ISA 260 (Revised) – Communication With Those Charged With Governance

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ISA 260 (Revised) DEALS with the auditor’s responsibility to COMMUNICATE with those charged with governance in an ‘Audit‘ of Financial Statements.

§ 01 — Overview

What is ISA 260?

ISA 260, titled “Communication with Those Charged with Governance,” is a cornerstone standard issued by the International Auditing and Assurance Standards Board (IAASB). It establishes the auditor’s responsibilities to communicate, on a timely basis, matters arising from the audit of an entity’s financial statements to those responsible for overseeing the strategic direction and accountability of the organization.

This standard recognises that a two-way dialogue between external auditors and governance bodies such as audit committees, boards of directors, and supervisory boards is essential for an effective audit. When properly implemented, ISA 260 strengthens the overall quality of financial reporting and reinforces trust in the audit process.

“Effective two-way communication between the auditor and those charged with governance assists both parties in understanding matters related to the audit in context, and in developing a constructive working relationship.”

– ISA 260, Paragraph A1
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§ 02 — Objectives

Core Objectives of ISA 260

The standard sets out two primary objectives for the auditor:

01
Communicate Clearly
To communicate clearly with those charged with governance about the auditor’s responsibilities, the planned scope and timing of the audit, and significant audit findings.
02
Obtain Information
To obtain information relevant to the audit from those charged with governance, supporting a collaborative and informed audit process.
03
Foster Dialogue
To promote effective two-way communication that enhances audit quality and helps both parties fulfil their responsibilities to users of financial statements.
§ 03 — Those Charged with Governance

Identifying Those Charged with Governance (TCWG)

Those Charged with Governance (TCWG) refers to persons or organisations with the 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.

The specific governance structure varies by entity and jurisdiction. Common examples include:

  • Audit Committees (or equivalent bodies) in listed companies
  • Board of Directors or Supervisory Boards
  • Owner-managers in small and medium-sized entities (SMEs)
  • Trustees in not-for-profit and charitable organisations
  • Councils or governing bodies in public sector entities

Important Distinction: Management vs. Governance

ISA 260 carefully distinguishes between management and those charged with governance. While some individuals may serve both functions, particularly in smaller entities, the standard requires the auditor to identify and communicate with the appropriate governance body separately from routine management communication.

Where management and governance overlap, the auditor must exercise professional judgement to avoid ambiguity in communication responsibilities.

§ 04 — Key Requirements

Key Requirements Under ISA 260

The standard imposes specific requirements on auditors. These are not Discretionary, they represent mandatory actions the auditor must perform during every engagement.

RequirementDescriptionStandard Reference
Identify TCWGDetermine who is responsible for governance and clarify roles, especially where management and governance overlap.Para. 11
Auditor’s ResponsibilitiesCommunicate the auditor’s responsibilities under ISAs and provide an overview of the planned scope and timing of the audit.Para. 14–15
Significant FindingsCommunicate qualitative aspects of accounting practices, significant difficulties encountered, uncorrected misstatements, and significant matters discussed with management.Para. 16
Auditor IndependenceFor listed entities, communicate relationships that may affect independence and safeguards applied. Confirm independence annually.Para. 17
Two-Way CommunicationEvaluate whether the two-way communication is adequate. If not, evaluate its effect on the audit approach.Para. 18
DocumentationDocument oral communications and retain copies of written communications with TCWG.Para. 23
§ 05 — What Must Be Communicated

Matters Required to Be Communicated

1. Auditor’s Responsibilities

The auditor must explain their responsibility for forming and expressing an opinion on the financial statements and clarify that the audit does not relieve management or governance of their own responsibilities for financial reporting. This sets the proper context for the audit relationship.

2. Planned Scope and Timing

Communicating the planned scope and timing of the audit helps TCWG understand the nature of the work to be performed. This is also an opportunity for governance bodies to alert the auditor to areas of special concern or risk, supporting a more targeted and effective audit.

3. Significant Audit Findings

This is the most substantive communication requirement under ISA 260. The auditor must communicate:

  • Qualitative aspects of the entity’s significant accounting practices and estimates
  • Significant difficulties encountered during the audit
  • Significant matters arising from the audit that were discussed with management
  • Written representations the auditor requested from management
  • Circumstances that affect the form and content of the auditor’s report
  • Uncorrected misstatements and their cumulative effect (refer also to ISA 450)
  • Material weaknesses in internal control identified during the audit

4. Independence (Listed Entities)

For audits of listed entities, ISA 260 requires the auditor to communicate annually all relationships between the auditor and the entity that may reasonably be thought to bear on independence. The auditor must also disclose the related safeguards applied and confirm that, in their professional judgement, they are independent within the meaning of relevant ethical requirements.

§ 06 — Timing & Form of Communication

Timing, Form, and Process

A
Timeliness
Matters must be communicated on a timely basis — early enough to allow TCWG to take corrective action where necessary, particularly before the auditor’s report is issued.
B
Written vs. Oral
Communication may be written or oral. However, significant findings and independence matters should generally be in writing, especially for listed entities.
C
Two-Way Dialogue
The auditor must assess the effectiveness of the two-way communication and evaluate the impact of inadequate responses on audit risk and approach.
D
Documentation
Oral communications must be documented in the audit file. Written communications, including management letters, should be retained as part of the audit documentation.

When the auditor determines that the communication from TCWG is inadequate or that significant matters are not being addressed, the auditor must evaluate the implications for the audit, including the need to modify the overall audit strategy or plan.

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§ 07 — Frequently Asked Questions

Common Questions on ISA 260

Does ISA 260 apply to all audits?
Yes. ISA 260 applies to audits of financial statements of all entities, regardless of size or structure. However, the nature, timing, and extent of communications may vary based on the entity’s governance structure for example, between large listed companies and owner-managed SMEs.
What is the difference between ISA 260 and ISA 265?
ISA 260 governs the broader communication between the auditor and those charged with governance, including audit scope, significant findings, and independence. ISA 265 specifically addresses the communication of deficiencies in internal control identified during the audit. Both standards work together to ensure governance bodies receive comprehensive and relevant information.
Must all communications under ISA 260 be in writing?
Not necessarily. The standard permits oral communication for certain matters, particularly in smaller entities where formal written communications may be impractical. However, significant findings, material weaknesses, and independence disclosures are generally expected to be communicated in writing, especially for audits of listed entities. Oral communications must be documented in the audit file.
What happens if TCWG fails to respond adequately?
If the auditor determines that communication with those charged with governance is inadequate for instance, if governance bodies fail to engage meaningfully or address significant matters raised, the auditor must assess the impact on the audit. This may include modifying the overall audit strategy, altering the nature of audit procedures, or considering the implications for the auditor’s report. In extreme cases, the auditor may need to consult legal counsel or, where permitted, report directly to regulators.
How does ISA 260 relate to the audit committee?
Audit committees are typically the primary governance body to which auditors communicate under ISA 260, particularly in listed and public interest entities. The audit committee plays a critical oversight role in financial reporting and internal controls. ISA 260 supports the audit committee’s effectiveness by ensuring it receives timely, meaningful, and candid information from the external auditor about the audit and the entity’s financial reporting.