Lecture - 15

Chapter – 1
“Quality Control and Engagement Standards”

(18) SA 260 “Communication with Those charged with Governance”

(i) Meaning of TCWG: Persons with responsibility to oversee the strategic direction of

the entity

and

obligations towards the stakeholders.

Note: In case of small sized entities, persons having managerial responsibilities may

also be involved in governance function. In such cases, management and TCWG

will be the same person, for example, proprietorship entities, partnership

firms, LLPs, OPCs, small companies, unlisted companies etc.

(ii) Auditor’s responsibility as to determination of TCWG:

- Auditor is required to determine the appropriate person within the organisation

to whom communication is to be made.

- If any matter has been communicated to a person in his managerial role, same

information need not be communicated to that person in his governance role.

- If any matter has been communicated to a sub group of TCWG (for ex., Audit

Committee), auditor is required to determine whether the same information is

to be communicated to entire governing body.

(For ex.: Matters communicated to Audit Committee may not be required to be

communicated to BoD).

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(iii) Matters to be Communicated:

(1) Auditor’s responsibilities in relation to audit of Financial Statement:

It is communicated through letter of engagement.

(2) Planned scope and timing of audit: It comprises of

(a) Auditor’s plan to address risk of material misstatements.

(b) Auditor’s approach towards internal control.

(c) Application of materiality concept.

(3) Significant findings from the audit:

(a) Qualitative characteristics of accounting policies, accounting

practices, estimates etc.

(b) Significant difficulties encountered during the audit.

For Example:

 Limitations / restrictions imposed by management.

 Non availability of expected information.

 Delay in providining necessary information.

 Management unwillingness to extend their prcedures for

determining appropriateness of G.C. basis of accounting.

 Unnessarily brief time for completion of audit.

(c) Significant matters discussed with management and written

representation requested from them.

(d) Circumstances that may affect from and content of audit report.

For example: Matters that lead to modifications in audit reports.

(e) Any other matter, that appears significant to auditor.

For example: Deficiencies identified in internal control system.

(4) Auditor’s independence: Required in case of listed entities.

Statement of independence comprises of:

(a) Compliance of ethical requirements including independence.

(b) Any relationship that may effect independence.

(c) Related safeguards that are applied to eliminate identified threats.

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(iv) Communication process:

(a) Forms of Communication: Communicaion may be:

- Oral or written

- Formal or informal

- Structured or unstructured

- Summarized or detailed.

Factors affecting mode of communication:

- Matters to be communicated (e.q. Key Audit matter to be

communicated in writing)

- Expectation of TCWG

- Legal requirements, if any

- Legal structure of entity (e.g. Prop./ OPC /Firm etc.)

- Size of business

- Ongoing Contact with TCWG

- Significant changes in governing body.

- Matters informed to management and already resolved.

(b) Timings of Communication: Self Study from Main Book

DO Practice – Questions on SA 260

(19) SA 265 “Communicating Deficiencies in Internal Control to TCWG and

Management:

(i) Meaning of Deficiency in Internal Control:

Internal Control (I.C.) is said to be deficient if:

I.C. required to prevent, detect and I.C. fails to prevent, detect and
correct material misstatement do not OR or correct material
exist misstatements on timely basis.

(Non Existent I.C.) (Ineffective I.C.)

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(ii) Auditor’s responsibilities w.r.t. Internal Control:
(i) Auditor should determine whether deficiencies in Internal Control exist.
For this purpose, auditor is required to
- plan as per SA 300;
- perform RAP as per SA 315;
- perform ToC / Compliance Procedures as per SA 330.

(ii) If deficiency exist, auditor should determine whether such deficiency, either
individually or in aggregate with other deficiencies, constitute significant
deficiency.

Yes No

Auditor should communicate Auditor should communicate

in writing in writing

to TCWG and management to management

Indicators of significant deficiencies:

(c) Ineffective response to assessed risk

(iii) Communication of deficiencies shall be through a formal letter known as

letter of weakness (LOW)

LOW shall comprise the following matters:

(a) Description of deficiency

(b) Explanation as to their potential effect

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(c) Sufficient information so as to explain that purpose of audit is to

express an opinion on F.S. and Internal Controls are evaluated to

design, nature, timining and extent of substantive audit procedures.

(d) Statement that matters reported in this letter are limited to

deficiencies identified and considered significant by the auditor.

(it implies that other deficiencies may exist).

(20) SA 299 “Joint Audit of Financial Statements”

reporting considerations in case of joint auditors, coordination among joint auditors, etc.

(i) Audit Planning and Risk Assesment in case of joint Audit:

- EP and other key members of ET of each of joint auditors shall be involved

in planning the audit.

- Audit Strategy shall be established jointly.

- Joint auditors shall discuss and develop a joint audit plan.

- RMM to be assessed and considered by each of the joint auditors and shall

be communicated to other joint auditors.

- Joint auditors shall obtain common Written Representation.

- Joint auditors shall obtain common Engagement Letter.

(ii) Division of Work: (Allocation of work)

(a) Joint auditors shall divide the work among themselves on mutual

understanding.

(b) The work may be divided by the joint auditors on the basis of identifiable

Units. (Ex. Branches, divisions).

(c) However, if identifiable units are not traceable, work may be divided on

following considerations:

- On basis of time period.

- Nature of financial items.

- On any other suitable criteria.

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(d) Some areas, because of significant nature, should not be dividend, for

Example-

- Examination of selection and application of accounting policies.

- Examination of presentation and disclosure of financial items in the

Financial statements.

- Decisions as to Nature, Timing and Extent of audit procedures for

the subject matters of common interest.

- Compliance of Auditing Standards.

- Examining that F.S are being prepared in all material respects as per

requirements of applicable Financial Reporting Framework.

- Compliance of Legal and Regulatory Requirements.

(e) The work so divided shall be documented and communicated to TCWG for

record.

(iii) Responsibilities of joint auditors:

(a) For work divided: Individual responsibility of Concerned joint auditor

who was responsible for that work.

(b) For work not divided: Joint and several responsibility of joint auditors.

Note: Details of work not to be divided is covered in topic “division of work”.

(iv) Reporting Considerations:

(a) Generally, joint auditors arrive at a common opinion and issued a single

report signed by all joint auditors.

(b) However, if there are differences of opinion, among the joint auditors,

“Separate Reports” shall be issued.

(c) In case of separate reports, issued by joint auditors, individual reports

issued shall include a reference of separate report issued by other auditors.

(d) Such reference shall be made under the heading “Other Matter Para”

as per the requirements of SA 706.

(e) A joint auditor is not bound by the views of majority of joint auditors.

In such a case, separate reports are to be issued.

Do Practice – Questions on SA 299

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