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ACCA Strategic Professional · Advanced Audit and Assurance (International)

Reports to Those Charged with Governance and Management

Reports to those charged with governance (TCWG) and management are the auditor's formal communications about the audit. ISA 260 covers matters such as audit scope, findings and independence. ISA 265 covers significant deficiencies in internal control. To answer exam questions, identify the matter, explain its impact, and recommend an action.

What this chapter covers

This chapter covers how the auditor communicates with those charged with governance (TCWG) and with management. It has four parts: general communication under ISA 260, reporting of internal control deficiencies under ISA 265, management letters, and independence and other communications.

The chapter sits at the end of the audit process, but it draws on almost everything before it. Risk assessment, controls work, audit evidence, misstatements and going concern all produce matters that you may need to communicate. It also links to ethics, because independence threats and safeguards are a required communication.

In the AAA exam, this chapter is rarely tested as a list of rules. You are more likely to get a scenario and be asked to draft points for a report, explain what to tell TCWG, or recommend improvements to controls. The professional skills marks reward clear, well-organised and commercially sensible communication.

Communication tasks appear regularly in the Section A case study and in Section B questions, often as one requirement among several. They are also marks you can control. If you know what must be communicated, to whom, and how a good recommendation is built, you can score well even on an unfamiliar scenario. The chapter also lets you show professional skills: tone, structure, scepticism and practical advice. Students who only recite ISA lists tend to lose those marks.

Reports to those charged with governance and management: topics in the order to study them

  1. 1Communicating with Those Charged with Governance (ISA 260)This is the core framework: who TCWG are, what you must communicate, and when. Everything else builds on it.
  2. 2Communicating Deficiencies in Internal Control (ISA 265)This is a specific required communication under its own standard. It needs the ISA 260 context and links to your controls knowledge from earlier chapters.
  3. 3Management Letters and Reporting to ManagementOnce you know what is communicated and to whom, you can learn how to write it up in practice. Deficiency, consequence and recommendation is the format examiners expect.
  4. 4Auditor Independence and Other Communications with TCWGStudy this last because it pulls in ethics and the wider list of communications. Learn the split: ISA 260 requires the independence communication for audits of listed entities, covering compliance, relationships, threats and safeguards. For other entities ISA 260 does not mandate it, though the IESBA Code and local rules may. It is easier to apply once the main reporting structure is clear.

How to prepare Reports to those charged with governance and management

Treat this chapter as a skill to practise, not a list to memorise. Build the knowledge first, then spend most of your time on written answers.

  1. Read ISA 260 and ISA 265 in outline. Note who the audience is, what is communicated, and the timing and form.
  2. Make a one-page summary of ISA 260 matters: auditor responsibilities, planned scope and timing, significant findings, independence, and misstatements.
  3. Learn how to tell a significant deficiency from a minor one, and practise judging the potential effect on the financial statements and the audit.
  4. Practise the three-part format for each point: the deficiency, the possible consequence for the entity, and a specific, practical recommendation.
  5. Do past exam requirements on drafting report content. Write full answers, in a professional tone and with a clear structure, within the time allowed.
  6. Mark your answers against the examiner's solution. Check whether each point was tied to the scenario facts and whether the recommendations were realistic.
  7. In the final week, review your summary sheet and redo one or two weak answers.

Common mistakes in Reports to those charged with governance and management

  • Listing ISA requirements without linking them to the scenario.

    Fix: Choose only the matters that arise in the scenario. Quote or refer to specific facts and explain why each matters to TCWG.

  • Giving recommendations that are vague, such as 'improve controls'.

    Fix: Name the specific control, who performs it and how often. Make sure it addresses the exact weakness you described.

  • Describing the deficiency but not the consequence.

    Fix: Always state what could go wrong, for example fraud, error or misstated figures. This is where the analysis marks sit.

  • Confusing who receives what, sending all matters only to management or only to TCWG.

    Fix: Decide the audience first. Significant deficiencies go to TCWG in writing. ISA 265 also requires them to go to management in writing, unless that is inappropriate. Other deficiencies that merit management's attention go to management, in writing or orally, if others have not already communicated them. Write the audience at the top of your plan.

  • Using an informal or accusatory tone in report content.

    Fix: Write in a clear, neutral and constructive style. Use short headed points and avoid blaming individuals.

  • Ignoring independence and ethics when the scenario hints at them.

    Fix: When the scenario mentions fees, long association or non-audit services, identify the threat and name possible safeguards. For a listed entity, ISA 260 (para 17) requires the auditor to communicate to TCWG a statement of compliance with ethical requirements on independence, all relationships and other matters that may reasonably bear on independence, and the related safeguards. For other entities, ISA 260 does not mandate this, though the IESBA Code and local rules may require it.

Last-day revision: Reports to those charged with governance and management

  • TCWG are those with responsibility for overseeing the entity's strategic direction and accountability, such as the board or audit committee.
  • Where roles are unclear, the auditor decides who the appropriate TCWG are. Management may be involved in governance.
  • ISA 260 communications cover auditor responsibilities, planned scope and timing, and significant findings.
  • Significant findings include views on accounting practices, difficulties during the audit, and uncorrected misstatements.
  • For audits of listed entities, ISA 260 (para 17) requires the auditor to communicate to TCWG a statement that the engagement team and firm comply with relevant ethical requirements on independence. The auditor also communicates all relationships and other matters that may reasonably bear on independence, and the related safeguards. For other entities, ISA 260 does not mandate this, though the IESBA Code and local rules may require it.
  • ISA 265 requires you to communicate significant deficiencies in internal control in writing to TCWG on a timely basis.
  • ISA 265 also requires the auditor to communicate to management, at an appropriate level of responsibility and on a timely basis: (a) in writing, significant deficiencies that have been or will be communicated to TCWG, unless it is inappropriate to communicate them directly to management; and (b) other deficiencies that merit management's attention, in writing or orally, if they have not already been communicated to management by others.
  • A significant deficiency is a deficiency, or combination of deficiencies, in internal control that, in the auditor's professional judgement, is of sufficient importance to merit the attention of TCWG.
  • A good management letter point states the deficiency, the consequence and a practical recommendation.
  • Keep management's responses separate from the auditor's findings in the letter.
  • Make the tone constructive and tie each point to the scenario facts.
  • Keep the report from implying that all deficiencies have been found. The audit is not designed to identify them all.

Reports to those charged with governance and management practice questions

Reports to those charged with governance and management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Reports to those charged with governance and management: frequently asked questions

What is the difference between ISA 260 and ISA 265?

ISA 260 sets out the general communication the auditor has with those charged with governance, including scope, findings and independence. ISA 265 deals only with communicating deficiencies in internal control. A deficiency may therefore appear in both a general ISA 260 report and a specific ISA 265 communication.

Who are those charged with governance?

They are the people or organisations responsible for overseeing the strategic direction of the entity and its accountability, which includes financial reporting. This is often the board of directors or an audit committee. If it is unclear, the auditor decides who the appropriate parties are.

How should I structure a management letter point in the exam?

Use three parts: the deficiency, its possible consequence, and a recommendation. Keep each part linked to the scenario. This structure shows analysis and is easy for the marker to follow.

Does this chapter carry professional skills marks?

Yes, when the requirement asks you to draft or prepare communication. Clear structure, a suitable tone and practical, commercially aware advice all support professional skills marks. Check the requirement wording to see what is being asked.