Speaker 1: Welcome back audit fans, and if this is your first visit here to the channel, Dr. Amanda here with a set of videos explaining various auditing standards. Right now I'm up to number 260, but there will be an entire suite of all auditing standards explained. Now, today I'm looking at ASA 260, which is communication with those charged with governance. Now the first question is, who are the people, who are those mythical people charged with governance? Well, that's a few different people. That's going to be management, obviously management have a whole lot of staff working under them executing the vision of the board of directors. So our board is elected by our shareholders, okay, and management report to the board. Now a subset of the board is a small group of people that form the audit committee. Now the audit committee is of course our independent board members, and they have oversight of the audit. So when you have your auditor over here, excuse my little stick figure drawings, I'm not all that great, but when you have your auditor, it's important that as they're doing the audit and they find information, that they communicate regularly with those charged with governance. And that could be the audit committee, could be the board, or it could be management, but ISA ASA 260 is the standard that helps us decide when to communicate and how to communicate. Our contents, pretty standard stuff as always. So ours starts with the application, which is Australian specific information, an introduction. Remember the requirements are the parts that we have to do, and the explanatory material is further guidance about how to implement those requirements. My videos of course focus on the requirements and not so much on the explanatory material. Now we do know, according to this particular page here, that ISA 260 and ASA 260 are aligned. There are some extra requirements in the ASA specific to Australia and our requirements under the Corporations Act and our regulator, but everything else is still the same. So let's dive into first the scope, and this is really important because it says here that the scope of our standard is our responsibility to communicate with those charged with governance. Now there's a specific line, this standard does not establish requirements regarding communication with management or owners unless they are also charged with a governance role. So we're going to look into what governance roles mean. Now why is this important? Well you need to have two-way communication on an audit so that everybody knows what is happening, nothing is a surprise, and so that we have a good working relationship with our clients. Because remember, even though we are representing shareholders, and I guess our overall perspective is to the public, we need to deal with management and those charged with governance on a day-to-day basis. So keeping a good working relationship with them is really, really important. Now why is communication important? Well there's actually a whole section of standards here. So there's a section that talks about the role of communication and why we have communication. So it's about making sure that we have a good working relationship, as I mentioned before, that we might need to get information relevant to the audit. So we might need to ask for information, communicating with them is important. And then also, the people who are in charge of governance are responsible for financial reporting. So we need to keep them informed of what we may find during the audit. So clear communication of specific matters is an integral part of every audit. We don't want to surprise our clients with anything at the very end. We want to keep communicating with them throughout the entire audit. Now we move on to our objectives of our standards. So what is the standard getting us to do or what's the purpose of that standard? We want to communicate clearly in a way that's unambiguous, that there's no confusion. We want to be able to get evidence relevant to the audit. We want to give those people charged with governance observations about issues that are significant and relevant to their responsibilities and have effective two-way communication. Now remember earlier I said that there was a part of the standard that says this is not about talking with management or with ownership unless they're charged with a governance role. So this is where the definitions come in really critical. Those charged with governance are those people or organisations with the responsibility for overseeing strategic direction of the entity and obligations regarding accountability. So that might include management personnel. It could include board members, so executive members of a governance board or of an owner-manager. So most of the time in big publicly listed companies that's not shareholders. So most of the time it is going to be our board and our management because remember management are the ones responsible for implementing internal controls and financial reporting. So let's scroll down to our requirements. These are the things that we have to do. That's our requirements there. So we shall determine the appropriate people who are in that governance structure. So who are the people on the board, maybe the audit committee that we might need to speak to and who are those involved in managing the entity. So in publicly listed companies we need to look at who are our executives and then what are their roles and responsibilities within the client. We don't want to talk to every executive. We want to talk to executives that are specifically required under our financial reporting obligations. So what sort of things do we actually talk about in our communication? There's a few different things. We always want to say to them here's our job and responsibility to the financial report. We want to clearly make sure that we're giving an opinion based on reasonable assurance about the financial report. We're going to tell them about the scope and timing of the audit. What are we auditing? Auditing is about when we're going to be doing the auditing. We're going to tell them about the findings from the audit. So that could be things like misstatements that we might identify. It could be, so it says here, we should talk about any qualitative aspects of accounting practices. So for example, this year we have significant changes to three standards, revenue recognition for contracts, leases, and financial instruments. Now that's going to require significant change in accounting policies and disclosures. So this would definitely be something we'd be talking about with those charged with governance. I also want to let them know if we've had any difficulties during the audit, if I couldn't get evidence, if management were being a pain to get evidence from. We might want to talk about any matters that arise during the audit. So that could be misstatements or adjustments and then written representations the auditor is requesting. So a written representation is really a confirmation by a letter of something that management has told us verbally. We'll also talk to them about what's going into the audit report. So the audit report isn't a surprise. We talk to them about it beforehand and any other significant matters that arise during the audit. That's typically going to be the sorts of things that we might see in Key Audit Matters, which is ISA ASA 701. There are a few other things that we might want to discuss. If we come across any independence issues, we might want to talk to them about auditor independence. We will definitely say we've explicitly complied with any ethical requirements. But if we do find an issue, we do need to tell management about that because we haven't followed the APES, which is our ethical standards or our account standards or auditing standards. So how do you communicate with them? Do we walk up over a cup of coffee? Do we write a letter? Well, we want to start by establishing some sort of communication process. We could talk about oral communication, but that's not adequate. It needs to be written. So we might start with oral communication, but it's not enough on its own. We also need to have written communication. And if we find anything under paragraph 17 back previously, which is on the previous page, any issues that we might have found, then we do need to provide those in writing with those parties. This is because oral information, we might not say everything. We might not be clear. People might not understand us. But if it's written, then hopefully it's a lot more clear and very understandable by both parties. Now we need to communicate on a timely basis. That doesn't mean reporting every day. It might mean setting up some sort of schedule where you could agree to contact them weekly or if matters are serious, straight away. What do we need to do in terms of documentation? Whoops, I have my highlighter on there. As we mentioned before up here, everything needs to be written out and where we've communicated issues in writing, we should contain or keep that within our audit files under our documentation standards and quality control standards, which is 220 and 230. If you found it useful, give us a thumbs up or a like, subscribe to get more videos and check out the rest of the videos in the series and everything else on my channel. I've got full lectures, short concept videos, weekly updates with news and current affairs. Thanks for watching and I'll see you in the next video.