THE AUDITING PRACTICES BOARD COMMUNICATION OF AUDIT MATTERS TO THOSE CHARGED WITH GOVERNANCE

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1 COMMUNICATION OF AUDIT MATTERS TO THOSE CHARGED WITH GOVERNANCE Contents Paragraphs Introduction 1-8 The communication process 9-23 Relevant matters relating to the audit to be communicated Third parties interested in communications to those charged with governance Other public sector considerations Compliance with International Standards on Auditing 47 Effective date 48 Appendix: Other Auditing Standards referring to communication to those charged with governance 1

2 STATEMENT OF AUDITING STANDARDS 610 COMMUNICATION OF AUDIT MATTERS TO THOSE CHARGED WITH GOVERNANCE Statements of Auditing Standards ( SASs ) are to be read in the light of The scope and authority of APB pronouncements. In particular, they contain basic principles and essential procedures ( Auditing Standards ), indicated by paragraphs in bold type, with which auditors are required to comply in the conduct of any audit. SASs also include explanatory and other material which is designed to assist auditors in interpreting and applying Auditing Standards. The definitions in the Glossary of terms are to be applied in the interpretation of SASs. Introduction 1 The purpose of this SAS is to establish standards and provide guidance on the communication of relevant matters relating to the audit of financial statements between the auditors and those charged with governance of an entity. This SAS does not deal with the auditors communications associated with their other responsibilities; nor does it deal with their communications with parties outside the entity (e.g. external regulatory bodies 1 ). 2 Auditors should communicate relevant matters relating to the audit of the financial statements to those charged with governance of the entity. Such communications should be on a sufficiently prompt basis to enable those charged with governance to take appropriate action. (SAS 610.1) 3 The principal purposes of communication to those charged with governance are for auditors to: ensure that there is a mutual understanding of the scope of the audit and the respective responsibilities of the auditors and those charged with governance; share information to assist both auditors and those charged with governance fulfil their respective responsibilities; and 1 Auditing Standards in respect of the auditors right and duty to report to regulators in the financial sector are the subject of SAS

3 provide to those charged with governance constructive observations arising from the audit process 2. 4 Relevant matters relating to the audit include: relationships that may bear on the auditors independence and objectivity; audit planning information; and the findings from the audit, including the auditors views on the qualitative aspects of the entity s accounting and reporting. These are addressed in more detail later in this SAS. 5 Those charged with governance are ultimately responsible for the financial statements of the entity. Although the requirements of this SAS focus on the auditors communications to those charged with governance, it is important that there is effective two-way communication. Auditors reasonably expect those charged with governance to give them such information and explanations as they require for the purposes of their audit 3. This SAS is generally not prescriptive as to the manner in which communication takes place. Whilst recognising the value of written reports, oral presentation and discussion of matters are encouraged. Discussion of matters helps enable both auditors and those charged with governance to understand fully the issues involved. Size and nature of the entity 6 The extent, form and frequency of communications to those charged with governance will vary, reflecting the size and nature of the entity and the manner in which those charged with governance operate, as well as the auditors views as to the importance of the relevant matters relating to the audit. In particular, communications to those charged with governance of listed companies might be more formal than communications to those charged with governance of smaller entities, or of subsidiary undertakings. Timing of communications 7 Auditors communicate relevant matters relating to the audit on a sufficiently prompt basis to enable those charged with governance to take appropriate action, recognising that in certain circumstances they may identify matters of such significance that they may need to be communicated to those charged with governance without delay. Findings from the audit that are relevant to the financial statements, including the auditors views about the qualitative aspects of the entity s accounting and financial reporting, will usually be communicated to those charged with governance before they approve the financial statements. 2 The Auditors Code states that auditors add to the reliability and quality of financial reporting; they provide to the directors and officers constructive observations arising from the audit process; and thereby contribute to the effective operation of business, capital markets and the public sector. 3 Section 389A(1) of the Companies Act 1985 specifies that The auditors of a company are entitled to require from the company s officers such information and explanations as they think necessary for the performance of their duties as auditors. (For Northern Ireland and the Republic of Ireland equivalent requirements are set out in Article 245(3) of the Companies (Northern Ireland ) Order 1986 and section 193(3) of the Companies Act 1990 respectively.) 3

4 Definitions 8 In this SAS, the following terms have the meaning attributed below: (a) (b) (c) (d) relevant matters relating to the audit such matters arising from the audit of financial statements as the auditors believe to be both important and relevant to those charged with governance in overseeing the financial reporting process. Relevant matters relating to the audit include only those items that have come to the attention of the auditors as a result of the performance of the audit. Auditors are not required, in an audit in accordance with SASs, to design procedures for the specific purpose of identifying matters of relevance to those charged with governance. those charged with governance those persons entrusted with the supervision, control and direction of an entity. Those charged with governance include the directors of a company or other body, the partners, proprietors, committee of management or trustees of other forms of entity, or equivalent persons responsible for directing the entity s affairs and preparing its financial statements. management those persons who have executive responsibility for the conduct of the entity s operations and the preparation of its financial statements. listed companies entities whose capital instruments are listed or publicly traded on a stock exchange or market, including domestic and foreign exchanges and markets, and markets other than main markets 4. The communication process 9 Auditors should plan with those charged with governance the form and timing of communications to them and determine whether there are particular persons to whom they should communicate certain matters. (SAS 610.2) Establishing expectations 10 In order to ensure that effective two-way communication is established, the expectations both of the auditors and those charged with governance regarding the form, level of detail and timing of communications are established at an early stage in the audit process. The manner in which these expectations are established will vary, reflecting the size and nature of the entity and the manner in which those charged with governance operate. 11 To avoid misunderstandings, auditors may explain that they will communicate only those matters that they believe to be relevant to those charged with governance that come to their attention as a result of the performance of the audit of the financial statements; and that they are not required to design audit procedures for the specific purpose of identifying matters of relevance to those charged with governance. 4 This definition includes markets such as the London and Irish Stock Exchanges, EASDAQ, NASDAQ and the Alternative Investment Market. 4

5 Addressees of communications to those charged with governance 12 In most entities a board or equivalent governing body has collective responsibility for governance, including financial reporting. In some smaller entities a single individual may be charged with governance. In other cases, committees of the board or individual members of it may be charged with specific tasks in order to assist the board to meet its governance responsibilities (e.g. there may be an audit committee, a remuneration committee or a nomination committee). 13 Auditors use judgment to determine to whom they communicate certain matters. When considering communicating to a committee, the auditors take into account the responsibilities of the committee, the nature of the matters and any legal or regulatory requirements. The auditors also consider whether the committee is in a position to provide the information and explanations they need for the purpose of their audit, whether it has the authority to act on the auditors findings and whether there may be a need to repeat their communications to the board or governing body. Irrespective of what may be agreed, the auditors may judge it necessary to communicate directly to the board or governing body when a matter is sufficiently important. 14 The establishment of audit committees by the boards of listed companies, many public sector bodies and some other organisations has meant that communications to the audit committee, where one exists, has become a key element in the auditors communication to those charged with governance. As part of obtaining an understanding of the control environment, auditors obtain an understanding of how the audit committee operates, including the particular remit given to the committee by the entity s board and its role in relation to governance matters such as reviewing the identification, evaluation and management of business risks. An entity s board and its auditors bear in mind that communication to audit committees forms only part of the auditors overall obligation to communicate effectively to those charged with governance. Forms of communication 15 The auditors communication to those charged with governance may be made orally or in writing. The auditors decision whether to communicate orally or in writing is affected by factors such as: the size, operating structure, legal structure and communication process of the entity being audited; the nature, sensitivity and significance of the matters being communicated; statutory and regulatory requirements; and the arrangements made with respect to periodic meetings or reporting of significant matters. 5

6 16 When auditors do not intend to issue a written report to those charged with governance they may consider it appropriate to inform them that no such report is to be issued. 17 When relevant matters relating to the audit are communicated orally, the auditors document in the audit working papers the matters communicated and any response to those matters. Such documentation is sufficiently detailed to enable an understanding to be obtained of the matter communicated and, where appropriate, of how issues were resolved and any actions agreed. 18 Depending on the nature, sensitivity and significance of the matter(s) concerned, auditors confirm oral communications in writing with those charged with governance. Communication with management 19 Ordinarily, before communicating matters to those charged with governance, the auditors discuss those matters with management. These initial discussions with management are important in order to clarify facts and issues, and to provide management with an opportunity to provide further information and explanations. If management agrees to communicate certain matters to those charged with governance, the auditors may not need to repeat the communication provided that they are satisfied that such communication is made and conveys, in an appropriate manner, relevant facts and conclusions. 20 Auditors incorporate in their communication of matters to those charged with governance comments made by management, where those comments will aid the understanding of those charged with governance, and any actions management have indicated that they will take. Groups 21 Where a parent undertaking is preparing group financial statements, the auditors communicate to those charged with its governance such matters brought to the attention of those charged with governance of its subsidiary undertakings by their auditors as they judge to be of significance in the context of the group (e.g. weaknesses in systems of internal control that have resulted, or could result, in material errors in the group financial statements). 22 There are statutory obligations on corporate subsidiary undertakings, and their auditors, in the UK and Ireland to provide the auditors of a corporate parent undertaking with such information and explanations as they may reasonably require for the purposes of their 6

7 audit 5. Where there is no statutory obligation (e.g. for non corporate entities and overseas subsidiary undertakings) permission may be needed from those charged with governance of the subsidiary undertakings to disclose the contents of any communication to them to the auditors and those charged with governance of the parent undertaking. The auditors of the parent undertaking seek to ensure that appropriate arrangements are made at the planning stage for these disclosures. Normally, such arrangements for groups are recorded in the instructions to the auditors of subsidiary undertakings and relevant engagement letters. 23 Auditors of the parent undertaking consider the manner in which the group is managed and the wishes of those charged with governance of the parent undertaking when deciding with whom they should communicate in the group about particular matters. In recognition of the responsibilities of those charged with governance of subsidiary undertakings, the auditors of those subsidiary undertakings communicate relevant matters to those charged with their governance. Relevant matters relating to the audit to be communicated Relationships that may bear on the firm s independence and the objectivity of the audit engagement partner and audit staff 24 At least annually, for all audit engagements where the audited entity is a listed company, auditors should: (a) disclose in writing to the audit committee, and discuss as appropriate: all relationships between the audit firm and its related entities and the client entity and its related entities that may reasonably be thought to bear on the firm s independence and the objectivity of the audit engagement partner and the audit staff; and the related safeguards that are in place; and (b) where this is the case, confirm in writing to the audit committee that, in their professional judgment, the firm is independent within the meaning of regulatory and professional requirements and the objectivity of the audit engagement partner and audit staff is not impaired. (SAS 610.3) 5 Section 389A of the Companies Act 1985 requires a subsidiary undertaking which is a body corporate incorporated in Great Britain, and its auditors, to give to the auditors of any parent company of the undertaking such information and explanations as they may reasonably require for the purposes of their duties as auditors of that company. If a parent company has a subsidiary undertaking which is not a body corporate incorporated in Great Britain, section 389A requires that it shall, if required by its auditors to do so, take all such steps as are reasonably open to it to obtain from the subsidiary undertaking such information and explanations as the parent company auditors may reasonably require for the purposes of their duties as auditors of that company. (Similar obligations regarding companies incorporated in Northern Ireland and the Republic of Ireland are set out in Article 397A of the Companies (Northern Ireland) Order 1986 and section 196 of the Companies Act 1990 respectively.) 7

8 25 Where they consider that it would be beneficial, auditors also make these disclosures to, and discuss them with, the audit committees of other types of entity or, where there is no audit committee, those charged with governance. 26 SAS 240 Quality control for audit work (Revised) requires audit engagement partners to consider whether adequate arrangements are in place to safeguard their objectivity and the firm s independence. A firm appointed as auditor of an entity needs to have in place appropriate procedures to ensure that the audit engagement partner is made aware of any other relationship which exists between the firm and its related entities and the client entity and its related entities that may reasonably be thought to bear on the firm s independence and the objectivity of the audit engagement partner and the audit staff. 27 SAS 240 also indicates that before accepting appointment or agreeing to continue in office as auditor, a summary is prepared (or reconsidered if already in existence) of any factors that may reasonably be thought to bear on the firm s independence and the objectivity of the audit engagement partner and the audit staff and the related safeguards that are in place. The summary should be updated (including at the time the auditors are completing their audit work), and the appropriateness of remaining in office as auditor reconsidered, as necessary to reflect changed circumstances. 28 Duties of audit committees complying with the Combined Code 6 include keeping under review the independence and objectivity of the auditors. Accordingly, auditors make the audit committee aware of relationships that could reasonably be perceived as threatening their objectivity and the firm s independence (e.g. the total amount of fees the firm earns from the provision of other services to the entity) and of the safeguards that are in place. Planning information 29 Auditors should communicate to those charged with governance an outline of the nature and scope, including, where relevant, any limitations 7 thereon, of the work they propose to undertake and the form of the reports they expect to make. (SAS 610.4) 30 The nature and detail of the planning information communicated will reflect the size and nature of the entity and the manner in which those charged with governance operate. Matters that might be communicated in outline include: 6 The Combined Code sets out principles of good governance and a code of best practice. It was published in June 1998 and has been appended to the Listing Rules of the FSA and the Irish Stock Exchange. 7 SAS 601 sets out standards and guidance for situations where there is an imposed limitation of audit scope. This includes consideration of whether to accept or continue with the audit engagement. 8

9 the concept of materiality and its application to the audit approach; the way the auditors propose to address the risk of material misstatements, with particular reference to areas of higher risk; the auditors approach to the assessment of, and reliance on, internal controls; the extent, if any, to which reliance will be placed on the work of internal audit and on the way in which the external and internal auditors can best work together on a constructive and complementary basis; where relevant, the work to be undertaken by any other firms of auditors (including related firms) and how the principal auditors intend to obtain assurance as to the adequacy of the other auditors procedures in so far as it relates to their role as principal auditors. 31 In any particular year, auditors may decide that there are no significant changes from relevant information that has been communicated previously and they judge that it is unnecessary to remind those charged with governance of all or part of that information. In these circumstances, auditors need only make those charged with governance aware that they have no new relevant information to communicate. Matters that are included in the audit engagement letter need not be repeated Other matters that auditors may, for the purpose of their audit, find beneficial to discuss with those charged with governance include: the views of those charged with governance of the nature and extent of significant internal and external operational, financial, compliance and other risks facing the entity which might affect the financial statements, including the likelihood of those risks materialising and how they are managed; the control environment within the entity, including the attitude of management to controls, and whether those charged with governance have a process for keeping under review the effectiveness of the system of internal control and, where a review of the effectiveness of internal control has been carried out, the results of that review; actions those charged with governance plan to take in response to matters such as developments in law, accounting standards, corporate governance reporting, 8 SAS 140 requires that the audit engagement letter includes a summary of the scope of the engagement and the form of any reports. It also indicates other matters that might be dealt with in the engagement letter. 9

10 Listing Rules, and other developments relevant to the entity s financial statements and annual report; the actions taken by those charged with governance and management in response to previous communications. Where significant matters raised in previous communications to those charged with governance have not been dealt with effectively, the auditors enquire as to why appropriate action has not been taken. If auditors consider that a matter raised previously has not been adequately addressed, consideration is given to repeating the point in a current communication; otherwise there is a risk that they may give an impression that they are satisfied that the matter has been adequately addressed or is no longer significant. Findings from the audit 33 Auditors should communicate to those charged with governance: (a) expected modifications to the auditors report; (b) unadjusted misstatements; (c) material weaknesses in the accounting and internal control systems identified during the audit; (d) their views about the qualitative aspects of the entity s accounting practices and financial reporting; (e) matters specifically required by other Auditing Standards to be communicated to those charged with governance 9 ; and (f) any other relevant matters relating to the audit. (SAS 610.5) Expected modifications to the auditors report 34 Auditors discuss expected modifications to the auditors report on the financial statements with those charged with governance to ensure that: those charged with governance are aware of the proposed modification and the reasons for it before the report is finalised; there are no disputed facts in respect of the matter(s) giving rise to the proposed modification (or that matters of disagreement are confirmed as such); and 9 A summary of such requirements as at 1 June 2001 is included in the appendix. 10

11 those charged with governance have an opportunity, where appropriate, to provide the auditors with further information and explanations in respect of the matter(s) giving rise to the proposed modification. Unadjusted misstatements detected by the auditors 35 When misstatements identified by the auditors are not adjusted by the entity s management the auditors communicate all such unadjusted misstatements, other than those that they believe are clearly trifling 10, to those charged with governance and request them to make the adjustments. Where those charged with governance refuse to make some or all of the adjustments, the auditors discuss with them the reasons for, and appropriateness of, not making those adjustments, having regard to qualitative as well as quantitative considerations, and consider the implications for their audit report of the effect of misstatements that remain unadjusted. If management have adjusted material misstatements, the auditors consider whether those adjustments of which they are aware should be communicated to those charged with governance so as to assist them to fulfil their governance responsibilities, including reviewing the effectiveness of the system of internal control. 36 Auditors should seek to obtain a written representation from those charged with governance that explains their reasons for not adjusting misstatements brought to their attention by the auditors. (SAS 610.6) 37 If those charged with governance refuse to make some or all of the adjustments the auditors have requested, a representation is obtained to reduce the possibility of misunderstandings concerning their reasons for not making the adjustments. A summary of the unadjusted misstatements 11 is included in, or attached to, the representation letter. Obtaining the representation does not relieve the auditors of the need to form their own opinion as to the materiality of unadjusted misstatements. Material weaknesses in the accounting and internal control systems 38 A material weakness in the accounting and internal control systems is a deficiency in design or operation which could adversely affect the entity s ability to record, process, summarise and report financial and other relevant data so as to result in a material misstatement in the financial statements. Auditors normally do not need to communicate information concerning a material weakness of which those charged with governance are aware and in respect of which, in the view of the auditors, appropriate corrective action 10 This is not another expression for immaterial. Matters which are clearly trifling will be of an wholly different (smaller) order of magnitude than the materiality thresholds used in the audit, and will be matters that are clearly inconsequential, whether taken individually or in aggregate and whether judged by any quantitative and/or qualitative criteria. Further, whenever there is any uncertainty about whether one or more items are clearly trifling (in accordance with this definition), the presumption should be that the matter is not clearly trifling. 11 The summary need not include any misstatements that the auditors believe are clearly trifling. 11

12 has been taken, unless the weakness is symptomatic of broader weaknesses in the overall control environment and there is a risk that other material weaknesses may occur. Material weaknesses of which the auditors are aware are communicated where they have been corrected by management without the knowledge of those charged with governance. 39 Auditors explain to those charged with governance that they have not provided a comprehensive statement of all weaknesses which may exist in the accounting and internal control systems or of all improvements which may be made, but have addressed only those matters which have come to their attention as a result of the audit procedures performed. Qualitative aspects of accounting practices and financial reporting 40 The accounting requirements of company law, accounting standards and Urgent Issues Task Force (UITF) Abstracts permit a degree of choice in some areas as to the specific accounting policies and practices that may be adopted by an entity 12. Additionally, there are matters for which those charged with governance have to make accounting estimates and judgments. 41 In the course of their audit of the financial statements, auditors consider the qualitative aspects of the financial reporting process, including items that have a significant impact on the relevance, reliability, comparability, understandability and materiality of the information provided by the financial statements 13. Auditors discuss in an open and frank manner with those charged with governance the auditors views on the quality and acceptability of the entity s accounting practices and financial reporting. Such discussions may include: the appropriateness of the accounting policies to the particular circumstances of the entity, judged against the objectives of relevance, reliability, comparability and understandability but having regard also to the need to balance the different objectives and the need to balance the cost of providing information with the likely benefit to users of the entity s financial statements 14 ; Auditors explain to those charged with governance why they consider any accounting policy not to be the most appropriate, and request those charged with governance to make appropriate changes. If those charged with governance decline to make the changes on the grounds that the effect is not material, the auditors inform them that they will consider qualifying the auditors report as soon 12 Financial Reporting Standard (FRS) 18 Accounting policies requires that Where it is necessary to choose between accounting policies an entity should select whichever of those accounting policies is judged by the entity to be most appropriate to its particular circumstances for the purpose of giving a true and fair view. 13 These qualitative characteristics of financial information are discussed in the Accounting Standards Board s Statement of Principles for Financial Reporting. 14 These objectives and constraints are set out in FRS 18, paragraphs 30 and

13 as the effect of not using the most appropriate policy can reasonably be expected to influence the economic decisions of users of the financial statements. the timing of transactions and the period in which they are recorded; the appropriateness of accounting estimates and judgments, for example in relation to provisions, including the consistency of assumptions and degree of prudence reflected in the recorded amounts; the potential effect on the financial statements of any uncertainties including significant risks and exposures, such as pending litigation, that are required to be disclosed in the financial statements; material uncertainties related to events and conditions that may cast significant doubt on the entity s ability to continue as a going concern; the extent to which the financial statements are affected by any unusual transactions including non-recurring profits and losses recognised during the period and the extent to which such transactions are separately disclosed in the financial statements; apparent misstatements in the other information in the document containing the audited financial statements or material inconsistencies between it and the audited financial statements 15 ; the overall balance and clarity of the information contained in the annual report; disagreements about matters that, individually or in aggregate, could be significant to the entity s financial statements or the auditors report. These communications include consideration of whether the matters have, or have not, been resolved and the significance of the matters. Third parties interested in communications to those charged with governance 42 Occasionally those charged with governance may wish to provide third parties, for example bankers or certain regulatory authorities, with copies of a written communication from the auditors. It is appropriate to ensure that third parties who see the communication understand that it was not prepared with third parties in mind. Furthermore, where the written communications contain open and frank discussion of aspects of the entity s accounting and financial reporting practices, it may not be 15 SAS 160 sets out standards and guidance for auditors consideration of other information in documents containing audited financial statements. 13

14 appropriate for such communications to be disclosed to third parties. Thus auditors normally state in their communication to those charged with governance that: the report has been prepared for the sole use of the entity and, where appropriate, any parent undertaking and its auditors; it must not be disclosed to a third party, or quoted or referred to, without the written consent of the auditors; and no responsibility is assumed by the auditors to any other person. 43 In the public or regulated sectors, auditors may have a duty to submit a report to those charged with governance annually, and also to submit copies of the report to relevant regulatory or funding bodies. In the public sector, there may also be a requirement or expectation that reports will be made public and in such circumstances some or all of the restrictions set out in the preceding paragraph may not be appropriate. 44 Any communication to those charged with governance is confidential information. Thus, when auditors communicate in writing to those charged with governance, they require the prior consent of those charged with governance if they are to provide a copy of their communication to a third party. Other public sector considerations 45 While the Auditing Standards and guidance in this SAS apply to the audit of financial statements in the public sector, the legislation and regulations giving rise to the audit mandate may specify the nature, form and content of communication with public sector bodies. 46 For public sector audits, the types of matters that may be relevant to those charged with governance may be broader than the types of matters discussed in the SAS, which are directly related to the audit of financial statements. Public sector auditors mandates may require them to report other significant matters arising out of the audit, including: misconduct, fraud or other irregularity; occasions where the Board, Chief Executive or any other official has fallen short of the high standards of financial integrity expected of those responsible for the management of public assets; or occasions where the entity has incurred expenditure of an extravagant or wasteful nature. 14

15 Compliance with International Standards on Auditing 47 Compliance with this SAS ensures compliance in all material respects with International Standard on Auditing 260 Communications of audit matters with those charged with governance and the section entitled Communication of weaknesses in International Standard on Auditing 400 Risk assessments and internal control. Effective date 48 Auditors are required to comply with the Auditing Standards contained in this SAS in respect of audits of financial statements for periods commencing on or after 23 December Earlier adoption is encouraged. 15

16 Appendix Other Auditing Standards referring to communication to those charged with governance Fraud and error The auditors should as soon as practicable communicate their findings to the appropriate level of management, the board of directors or the audit committee if: (a) they suspect or discover fraud, even if the potential effect on the financial statements is immaterial (save where SAS applies), or (b) material error is actually found to exist. (SAS 110.7) Where the auditors become aware of a suspected or actual instance of fraud they should (a) consider whether the matter may be one that ought to be reported to a proper authority in the public interest; and where this is the case (b) except in the circumstances covered in SAS , discuss the matter with the board of directors, including any audit committee. (SAS ) Where, having considered any views expressed on behalf of the entity and in the light of any legal advice obtained, the auditors conclude that the matter ought to be reported to an appropriate authority in the public interest, they should notify the directors in writing of their view and, if the entity does not voluntarily do so itself or is unable to provide evidence that the matter has been reported, they should report it themselves. (SAS ) Compliance with law and regulations The auditors should perform procedures to help identify possible or actual instances of noncompliance with those laws and regulations which provide a legal framework within which the entity conducts its business and which are central to the entity s ability to conduct its business and hence to its financial statements, by (a) obtaining a general understanding of the legal and regulatory framework applicable to the entity and the industry, and of the procedures followed to ensure compliance with that framework (b) inspecting correspondence with relevant licensing or regulatory authorities (c) enquiring of the directors as to whether they are on notice of any such possible instances of non-compliance with law or regulations, and 16

17 (d) obtaining written confirmation from the directors that they have disclosed to the auditors all those events of which they are aware which involve possible non-compliance, together with the actual or contingent consequences which may arise therefrom. (SAS 120.3) The auditors should, as soon as practicable (save where SAS applies), either (a) communicate with management, the board of directors or the audit committee, or (b) obtain evidence that they are appropriately informed, regarding any suspected or actual non-compliance with law or regulations that comes to the auditors attention. (SAS 120.8) Where the auditors become aware of a suspected or actual instance of non-compliance with law or regulations which does not give rise to a statutory duty to report to an appropriate authority they should (a) consider whether the matter may be one that ought to be reported to a proper authority in the public interest; and where this is the case (b) except in the circumstances covered in SAS , discuss the matter with the board of directors, including any audit committee. (SAS ) Where, having considered any views expressed on behalf of the entity and in the light of any legal advice obtained, the auditors conclude that the matter ought to be reported to an appropriate authority in the public interest, they should notify the directors in writing of their view and, if the entity does not voluntarily do so itself or is unable to provide evidence that the matter has been reported, they should report it themselves. (SAS ) Going concern The auditors should assess the adequacy of the means by which the directors have satisfied themselves that: (a) it is appropriate for them to adopt the going concern basis in preparing the financial statements; and (b) the financial statements include such disclosures, if any, relating to going concern as are necessary for them to give a true and fair view. For this purpose: (i) the auditors should make enquiries of the directors and examine appropriate available financial information; and 17

18 (ii) having regard to the future period to which the directors have paid particular attention in assessing going concern, the auditors should plan and perform procedures specifically designed to identify any material matters which could indicate concern about the entity s ability to continue as a going concern. (SAS 130.2) Engagement letters The auditors and the client should agree on the terms of the engagement, which should be recorded in writing. (SAS 140.1) Auditors should agree the terms of their engagement with new clients in writing. Thereafter auditors should regularly review the terms of engagement and if appropriate agree any updating in writing. (SAS 140.2) Auditors who, before the completion of the audit, are requested to change the engagement to one which provides a different level of assurance, should consider the appropriateness of so doing. If auditors consider that it is appropriate to change the terms of engagement, they should obtain written agreement to the revised terms. (SAS 140.3) Auditors should ensure that the engagement letter documents and confirms their acceptance of the appointment, and includes a summary of the responsibilities of the directors and of the auditors, the scope of the engagement and the form of any reports. (SAS 140.4) Subsequent events When, after the date of their report but before the financial statements are issued, auditors become aware of subsequent events which may materially affect the financial statements, they should establish whether the financial statements need amendment, should discuss the matter with the directors and should consider the implications for their report, taking additional action as appropriate. (SAS 150.3) When, after the financial statements have been issued, but before they have been laid before the members or equivalent, auditors become aware of subsequent events which, had they occurred and been known of at the date of their report, might have caused them to issue a different report, they should consider whether the financial statements need amendment, should discuss the matter with the directors, and should consider the implications for their report, taking additional action as appropriate. (SAS 150.4) Other information in documents containing audited financial statements If auditors identify an inconsistency between the financial statements and the other information, or a misstatement within the other information, they should consider whether an amendment is required to the financial statements or to the other information and should seek to resolve the matter through discussion with the directors. (SAS 160.2) If, after discussion with the directors, the auditors conclude: 18

19 (a) that the financial statements require amendment and no such amendment is made, they should consider the implications for their report; or (b) that the other information requires amendment and no such amendment is made, they should consider appropriate action including the implications for their report. (SAS 160.3) Management representations Auditors should obtain written confirmation of appropriate representations from management before their report is issued. (SAS 440.1) Auditors should obtain evidence that the directors acknowledge their collective responsibility for the preparation of the financial statements and have approved the financial statements. (SAS 440.2) Auditors should obtain written confirmation of representations from management on matters material to the financial statements when those representations are critical to obtaining sufficient appropriate audit evidence. (SAS 440.3) If management refuses to provide written confirmation of a representation that the auditors consider necessary, the auditors should consider the implications of this scope limitation for their report. (SAS 440.5) Related parties The auditors should obtain written representations from the directors concerning the completeness of information provided regarding the related party and control disclosures in the financial statements. (SAS 460.7) The auditors right and duty to report When the matter giving rise to a statutory duty to make a report direct to a regulator casts doubt on the integrity of the directors or their competence to conduct the business of the regulated entity, the auditors should make their report to the regulator without delay and without informing the directors in advance. (SAS 620.6) When a matter comes to the auditors attention which they conclude does not give rise to a statutory duty to report but nevertheless may be relevant to the regulator s exercise of its functions, they should (a) consider whether the matter should be brought to the attention of the regulator under the terms of the appropriate legal provisions enabling auditors to report direct to the regulator; and, if so (b) advise the directors that in their opinion the matter should be drawn to the regulators attention. 19

20 Where the auditors are unable to obtain, within a reasonable period, adequate evidence that the directors have properly informed the regulator of the matter, they should make a report direct to the regulator without undue delay. (SAS 620.7) 20

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