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February 2014


By Sriraman Parthasarathy
Chartered Accountant
Reading Time 12 mins

Effective External Audit, a key pillar for having a good governance structure, is not only a statutory requirement but is also intended to be an unbiased review of the financial statements and the underlying transactions by an independent audit professional to protect the interests of all the stakeholders. In this process, communication by the auditors with those in charge of governance such as audit committees is very crucial. Regulators in various countries are seriously exploring the possibility of introducing a framework for extracting additional information from the auditors. Read on to know more about the items which are typically reported by the auditors to the audit committees based on the practices prevailing in several countries and the emerging trends in this area.

Effective External Audit is one of the key pillars for having a good governance structure in any organisational set up especially in the corporate form. The audit process is not only a statutory requirement but is also intended to be an impartial/ unbiased review of the financial statements and the underlying transactions by an independent audit professional, which protects the interests of all the stakeholders. In this process, communication by the auditors with those in charge of governance such as audit committees is very crucial and helps in better understanding of the financial statements and the accounting aspects. Above all, it brings in enormous transparency in sharing the critical information relating to the entity with those who are legally and morally responsible for ensuring good governance. Further, these communications with the audit committee also provide auditors with an exclusive forum separate from the management to discuss matters about the audit and the company’s financial reporting process.

Currently, in addition to the standard audit report on the financial statements and the existing requirement of reporting to those in charge of governance, the regulators in various countries are seriously exploring the possibility of introducing a framework for extracting additional information from the auditors such as Auditors’ Discussion & Analysis on the financial statements similar to that of the Management Discussions & Analysis and enhancing the audit scope/reporting requirements to provide a more detailed and professional analysis to all the readers of the financial statements.

In this context, considering the ever increasing appetite for obtaining more information from the auditor, and the legal/regulatory environment, the auditing standards in general provide for reporting on various matters to those in charge of governance. This article summarises some of the items which are typically reported by the auditors to the audit committees based on the practices prevailing in several countries and the emerging trends in this area.

Reporting Framework in India and in Other Countries

Indian Standard on Auditing SA 260 -“Communication with Those Charged with Governance” deals with the reporting requirements for auditors to those in charge of governance. The SA 260 does not contain any material modifications vis-a-vis ISA 260, which is the equivalent International Auditing Standard. This standard aims at creating a platform to promote effective two-way communication between the auditor and those charged with governance and provides an overall framework for the auditor’s communication with those charged with governance and identifies some specific matters to be communicated to them. However, nothing in this SA precludes the auditor from communicating any other matters to those charged with governance.

Although the auditor is responsible for communicating matters required by this SA, the management also has a responsibility to communicate matters of governance interest to those charged with governance. Communication by the auditor does not relieve the management of this responsibility. Similarly, communication by the management with those charged with governance of matters that the auditor is required to communicate does not relieve the auditor of his responsibility to also communicate to them.

The requirement in India is similar to the reporting requirement in several other geographies where the standard establishes a framework for the auditor to communicate certain matters related to the conduct of an audit to those who have responsibility for oversight of the financial reporting process. For example, in the United States, AU Section 380 – “Communication with Audit Committees” deals with such a reporting requirement for the auditors. Recently, the Public Company Accounting Oversight Board (PCAOB), the auditing regulator in the USA, approved Auditing Standard 16 on communications with the audit committees, which substantially enhances the reporting obligations on the part of the auditors. In Australia, the auditing standard ASA 260 deals with the communication relating to those charged with governance which is very similar to the international reporting framework. The Financial Reporting Council in the UK has recently issued FRC 260, International Standard on Auditing (UK and Ireland) relating to communication with those charged with governance, which puts onerous responsibilities on the external auditors. Singapore Standard on Auditing (SSA 260) is also in line with the reporting requirements of other countries.

Whilst the basic audit committee reporting requirements on the part of the auditors remain the same in many jurisdictions, there is also an emerging trend of mandating auditors to provide more specific information on various aspects relating to the audit process and the financial statements duly considering the country specific requirements and the expectations of the stakeholders.

Matters considered for Reporting The matters which are typically included in the communications to the audit committee can be broadly classified in to two categories, namely;

• Regular Reportable Matters
• Emerging Additional Reporting Requirements

This classification is based on the general practice/ applicability in various jurisdictions and the contents could vary depending on the need/other requirements.

Regular Reportable Matters

The list of items which are included in the regular list of items to be reported would include the following:

• The Auditor’s Responsibility under Generally Accepted Auditing Standards

• Significant Accounting Policies

• Management Judgments and Accounting Estimates

• Composition of the Engagement Team

• A statement that the Engagement Team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence

• Planned Scope of Audit

• Overview of the Audit Strategy, Timing of the Audit, and Significant Risks

• Consideration of Fraud in a Financial Statements Audit

• Significant Issues Discussed with the Management prior to retention

• The form, timing, and expected general content of communications

• Disagreements with the Management

• Consultation with other accountants

• Difficulties encountered in performing the audit

• Communication about Control Deficiencies in an audit of Financial Statements

• Financial Statement Presentation

• Alternative Accounting Treatments.

• Significant Audit Adjustments

• Significant Findings from the Audit

• All written representations requested from the Management (where the Management is separate from those charged with governance)

Emerging Additional Reporting Requirements

Items which are increasingly required to be reported in communications by the auditors to the audit commit-tee depending on the various regulatory/other requirements/practices are listed below;

•    All relationships and other matters between the firm, network firms and the entity which, in the auditor’s professional judgment, may reasonably be thought to bear on the firm’s independence.

•    The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.
•    The total fees charged by the audit firm (including network firms) for audit and non-audit services for the period covered by the financial report audit.

•    Assessment of the adequacy of the communication process, between the auditor and those charged with governance for the purposes of the audit.

•    Illegal Acts
•    Going-Concern Matters
•    Material Written Communications between the audi-tor and the Management.
•    Significant unusual transactions
•    Departure from the Auditor’s Standard Report
•    Matters that have arisen during the audit which are significant to the oversight of the financial reporting process
•    Difficult or contentious matters on which the auditor was consulted
•    Specific matters relating to the group audits to be communicated by the parent company auditors

•    Auditor’s Judgments about the quality of the entity’s accounting principles and practices
•    Auditor’s opinion on other information in any other document which contains the Audited Financial Statements
•    New accounting pronouncements and their impact on the entity

Background for the Enhanced Expectations for Additional Reporting Requirements

The emerging regulatory framework is tilted towards enhancing the relevance, timeliness, and quality of the communications between the auditor and the audit committee relative to the annual audit and related in-terim period reviews and fosters constructive dialogue between the auditor and the audit committee about significant audit and financial statement matters. The underlying reasons for enhancing the reporting requirements to the audit committee by the auditors which are emerging in several jurisdictions are explained below.

The audit committee has an important role to play in the relationship between the executive management and the external auditors. The audit committee should always make the external auditor aware of any issues which are of concern to it. Similarly, the external auditor should inform the audit committee of any concerns he has so as to ensure that the financial oversight process is complete and comprehensive. This is absolutely essential since the extent of importance provided to the audit process and the oversight provided by the audit committee is on the rise worldwide. For example, in Belgium, the statute explicitly requires that the audit committee monitors the statutory audit of the annual consolidated accounts, including the follow up of questions raised by the statutory auditor. The French Stock Exchange Authority requires the audit committees to discuss with their statutory auditors specifically and formally, any difficulties they have faced during the course of their audit.

Facing more scrutiny from regulators and investors, audit committees are continuing to challenge their roles and responsibilities. A primary responsibility of the audit committee is to oversee the integrity of the company’s accounting and reporting practices and financial statements. As financial reporting becomes more complex, the audit committee needs to make sure that the financial statements are understandable and transparent. To perform their oversight responsibilities, audit committee members need to understand what information they need, how to analyse it and what questions to ask to gain insights and make informed decisions. In view of the above, the audit committees are expecting enhanced support from the external audi-tors and candid and open communication between the external auditor and the audit committee is imperative in this regard.

The expectations from different stakeholders relating to the compliance aspects of various laws and regulations are also another reason for the enhanced reporting requirements. In some of the jurisdictions, the auditor is now required to inquire if the audit committee is aware of any matters relevant to the audit, including but not limited to violations or possible violations of laws or regulations. Further, the auditor should also assure himself that the audit committee or others with equivalent authority and responsibility is adequately informed with respect to illegal acts that come to the auditor’s attention.

Need for proactive action, understanding the nuances relating to the audit process, managing the subjective assessments, fixing the specific responsibilities have changed the entire dimension of the oversight function. This has also resulted in mandating the auditors to provide information on various significant aspects of the audit such as the planned use of other auditors to audit certain components or subsidiaries, the basis for the auditor’s determination that they can serve as the principal auditor, consultations on difficult or contentious matters outside the engagement team, specialised skill and knowledge to complete the audit, any concerns regarding the management’s anticipated application of accounting pronouncements that are not yet effective.

Audit is no longer an exercise of just ticking the numbers and confirming the mathematical accuracy of the figures provided by the management. It has changed its dimension quite drastically in the recent past and the audit process now requires thorough understanding of the business, external and the internal environments, regulatory framework in which the entity operates business and other risks, internal control framework, computer environment and much more. Currently, there is an expectation to have industry specialists in the audit field so as to bring lot more value to the audit process by demonstrating the immense industry experience. In this background, an auditor is now required to ensure that the audit committee is informed about the methods used to account for significant unusual transaction and the auditor would also be required to communicate about additional aspects of such significant unusual transactions, including the his understanding of the business rationale for them and not just the company’s methods of accounting for them.


Regulators worldwide believe that effective communication between the auditor and the audit committee allows the audit committee to be well-informed about accounting and disclosure matters, including the auditor’s evaluation of matters that are significant to the financial statements and to be better able to carry out its oversight role. Further, the auditor also benefits from a meaningful exchange of information regarding significant risks of material misstatement in the financial statements and other matters that may affect the integrity of the company’s financial reports.

In today’s world, the varying expectations of the stakeholders impose an onerous responsibility on the part of the audit committee and the auditors to discharge their duties properly. One should always remember that the roles of the auditors and the audit committees are critical to the efficiency and integrity of the capital markets and for protecting the interests of the various stakeholders. Considering enhanced regula-tory and legal environment and the investor activism, seamless and timely communication between the au-ditor and the audit committee is absolutely essential. This would pave the way for transparent and focused discussions and would also help in taking well informed decisions and having an effective financial oversight.

In a dynamic environment, the roles and the responsibilities keep changing and the audit profession is not an exception to this ground level reality. Hence, the audit community should rise to the occasion and use this tool of communicating with the audit committee purposefully for not only discharging their professional/ regulatory responsibilities but also for demonstrating their professional expertise and the value created by the services rendered. This would enhance the image of the profession and make the audit process more valuable and reliable.

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