Many companies will use an internal audit function to review their internal controls and make recommendations to improve them. Again, there are requirements in some corporate governance codes (eg UK Corporate Governance Code) to consider the need for an internal audit function on annually. AUDITORS COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (ISA 260) ISA 260 Communication with those charged with governance Who are 'those charged with governance'? o 'The person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.' Why do auditors need to communicate with those charged with governance? o Communication assists the auditor and TCWG to understand audit-related matters in context and allows them to develop a constructive working relationship. o Communication allows the auditor to obtain information relevant to the audit. o Communication assists TCWG to fulfil their responsibility to oversee the financial reporting process, thus reducing the risks of material misstatement in the financial statements. Matters to be communicated o The auditor's responsibilities in relation to the audit o The planned scope and timing of the audit o Significant findings from the audit o Auditor independence Examples of how auditors communicate with those charged with governance o Audit engagement letter (see Chapter 4) o Planning letter (Chapter 7) o Report to management (see Chapter 19) o Meetings During the audit itself there should be ongoing communication between the audit team and management as issues arise. AUDITOR’S REPORTING REQUIREMENTS 1. SARBANES OAXLEY ACT (SOX)
o In addition to audit report, SOX requires that auditors issue a separate assurance report on an entity’s IC and its operation for the reporting period 2. UK CORPORATE GOVERNANCE CODE o In UK, requirements on EA are less onerous than SOX o The auditors are only required to review the IC (discuss, asses and appraise docs and reports) if the directors have carried out specific actions as required by a limited num of the UK CGC sections and the rules of the London Stock Exchange Auditors are not required to perform tests or form an opinion on internal control, but are expected to: o Draw on their knowledge of the client, its environment and IC o Consider the results of their audit testing of the effectiveness of the IC o Review the info disclosed by the requirements of the UK CGC and the listing rules for consistency with the financial statements as required by ISA 720 Other information in Documents Containing Audited Financial Statements and; o Report any non-compliance with the specific requirements of the UK CGC/ listing rules (e.g no explanation is given when required) in their audit report as an “other matter” rather than an opinion modification
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- UK Corporate Governance Code