ISA 260 communicating with those charged with governance requires the following matters to be included in the communication:

• The auditor’s responsibility in relation to the financial statements:
• The auditor is responsible for forming and expressing an opinion on the financial statements.
• The audit does not relieve management or those charged with governance of their responsibilities
• Planned Scope and timing of the audit includes:
  * How the audit proposes to address the significant risks of material misstatement from fraud and error.
  * The auditor’s approach to internal control
  * Application of materiality
  * The extent to which the auditor will use the work of internal audit
  * Matters which those charged with governance consider warrant particular attention
• Significant findings from the audit including:
  * The selection of , or changes in, significant accounting policies
  * The potential effect on the financial statements of any significant risks and exposures, for example pending litigation that are required to be disclosed in the accounts
  * Significant difficulties, if any encountered during the audit, (e.g. delays in provision of required information, brief time in which to complete audit, unavailability of expected information)
• Auditor’s independence. In the case of listed entities matters include:
  * A statement that relevant ethical requirements regarding independence have been complied with
  * All relationships (including total fees for audit and non-audit services) which may be thought to bear on independence.
  * The related safeguards that have been applied to eliminate/reduce identified threats to independence

Procedures relevant to communicating deficiencies in internal control to those charged with governance are as follows:

• Deficiencies discovered during the audit are first noted on the relevant section of the audit programme and initially discussed with the auditees operatives.
• The deficiencies are summary on the file divider for management letter.
• A formal discussion is held with management for their responses.
• The deficiencies together with management responses are used to write a formal letter to those charged with governance and management.
• Management is requested to acknowledge receipt of the letter and to indicate actions already taken or intended to be taken to rectify the deficiencies and/ or prevent their reoccurrence.

(4 points @ 1.5 marks =6 marks)

• Internal control cycle where deficiency has been discovered with a brief description of the actual deficiency.
• The effect of the deficiency on the operations of the business and / or the financial statements.
• Possible management response.
• Recommendations to rectify the deficiency and /or prevent future reoccurrence.

(4 points @ 1.5 marks =6 marks)

The two authoritative sources which govern the auditor’s report to members are

•  Professional Standards or Requirement: International Standards on Auditing (700/701) specified both the form or structure and the contents of the auditor’s report to members. The standards specify the structure or form of the report that is how the information should be arranged in a systematic manner, allowing the information to flow in a coherent manner from title to date. They also specify the content that is the information that must be stated in the report, for example what the title must be- Independent Auditors Report etc.
• The other authoritative source for the auditor’s report is statutory or legal requirements. While the legal or statutory requirement does not prescribe the format of the report (that is left to the professional requirements) they specify the information that must be included in the report. Eg whether the auditor have received all the information and explanations they require for the purposes of their audit etc.

There is a phenomenon known as ‘an expectation gap’ which represents the misconception in the minds of the public as to what auditors do and the meaning of the auditor’s report. For example members of public think it is the auditor who is responsible for the preparation of the financial statements. Another misconception is that the main objective of an audit is to detect fraud.
To minimise this expectation gap, if not to completely eliminate it, there is the need for the Accountancy profession to educate the general public in attempt at this education is the inclusion of the paragraphs under management responsibility and auditor’s responsibility in the auditor’s report.
Management Responsibility Paragraph. The essence of this paragraph explains briefly but succinctly, the responsibility of management for preparation of the financial statements that are free from material misstatements whether due to fraud or error. It also explain management responsibility to operate internal controls to ensure the reliability of the financial statements, making significant judgements and estimates in the preparation of the financial statements. It also touches on the prevention and detection of fraud and errors.
Auditors Responsibility Paragraph: The essence of this paragraph spelt out the auditor’s responsibility for the audit of the financial statements and the expression of an opinion on the view given by the financial statements. This is in sharp contrast to management responsibility to prepare the financial statements. This paragraph also states the procedure followed by the auditor in the conduct of the audit to be able to obtain the evidence needed to form the opinion on the true and fairness of the view given by the financial statements but not certify the correctness of the accounts or prevent and /or detect fraud.

The objectives of the auditor in communicating with those charged with governance are:

• To communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the planned scope and timing of the audit;
• To obtain from those charged with governance information relevant to the audit;
• To provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process; and
• To promote effective two-way communication between the auditor and those charged with governance.

The significant matters the auditor shall communicate with those charged with governance about the auditor’s responsibilities in relation to the financial statement audit include:

• The auditor is responsible for forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance; and
• The audit of the financial statements does not relieve management or those charged with governance of their responsibilities,
• The auditor shall communicate with those charged with governance an overview of the planned scope and timing of the audit,
• The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures,
• Significant difficulties, if any, encountered during the audit,
• Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process.

The term ‘key audit matters’(KAM) is defined in ISA 701 as:
‘Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.’

The objectives of ISA 701 are for the auditor to:

• determine those matters which are to be regarded as KAM; and
• communicate those matters in the auditor’s report.

The definition in paragraph 8 of ISA 701 states that KAM are selected from matters which are communicated with those charged with governance. Matters which are discussed with those charged with governance are then evaluated by the auditor who then determines those matters which required significant auditor attention during the course of the audit.

There are three matters which the ISA requires the auditor to take into account when making this determination:

• Areas which were considered to be susceptible to higher risks of material misstatement or which were deemed to be ‘significant risks’ in accordance with ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
• Significant auditor judgments in relation to areas of the financial statements that involved significant management judgment. This might include accounting estimates which have been identified by the auditor as having a high degree of estimation uncertainty.
• The effect on the audit of significant events or transactions that have taken place during the period. The auditor must determine which matters are of most significance in the audit of the financial statements and these will be regarded as KAM.

Once the auditor has determined which matters will be included as KAM, the auditor must ensure that each matter is appropriately described in the auditor’s report including a description of:

• Why the matter was determined to be one of most significance and therefore a key audit matter, and
• How the matter was addressed in the audit (which may include a description of the auditor’s approach, a brief overview of procedures performed with an indication of their outcome and any other key observations in respect of the matter).

• The selection of or/and changes in significant accounting policies that could have a material impact on the financial statement.
• Material uncertainties related to events and conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
• Earlier adoption of an accounting standards that will have pervasive impact on the financial statements
• Expected limitations on the audit either imposed by management or other circumstances.
• A request that uncorrected material misstatement to be adjusted in the financial statements.
• Any expected modification to the financial statement and reasons for such modification.
• The potential effect on the financial statements of any material risks and exposures such as pending litigation that are required to be disclosed in the financial statements.
• Significant deficiencies in internal control.
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• Title
  The audit report should have a title which includes the wording ‘independent auditor’ to distinguish this report from others that may be prepared internally by the company.
• Addressee
  The report should be appropriately addressed as required by the engagement and local regulations. This is normally to the shareholders of the company or to those charged with governance.
• Introductory paragraph/ Report on Financial statement
  This section identifies the financial statements being audited, including the date and period covered. It also identifies the title of each statement that comprises the financial statements being audited.
• Management’s responsibility for the financial statements
  This part of the report is included to describe the responsibilities of those who are responsible for the preparation of the financial statements including those in respect of internal control.
• Auditors responsibility
  This section describes the auditor’s responsibility for expressing an opinion, notifies users that the audit was carried out in accordance with ISAs and explains what an audit involves.
• Opinion
  This indicates the financial reporting framework used to prepare the accounts and states the auditor’s opinion as to whether the financial statements present fairly, in all material respects (or show a true and fair view of) the financial position of the audited entity in accordance with that framework.
• Date
  The audit report should be dated as at the completion of the audit, to show that the auditor has considered any events after the reporting period date up to the date of completion and how these might affect the financial statements. The report should not be dated earlier than the date on which the accounts are signed or approved by management.
• Auditor’s address
  The audit report should name a specific location, which is normally the city or town where the auditor maintains the office that has responsibility for the audit.
• Auditor’s signature
  The audit report should be signed in the name of the audit firm, the personal name of the auditor, or both, as appropriate. It is usually signed in the name of the firm because the firm assumes responsibility for the audit.
• Report on Legal and other requirement
                                                                                                                                                                                  (Any 6 points)