Wiley Practitioner's Guide to GAAS 2017. Flood Joanne M.

or disclaim an opinion in accordance with AU-C 705. (AU-C 250.25)

      If the client refuses to accept the auditor's report as modified because of noncompliance, the auditor should withdraw from the engagement and communicate, in writing, the reasons for withdrawal to the audit committee or to those charged with governance. (AU-C 250.A27)

      External Communications

      Normally, disclosing noncompliance with laws or regulations outside the client's organization would be precluded by the auditor's ethical or legal obligation of confidentiality. However, the auditor should determine whether there is a responsibility to report the matter to outside parties. (AU-C 250.27) The auditor should recognize that in the following circumstances, a duty to notify parties outside the client may exist:

      1. To the SEC when the client reports an auditor change on Form 8-K (or to comply with other legal and regulatory requirements, such as Section 10A of the Securities Exchange Act of 1934)

      2. To a successor auditor under Section 210

      3. To a court order

      4. To a funding agency or other specified agency in audits of entities that receive financial assistance from a government agency

      (AU-C 250.A28)

      Documentation

      The auditor should document identified or suspected noncompliance and the related discussions with management, those charged with governance, and other internal or external parties. (AU-C 250.28)

      AU-C 260 THE AUDITOR'S COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

      AU-C Original Pronouncements

      AU-C Definitions of Terms

       Source: AU-C 260.06

      Management. The person(s) with executive responsibility for the conduct of the entity's operations. For some entities, management includes some or all of those charged with governance; for example, executive members of a governance board or an owner-manager.

      Those charged with governance. The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Those charged with governance may include management personnel; for example, executive members of a governance board or an owner-manager.

      Objectives of AU-C Section 260

      AU-C Section 260.05 states that the objectives of the auditor are to:

      a. communicate clearly with those charged with governance the responsibilities of the auditor regarding the financial statement audit and an overview of the planned scope and timing of the audit.

      b. obtain from those charged with governance information relevant to the audit.

      c. 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.

      d. promote effective two-way communication between the auditor and those charged with governance.

      Requirements

      Auditor's General Responsibility

      The auditor must communicate with those charged with governance matters related to the financial statement audit that are, in the auditor's professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Certain matters should be communicated in each audit (as described below); however, the auditor is not required to perform procedures specifically to identify these matters.

      Those Charged with Governance

      AU-C 260.09 and AU-C 206.A6-.A9 provide some guidance on how the auditor should determine which persons or bodies are “those charged with governance” (see “Definitions of Terms”). Governance structures vary by entity; however, in most entities, governance is the collective responsibility of a governing body, such as a board of directors, a supervisory board, partners, proprietors, a committee of management, trustees, or equivalent. In some entities, one person, such as the owner-manager, may be the sole person charged with governance of the entity.

      When “those charged with governance” are not clearly identifiable, the auditor and the engaging party should agree on the person(s) with whom the auditor will communicate. In those situations where the entity's governance structure includes subgroups (e.g., an audit committee), the auditor also should evaluate whether communication with a subgroup is sufficient.

      Matters to Be Communicated

      The auditor should communicate with those charged with governance:

      1. The auditor's responsibility under generally accepted auditing standards, that is, forming and expressing an opinion on statements prepared by management with oversight by those charged with governance in accordance with the applicable financial reporting framework.

      2. The fact that the audit of the financial statements does not relieve management or those charged with governance of their responsibilities.

      3. An overview of the planned scope and timing of the audit.

      4. Significant findings from the audit.

      (AU-C 260.10-11)

      The auditor may communicate matters such as:

      ● The auditor is responsible for performing the audit in accordance with GAAS.

      ● An audit is designed to obtain reasonable, not absolute, assurance.

      ● An audit includes consideration of internal control as a basis for designing audit procedures, but not for expressing an opinion on the effectiveness of internal control over financial reporting.

      ● The auditor is responsible for communicating significant matters related to the audit that are relevant to the responsibilities of those charged with governance.

      ● The auditor is responsible for communicating particular matters required by laws or regulations, agreement with the entity, or additional requirements applicable to the engagement.

      (AU-C 260.A13)

      Overview of the Planned Scope and Timing of the Audit

      The auditor should communicate an overview of the planned scope and timing of the audit. To meet that general requirement, the auditor may communicate matters such as the following:

      ● How the auditor proposes to address the significant risks of material misstatement.

      ● The auditor's approach to internal control.

      ● The concept of materiality in planning and executing the audit.

      ● Where the entity has an internal audit function and the internal auditors can work together in a constructive manner, the extent to which the auditor will use internal auditors.

      ● The views of those charged with governance about:

      ● The appropriate person(s) in the entity's governance structure with whom to communicate

      ● The allocation of responsibilities between those charged with governance and management

      ● The entity's objectives and strategies, and the related business risks that may result in material misstatements

      ● Matters those charged with governance consider warrant particular attention during the audit, and any areas where they request additional procedures to be undertaken

      ● Significant communications with regulators

      ● Other matters those charged with governance believe are relevant to the audit of the financial statements

      ● The attitudes, awareness, and actions of those charged with