Communicating with those charged with governance under AU-C 260

In this lesson you will

Identify those charged with governance for a given entity
List the planning and significant findings matters in AU-C 260.10 through .14
Decide when AU-C 260.16 requires written communication
Document communications to meet AU-C 260.21

Who receives the communication

AU-C 260.07 requires you to determine the appropriate person or persons in the governance structure. In a company with a board and audit committee, that is the audit committee, and AU-C 260.08 requires you to decide whether the full board also needs to hear certain matters. In an owner-managed business where the owner is the only governance, AU-C 260.09 says matters communicated to that person in a management role need not be repeated in a governance role, as long as the communication informs everyone you would otherwise address.

Some requirements change when all of those charged with governance manage the entity. AU-C 260.14 lists matters you communicate only when that is not the case.

Planning matters

Two items belong early:

Your responsibilities (AU-C 260.10). You form and express an opinion on whether the statements prepared by management, with governance oversight, are prepared, in all material respects, in accordance with the applicable financial reporting framework; the audit does not relieve management or governance of their responsibilities.
Planned scope and timing (AU-C 260.11). An overview that includes the significant risks you identified.

Many firms cover AU-C 260.10 in the engagement letter and send a short planning letter for AU-C 260.11; see the planning communication example. Be careful not to describe procedures in so much detail that they become predictable.

Significant findings

AU-C 260.12 requires you to communicate:

Your views about qualitative aspects of significant accounting practices, including policies, estimates and disclosures. That includes explaining why an acceptable practice is not the most appropriate for the entity, and informing governance about management's process for particularly sensitive estimates and the basis for your conclusions on them.
Significant unusual transactions.
Significant difficulties encountered.
Disagreements with management.
Circumstances that affect the form and content of your report.
Difficult or contentious matters on which you consulted outside the engagement team that are significant and relevant to governance oversight.
Other significant findings relevant to governance oversight of financial reporting.

AU-C 260.13 adds uncorrected misstatements: their effect on the opinion, material items identified individually, a request for correction, prior-period effects, and the risk they pose to future periods.

When not all of governance is in management, AU-C 260.14 adds material corrected misstatements, significant findings discussed with management, your views on management's consultations with other accountants, and the written representations you are requesting.

Other sections add their own items, including going concern (AU-C 570.28), expected report modifications (AU-C 705.31), expected emphasis-of-matter or other-matter paragraphs (AU-C 706.12), key audit matters (AU-C 701.16) and other information (AU-C 720.15).

Form, timing and adequacy

AU-C 260.15 requires you to communicate the form, timing and expected general content of communications. AU-C 260.16 requires written communication of the significant findings in paragraphs .12 through .14 when, in your judgment, oral communication would not be adequate; matters raised and satisfactorily resolved during the audit need not be included. AU-C 260.18 requires a written communication to state it is intended solely for governance and, if appropriate, management. AU-C 260.19 requires timely communication, and AU-C 260.20 requires you to evaluate whether the two-way communication was adequate and, if not, consider the effect on risk assessment and evidence.

Documentation

AU-C 260.21: oral communications go into the file with when and to whom they were made; written communications are kept in the file. A note that says "discussed with the board" with no date, attendee list or content does not meet the requirement.

The required communications checklist maps each paragraph to where it was satisfied, and the communications calendar guide lays out timing across the engagement.

Worked example

St. Brendan's Community Health Center: what goes in writing

St. Brendan's Community Health Center is a nonprofit with a volunteer board and a three-person finance committee; no board member is in management.

Findings at year end:

The team proposed a $340,000 adjustment to patient receivables for implicit price concessions, which management booked. Materiality is $250,000, so this is a material corrected misstatement: AU-C 260.14a applies because governance is separate from management.
Uncorrected misstatements total $48,000 against materiality of $250,000, which is 19.2% of materiality. AU-C 260.13 requires communication and a request to correct, even though they are immaterial.
The CFO consulted another CPA firm on a lease classification. AU-C 260.14c requires the team's views on that consultation.
Management's estimate of third-party payor settlements is the most sensitive estimate. AU-C 260.12a requires informing the committee about management's process and the basis for the team's conclusion.

Form: the partner judges that oral communication would not be adequate for items 1 through 4 because the board relies on the finance committee to brief it. Under AU-C 260.16 they go in writing, with the AU-C 260.18 restricted-use statement, addressed to the finance committee and the board.

Documentation: the letter, the meeting date, and attendees go into the file under AU-C 260.21.

Self-check

Answer each question before you open the answer.

The sole owner is also the CEO and the only person with governance responsibilities. Must you communicate material corrected misstatements under AU-C 260.14?
Show answer
No. AU-C 260.14 applies only unless all of those charged with governance are involved in managing the entity, and here they are. You still communicate the AU-C 260.10 through .13 matters.
When must significant findings be in writing?
Show answer
When, in your professional judgment, oral communication would not be adequate (AU-C 260.16). Matters raised and satisfactorily resolved during the audit can be left out.
What does AU-C 260.21 require when you communicate orally?
Show answer
Documentation of the matters communicated, when, and to whom. Without it, the file cannot show the requirement was met.

Sources

AICPA Statements on Auditing Standards (AU-C sections), currently effective

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error