HKSA 260 (Revised) Issued August 2015; revised January 2016, June 2017 Effective fr audits f financial statements fr perids ending n r after 15 December 2016 Hng Kng Standard n Auditing 260 (Revised) Cmmunicatin with Thse Charged with Gvernance
COPYRIGHT Cpyright 2017 Hng Kng Institute f Certified Public Accuntants The Hng Kng Standard n Auditing 260 (Revised), Cmmunicatin with Thse Charged with Gvernance is based n Internatinal Standard n Auditing (ISA) 260 (Revised), Cmmunicatin with Thse Charged with Gvernance f the Internatinal Auditing and Assurance Standards Bard (IAASB), published by the Internatinal Federatin f Accuntants (IFAC) in January 2015 and is used with permissin f IFAC. Internatinal Standard n Auditing (ISA) 260 (Revised), Cmmunicatin with Thse Charged with Gvernance January 2015 by the Internatinal Federatin f Accuntants. This Hng Kng Standard n Auditing cntains IFAC cpyright material. Reprductin within Hng Kng in unaltered frm (retaining this ntice) is permitted fr persnal and nn-cmmercial use subject t the inclusin f an acknwledgment f the surce. Requests and inquiries cncerning reprductin and rights fr cmmercial purpses within Hng Kng shuld be addressed t the Directr, Finance and Operatins, Hng Kng Institute f Certified Public Accuntants, 37/F., Wu Chung Huse, 213 Queen's Rad East, Wanchai, Hng Kng. All rights in this material utside f Hng Kng are reserved by IFAC. Reprductin f Hng Kng Standards n Auditing utside f Hng Kng in unaltered frm (retaining this ntice) is permitted fr persnal and nn-cmmercial use nly. Further infrmatin and requests fr authrisatin t reprduce fr cmmercial purpses utside Hng Kng shuld be addressed t the IFAC at permissins@ifac.rg. Cpyright 2 HKSA 260 (Revised) (June 2017)
HONG KONG STANDARD ON AUDITING 260 (REVISED) COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (Effective fr audits f financial statements fr perids ending n r after 15 December 2016) CONTENTS Intrductin Paragraph Scpe f this HKSA... The Rle f Cmmunicatin... 13 47 Effective Date... 8 Objectives... 9 Definitins... 10 Requirements Thse Charged with Gvernance... Matters t Be Cmmunicated... The Cmmunicatin Prcess... 1113 1417 1822 Dcumentatin... 23 Cnfrmity and Cmpliance with Internatinal Standards n Auditing..... 24-25 Applicatin and Other Explanatry Material Thse Charged with Gvernance... Matters t Be Cmmunicated... The Cmmunicatin Prcess... Dcumentatin... A1A8 A9A36 A37A53 A54 Appendix 1: Specific Requirements in HKSQC 1 and Other HKSAs that Refer t Cmmunicatins with Thse Charged with Gvernance Appendix 2: Qualitative Aspects f Accunting Practices Hng Kng Standard n Auditing (HKSA) 260 (Revised), Cmmunicatin with Thse Charged with Gvernance, shuld be read in cnjunctin with HKSA 200, Overall Objectives f the Independent Auditr and the Cnduct f an Audit in Accrdance with Hng Kng Standards n Auditing. Cpyright 3 HKSA 260 (Revised)
Intrductin Scpe f this HKSA 1. This Hng Kng Standard n Auditing (HKSA) deals with the auditr's respnsibility t cmmunicate with thse charged with gvernance in an audit f financial statements. Althugh this HKSA 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 HKSA 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 HKSA 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 HKSA 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 HKSA, are identified in ther HKSAs (see Appendix 1). In additin, HKSA 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 HKSAs, 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 prfessinal accuntancy bdy. Nthing in this HKSA precludes the auditr frm cmmunicating any ther matters t thse charged with gvernance. (Ref: Para. A33 A36) The Rle f Cmmunicatin 4. This HKSA 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 HKSA, 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. Similarly, cmmunicatin by management with thse charged with gvernance f 1 HKSA 265, Cmmunicating Deficiencies in Internal Cntrl t Thse Charged with Gvernance and Management Cpyright 4 HKSA 260 (Revised)
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 HKSAs is an integral part f every audit. HKSAs 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 1a, 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 HKSA is effective fr audits f financial statements fr perids ending n r after 15 December 2016. 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 HKSAs, the fllwing terms have the meanings attributed belw: (a) Thse charged with gvernance The persn(s) r rganizatin(s) (e.g., 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. 1a In Hng Kng, sectin 378 f the Securities and Futures Ordinance impses a duty f secrecy upn the auditr f a licensed crpratin. Applicatin f sectin 378 will prevent the auditr frm cmmunicating certain matters t any parties ther than the Securities and Futures Cmmissin except under certain circumstances. Further guidance is set ut in PN 820 (Revised), The Audit f Licensed Crpratins and Assciated Entities f Intermediaries. Cpyright 5 HKSA 260 (Revised)
(b) 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 thse charged with gvernance, fr example, executive members f a gvernance bard, r an wner-manager. Requirements 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 HKSA 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(c). 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 A16) Cpyright 6 HKSA 260 (Revised)
Significant Findings frm the Audit 16. The auditr shall cmmunicate with thse charged with gvernance: (Ref: Para. A17 A18) (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 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. A19 A20) (b) Significant difficulties, if any, encuntered during the audit; (Ref: Para. A21) (c) Unless all f thse charged with gvernance are invlved in managing the entity: (i) (ii) Significant matters arising during the audit that were discussed, r subject t crrespndence, with management; and (Ref: Para. A22) Written representatins the auditr is requesting; (d) (e) Circumstances that affect the frm and cntent f the auditr's reprt, if any; and (Ref: Para. A23 A25) Any ther significant matters arising during the audit that, in the auditr's prfessinal judgment, are relevant t the versight f the financial reprting prcess. (Ref: Para. A26 A28) 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. A29 A32) 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. A37 A45) 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 Cpyright 7 HKSA 260 (Revised)
wuld nt be adequate. Written cmmunicatins need nt include all matters that arse during the curse f the audit. (Ref: Para. A46 A48) 20. The auditr shall cmmunicate in writing with thse charged with gvernance regarding auditr independence when required by paragraph 17. Timing f Cmmunicatins 21. The auditr shall cmmunicate with thse charged with gvernance n a timely basis. (Ref: Para. A49 A50) 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. A51 A53) Dcumentatin 23. Where matters required by this HKSA 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. A54) Cnfrmity and Cmpliance with Internatinal Standards n Auditing 24. As f August 2015 (date f issue), this HKSA cnfrms with Internatinal Standard n Auditing (ISA) 260 (Revised), Cmmunicatin with Thse Charged with Gvernance. Cmpliance with the requirements f this HKSA ensures cmpliance with ISA 260 (Revised). 25. Additinal lcal guidance is prvided in ftnte 1a. *** 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. 2 HKSA 230, Audit Dcumentatin, paragraphs 8 11, and A6 Cpyright 8 HKSA 260 (Revised) (June 2017)
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 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 HKSA 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-frprfit 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 HKSA 315 (Revised) 4 is relevant. The apprpriate persn(s) with whm t cmmunicate may vary depending n the matter t be cmmunicated. A4. HKSA 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 (e.g., 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. 3 4 5 As described in paragraph A68 f HKSA 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. HKSA 315 (Revised), Identifying and Assessing the Risks f Material Misstatement thrugh Understanding the Entity and Its Envirnment HKSA 600, Special Cnsideratins Audits f Grup Financial Statements (Including the Wrk f Cmpnent Auditrs), paragraph 49 Cpyright 9 HKSA 260 (Revised) (June 2017)
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 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 (e.g., ne respnsible fr marketing) may be unaware f significant matters discussed with anther directr (e.g., 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. 6 Law, regulatin r the gvernance structure f the entity may require thse charged with gvernance t agree the terms f the engagement with the auditr. When this is nt the case, prviding 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 HKSAs, which is directed twards the expressin f an pinin n the financial statements. The matters that HKSAs require t be cmmunicated, therefre, include significant matters arising during the audit f the financial statements that are relevant t thse charged with gvernance in verseeing the financial reprting prcess. 6 See paragraph 10 f HKSA 210, Agreeing the Terms f Audit Engagements. Cpyright 10 HKSA 260 (Revised)
The fact that HKSAs d nt require the auditr t design prcedures fr the purpse f identifying supplementary matters t cmmunicate with thse charged with gvernance. When HKSA 701 7 applies, the auditr's respnsibilities t determine and cmmunicate key audit matters in the auditr's reprt. 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. 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 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. A12. 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. A13. Matters cmmunicated may include: Hw the auditr plans t address the significant risks f material misstatement, whether due t fraud r errr. Hw the auditr plans t address areas f higher assessed risks f material misstatement. The auditr's apprach t internal cntrl relevant t the audit. The applicatin f the cncept f materiality in the cntext f an audit. 8 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. 9 When HKSA 701 applies, the auditr's preliminary views abut matters that may be areas f significant auditr attentin in the audit and therefre may be key audit matters. 7 8 9 HKSA 701, Cmmunicating Key Audit Matters in the Independent Auditr's Reprt HKSA 320, Materiality in Planning and Perfrming an Audit See HKSA 620, Using the Wrk f an Auditr's Expert. Cpyright 11 HKSA 260 (Revised)
The auditr's planned apprach t addressing the implicatins n the individual statements and the disclsures f any significant changes within the applicable financial reprting framewrk r in the entity's envirnment, financial cnditin r activities. A14. Other planning matters that it may be apprpriate t discuss with thse charged with gvernance include: Where the entity has an internal audit functin, hw the external auditr and internal auditrs can wrk tgether in a cnstructive and cmplementary manner, including any planned use f the wrk f the internal audit functin, and the nature and extent f any planned use f internal auditrs t prvide direct assistance. 10 The views f thse charged with gvernance abut: 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 between the entity and 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, and the effect f such develpments n, fr example, the verall presentatin, structure and cntent f the financial statements, including: The relevance, reliability, cmparability and understandability f the infrmatin presented in the financial statements; and Cnsidering whether the financial statements are undermined by the inclusin f infrmatin that is nt relevant r that bscures a prper understanding f the matters disclsed. The respnses f thse charged with gvernance t previus cmmunicatins with the auditr. 10 HKSA 610 (Revised 2013), Using the Wrk f Internal Auditrs, paragraphs 20 and 31 Cpyright 12 HKSA 260 (Revised) (June 2017)
The dcuments cmprising the ther infrmatin (as defined in HKSA 720 (Revised)) and the planned manner and timing f the issuance f such dcuments. When the auditr expects t btain ther infrmatin after the date f the auditr s reprt, the discussins with thse charged with gvernance may als include the actins that may be apprpriate r necessary if the auditr cncludes that a material misstatement f the ther infrmatin exists in ther infrmatin btained after the date f the auditr s reprt. A15. 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. A16. Care is necessary 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) A17. 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. A18. When HKSA 701 applies, the cmmunicatins with thse charged with gvernance required by paragraph 16, as well as the cmmunicatin abut the significant risks identified by the auditr required by paragraph 15, are particularly relevant t the auditr's determinatin f matters that required significant auditr attentin and which therefre may be key audit matters. 11 Significant Qualitative Aspects f Accunting Practices (Ref: Para. 16(a)) A19. 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. A20. 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 A19, 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 and the quality f the disclsures. Appendix 2 identifies matters that may be included in this cmmunicatin. 11 HKSA 701, paragraphs 9 10 Cpyright 13 HKSA 260 (Revised) (June 2017)
Significant Difficulties Encuntered during the Audit (Ref: Para. 16(b)) A21. Significant difficulties encuntered during the audit may include such matters as: Significant delays by management, the unavailability f entity persnnel, r an unwillingness by management t prvide infrmatin necessary fr the auditr t perfrm the auditr's prcedures. An unreasnably 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. 12 Significant Matters Discussed, r Subject t Crrespndence with Management (Ref: Para. 16(c)(i)) A22. Significant matters discussed, r subject t crrespndence with management may include such matters as: Significant events r transactins that ccurred during the year. 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. Circumstances that Affect the Frm and Cntent f the Auditr's Reprt (Ref: Para 16(d)) A23. HKSA 210 requires the auditr t agree the terms f the audit engagement with management r thse charged with gvernance, as apprpriate. 13 The agreed terms f the audit engagement are required t be recrded in an audit engagement letter r ther suitable frm f written agreement and include, amng ther things, reference t the expected frm and cntent f the auditr's reprt. 14 As explained in paragraph A9, if the terms f engagement are nt agreed with thse charged with gvernance, the auditr may prvide thse charged with gvernance with a cpy f the engagement letter t cmmunicate abut matters relevant t the audit. The cmmunicatin required by paragraph 16(d) is intended t infrm thse charged with 12 13 14 HKSA 705 (Revised), Mdificatins t the Opinin in the Independent Auditr's Reprt HKSA 210, paragraph 9 HKSA 210, paragraph 10 Cpyright 14 HKSA 260 (Revised) (January 2016)
gvernance abut circumstances in which the auditr's reprt may differ frm its expected frm and cntent r may include additinal infrmatin abut the audit that was perfrmed. A24. Circumstances in which the auditr is required r may therwise cnsider it necessary t include additinal infrmatin in the auditr's reprt in accrdance with the HKSAs, and fr which cmmunicatin with thse charged with gvernance is required, include when: The auditr expects t mdify the pinin in the auditr's reprt in accrdance with HKSA 705 (Revised). 15 A material uncertainty related t ging cncern is reprted in accrdance with HKSA 570 (Revised). 16 Key audit matters are cmmunicated in accrdance with HKSA 701. 17 The auditr cnsiders it necessary t include an Emphasis f Matter paragraph r Other Matters paragraph in accrdance with HKSA 706 (Revised) 18 r is required t d s by ther HKSAs. The auditr has cncluded that there is an uncrrected material misstatement f the ther infrmatin in accrdance with HKSA 720 (Revised). 19 In such circumstances, the auditr may cnsider it useful t prvide thse charged with gvernance with a draft f the auditr's reprt t facilitate a discussin f hw such matters will be addressed in the auditr's reprt. A25. In the rare circumstances that the auditr intends nt t include the name f the engagement partner in the auditr's reprt in accrdance with HKSA 700 (Revised), the auditr is required t discuss this intentin with thse charged with gvernance t infrm the auditr's assessment f the likelihd and severity f a significant persnal security threat. 20 The auditr als may cmmunicate with thse charged with gvernance in circumstances when the auditr elects nt t include the descriptin f the auditr's respnsibilities in the bdy f the auditr's reprt as permitted by HKSA 700 (Revised). 21 Other Significant Matters Relevant t the Financial Reprting Prcess (Ref: Para. 16(e)) A26. HKSA 300 22 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 assessed risks. The auditr may cmmunicate with thse charged with gvernance abut such matters, fr example, as an update t initial discussins abut the planned scpe and timing f the audit. 15 16 17 18 19 20 21 22 HKSA 705 (Revised), paragraph 30 HKSA 570 (Revised), Ging Cncern, paragraph 25(d) HKSA 701, paragraph 17 HKSA 706 (Revised), Emphasis f Matter Paragraphs and Other Matter Paragraphs in the Independent Auditr's Reprt, paragraph 12 HKSA 720 (Revised), The Auditr s Respnsibilities Relating t Other Infrmatin, paragraph 18(a) HKSA 700 (Revised), paragraphs 46 and A63 HKSA 700 (Revised), paragraph 41 HKSA 300, Planning an Audit f Financial Statements, paragraph A15 Cpyright 15 HKSA 260 (Revised) (June 2017)
A27. Other significant matters arising during 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 the ther infrmatin that have been crrected. A28. T the extent nt already addressed by the requirements in paragraphs 16(a) (d) 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 HKSA 220. 23 Auditr Independence (Ref: Para. 17) A29. The auditr is required t cmply with relevant ethical requirements, including thse pertaining t independence, relating t financial statement audit engagements. 24 A30. 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. A31. 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 HKICPA's Cde f Ethics fr Prfessinal Accuntants (the 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. 25 A32. The cmmunicatin requirements relating t auditr independence that apply in the case f listed entities may als be apprpriate in the case f sme ther entities, including thse that may be f significant public interest, fr example because they have a large number and wide range f stakehlders and cnsidering the nature and size f the business. Examples f such entities may include financial institutins (such as banks, insurance cmpanies, and pensin funds), and ther entities such as charities. 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) A33. 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. 23 24 25 See paragraphs 19 22 and A23 A32 f HKSA 220, Quality Cntrl fr an Audit f Financial Statements. HKSA 200, Overall Objectives f the Independent Auditr and the Cnduct f an Audit in Accrdance with Hng Kng Standards n Auditing, paragraph 14 See Sectin 290.39 49 f the Cde, which addresses breaches f independence. Cpyright 16 HKSA 260 (Revised) (June 2017)
A34. 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, significant issues regarding gvernance structures r prcesses, and significant decisins r actins by senir management that lack apprpriate authrizatin. A35. 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. A36. 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) A37. 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 twway cmmunicatin. A38. 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 amng 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. A39. 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 A52). Cpyright 17 HKSA 260 (Revised) (January 2016)
Cnsideratins Specific t Smaller Entities A40. 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 A41. Many matters may be discussed with management in the rdinary curse f an audit, including matters required by this HKSA 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. A42. 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 A43. 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. A44. 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. A45. 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. Cpyright 18 HKSA 260 (Revised) (January 2016)
Frms f Cmmunicatin (Ref: Para. 19) A46. 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 20 either rally r in writing. Written cmmunicatins may include an engagement letter that is prvided t thse charged with gvernance. A47. In additin t the significance f a particular matter, the frm f cmmunicatin (e.g., 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. Fr example, when key audit matters are cmmunicated in the auditr's reprt, the auditr may cnsider it necessary t cmmunicate in writing abut the matters determined t be key audit matters. 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. A48. 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) A49. Timely cmmunicatin thrughut the audit cntributes t the achievement f rbust tw-way dialgue between thse charged with gvernance and the auditr. Hwever, 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. Cpyright 19 HKSA 260 (Revised)
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 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 HKSA 265. 26 When HKSA 701 applies, the auditr may cmmunicate preliminary views abut key audit matters when discussing the planned scpe and timing f the audit (see paragraph A13), and the auditr als may have mre frequent cmmunicatins t further discuss such matters when cmmunicating abut significant audit findings. 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. Cmmunicatins regarding findings frm the audit, including the auditr's views abut the qualitative aspects f the entity's accunting practices, may als be made as part f the cncluding discussin. When auditing bth general purpse and special purpse financial statements, it may be apprpriate t crdinate the timing f cmmunicatins. A50. 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 (e.g., 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) A51. 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. 26 HKSA 265, paragraphs 9 and A14 Cpyright 20 HKSA 260 (Revised)