VSA 260 - Communications of audit matters with those charged with governance

VIETNAMESE STANDARDS ON AUDITING

STANDARD No. 260

COMMUNICATIONS OF AUDIT MATTERS WITH THOSE CHARGED WITH GOVERNANCE

(Issued in pursuance of the Minister of Finance Decision No. 101/2005/QD-BTC dated 29 December 2005)

GENERAL PROVISIONS

1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on communication of audit matters arising from the audit of financial statements between the auditor and the audit firm and those charged with governance of an entity.

2.  The auditor and the audit firm should communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an entity.
3. This VAS applies to communications of audit matters between the auditor and the audit firm and those charged with governance.

          This VAS does not specify how the auditor communicates with those outside the audited entity.

The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and rendering related services.

It is expected that the audited (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and dealing with the relations maintained during the audit.

In this VSA, the following terms have the meaning attributed below:

4. Management refers to persons entrusted with the supervision, control and direction of an entity and the decison making for its operation and development, consisting of members of the Board of Management, Board of Directors and Control Committee and those charged with managing business areas.
5. Governance is the term used to describe the role of persons entrusted with managing, supervising and controling a particular area of business or directing and executing a legal entity.

Those charged with governance ordinarily are accountable for ensuring that the entity achieves its objectives, supervising the operations and reporting to interested parties.

6. Audit matters of governance interest are those that arise from the audit of financial statements and, in the opinion of the auditor and the audit firm, are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process.

The auditor is not required to identify and report to management of the entity all matters of governance interest.

CONTENTS OF THE VSA

7. The auditor and the audit firm should determine the relevant persons who are charged with governance and with whom significant matters, including audit matters of governance interest, are communicated.
8. The auditor should determine the structure and principles of governance of each entity, such as the overseeing function (Control Committee) and executing function of the Board of Directors and the Board of Management.
9. The auditor should identify the persons who are charged with governance and whom the auditor communicates audit matters of governance interest.
10. When the entity’s governance structure is not well defined, or those charged with governance are not clearly identified, the auditor comes to an agreement with the entity about with whom audit matters of governance interest are to be communicated.
11. To avoid misunderstandings, an audit engagement letter may explain that the auditor will communicate only those matters of governance interest that come to attention as a result of the performance of an audit and that the auditor is not required to design audit procedures for the specific purpose of identifying matters of governance interest.

The engagement letter may also:

• Identify the relevant persons with whom such communications will be made; and
• Identify any specific audit matters of governance interest to be communicated.
• The effectiveness of communications is enhanced by developing a constructive working relationship between the auditor and those charged with governance. This relationship is developed while maintaining an attitude of professional independence and objectivity.

Audit Matters of Governance Interest to be Communicated

13. The auditor should consider significant matters, including audit matters of governance interest that arise from the audit of the financial statements and communicate them with those charged with governance. Ordinarily such matters include the following:
    1. The general approach and overall scope of the audit, including any expected limitations thereon, or any additional requirements;
    2. The selection of, or changes in, significant accounting policies and practices that have, or could have, a material effect on the entity’s financial statements;
    3. The potential effect on the financial statements of any material risks and exposures, such as pending litigation, that are required to be disclosed in the financial statements;
    4. Audit adjustments, whether or not recorded by the entity that have, or could have, a material effect on the entity’s financial statements;
    5. Material uncertainties related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern;
    6. Disagreements with management about matters that, individually or in aggregate, could be significant to the entity’s financial statements or the auditor’s report;
    7. Expected modifications to the auditor’s report;
    8. Other matters warranting attention by those charged with governance, such as material weaknesses in internal control, questions regarding management integrity, and fraud involving management; and
    9. Any other matters agreed upon in the terms of the audit engagement.
14. As part of the auditor’s communications, those charged with governance are informed of the following signifcant matters:
    1. The auditor’s communications of the audit results; and
    2. The fact that an audit of financial statements is not designed to identify all matters that may be relevant to those charged with governance. Accordingly, the auditor and the audit firm do not ordinarily identify all such matters.

Timing of Communications

15. The auditor should communicate significant matters, including audit matters of governance interest, on a timely basis. This enables those charged with governance to take appropriate and prompt action.
16. In order to achieve timely communications, the auditor discusses with those charged with governance the basis and timing of such communications. In certain cases, because of the nature of the matter, the auditor may communicate that matter sooner than previously agreed.

Forms of Communications

17. The auditor’s communications with those charged with governance may be made orally or in writing. The auditor and the audit firm’s decision whether to communicate orally or in writing is affected by factors such as the following:
    1. The size, operating structure, legal structure, and communications processes of the entity being audited;
    2. The nature, sensitivity and significance of the audit matters of governance interest to be communicated;
    3. The arrangements made with respect to periodic meetings or reporting of audit matters of governance interest; and
    4. The amount of on-going contact and dialogue the auditor has with those charged with governance.
18. When audit matters of governance interest are communicated orally, the auditor documents in the working papers the matters communicated and any responses to those matters. This documentation may take the form of a copy of the minutes of the auditor’s discussion with those charged with governance. In certain circumstances, depending on the nature, sensitivity, and significance of the matter, it may be advisable for the auditor and the audit firm to confirm in writing with those charged with governance any oral communications on audit matters of governance interest.
19. Ordinarily, the auditor initially discusses audit matters of governance interest with management, except where those matters relate to questions of management competence or integrity. These initial discussions with management enable the auditor to gather further information from the audit. If management agrees to communicate a matter of governance interest with those charged with governance, the auditor may not need to repeat the communications, provided that the auditor is satisfied that such communications have effectively and appropriately been made.

When the auditor is satisfied with information obtained after communicating with management of the entity, the auditor is not required to discuss the information with any others of those charged with governance.

Other Matters

20. If the auditor considers that a modification of the auditor’s report on the financial statements is required, as described in VSA 700 The Auditor’s Report on Financial Statements communications between the auditor and those charged with governance cannot be regarded as a substitute.
21. The auditor and the audit firm consider whether audit matters of governance interest previously communicated may have an effect on the current year’s financial statements. The auditor considers whether the point continues to be a matter of governance interest and whether to communicate the matter again with those charged with governance.

Confidentiality

22. When legal documents provide regulations on confidentiality that restrict communication of audit matters of governance interest arising from the audit of financial statements, the auditor and the audit firm refer to such regulations before communicating with those charged with governance. In some circumstances, the potential conflicts with the auditor’s ethical and legal obligations, the auditor may wish to consult with legal counsel.

Laws and Regulations

23.        When the requirements of legal documents impose obligations on the auditor and the audit firm to make communications on governance related matters that are not covered by this VSA, the auditor and the audit firm should comply with these requirements.