Ensuring the integrity of the finances and presenting an accurate financial statement is critical for any business to maintain its business reputation, and auditing plays one of the most crucial roles in it. During the process of auditing, a clear and effective system of communication between the auditors and the various stakeholders of the entity is a must. Standard on Auditing (SA) 260, Communication with Those Charged with Governance, is the framework that provides the auditors with the required channel and methodology to communicate effectively with the stakeholders responsible for the governance of an entity in order to ensure accountability, transparency, and an informed decision-making process to be in place. Let us delve into the details of SA 260, including its purpose, process, and key aspects for a thorough understanding.

Purpose and Process of Communication

Under SA 260, the auditor is responsible for ensuring a clear, structured, and timebound system of communication with those charged with the governance. Those charged with governance hold the responsibility of shaping the strategic directions and building the accountability of the entity. Effective communication under SA 260 serves several critical aspects of a business from both the audit and growth perspectives, which include:

Determining the Recipient(s) of the Communication

Determining the recipient or recipients of the communications under SA 260 is another crucial aspect of this entire process. The designated recipient(s) of communications under SA 260 vary depending on the nature of the organisation that communication is intended to be directed to. Let us examine who these designated recipients could be with respect to the nature of the organisation.

Communications made under SA 260 are not just one-time correspondence between the auditors and those charged with governance. It is a regular process that goes on through the entire tenure of the audit. Regular and continuous updates are also pivotal for the ones charged with the responsibilities of governance to oversee the financial reporting process and enable them to take timely and informed decisions as and when required.

Key Details Under SA 260

SA 260 outlines the key matters that auditors must communicate to those charged with governance. These include:

Inaccurate Practices to Avoid

While implementing communications under SA 260, auditors must be careful to avoid certain inaccurate practices that might have an adverse impact on the entire process in the long run. Some of these include:

Key considerations

A. Auditor’s responsibility vs. Manager’s role:

This SA gives the framework for effective communication, aiding both in audit and informed decision-making for the entity but doesn’t replace others’ responsibility. Although the auditor holds the responsibility of communication under this SA, it doesn’t relieve the management from its duty of communicating matters of governance interest.

B. Legal restrictions:

Laws may restrict auditors from communicating certain matters with governance, such as in cases where such communication may impact an investigation by an appropriate authority into an actual or suspected illegal act. The auditor may consider obtaining legal advice in case of any complexities involved in such situations.

C. Supplementary matters:

In addition to the issues related to the financial reporting process, auditors may also identify certain supplementary matters that might impact governance, such as issues in structures, processes, or unauthorised management actions. Auditors may initiate discussion with the management if it’s not inappropriate and then can consider communicating the same to those in charge of governance.

D. Inadequate communication:

If the two-way communication between the auditor and those charged with governance is not adequate and the situation cannot be resolved, the auditor can evaluate its impacts under SA 705 in modifying the audit opinion or seek legal advice on the consequences of courses of action or consider communicating with the authorities or regulators as it may deem fit.

Conclusion

The main objective of SA 260 is to ensure effective communication between the auditors and those charged with governance of an entity, which is of paramount importance in the audit process. SA 260 also facilitates an informed decision-making process, which is pivotal for the success of any business. Beyond the intricacies of regulatory compliance, it also aims to strengthen the audit process and create a robust governance framework. Though the process of communication may vary with the size and the organisational structure of the entity, it is the responsibility of the auditors to ensure clear and structured reporting, a two-way dialogue process, and providing actionable insights to those charged with governance. Auditors need to be vigilant in complying with these Standards on Auditing so that the process contributes to a robust auditing system that fosters accountability, transparency and integrity.

Contributors

CA Prajwal Bhat – LinkedIn
CA Sindhushree M – LinkedIn
CA N Srilatha Bhat– LinkedIn
Kuldeep Sarma – LinkedIn
Poonam Vernekar – LinkedIn