CPA Exam AUD: Communication with Those Charged with Governance
Master governance communication requirements for the CPA AUD exam. Learn what auditors must communicate, when, and to whom under AU-C 260.
Communication with Those Charged with Governance: CPA Exam Guide
Effective communication between the auditor and those charged with governance is essential to the audit process. AU-C Section 260 (The Auditor's Communication with Those Charged with Governance) establishes requirements for two-way communication about significant matters arising from the audit. This topic is frequently tested on the AUD exam because it touches on the auditor's professional responsibilities and the governance structure of the entity.
Who Are Those Charged with Governance?
Those charged with governance are the person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity, including overseeing the financial reporting process. In many entities, this is the board of directors or the audit committee. The governance structure varies among entities based on size, ownership, and legal requirements. For smaller entities, those charged with governance may be the owner-manager. The auditor should identify the appropriate governance body and determine the appropriate person(s) within that structure for communication purposes.
Required Communications
AU-C 260 requires the auditor to communicate several categories of matters to those charged with governance:
- The auditor's responsibilities under GAAS: The auditor should communicate that the audit is designed to obtain reasonable assurance about whether the financial statements are free from material misstatement, and that the audit does not relieve management of its responsibilities.
- Planned scope and timing of the audit: This includes an overview of the planned approach, areas of higher risk, the planned use of specialists, and the planned involvement of internal auditors. This communication helps governance understand the audit approach without providing details that would compromise audit effectiveness.
- Significant findings from the audit: This includes the auditor's views about qualitative aspects of the entity's significant accounting practices (including accounting policies, accounting estimates, and financial statement disclosures), significant difficulties encountered during the audit, disagreements with management (whether or not resolved), other matters arising from the audit that are significant to governance oversight, and circumstances that affect the form and content of the auditor's report.
Additional Required Communications
Beyond AU-C 260, other AU-C sections require specific communications to governance. AU-C 265 requires written communication of significant deficiencies and material weaknesses in internal control. AU-C 240 requires communication of fraud involving management and fraud that causes a material misstatement. AU-C 250 requires communication of identified or suspected noncompliance with laws and regulations. AU-C 550 requires communication about significant related party transactions. AU-C 560 requires communication about subsequent events that may affect the financial statements.
Form of Communication
The form of communication may be oral or written, depending on the significance of the matter. However, certain communications must be in writing. Written communication is required for significant deficiencies and material weaknesses in internal control (under AU-C 265), and the communication must be made no later than 60 days after the report release date. Other matters may be communicated orally, but the auditor should consider whether the importance of the matter warrants written communication. The auditor should document oral communications in the audit documentation.
Timing of Communications
The auditor should communicate matters on a timely basis. This does not necessarily mean that all communications must occur before the audit report is issued. However, certain matters should be communicated early enough for governance to take appropriate action. For example, significant difficulties encountered during the audit should be communicated when they arise, not just at the conclusion of the audit. The planned scope and timing of the audit should be communicated before substantive work begins.
Two-Way Communication
Communication between the auditor and governance should be two-way. The auditor should also be receptive to information from those charged with governance. If two-way communication is inadequate, the auditor should evaluate the effect on the audit, including the risk assessment. Inadequate communication may indicate a weak governance structure, which could affect the control environment and overall audit risk. If the inadequacy cannot be resolved, the auditor should consider modifying the opinion, communicating with regulators, or withdrawing from the engagement.
Communication with Management vs. Governance
Some matters are communicated to management, others to those charged with governance, and some to both. The auditor should be careful to communicate matters to the appropriate level. For example, fraud involving management should be communicated directly to those charged with governance, not to management. Similarly, significant deficiencies and material weaknesses are communicated to both management and governance, but the written communication is addressed to governance. When management and governance are the same individuals (as in some smaller entities), the auditor should still ensure all required communications occur.
Confidentiality Considerations
The auditor must consider confidentiality requirements when communicating with governance. In some cases, legal or regulatory restrictions may limit the auditor's ability to communicate certain matters. The auditor should obtain legal advice if there is uncertainty about whether a particular communication is appropriate. However, the auditor's obligation to communicate significant audit matters to governance generally takes precedence.
Exam Tips for Communication with Governance
- Written communication of significant deficiencies and material weaknesses is required within 60 days of the report release date.
- Fraud involving management must be communicated directly to those charged with governance.
- Two-way communication is expected; inadequate communication may affect audit risk.
- Planned scope and timing should be communicated before substantive work begins.
- Distinguish between matters communicated to management vs. those charged with governance.
Practice What You Learned
Study with 1,200+ flashcards and 140 practice exams across all 4 CPA sections.