters are nted in paragraph 16(dc). The auditr shall nnetheless be satisfied that cmmunicatin with persn(s) with management respnsibilities adequately infrms all f thse with whm the auditr wuld therwise cmmunicate in their gvernance capacity. (Ref: Para. A8) Matters t Be Cmmunicated The Auditr s Respnsibilities in Relatin t the Financial Statement Audit 14. The auditr shall cmmunicate with thse charged with gvernance the respnsibilities f the auditr in relatin t the financial statement audit, including that: (a) (b) The auditr is respnsible fr frming and expressing an pinin n the financial statements that have been prepared by management with the versight f thse charged with gvernance; and The audit f the financial statements des nt relieve management r thse charged with gvernance f their respnsibilities. (Ref: Para. A9 A10) Planned Scpe and Timing f the Audit 15. The auditr shall cmmunicate with thse charged with gvernance an verview f the planned scpe and timing f the audit, which includes cmmunicating abut the significant risks identified by the auditr. (Ref: Para. A11 A15) Significant Findings frm the Audit 16. The auditr shall cmmunicate with thse charged with gvernance: (Ref: Para. A16) (a) The auditr s views abut significant qualitative aspects f the entity s accunting practices, including accunting plicies, accunting estimates and financial statement disclsures. When applicable, the auditr shall explain t thse charged with gvernance why the auditr 4

cnsiders a significant accunting practice, that is acceptable under the applicable financial reprting framewrk, nt t be mst apprpriate t the particular circumstances f the entity; (Ref: Para. A17 A17a) (b) Significant difficulties, if any, encuntered during the audit; (Ref: Para. A18) (c) (dc) Circumstances that required significant mdificatin f the auditr s planned apprach t the audit; (Ref: Para. A18a A18b) Unless all f thse charged with gvernance are invlved in managing the entity: (i) (ii) Significant matters, if any, arising duringfrm the audit that were discussed, r subject t crrespndence, with management; and (Ref: Para. A19) Written representatins the auditr is requesting; and (ed) Any Other significant matters, if any, arising frm during the audit that, in the auditr s prfessinal judgment, are relevantsignificant t the versight f the financial reprting prcess. (Ref: Para. A20 A20a) Auditr Independence 17. In the case f listed entities, the auditr shall cmmunicate with thse charged with gvernance: (a) A statement that the engagement team and thers in the firm as apprpriate, the firm and, when applicable, netwrk firms have cmplied with relevant ethical requirements regarding independence; and (i) (ii) All relatinships and ther matters between the firm, netwrk firms, and the entity that, in the auditr s prfessinal judgment, may reasnably be thught t bear n independence. This shall include ttal fees charged during the perid cvered by the financial statements fr audit and nn-audit services prvided by the firm and netwrk firms t the entity and cmpnents cntrlled by the entity. These fees shall be allcated t categries that are apprpriate t assist thse charged with gvernance in assessing the effect f services n the independence f the auditr; and The related safeguards that have been applied t eliminate identified threats t independence r reduce them t an acceptable level. (Ref: Para. A21 A23) The Cmmunicatin Prcess Establishing the Cmmunicatin Prcess 18. The auditr shall cmmunicate with thse charged with gvernance the frm, timing and expected general cntent f cmmunicatins. (Ref: Para. A28 A36) Frms f Cmmunicatin 19. The auditr shall cmmunicate in writing with thse charged with gvernance regarding significant findings frm the audit if, in the auditr s prfessinal judgment, ral cmmunicatin wuld nt be adequate. Written cmmunicatins need nt include all matters that arse during the curse f the audit. (Ref: Para. A37 A39) 20. The auditr shall cmmunicate in writing with thse charged with gvernance regarding auditr independence when required by paragraph 17. 5

Timing f Cmmunicatins 21. The auditr shall cmmunicate with thse charged with gvernance n a timely basis. (Ref: Para. A40 A41) Adequacy f the Cmmunicatin Prcess 22. The auditr shall evaluate whether the tw-way cmmunicatin between the auditr and thse charged with gvernance has been adequate fr the purpse f the audit. If it has nt, the auditr shall evaluate the effect, if any, n the auditr s assessment f the risks f material misstatement and ability t btain sufficient apprpriate audit evidence, and shall take apprpriate actin. (Ref: Para. A42 A44) Dcumentatin 23. Where matters required by this ISA t be cmmunicated are cmmunicated rally, the auditr shall include them in the audit dcumentatin, and when and t whm they were cmmunicated. Where matters have been cmmunicated in writing, the auditr shall retain a cpy f the cmmunicatin as part f the audit dcumentatin. 2 (Ref: Para. A45) *** Applicatin and Other Explanatry Material Thse Charged with Gvernance (Ref: Para. 11) A1. Gvernance structures vary by jurisdictin and by entity, reflecting influences such as different cultural and legal backgrunds, and size and wnership characteristics. Fr example: In sme jurisdictins, a supervisry (whlly r mainly nn-executive) bard exists that is legally separate frm an executive (management) bard (a tw-tier bard structure). In ther jurisdictins, bth the supervisry and executive functins are the legal respnsibility f a single, r unitary, bard (a ne-tier bard structure). In sme entities, thse charged with gvernance hld psitins that are an integral part f the entity s legal structure, fr example, cmpany directrs. In thers, fr example, sme gvernment entities, a bdy that is nt part f the entity is charged with gvernance. In sme cases, sme r all f thse charged with gvernance are invlved in managing the entity. In thers, thse charged with gvernance and management cmprise different persns. In sme cases, thse charged with gvernance are respnsible fr apprving 3 the entity s financial statements (in ther cases management has this respnsibility). A2. In mst entities, gvernance is the cllective respnsibility f a gverning bdy, such as a bard f directrs, a supervisry bard, partners, prprietrs, a cmmittee f management, a cuncil f gvernrs, trustees, r equivalent persns. In sme smaller entities, hwever, ne persn may be charged with gvernance, fr example, the wner-manager where there are n ther wners, r a 2 3 ISA 230, Audit Dcumentatin, paragraphs 8 11, and A6 As described inat paragraph A50A40 f prpsed ISA 700 (Revised), Frming an Opinin and Reprting n Financial Statements, having respnsibility fr apprving in this cntext means having the authrity t cnclude that all the statements that cmprise the financial statements, including the related ntes, have been prepared. 6

sle trustee. When gvernance is a cllective respnsibility, a subgrup such as an audit cmmittee r even an individual, may be charged with specific tasks t assist the gverning bdy in meeting its respnsibilities. Alternatively, a subgrup r individual may have specific, legally identified respnsibilities that differ frm thse f the gverning bdy. A3. Such diversity means that it is nt pssible fr this ISA t specify fr all audits the persn(s) with whm the auditr is t cmmunicate particular matters. Als, in sme cases, the apprpriate persn(s) with whm t cmmunicate may nt be clearly identifiable frm the applicable legal framewrk r ther engagement circumstances, fr example, entities where the gvernance structure is nt frmally defined, such as sme family-wned entities, sme nt-fr-prfit rganizatins, and sme gvernment entities. In such cases, the auditr may need t discuss and agree with the engaging party the relevant persn(s) with whm t cmmunicate. In deciding with whm t cmmunicate, the auditr s understanding f an entity s gvernance structure and prcesses btained in accrdance with ISA 315 (Revised) 4 is relevant. The apprpriate persn(s) with whm t cmmunicate may vary depending n the matter t be cmmunicated. A4. ISA 600 includes specific matters t be cmmunicated by grup auditrs with thse charged with gvernance. 5 When the entity is a cmpnent f a grup, the apprpriate persn(s) with whm the cmpnent auditr cmmunicates depends n the engagement circumstances and the matter t be cmmunicated. In sme cases, a number f cmpnents may be cnducting the same businesses within the same system f internal cntrl and using the same accunting practices. Where thse charged with gvernance f thse cmpnents are the same (fr example, cmmn bard f directrs), duplicatin may be avided by dealing with these cmpnents cncurrently fr the purpse f cmmunicatin. Cmmunicatin with a Subgrup f Thse Charged with Gvernance (Ref: Para. 12) A5. When cnsidering cmmunicating with a subgrup f thse charged with gvernance, the auditr may take int accunt such matters as: The respective respnsibilities f the subgrup and the gverning bdy. The nature f the matter t be cmmunicated. Relevant legal r regulatry requirements. Whether the subgrup has the authrity t take actin in relatin t the infrmatin cmmunicated, and can prvide further infrmatin and explanatins the auditr may need. A6. When deciding whether there is als a need t cmmunicate infrmatin, in full r in summary frm, with the gverning bdy, the auditr may be influenced by the auditr s assessment f hw effectively and apprpriately the subgrup cmmunicates relevant infrmatin with the gverning bdy. The auditr may make explicit in agreeing the terms f engagement that, unless prhibited by law r regulatin, the auditr retains the right t cmmunicate directly with the gverning bdy. A7. Audit cmmittees (r similar subgrups with different names) exist in many jurisdictins. Althugh their specific authrity and functins may differ, cmmunicatin with the audit cmmittee, where ne 4 5 ISA 315 (Revised), Identifying and Assessing the Risks f Material Misstatement thrugh Understanding the Entity and Its Envirnment ISA 600, Special Cnsideratins Audits f Grup Financial Statements (Including the Wrk f Cmpnent Auditrs), paragraphs 46 49 7

exists, has becme a key element in the auditr s cmmunicatin with thse charged with gvernance. Gd gvernance principles suggest that: The auditr will be invited t regularly attend meetings f the audit cmmittee. The chair f the audit cmmittee and, when relevant, the ther members f the audit cmmittee, will liaise with the auditr peridically. The audit cmmittee will meet the auditr withut management present at least annually. When All f Thse Charged with Gvernance Are Invlved in Managing the Entity (Ref: Para.13) A8. In sme cases, all f thse charged with gvernance are invlved in managing the entity, and the applicatin f cmmunicatin requirements is mdified t recgnize this psitin. In such cases, cmmunicatin with persn(s) with management respnsibilities may nt adequately infrm all f thse with whm the auditr wuld therwise cmmunicate in their gvernance capacity. Fr example, in a cmpany where all directrs are invlved in managing the entity, sme f thse directrs (fr example, ne respnsible fr marketing) may be unaware f significant matters discussed with anther directr (fr example, ne respnsible fr the preparatin f the financial statements). Matters t Be Cmmunicated The Auditr s Respnsibilities in Relatin t the Financial Statement Audit (Ref: Para. 14) A9. The auditr s respnsibilities in relatin t the financial statement audit are ften included in the engagement letter r ther suitable frm f written agreement that recrds the agreed terms f the engagement. Law, regulatin r the gvernance structure f the entity may require thse charged with gvernance t agree the terms f the audit with the auditr. When this is nt the case, Pprviding thse charged with gvernance with a cpy f that engagement letter r ther suitable frm f written agreement may be an apprpriate way t cmmunicate with them regarding such matters as: The auditr s respnsibility fr perfrming the audit in accrdance with ISAs, which is directed twards the expressin f an pinin n the financial statements. The matters that ISAs require t be cmmunicated, therefre, include significant matters arising frm during the audit f the financial statements that are relevant t thse charged with gvernance in verseeing the financial reprting prcess. The fact that ISAs d nt require the auditr t design prcedures fr the purpse f identifying supplementary matters t cmmunicate with thse charged with gvernance. When applicable, the auditr s respnsibilities t determine and cmmunicate key audit matters in the auditr s reprt in accrdance with prpsed ISA 701. 6 When applicable, the auditr s respnsibility fr cmmunicating particular matters required by law r regulatin, by agreement with the entity r by additinal requirements applicable t the engagement, fr example, the standards f a natinal prfessinal accuntancy bdy. A10. Law r regulatin, an agreement with the entity r additinal requirements applicable t the engagement may prvide fr brader cmmunicatin with thse charged with gvernance. Fr 6 Prpsed ISA 701, Cmmunicating Key Audit Matters in the Independent Auditr s Reprt 8

example, (a) an agreement with the entity may prvide fr particular matters t be cmmunicated when they arise frm services prvided by a firm r netwrk firm ther than the financial statement audit; r (b) the mandate f a public sectr auditr may prvide fr matters t be cmmunicated that cme t the auditr s attentin as a result f ther wrk, such as perfrmance audits. Planned Scpe and Timing f the Audit (Ref: Para. 15) A11. Cmmunicatin regarding the planned scpe and timing f the audit may: (a) (b) Assist thse charged with gvernance t understand better the cnsequences f the auditr s wrk, t discuss issues f risk and the cncept f materiality with the auditr, and t identify any areas in which they may request the auditr t undertake additinal prcedures; and Assist the auditr t understand better the entity and its envirnment. A11a.Cmmunicating significant risks identified by the auditr helps thse charged with gvernance understand thse matters and why they require special audit cnsideratin. The cmmunicatin abut significant risks may assist thse charged with gvernance in fulfilling their respnsibility t versee the financial reprting prcess. * A12. Matters cmmunicated may include:^ Hw the auditr prpses t address the significant risks f material misstatement, whether due t fraud r errr. Assessed risks f material misstatement ther than identified significant risks that are anticipated t have the greatest effect n the verall audit strategy r n the audit plan, including n the effrts f the engagement team. The auditr s apprach t internal cntrl relevant t the audit. The applicatin f the cncept f materiality in the cntext f an audit. 7 The nature and extent f specialized skill r knwledge needed t perfrm the planned audit prcedures r evaluate the audit results, including the use f an auditr s expert. 8 A13. Other planning matters that it may be apprpriate t discuss with thse charged with gvernance include: Where the entity has an internal audit functin, the extent t which hw the external auditr will use the wrk f internal audit, and hw the external and internal auditrs can best wrk tgether in a cnstructive and cmplementary manner, including any planned use f the wrk * ^ 7 8 When the final standard is issued, this paragraph will becme paragraph A12 and all subsequent paragraphs will be renumbered accrdingly. Cnfrming amendments t this paragraph als were prpsed in the Expsure Draft, Prpsed ISA 720 (Revised), The Auditr s Respnsibilities Relating t Other Infrmatin in Dcuments Cntaining r Accmpanying Audited Financial Statements and the Auditr s Reprt Theren. The IAASB will cnsider feedback frm that cnsultatin in determining whether such changes cntinue t be apprpriate as it finalizes bth prpsed ISA 260 (Revised) and prpsed ISA 720 (Revised). ISA 320, Materiality in Planning and Perfrming an Audit See ISA 620, Using the Wrk f an Auditr s Expert. 9

f the internal audit functin, and the nature and extent f any planned use f internal auditrs t prvide direct assistance. 9 The views f thse charged with gvernance f: The apprpriate persn(s) in the entity s gvernance structure with whm t cmmunicate. The allcatin f respnsibilities between thse charged with gvernance and management. The entity s bjectives and strategies, and the related business risks that may result in material misstatements. Matters thse charged with gvernance cnsider warrant particular attentin during the audit, and any areas where they request additinal prcedures t be undertaken. Significant cmmunicatins with regulatrs. Other matters thse charged with gvernance cnsider may influence the audit f the financial statements. The attitudes, awareness, and actins f thse charged with gvernance cncerning (a) the entity s internal cntrl and its imprtance in the entity, including hw thse charged with gvernance versee the effectiveness f internal cntrl, and (b) the detectin r pssibility f fraud. The actins f thse charged with gvernance in respnse t develpments in accunting standards, crprate gvernance practices, exchange listing rules, and related matters. The respnses f thse charged with gvernance t previus cmmunicatins with the auditr. A14. While cmmunicatin with thse charged with gvernance may assist the auditr t plan the scpe and timing f the audit, it des nt change the auditr s sle respnsibility t establish the verall audit strategy and the audit plan, including the nature, timing and extent f prcedures necessary t btain sufficient apprpriate audit evidence. A15. Care is necessaryrequired when cmmunicating with thse charged with gvernance abut the planned scpe and timing f the audit s as nt t cmprmise the effectiveness f the audit, particularly where sme r all f thse charged with gvernance are invlved in managing the entity. Fr example, cmmunicating the nature and timing f detailed audit prcedures may reduce the effectiveness f thse prcedures by making them t predictable. Significant Findings frm the Audit (Ref: Para. 16) A16. The cmmunicatin f findings frm the audit may include requesting further infrmatin frm thse charged with gvernance in rder t cmplete the audit evidence btained. Fr example, the auditr may cnfirm that thse charged with gvernance have the same understanding f the facts and circumstances relevant t specific transactins r events. 9 ISA 610 (Revised), Using the Wrk f Internal Auditrs, paragraph 18, and ISA 610 (Revised 2013), Using the Wrk f Internal Auditrs, paragraph 31 10

Significant Qualitative Aspects f Accunting Practices (Ref: Para. 16(a)) A17. Financial reprting framewrks rdinarily allw fr the entity t make accunting estimates, and judgments abut accunting plicies and financial statement disclsures, fr example, in relatin t the use f key assumptins in the develpment f accunting estimates fr which there is significant measurement uncertainty. In additin, law, regulatin r financial reprting framewrks may require disclsure f a summary f significant accunting plicies r make reference t critical accunting estimates r critical accunting plicies and practices t identify and prvide additinal infrmatin t users abut the mst difficult, subjective r cmplex judgments made by management in preparing the financial statements. A17a.As a result, the auditr s views n the subjective aspects f the financial statements may be particularly relevant t thse charged with gvernance in discharging their respnsibilities fr versight f the financial reprting prcess. Fr example, in relatin t the matters described in paragraph A17, thse charged with gvernance may be interested in the auditr s evaluatin f the adequacy f disclsures f the estimatin uncertainty relating t accunting estimates that give rise t significant risks. Open and cnstructive cmmunicatin abut significant qualitative aspects f the entity s accunting practices als may include cmment n the acceptability f significant accunting practices. Appendix 2 identifies matters that may be included in this cmmunicatin. Significant Difficulties Encuntered during the Audit (Ref: Para. 16(b)) A18. Significant difficulties encuntered during the audit may include such matters as: Significant delays by management, the unavailability f entity persnnel, r an unwillingness inby management t prvideing required infrmatin necessary fr the auditr t perfrm the auditr s prcedures. An unreasnably unnecessarily brief time within which t cmplete the audit. Extensive unexpected effrt required t btain sufficient apprpriate audit evidence. The unavailability f expected infrmatin. Restrictins impsed n the auditr by management. Management s unwillingness t make r extend its assessment f the entity s ability t cntinue as a ging cncern when requested. In sme circumstances, such difficulties may cnstitute a scpe limitatin that leads t a mdificatin f the auditr s pinin. 10 Circumstances that Required Significant Mdificatin f the Auditr s Planned Apprach t the Audit (Ref: Para. 16(c)) A18a.ISA 300 11 ntes that, as a result f unexpected events, changes in cnditins, r the audit evidence btained frm the results f audit prcedures, the auditr may need t mdify the verall audit strategy and audit plan and thereby the resulting planned nature, timing and extent f further audit prcedures, based n the revised cnsideratin f risks. Timely cmmunicatin abut significant changes t the planned audit strategy, the audit plan r the significant risks identified (i.e., updates 10 11 Prpsed ISA 705 (Revised), Mdificatins t the Opinin in the Independent Auditr s Reprt ISA 300, Planning an Audit f Financial Statements, paragraph A13 11

t the matters required t be cmmunicated by paragraph 15) and the reasns fr such changes as they arise during the audit is als likely t be relevant t the respnsibilities f thse charged with gvernance t versee the financial reprting prcess. A18b.Mdificatin f the auditr s planned apprach t the audit may be necessary when a significant deficiency in internal cntrl has been identified in accrdance with ISA 265. 12 Fr example, when deviatins frm cntrls upn which the auditr intends t rely are detected, ISA 330 13 requires the auditr t understand these matters and their ptential cnsequences and determine whether, amng ther things, additinal tests f cntrls may be necessary r the ptential risks f misstatement need t be addressed using substantive prcedures. Significant Matters Discussed, r Subject t Crrespndence with Management (Ref: Para. 16(dc)(i)) A19. Significant matters discussed, r subject t crrespndence with management may include such matters as: Business cnditins affecting the entity, and business plans and strategies that may affect the risks f material misstatement. Cncerns abut management s cnsultatins with ther accuntants n accunting r auditing matters. Discussins r crrespndence in cnnectin with the initial r recurring appintment f the auditr regarding accunting practices, the applicatin f auditing standards, r fees fr audit r ther services. Significant matters n which there was disagreement with management, except fr initial differences f pinin because f incmplete facts r preliminary infrmatin that are later reslved by the auditr btaining additinal relevant facts r infrmatin. Other Significant Matters Relevant t the Financial Reprting Prcess (Ref: Para. 16(ed)) A20. Other significant matters arising duringfrm the audit that are directly relevant t thse charged with gvernance in verseeing the financial reprting prcess may include such matters as material misstatements f fact r material incnsistencies in infrmatin accmpanying the audited financial statements that have been crrected.^ A20a.T the extent nt already addressed by the requirements in paragraphs 16(a) (e) and related applicatin material, the auditr may cnsider cmmunicating abut ther matters discussed with, r cnsidered by, the engagement quality cntrl reviewer, if ne has been appinted, in accrdance with ISA 220. 14 12 13 ^ 14 ISA 265, paragraph 9 ISA 330, The Auditr s Respnses t Assessed Risks, paragraph 17 Cnfrming amendments t this paragraph are likely t be needed in light f the Expsure Draft f prpsed ISA 720 (Revised). See paragraphs 19 22 and A23 A31 f ISA 220, Quality Cntrl fr an Audit f Financial Statements. 12

Auditr Independence (Ref: Para. 17) A21. The auditr is required t cmply with relevant ethical requirements, including thse pertaining t independence, relating t financial statement audit engagements. 15 A22. The relatinships and ther matters, and safeguards t be cmmunicated, vary with the circumstances f the engagement, but generally address: (a) (b) Threats t independence, which may be categrized as: self-interest threats, self-review threats, advcacy threats, familiarity threats, and intimidatin threats; and Safeguards created by the prfessin, legislatin r regulatin, safeguards within the entity, and safeguards within the firm s wn systems and prcedures. The cmmunicatin required by paragraph 17(a) may include an inadvertent vilatin f relevant ethical requirements as they relate t auditr independence, and any remedial actin taken r prpsed. A22a.Relevant ethical requirements r law r regulatin may als specify particular cmmunicatins t thse charged with gvernance in circumstances where breaches f independence requirements have been identified. Fr example, the Internatinal Ethics Standards Bard fr Accuntants Cde f Ethics fr Prfessinal Accuntants (IESBA Cde) requires the auditr t cmmunicate with thse charged with gvernance in writing abut any breach and the actin the firm has taken r prpses t take. 16 A23. The cmmunicatin requirements relating t auditr independence that apply in the case f listed entities may als be relevant in the case f sme ther entities, particularly thse that may be f significant public interest because, as a result f their business, their size r their crprate status, they have a wide range f stakehlders. Examples f entities that are nt listed entities, but where cmmunicatin f auditr independence may be apprpriate, include public sectr entities, credit institutins, insurance cmpanies, and retirement benefit funds. On the ther hand, there may be situatins where cmmunicatins regarding independence may nt be relevant, fr example, where all f thse charged with gvernance have been infrmed f relevant facts thrugh their management activities. This is particularly likely where the entity is wner-managed, and the auditr s firm and netwrk firms have little invlvement with the entity beynd a financial statement audit. Supplementary Matters (Ref: Para. 3) A24. The versight f management by thse charged with gvernance includes ensuring that the entity designs, implements and maintains apprpriate internal cntrl with regard t reliability f financial reprting, effectiveness and efficiency f peratins and cmpliance with applicable laws and regulatins. A25. The auditr may becme aware f supplementary matters that d nt necessarily relate t the versight f the financial reprting prcess but which are, nevertheless, likely t be significant t the respnsibilities f thse charged with gvernance in verseeing the strategic directin f the entity r the entity s bligatins related t accuntability. Such matters may include, fr example, 15 16 ISA 200, Overall Objectives f the Independent Auditr and the Cnduct f an Audit in Accrdance with Internatinal Standards n Auditing, paragraph 14 See Sectin 290.39 49 f the IESBA Cde, which addresses breaches f independence. 13

significant issues regarding gvernance structures r prcesses, and significant decisins r actins by senir management that lack apprpriate authrizatin. A26. In determining whether t cmmunicate supplementary matters with thse charged with gvernance, the auditr may discuss matters f this kind f which the auditr has becme aware with the apprpriate level f management, unless it is inapprpriate t d s in the circumstances. A27. If a supplementary matter is cmmunicated, it may be apprpriate fr the auditr t make thse charged with gvernance aware that: (a) (b) (c) Identificatin and cmmunicatin f such matters is incidental t the purpse f the audit, which is t frm an pinin n the financial statements; N prcedures were carried ut with respect t the matter ther than any that were necessary t frm an pinin n the financial statements; and N prcedures were carried ut t determine whether ther such matters exist. The Cmmunicatin Prcess Establishing the Cmmunicatin Prcess (Ref: Para. 18) A28. Clear cmmunicatin f the auditr s respnsibilities, the planned scpe and timing f the audit, and the expected general cntent f cmmunicatins helps establish the basis fr effective tw-way cmmunicatin. A29. Matters that may als cntribute t effective tw-way cmmunicatin include discussin f: The purpse f cmmunicatins. When the purpse is clear, the auditr and thse charged with gvernance are better placed t have a mutual understanding f relevant issues and the expected actins arising frm the cmmunicatin prcess. The frm in which cmmunicatins will be made. The persn(s) in the engagement team and amngst thse charged with gvernance wh will cmmunicate regarding particular matters. The auditr s expectatin that cmmunicatin will be tw-way, and that thse charged with gvernance will cmmunicate with the auditr matters they cnsider relevant t the audit, fr example, strategic decisins that may significantly affect the nature, timing and extent f audit prcedures, the suspicin r the detectin f fraud, and cncerns with the integrity r cmpetence f senir management. The prcess fr taking actin and reprting back n matters cmmunicated by the auditr. The prcess fr taking actin and reprting back n matters cmmunicated by thse charged with gvernance. A30. The cmmunicatin prcess will vary with the circumstances, including the size and gvernance structure f the entity, hw thse charged with gvernance perate, and the auditr s view f the significance f matters t be cmmunicated. Difficulty in establishing effective tw-way cmmunicatin may indicate that the cmmunicatin between the auditr and thse charged with gvernance is nt adequate fr the purpse f the audit (see paragraph A44). 14

Cnsideratins Specific t Smaller Entities A31. In the case f audits f smaller entities, the auditr may cmmunicate in a less structured manner with thse charged with gvernance than in the case f listed r larger entities. Cmmunicatin with Management A32. Many matters may be discussed with management in the rdinary curse f an audit, including matters required by this ISA t be cmmunicated with thse charged with gvernance. Such discussins recgnize management s executive respnsibility fr the cnduct f the entity s peratins and, in particular, management s respnsibility fr the preparatin f the financial statements. A33. Befre cmmunicating matters with thse charged with gvernance, the auditr may discuss them with management, unless that is inapprpriate. Fr example, it may nt be apprpriate t discuss questins f management s cmpetence r integrity with management. In additin t recgnizing management s executive respnsibility, these initial discussins may clarify facts and issues, and give management an pprtunity t prvide further infrmatin and explanatins. Similarly, when the entity has an internal audit functin, the auditr may discuss matters with the internal auditr befre cmmunicating with thse charged with gvernance. Cmmunicatin with Third Parties A34. Thse charged with gvernance may be required by law r regulatin, r may wish, t prvide third parties, fr example, bankers r certain regulatry authrities, with cpies f a written cmmunicatin frm the auditr. In sme cases, disclsure t third parties may be illegal r therwise inapprpriate. When a written cmmunicatin prepared fr thse charged with gvernance is prvided t third parties, it may be imprtant in the circumstances that the third parties be infrmed that the cmmunicatin was nt prepared with them in mind, fr example, by stating in written cmmunicatins with thse charged with gvernance: (a) (b) (c) That the cmmunicatin has been prepared fr the sle use f thse charged with gvernance and, where applicable, the grup management and the grup auditr, and shuld nt be relied upn by third parties; That n respnsibility is assumed by the auditr t third parties; and Any restrictins n disclsure r distributin t third parties. A35. In sme jurisdictins the auditr may be required by law r regulatin t, fr example: Ntify a regulatry r enfrcement bdy f certain matters cmmunicated with thse charged with gvernance. Fr example, in sme cuntries the auditr has a duty t reprt misstatements t authrities where management and thse charged with gvernance fail t take crrective actin; Submit cpies f certain reprts prepared fr thse charged with gvernance t relevant regulatry r funding bdies, r ther bdies such as a central authrity in the case f sme public sectr entities; r Make reprts prepared fr thse charged with gvernance publicly available. 15

A36. Unless required by law r regulatin t prvide a third party with a cpy f the auditr s written cmmunicatins with thse charged with gvernance, the auditr may need the prir cnsent f thse charged with gvernance befre ding s. Frms f Cmmunicatin (Ref: Para. 19 20) A37. Effective cmmunicatin may invlve structured presentatins and written reprts as well as less structured cmmunicatins, including discussins. The auditr may cmmunicate matters ther than thse identified in paragraphs 19 and 20 either rally r in writing. Written cmmunicatins may include an engagement letter that is prvided t thse charged with gvernance. A38. In additin t the significance f a particular matter, the frm f cmmunicatin (fr example, whether t cmmunicate rally r in writing, the extent f detail r summarizatin in the cmmunicatin, and whether t cmmunicate in a structured r unstructured manner) may be affected by such factrs as: Whether a discussin f the matter will be included in the auditr s reprt. Whether the matter has been satisfactrily reslved. Whether management has previusly cmmunicated the matter. The size, perating structure, cntrl envirnment, and legal structure f the entity. In the case f an audit f special purpse financial statements, whether the auditr als audits the entity s general purpse financial statements. Legal requirements. In sme jurisdictins, a written cmmunicatin with thse charged with gvernance is required in a prescribed frm by lcal law. The expectatins f thse charged with gvernance, including arrangements made fr peridic meetings r cmmunicatins with the auditr. The amunt f nging cntact and dialgue the auditr has with thse charged with gvernance. Whether there have been significant changes in the membership f a gverning bdy. A39. When a significant matter is discussed with an individual member f thse charged with gvernance, fr example, the chair f an audit cmmittee, it may be apprpriate fr the auditr t summarize the matter in later cmmunicatins s that all f thse charged with gvernance have full and balanced infrmatin. Timing f Cmmunicatins (Ref: Para. 21) A40. The apprpriate timing fr cmmunicatins will vary with the circumstances f the engagement. Relevant circumstances include the significance and nature f the matter, and the actin expected t be taken by thse charged with gvernance. Fr example: Cmmunicatins regarding planning matters may ften be made early in the audit engagement and, fr an initial engagement, may be made as part f agreeing the terms f the engagement. It may be apprpriate t cmmunicate a significant difficulty encuntered during the audit as sn as practicable if thse charged with gvernance are able t assist the auditr t vercme the difficulty, r if it is likely t lead t a mdified pinin. Similarly, the auditr may 16

cmmunicate rally t thse charged with gvernance as sn as practicable significant deficiencies in internal cntrl that the auditr has identified, prir t cmmunicating these in writing as required by ISA 265. 17 Cmmunicatins regarding independence may be apprpriate whenever significant judgments are made abut threats t independence and related safeguards, fr example, when accepting an engagement t prvide nn-audit services, and at a cncluding discussin. A cncluding discussin may als be an apprpriate time t cmmunicate findings frm the audit, including the auditr s views abut the qualitative aspects f the entity s accunting practices. When auditing bth general purpse and special purpse financial statements, it may be apprpriate t crdinate the timing f cmmunicatins. A41. Other factrs that may be relevant t the timing f cmmunicatins include: The size, perating structure, cntrl envirnment, and legal structure f the entity being audited. Any legal bligatin t cmmunicate certain matters within a specified timeframe. The expectatins f thse charged with gvernance, including arrangements made fr peridic meetings r cmmunicatins with the auditr. The time at which the auditr identifies certain matters, fr example, the auditr may nt identify a particular matter (fr example, nncmpliance with a law) in time fr preventive actin t be taken, but cmmunicatin f the matter may enable remedial actin t be taken. Adequacy f the Cmmunicatin Prcess (Ref: Para. 22) A42. The auditr need nt design specific prcedures t supprt the evaluatin f the tw-way cmmunicatin between the auditr and thse charged with gvernance; rather, that evaluatin may be based n bservatins resulting frm audit prcedures perfrmed fr ther purpses. Such bservatins may include: The apprpriateness and timeliness f actins taken by thse charged with gvernance in respnse t matters raised by the auditr. Where significant matters raised in previus cmmunicatins have nt been dealt with effectively, it may be apprpriate fr the auditr t inquire as t why apprpriate actin has nt been taken, and t cnsider raising the pint again. This avids the risk f giving an impressin that the auditr is satisfied that the matter has been adequately addressed r is n lnger significant. The apparent penness f thse charged with gvernance in their cmmunicatins with the auditr. The willingness and capacity f thse charged with gvernance t meet with the auditr withut management present. The apparent ability f thse charged with gvernance t fully cmprehend matters raised by the auditr, fr example, the extent t which thse charged with gvernance prbe issues, and questin recmmendatins made t them. 17 ISA 265, paragraphs 9 and A14 17

Difficulty in establishing with thse charged with gvernance a mutual understanding f the frm, timing and expected general cntent f cmmunicatins. Where all r sme f thse charged with gvernance are invlved in managing the entity, their apparent awareness f hw matters discussed with the auditr affect their brader gvernance respnsibilities, as well as their management respnsibilities. Whether the tw-way cmmunicatin between the auditr and thse charged with gvernance meets applicable legal and regulatry requirements. A43. As nted in paragraph 4, effective tw-way cmmunicatin assists bth the auditr and thse charged with gvernance. Further, ISA 315 (Revised) identifies participatin by thse charged with gvernance, including their interactin with internal audit, if any, and external auditrs, as an element f the entity s cntrl envirnment. 18 Inadequate tw-way cmmunicatin may indicate an unsatisfactry cntrl envirnment and influence the auditr s assessment f the risks f material misstatements. There is als a risk that the auditr may nt have btained sufficient apprpriate audit evidence t frm an pinin n the financial statements. A44. If the tw-way cmmunicatin between the auditr and thse charged with gvernance is nt adequate and the situatin cannt be reslved, the auditr may take such actins as: Mdifying the auditr s pinin n the basis f a scpe limitatin. Obtaining legal advice abut the cnsequences f different curses f actin. Cmmunicating with third parties (fr example, a regulatr), r a higher authrity in the gvernance structure that is utside the entity, such as the wners f a business (fr example, sharehlders in a general meeting), r the respnsible gvernment minister r parliament in the public sectr. Withdrawing frm the engagement, where withdrawal is pssible under applicable law r regulatin. Dcumentatin (Ref: Para. 23) A45. Dcumentatin f ral cmmunicatin may include a cpy f minutes prepared by the entity retained as part f the audit dcumentatin where thse minutes are an apprpriate recrd f the cmmunicatin. 18 ISA 315 (Revised), paragraph A77A70 18

Appendix 1 (Ref: Para. 3) Specific Requirements in ISQC 1 and Other ISAs that Refer t Cmmunicatins with Thse Charged With Gvernance This appendix identifies paragraphs in ISQC 1 19 and ther ISAs in effect fr audits f financial statements fr perids [beginning/ending n r after datedecember 15, 2009] that require cmmunicatin f specific matters with thse charged with gvernance. The list is nt a substitute fr cnsidering the requirements and related applicatin and ther explanatry material in ISAs. ISQC 1, Quality Cntrl fr Firms that Perfrm Audits and Reviews f Financial Statements, and Other Assurance and Related Services Engagements paragraph 30(a) ISA 240, The Auditr s Respnsibilities Relating t Fraud in an Audit f Financial Statements paragraphs 21, 38(c)(i) and 40-42 ISA 250, Cnsideratin f Laws and Regulatins in an Audit f Financial Statements paragraphs 14, 19 and 22 24 ISA 265, Cmmunicating Deficiencies in Internal Cntrl t Thse Charged with Gvernance and Management paragraph 9 ISA 450, Evaluatin f Misstatements Identified during the Audit paragraphs 12-13 ISA 505, External Cnfirmatins paragraph 9 ISA 510, Initial Audit Engagements Opening Balances paragraph 7 ISA 550, Related Parties paragraph 27 ISA 560, Subsequent Events paragraphs 7(b)-(c), 10(a), 13(b), 14(a) and 17 Prpsed ISA 570 (Revised), Ging Cncern paragraph 2723 ISA 600, Special Cnsideratins Audits f Grup Financial Statements (Including the Wrk f Cmpnent Auditrs) paragraph 49 ISA 610 (Revised), Using the Wrk f Internal Auditrs paragraph 18; ISA 610 (Revised 2013), Using the Wrk f Internal Auditrs paragraphs 20 and 31 Prpsed ISA 701, Cmmunicating Key Audit Matters in the Independent Auditr s Reprt paragraph 12 and 13(b) Prpsed ISA 705 (Revised), Mdificatins t the Opinin in the Independent Auditr s Reprt paragraphs 12, 14, 2319(a) and 3028 Prpsed ISA 706 (Revised), Emphasis f Matter Paragraphs and Other Matter Paragraphs in the Independent Auditr s Reprt paragraph 129 ISA 710, Cmparative Infrmatin Crrespnding Figures and Cmparative Financial Statements paragraph 18 19 ISQC 1, Quality Cntrl fr Firms that Perfrm Audits and Reviews f Financial Statements, and Other Assurance and Related Services Engagements 19