SA 265 Communicating Deficiencies in Internal Control

To Those Charged With Governance and Management

Topics to be
covered

Auditors' Deficiency in Identification of Communication of

responsibility internal control deficiency in significant
internal control deficiency in
internal control to
Meaning of those charged with
deficiency in governance
internal control

Significant deficiency
in internal control

Auditor’s
Deficiency in IC
Responsibility Examples of matter to be
considered by auditor to
exists
determine whether a
to communicate when
deficiency is a significant
appropriately to TCWG deficiency
and MGT. A control is designed, A control necessary to
implemented or prevent, or detect and
Example of indicators of
operated in such a way correct, misstatements in
deficiencies in IC that the significant deficiencies
in internal control that the FSs on a timely basis
auditor has identified in
an audit of FSs.
it is unable to prevent, or is missing.
detect and correct,
misstatements in the FSs on
a timely basis; or

Example
• In a small business, the same employee is responsible for processing payments, recording transactions, and reconciling the bank
statements.
• A company does not require managerial approval for expenditures above a certain threshold.
• A company has established controls but does not regularly review or monitor these controls for their effectiveness.
• A company fails to maintain detailed records of its transactions and supporting documentation.

Significant
deficiency

Depends on May exist

Sufficient even
importance misstateme
to merit, the and also nts or not
actual and potential
attention of likelihood of identified
misstatement magnitude of
TCWG. occurrence of during the
misstatement misstatement.
audit
 Assess if deficiencies could lead
Material Misstatement
to future material
Likelihood
misstatements.

Loss or Fraud Evaluate asset or liability risk for

Susceptibility loss or fraud due to deficiencies.

Consider challenges in estimating values,

Complexity in Estimates
like fair value, due to deficiencies.

Analyze the impact of

Exposure of Financial
deficiencies on financial
Statement Amounts
statement amounts.

Review activity level in affected account

Volume of Activity
balances or transaction classes.

General monitoring
controls and
Examples of matters management oversight.
that the auditor may
consider in determining
whether a deficiency or Fraud prevention and
combination of detection controls.
deficiencies in IC
constitutes a significant
Selection and application
deficiency
of significant accounting
policies.
Importance to Financial
Reporting
Related party
transaction controls.

Unusual business
transaction controls.

Period-end financial
reporting process
controls.

Investigate the reasons and

Cause and Frequency of
occurrence rate of exceptions due to
Exceptions
deficiencies.

Examine how deficiencies interact

Deficiency Interactions with or compound other control
weaknesses.
 Lack of governance
oversight on significant
Transaction Scrutiny
management-involved
transactions.

Occurrence of
Evidence of management fraud not
Management Fraud
Ineffective IC like prevented by internal
controls.

Management's inaction on
Remedial Actions previously identified
significant deficiencies.

Lack of a risk
assessment process
Risk Assessment
where it's typically
expected.
Ineffective entity risk
assessment process,
Risk Identification
Indicators of shown by missed
Significant identification of risks.
Deficiencies in
Signs of ineffective
Internal Control
components within
Control Environment
the control
environment.

Ineffective response
to significant risks
Risk Response
that have been
identified.

Management's
Management inability to oversee
Oversight financial statement
preparation.

Misstatements found
by the auditor not
Misstatements
caught or corrected
by internal controls.
 Identification of
deficiencies in IC

If the auditor has

The auditor shall
identified one or more
determine
deficiencies in IC,

whether, on the basis of

the auditor shall
the audit work
determine,
performed,

the auditor has

on the basis of the audit
identified one or more
work performed,
deficiencies in IC

whether, individually or
in combination, they
constitute significant
deficiencies.
 Communication of in writing
significant
deficiencies in IC to
TCWG on a timely basis.

at an appropriate
level of significant
responsibility deficiencies in IC that unless it would be
also communicate the auditor has inappropriate to
to management communicated or communicate directly to
Communication of significant

on a timely basis intends to management in the

communicate to circumstances; and
deficiencies in IC

In writing, TCWG,
in the auditor’s
professional
that have not been
judgment, are of
Other deficiencies communicated to
management by sufficient
in IC identified
importance to
during the audit other parties and
merit
that,
Description of management’s
deficiency. The purpose of the audit was for attention.
Explanation of their the auditor to express an opinion
potential effects on the FSs;
The auditor shall
include in the
written Sufficient The audit included consideration of IC relevant to the
communication of information to preparation of the FSs in order to design audit
significant enable TCWG and procedures that are appropriate in the circumstances,
deficiencies in IC management to but not for the purpose of expressing an opinion on the
understand the effectiveness of IC; and
context of the
communication.
The matters being reported are limited to those
deficiencies that the auditor has identified during the
audit and that the auditor has concluded are of sufficient
importance to merit being reported to TCWG.

"FutureTech Enterprises" lacks adequate

controls over its cloud data storage, risking
data breaches and unauthorized access.
Although similar issues might have been
informally raised by the IT department, there
is no record of these concerns being formally
communicated to senior management or
addressed comprehensively.
 support
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Auderor
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SA580
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written Rep .

Written Statements to Auditor

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Books & Record
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TCW4 (where APT

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From

·
That they believe
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That they tulthed
their Responsibility for
· PPFS 2 for completes of into to Auditor

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Support

· Other AE & Assertions in FS

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Relevant for FS

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Respond
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To written Rep Provided

o WR Requested butNot Provided -

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Management-with-Apt
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Responsibilities
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Form · Representation lever Addressed to the Auditor

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of its Responsibitbe

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of change righ
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⑧ SA580-WR outlines

·
General Requirement
to Obtain B from Migh

Other SAs (For exampl SA501)

Area
Thy skinity WOR
wortAudht

Beyond this an auditor may determine, based on their professional judgment, that additional written representations are
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necessary to support other audit evidence or to con rm speci c assertions in the nancial statements

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Examples of Such WOR

- Senchon
of Alag Policy

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AICIPID of Cerrain Males as by AFRF

lablikes
Conungent
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Plan/Erunton Classification of Asso

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of
- Compliance ham Applicable LIR

A pharmaceutical company confirms it has complied with all regulatory

health and safety standards; any fines or penalties for non-compliance
are appropriately recognized in the financial statements.

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Title/encumbrances
fi
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 260

As Resp to Communicate wim TCWG in AOFS

· Sope · an
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Communicate clearl TCW4

As objective With
-
· ·

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Respo of
.
A Planned Scope &
Timing
,
Obtain Info Relevant for
·
From TCwG And

Provide observation wort FR Process

TCW4 timely
·

Ourseang
· Promote-effective two-way Communication

of Communication

· There Must be
Zway Communication

·
why ? (Rok)

Constructive Relationship
-

Working
will Help
In Conduct of Audets

-
Help Obtaining
In
into Related to Audet from TCC4

E& E
Understanding
·

·
Sourusaf AE .

we Help

Responsibilities to FR Process
fulfilling
TCWG < in > oversee

Reduces the ROMM

COMMUNICATION

·
Identity (Demin) -
Apt Person -
as for Governanc Structure
 to be communicated
Matters
 Scope

Auditor's Objective

Role of
With whom?
communication

Communication with
Communication
Subgroup of TCWG

When all TCWG are involved In

managing entity

The Auditor’s Responsibilities in

Relation to the Financial Statement
Audit

SA 260 Planned scope and

Communication Timing of the audit
with TCWG Matters to be
communicated Significant findings
from the audit

Communication of auditor’
independence in case of listed
entities.

Establishing the communication

process

Forms of
communication

The communication
Independence
process

Timings of
Documentation
communications

Adequacy of
communication process
⑤m

Advantage

In dependenc

should not be

compromina-

- x

- - - -

-
-
 Matters to be
communicated

The Auditor’s Communication of

Planned scope and Timing Significant findings from
Responsibilities in auditor’ independence in
of the audit the audit
Relation to the Financial case of listed entities.
Statement Audit

The Auditor’s Responsibilities in

Relation to the Financial Planned Scope and
Statement Audit Timing of the Audit

The auditor is The audit of the

responsible FSs does not
relieve The auditor shall
management or communicate with
TCWG of their TCWG
for forming and
expressing an opinion responsibilities.
on the FSs
which includes
an overview of the communicating about
that have been planned scope and the significant risks
prepared by timing of the audit, identified by the
management auditor.
with the
oversight of
TCWG; and
Significant
Findings from the
Audit

QA of APractices, Significant Significant Written Circumstances

Any other
AP and AE difficulties, matters representations

that affect the

form and content significant
The auditor’s views if any, arising during the of the auditor's
the auditor is matters arising
about significant encountered audit that were requesting; report, if any; and during the audit
qualitative aspects during the audit; discussed, or that, in the
of the entity's subject to auditor's
accounting correspondence, professional
practices, including with judgment, are
accounting policies, management; and relevant to the
accounting
oversight of the
estimates and financial
financial statement
reporting process.
disclosures.
 have complied
with relevant
that the others in the when ethical
engagement firm as the firm and, applicable, requirements
team and appropriate, network firms regarding
independence;
We have identified and considered all and
Communication
of auditor’s relationships that may have an impact
independence in A statement on Independence including the impact
case of listed of non audit services.
entities
The related safeguards that have been
applied to eliminate identified threats to
independence or reduce them to an
acceptable level.

The Communication
Process

Establishing the Timing of Adequacy of the

Forms of Independence
Communication Communications Communication
Process Communication
Process (Adequate,
The auditor Effect)
Auditors must shall The auditor shall
The auditor shall Not every
communicate communicate communicate
communicate with issue
with TCWG in discovered in writing with TCWG on a Assess if the two-
TCWG the form, timing with TCWG way communication
writing about during the timely basis.
and expected general regarding with TCWG was
content of significant audit must
findings when be included auditor adequate for audit
communications. independenc purposes.
oral in written
communication e when
communicat
seems required in
ions. If inadequate,
inadequate. case of listed
entities evaluate its impact
on risk assessment
and evidence
gathering.

Take necessary
actions.
 -
(MS)

I. Accumulate Mistatements
O
Lial)
~
Plan

Audit & Audit Needs to be

2 . Evaluate -

-°
-
Strategy
changed ⑧
circum/
indicati .

.
3 Communicate
Mgt AggaMS > A
.

Misstatement

.
4 Request >
- Correct

Additional Audit Procedure

s Correct >
-
Check

Reasons + understandin
-
Uncorrected Mistatement

Not corrected MS new become UCM

.
6 >
-> >
-

- -
-

⑭am
- -

7 Reassess Materiality -
Actual Financial Result

8 HCM - Marial ? (Determine UCM is Material )

?

.
9 Communicate to . -UCM-effect
TCW4 on opinion

10 Request - Correction

(T(W4)
11 : Communicate the effect of UCM af Prior Period

& 104
.
12
WR-Mgt That they Believe - elficts of UCN ar

Immaterial

13
. Documentation
s
DOFS -
31/3 -
af
meaning SE

DOAR-15/5 -
en Even t Fach /5

not
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a Her me R
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DOFS DOAR ·
Had known Carler

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May Gam Caused Audero :

no Amend His Repor

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Type / Type z
· Ed e

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- (adjustinas
·
Event-Evidence

· Condition almady
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·BIs Dan

Arected in FS
 issue al FS
Date of

· Date-FS-Made Availabl to 3 Parties

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·
Depends on
Regulatory
--
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nuir on ment

Authorities
· Dale
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Es are Hid with
Regulatory
-

C AFS >
- cannot be issued who Auditor's Repor
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·
DO10FS - Must Not be earner than DOAR

(must be at/ later

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man DOAM)

Also
- > Date When AR is Provide
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to the entit
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Issue

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Had it been
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Achon
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Boasts
specific

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Amendmen
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update
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will
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Date His AP till

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Date
New Report
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2
issue AR After

7 Approvas
of Amer did

FS .

AP-St-Restricted to

Amendments of FS

Described in Ruvant Note to

me FS
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lar
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=> depo on e
& dahova
Date

AP-Restricted
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 Assumption
Going Aking
Fundamental
n
-

well continue its operation

-

Entity
for foreseeable future

- No intention or Necessity of liquidation

4CA >
-

Impacts -> now FS are

prepared
When GCA is Apt-Assets and liab. are Recorded
Appropriate
- -
on me basis
-
mat
- -
Ennle

To
we be
AG

· we
in
be usd

Busios
Realise it
Asses/Discharge
Conuse
- -
It liab
.

In Normal
of Busines
-
· Al for at Carrying
Valle

4CA -
Not Apt-Es are
prepared on Liquidamon
Basis
-

· Assets >
- Met Reausable Value
- n

(Price If sold)

① Investones - written down to

reflect expected
sal Price
Riquidation
>
-
Discuss the factors to be Rept in Mind While tormulating
wrt-entity's 4) .
Judgement Ability to continue as a
⑭70
Responsibility for assessment of entity,s ability to
continue as a going concern

who-righ
-

- Sun It Not Required by FRF

(Application of (E)
Involves a
judgement
- -

at a particular Point in time

-

futur
About Outcome of
-

seeuts/conditions
- -

It involves assessing whether the entity will be able to

- -

sustain its operations and meet its obligations as they

- - - -

fall due.
- -

Relevant factors -
for
Judgement
Degree of
O Uncertainity - Associand wenn

Example Softwarez
-facing financial ourcome of an evat

Diltimum or Condenon

tor
-

Negotiation high
Van Contract

Panel Co
·
Size andComplexity -

-
Solar
- - -
-

Nature and Condition of Business · Multiple Production

External factor tacles

·
Deverse Product
Range
Domestic & Inter
·
Carring
national
·

High competition Marke

In des the
-

Regulated
 d
Information Available sample -
Pandems .

C
- -
-

At
Me time

Made
Judgement was

Intered
>
-

- >
-
-

Restories/objectives
-
of Audrow

Obtain SAAE About

I ,

Appropriateness of Mgt's Us of 4CA

(Mud
E is Manual Uncertainle
Consider - whe there a

Reard to Evers and Conditions

Significant
Last Doubt or
that May
entity's Ability Continue
to as a 4C
.

Report in Accordance wal SASTO

S200 - Absence
of Any Ref to 4 uncertainty

in AR-cannot be numed as

Entity's Ability Continue

Guarante >
-
to
For
as a 4C .

Material
-
Main
uncertainties related to events or conditions that may cast significant
doubt on an entity's ability to continue as a going concern.

4
A material uncertainty exists when the magnitude of its potential
-- - -

impact and likelihood of occurrence is such that, in the auditor's

-°
- -

judgment, appropriate disclosure of the nature and implications of the

- -

uncertainty is necessary as per the AFRF.

°
- -
Example of ents /dation s

/
fe
Financial openerican
ents -
 & Reard Actimbs
&p Events/condition

-
Auditor Should Remain Alt -EK . . . . . . .

-
Determine

has aluady Performed Preliminary Assessment

Mighof Entitie's ability to continue as a going concern

ragt
Done -
Discuss nem

of
egt-Bass of
Not Dome - Discuss rem Us A
- -

Assessment
Mgts
-
Summate

· Consider all Ruant into included

in the Assessment

less
mgtAsussment-lovers
man
·

12 Mouc -
From
dane
of FS

Request atleas

Mgl
to excod

12 Mous
from that dat of Fs

knowledgedis
· Enquire
EC beyond Assessour
-x
 -

Pron
one an e

&
↑ ↓

M4
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Exc
 Ander Procedures - when
EK .........
- -

- are idented

whether
-

Obtain SAAE-MU Exist Read

to El .......

Ander
Through Additional Procedure

including consinuation
of Mitigatin
Factor

--

&
-

&
Assessment (it Performes
Migh
Make
Nolgel
to
·

Request

Svamate
Plan too future Action
mgt
O

④
Consider Reliability/Assumphon
CFS

·
Additional Facts/Information -
Avanabu Since dall al
Assessment by
Ugl
· Written Representanon from M47/TCWG
Regarding Plans billy
of plan
,
 Forecast Discuss cash flow, profit, and
F >
-

Forecast other forecasts with

= = FulmimFS
management.
L

f
>
-

LA/
-
Meeting

Examine the entity's latest interim

-
PlaR Interim FS
P financial statements.
I
+
Inuschganons
L
>
>
-
-

4R >
- Report Reve
Review debenture and loan
Loan Agreement etc.
agreements for breaches.

Read minutes from shareholder and

Governance Meeting
governance meetings for financing
Insights
issue references.

Inquire with legal counsel about

Legal Counsel litigation, claims, outcomes, and
financial implications.

Examples of audit Confirm arrangements for financial

Financial Support
procedures when support from related parties and their
Verification
events or conditions ability to provide funds.
………… .

Customer Orders Evaluate plans for handling

Strategy unfilled customer orders.

Audit subsequent events that

Subsequent Events
impact the going concern
Investigation
assessment.

Verify existence, terms,

Borrowing Facilities
and sufficiency of
Check
borrowing facilities.

Review reports on
Regulatory Reports
regulatory actions
Review
affecting the entity.

Assess support for planned asset

Asset Disposal Plans
disposals.
②
&