International Auditing and Assurance Standards Board Communication with Those Charged with Governance ISA Implementation Support Module Prepared by IAASB Staff October 2009

Introduction Two-Way Communication The Communication Process Matters to be Communicated Overview 2

The context for revising the standard New standard provides overarching framework for communication with TCWG Standard applies regardless of entity’s governance structure or size Specific considerations where TCWG and management are the same Introduction 3

Old standard focused on communication of audit matters arising from the audit with TCWG – Essentially a one-way communication from auditor to TCWG New standard imposes specific obligation on auditor to promote effective two-way communication – Auditor now has specific responsibility to take steps to achieve effective two-way communication, or failing that, to take further appropriate action Emphasis on effective two-way communication recognized in the objectives Two-Way Communication 4

Why is it important? – Assists in developing constructive working relationship between auditor and TCWG – Sets clear expectations between auditor and TCWG regarding communication of matters of audit relevance – Recognizes that TCWG are an important element of control environment – Assists TCWG in fulfilling their oversight responsibility for financial reporting process – Recognizes that TCWG are an important source of information for conduct of effective audit Two-Way Communication 5

Standard does not mandate two-way communication – TCWG cannot be required to communicate with auditor However, auditor required to evaluate whether two-way communication has been adequate If two-way communication not adequate – May affect auditor’s assessment of risks of material misstatement – May affect auditor’s ability to obtain sufficient appropriate audit evidence – Standard provides guidance on possible auditor actions Two-Way Communication 6

Communicate form, timing, and expected general content of communications – Provides basis for constructive dialogue Helps to explain or clarify such matters as – Purpose of communications – Which person(s) on each side will be the point contacts – The auditor’s expectation that the communication will be two-way – How the feedback mechanism will work between the parties The Communication Process 7

Will not be the same as in a larger entity audit – Process will vary with entity’s size and governance structure, among other things Formal communications may be more appropriate in a larger entity audit – Greater formality may be necessary with greater size and complexity of entity Communication Process in an SME Audit The Communication Process 8

Less structured approach often more suitable in an SME audit –Consistent with lack of formality in management and governance practices in SMEs Often, oral communication may be all that is needed in an SME audit –Especially if auditor has ongoing contact and dialogue with TCWG Communication Process in an SME Audit The Communication Process 9

If all TCWG are involved in managing the entity, matters communicated with them in a management capacity need not be re- communicated with them in a governance role – Common situation in owner-managed entities However, make sure that communication with individuals with management responsibilities informs all of those in a governance role The Communication Process 10

New standard is much more specific about matters that should be communicated – Auditor’s responsibilities in relation to the audit – Planned scope and timing of the audit – Significant findings from the audit Objectives recognize importance of these matters Intended to increase consistency of communication practices Will enhance quality and effectiveness of auditor’s communication with TCWG Matters to be Communicated 11

Helps TCWG better understand the audit and what to expect from it Opportunity for TCWG to identify any specific areas where they may ask auditor to perform additional work Assists auditor in better understanding the entity and its environment through dialogue with TCWG, consistent with the two-way communication principle Care needed not to compromise effectiveness of audit Communicating Planned Scope and Timing of Audit Matters to be Communicated 12

Significant qualitative aspects of accounting practices – E.g., accounting policies, accounting estimates, and disclosures Significant difficulties encountered during audit Unless all TCWG and management are the same – Significant matters discussed with management – Written representations sought by auditor Other matters of significance to oversight of financial reporting process Communicating Significant Findings Matters to be Communicated 13

Why is such communication important? – Helps confirm relevant facts and circumstances and achieve mutual understanding of the issues – Recognizes need for open and constructive dialogue on these matters – Provides opportunity to resolve significant difficulties arising during audit Communicate in writing if oral communication would be inadequate Communicating Significant Findings Matters to be Communicated 14

For listed entity audits, communicate – The auditor’s compliance with independence requirements – All relationships that may affect the auditor’s independence – Safeguards implemented to eliminate threats to independence or reduce them to acceptable level This communication – Required to be in writing – May also be relevant for audits of other entities, e.g., those with significant public interest Communicating Independence Matters Matters to be Communicated 15

Note This set of support slides does not amend or override the ISAs, the texts of which alone are authoritative. Reading the slides is not a substitute for reading the ISAs. The slides are not meant to be exhaustive and reference to the ISAs themselves should always be made. In conducting an audit in accordance with ISAs, the auditor is required to comply with all the ISAs that are relevant to the engagement. 16

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