Communication With Governance
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CPA Auditing and Attestation (AUD) › Communication With Governance
You are the auditor of a nonissuer manufacturing company in a financial statement audit. During interim testing, you identify that the controller both sets up new vendors and approves vendor master changes, and you note two instances where vendor bank account changes were processed without independent review; management states the process is efficient and does not plan to change it. The audit is otherwise on schedule and you plan to rely on controls over disbursements. What is the auditor's responsibility in communicating this issue?
Defer communication until the final audit completion meeting because control matters are only required to be communicated at the end of the engagement.
Include the control issue as a critical audit matter in the auditor’s report and no separate governance communication is necessary.
Communicate the significant deficiency or material weakness in writing to management only, because those charged with governance are not required recipients for nonissuer internal control matters.
Communicate the significant deficiency or material weakness in writing to those charged with governance on a timely basis and also communicate it in writing to management.
Explanation
This question tests the auditor's responsibility under AU-C 265 to communicate significant deficiencies and material weaknesses in internal control to those charged with governance in a nonissuer audit. The scenario describes a segregation of duties issue where the controller can both set up vendors and approve changes without independent review, which represents at least a significant deficiency given the lack of compensating controls and management's unwillingness to remediate. Professional standards require that significant deficiencies and material weaknesses be communicated in writing to both those charged with governance and management on a timely basis. Answer A is incorrect because control deficiencies must be communicated promptly when identified, not deferred until audit completion. Answer B is incorrect because those charged with governance must receive written communication of significant deficiencies, not just management. Answer D is incorrect because critical audit matters apply only to issuer audits, not nonissuer audits, and do not replace required governance communications. The key professional judgment is that timely written communication to both governance and management enables appropriate oversight and remediation of control deficiencies that could affect financial reporting reliability.
You are the auditor of a nonissuer in a financial statement audit. Near the end of fieldwork, management informs you that a warehouse fire occurred after year-end but before the auditor’s report date; management believes the event is immaterial and does not want to inform the board until insurance proceeds are finalized. You determine the event is a significant subsequent event requiring consideration of disclosure and potentially affects the audit timeline. What is the auditor's responsibility in communicating this issue?
Wait to communicate until after the financial statements are issued to avoid influencing governance’s oversight role.
Communicate the subsequent event to those charged with governance promptly, including the potential financial statement disclosure implications and any effect on the planned report date.
Issue an adverse opinion immediately because any subsequent event occurring before the report date requires an adverse opinion.
Avoid communicating with those charged with governance because management is responsible for subsequent event evaluation and disclosure decisions.
Explanation
This question addresses the auditor's responsibility under AU-C 560 to communicate significant subsequent events with those charged with governance in a nonissuer audit. The warehouse fire occurring after year-end but before the auditor's report date is a Type II subsequent event requiring disclosure consideration, and management's reluctance to inform the board raises concerns about transparency. Professional standards require the auditor to communicate promptly with governance about significant subsequent events, their potential disclosure implications, and any effects on the audit timeline. Answer B is incorrect because the auditor has a responsibility to ensure governance is aware of significant matters affecting the financial statements, including subsequent events. Answer C is incorrect because waiting until after issuance would prevent governance from fulfilling their oversight role regarding financial statement disclosures. Answer D is incorrect because subsequent events do not automatically require adverse opinions; the key is appropriate disclosure or adjustment. The critical professional judgment is that timely communication about subsequent events enables governance to oversee appropriate financial statement disclosure and maintain transparency with stakeholders.
You are the auditor of an issuer in an integrated audit. Testing of controls over journal entries identifies that the company’s system allows users with general ledger posting access to also modify the audit trail settings, and you observe that audit logs were disabled for two weeks during the year; management states it was for system maintenance. You conclude this is at least a significant deficiency and potentially a material weakness in internal control over financial reporting. Which information should the auditor prioritize in communication with governance?
The nature of the control deficiency, its potential impact on financial reporting and the auditor’s internal control opinion, and the fact that it will be communicated in writing on a timely basis.
A detailed list of every journal entry tested and the names of individual employees involved, because governance must approve each entry to remediate the deficiency.
A statement that no communication is required unless a material misstatement is found, because internal control issues are management’s responsibility.
A plan to communicate the matter only in a management letter after the Form 10-K is filed, to avoid disrupting reporting timelines.
Explanation
This question tests the auditor's responsibility under AS 1305 to communicate material weaknesses and significant deficiencies in internal control over financial reporting for an issuer. The control deficiency allowing users to modify audit trail settings and the observed disabling of audit logs represents at least a significant deficiency affecting the reliability of the control environment and potentially rising to a material weakness. PCAOB standards require timely written communication to the audit committee about the nature of control deficiencies, their potential impact on financial reporting and the internal control opinion, and management's response. Answer A is incorrect because detailed testing results and individual employee names are not required in governance communications; the focus should be on the deficiency's nature and impact. Answer C is incorrect because all material weaknesses and significant deficiencies must be communicated regardless of whether misstatements are found. Answer D is incorrect because significant deficiencies must be communicated on a timely basis, not delayed until after filing. The critical professional judgment is that prompt communication of control deficiencies enables governance oversight and timely remediation to improve internal control effectiveness.
You are auditing an issuer. The audit committee asks whether the engagement team had any significant disagreements with management during the audit. There were disagreements about the classification of certain expenses, but management ultimately accepted the auditor’s position. What is the auditor’s responsibility in communicating this issue?
Communicate only to the chief executive officer because the audit committee should not be involved in accounting classification disputes.
Communicate only if the disagreement resulted in a material weakness in internal control.
Do not communicate disagreements that were resolved because only unresolved disagreements are required to be reported.
Communicate significant disagreements with management to the audit committee, including those resolved, and describe the subject matter and how they were resolved.
Explanation
The professional standard being tested is the auditor's responsibility to communicate with those charged with governance, specifically regarding significant issues encountered during the audit as outlined in PCAOB AS 1301 and AU-C Section 260. The key facts are that the audit involves an issuer, there were significant disagreements with management about expense classification that were ultimately resolved by management accepting the auditor's position, and the audit committee inquired about such disagreements. The correct answer aligns with authoritative guidance because auditors must communicate significant disagreements with management to the audit committee, including resolved ones, to ensure transparency and oversight of the financial reporting process, describing the subject matter and resolution method. Choice B is incorrect because guidance requires reporting both resolved and unresolved disagreements if they are significant, as per AU-C 260.A27; choice C is wrong as communication is not limited to material weaknesses in internal control but extends to significant audit issues under PCAOB standards; choice D is incorrect because the audit committee, as those charged with governance, must be informed of such disputes, not just the CEO, to fulfill their oversight role. Effective communication with governance promotes accountability and helps mitigate risks in financial reporting. Auditors should exercise professional judgment in determining the significance of disagreements, prioritizing timely and complete disclosures to support governance's decision-making and enhance audit quality.
You are performing a financial statement audit of a nonissuer with a two-person accounting department. You identify that the same employee receives customer payments, posts to accounts receivable, and prepares the bank deposit, with no compensating controls. No misstatements were found in your substantive testing. Based on the auditor’s findings, what should be communicated to those charged with governance?
A critical audit matter disclosure in the auditor’s report describing the segregation-of-duties issue.
Nothing, because internal control matters are only communicated when a material misstatement is detected.
Only an oral comment to the bookkeeper, because written communication is not permitted for nonissuers.
A significant deficiency or deficiency in internal control (as appropriate) related to segregation of duties, communicated in writing to management and those charged with governance.
Explanation
The professional standard being tested is AU-C Section 265, which requires written communication of significant deficiencies in internal control to those charged with governance in nonissuer audits. The key facts are the lack of segregation of duties without compensating controls, despite no misstatements found. Choice A aligns with AU-C 265 by mandating communication of deficiencies based on risk potential. Choice B is incorrect because AU-C 265 requires communication regardless of misstatements; choice C is wrong as written communication is required per AU-C 265; choice D is incorrect because CAMs are PCAOB for issuers. A framework is to classify deficiencies by misstatement likelihood, then communicate accordingly. Effective governance communication drives control improvements and risk mitigation.
You are the auditor of an issuer. During the audit, you identify that management selected an aggressive revenue recognition interpretation that is within a reasonable range but results in materially higher revenue than an alternative acceptable policy. The audit committee is considering whether to change the policy next year. Which information should the auditor prioritize in communication with governance?
A directive that the audit committee must choose the most conservative policy available to avoid any risk of SEC comment.
No communication because the policy is acceptable and does not result in a misstatement.
A recommendation to publicly disclose the matter as a critical audit matter without first discussing with the audit committee.
The significant qualitative aspects of the company’s accounting practices, including why the policy is aggressive, the judgments involved, and the potential effect on comparability.
Explanation
The professional standard being tested is PCAOB AS 1301, which requires communication of significant qualitative aspects of accounting practices to those charged with governance in issuer audits. The key facts are the aggressive but acceptable revenue policy and the audit committee's consideration of changes. Choice A aligns with AS 1301 by prioritizing discussion of policy judgments and effects. Choice B is incorrect because AS 1301 does not mandate conservative policies; choice C is wrong as communication is required for qualitative aspects per AS 1301; choice D is incorrect because CAM disclosure follows governance discussion. A judgment framework is to evaluate policy reasonableness and bias, then communicate for governance input. Emphasizing governance communication aids in consistent and transparent accounting practices.
You are the auditor of a nonissuer manufacturing company in a financial statement audit. During walkthroughs and testing, you identify that (1) the controller can set up new vendors and approve payments without independent review, and (2) bank reconciliations are not prepared timely and lack evidence of review; two instances of duplicate payments were noted but corrected by management. Management agrees to remediate but asks that you wait until the end of fieldwork to inform the audit committee because “it will distract them.” What is the appropriate course of action for the auditor in this situation?
Communicate the significant deficiencies in writing to those charged with governance on a timely basis and also communicate them to management, without waiting until the end of fieldwork.
Communicate the deficiencies to the audit committee only if they result in a modified audit opinion on the financial statements.
Defer communication until after the report release date because the deficiencies were corrected and therefore no longer require governance communication.
Communicate the matters only to management because internal control communication is not required for nonissuers unless a material weakness exists.
Explanation
The professional standard being tested is AU-C Section 265, which requires auditors to communicate internal control deficiencies identified during an audit of a nonissuer to those charged with governance. The key facts are the identification of significant deficiencies in vendor setup and bank reconciliations, along with management's request to delay communication to the audit committee. Choice A aligns with AU-C 265 by requiring timely written communication to governance and also to management, ensuring transparency without delay. Choice B is incorrect because AU-C 265 mandates communication even if deficiencies are corrected, as governance needs awareness; choice C is wrong as communication to governance is required for significant deficiencies in nonissuer audits, not just material weaknesses; choice D is incorrect because AU-C 265 requires communication regardless of the audit opinion. A transferable framework is to evaluate the severity of deficiencies using indicators like potential for misstatement and compensating controls, then prioritize timely governance communication. Effective communication with governance fosters oversight and remediation, enhancing the entity's internal control environment and audit quality.
You are the auditor of an issuer in an integrated audit of financial statements and internal control over financial reporting. Midway through fieldwork, management restricts access to certain contract files supporting a new revenue stream, citing confidentiality with a strategic partner, and proposes providing only summary schedules instead. This restriction affects planned substantive procedures and could limit evidence. What is the appropriate course of action for the auditor in this situation?
Communicate the restriction only to management because the audit committee is not involved in audit scope decisions unless a misstatement is identified.
Automatically withdraw from the engagement without communicating with the audit committee because any restriction by management requires withdrawal for issuers.
Accept management’s summary schedules as sufficient appropriate audit evidence because the restriction relates to confidential information and proceed without further communication.
Communicate the scope limitation to the audit committee promptly and discuss its potential effect on the audit and the auditor’s report, while seeking to obtain the underlying evidence.
Explanation
This question addresses the auditor's responsibility under AS 1301 when management imposes scope limitations during an integrated audit of an issuer. The restriction on access to contract files supporting a new revenue stream constitutes a scope limitation that could affect the auditor's ability to obtain sufficient appropriate audit evidence for both the financial statement and internal control opinions. PCAOB standards require prompt communication with the audit committee about scope limitations, their potential effects on the audit, and possible implications for the auditor's report. Answer A is incorrect because accepting summary schedules without the underlying evidence would violate the auditor's responsibility to obtain sufficient appropriate audit evidence. Answer C is incorrect because the audit committee must be informed of scope limitations that could affect the audit opinions, not just management. Answer D is incorrect because automatic withdrawal is not required; the auditor should first communicate with governance and attempt to resolve the limitation. The critical professional judgment is that governance must be promptly informed of scope limitations to fulfill their oversight responsibilities and help resolve issues that could affect audit quality and reporting.
You are engaged to perform a financial statement compilation for a nonissuer closely held retailer, and management asks you to help “clean up” the books by proposing journal entries and also to speak directly with the two-member board about the company’s weak cash controls. You become aware that the bookkeeper both receives cash and performs the bank reconciliation, and there is no evidence of fraud but the risk is elevated. Based on the accountant's findings, what should be communicated to those charged with governance?
Nothing, because compilation engagements never involve any communication with those charged with governance about internal control matters.
Only a statement that the accountant will provide assurance on internal controls as part of the compilation due to the elevated risk.
A written communication to the audit committee describing significant deficiencies identified during tests of controls performed as part of the compilation.
If the accountant chooses to communicate, the communication should clearly state the lack of assurance in a compilation and describe the observed control weakness without implying an audit or review was performed.
Explanation
This question addresses communication considerations in a compilation engagement under AR-C 80 for a nonissuer. While compilations provide no assurance and have no requirement to communicate control matters, the accountant may choose to communicate observed issues when specifically requested by management or governance. The key is that any communication must clearly state the lack of assurance provided in a compilation and avoid implying that audit or review procedures were performed. Answer A is incorrect because while not required, accountants may communicate matters that come to their attention if they choose to do so. Answer B is incorrect because compilations provide no assurance on any aspect, including internal controls. Answer D is incorrect because compilations do not involve tests of controls or identification of significant deficiencies in the audit sense. The critical professional judgment is that if choosing to communicate in a compilation, the accountant must be clear about the engagement's limitations and avoid creating misunderstanding about the level of service provided.
You are the auditor of an issuer. During the audit, you identify that management consulted with a different accounting firm on a contentious accounting issue and is selectively sharing only the favorable portions of that consultation. The audit committee is unaware of the consultation. Based on the auditor’s findings, what should be communicated to those charged with governance?
Nothing, because consultations with other firms are privileged and cannot be discussed with the audit committee.
Communicate directly to the SEC staff because any consultation indicates potential fraud.
Only the final accounting conclusion, without mentioning the consultation, to avoid creating tension between management and the audit committee.
The existence of management’s consultation on a significant accounting matter, the auditor’s concerns about completeness and transparency, and the potential implications for financial reporting and audit evidence.
Explanation
The professional standard being tested is PCAOB AS 1301, which requires communication of significant accounting consultations and related concerns to those charged with governance in issuer audits. The key facts are management's selective sharing of the consultation and the audit committee's unawareness. Choice A aligns with AS 1301 by mandating discussion of the consultation and transparency issues. Choice B is incorrect because AS 1301 allows discussion of consultations; choice C is wrong as full context is required per AS 1301; choice D is incorrect because consultations do not automatically indicate fraud. A rule is to evaluate consultation completeness, then communicate risks to governance. Effective communication promotes fair financial reporting and audit evidence integrity.