A company should finish its audit with a clear understanding of how the work was approached and what it revealed. The signed financial statements are important, but they do not explain every significant matter considered during the engagement.
ISA 260 requires the auditor to communicate with the board, audit committee or others responsible for overseeing financial reporting. This covers the planned scope and timing, significant risks and significant findings. The communication is often presented in an ISA 260 or audit completion report, although its form depends on the engagement.
I believe this part of the audit deserves greater attention. It helps those overseeing the business understand the judgements behind the accounts, question the conclusions reached and consider whether changes are needed. That remains useful even where the auditor issues an unmodified opinion.
Control findings also matter. Under ISA 265, significant control deficiencies identified during the audit must be communicated in writing to those charged with governance. A management letter can explain these weaknesses and their possible consequences.
The value extends to how responsibilities are assigned within the business. If costs are repeatedly recorded late, for example, management should establish whether the underlying information is reaching finance on time. The response may require department heads or project managers to take clearer responsibility for confirming their costs.
That improves the basis for reporting and budget oversight. Managers need reliable actual costs to assess spending against their budgets and explain variances. Finance can coordinate the reporting, while responsibility for the information and the decisions remains with the relevant process owners.
For the board, an agreed management response makes follow-up possible. Each action should have a responsible person and a realistic completion date. Where management decides against a recommendation, its reasons and the risk being accepted should be clear.
Finance leaders should agree these communication arrangements with the audit partner at the outset. The findings can then be discussed with the right people and used to improve governance throughout the year.
Bank and counterparty requirements
Banks, landlords and larger customers often ask for audited financial statements before they commit, even where no regulator requires them.
References
- ISA 260 Revised Communication with Those Charged with Governance
- ISA 265 Communicating Deficiencies in Internal Control