AuditingandAssuranceStandardsCouncil

PhilippineStandardonAuditing265

COMMUNICATINGDEFICIENCIESININTERNALCONTROL
TOTHOSECHARGEDWITHGOVERNANCEANDMANAGE
MENT
ConformingAmendmentstoOtherStandards
PHILIPPINESTANDARDONAUDITING265

COMMUNICATINGDEFICIENCIESININTERNALCONTROLTOTHOSECHARGED
WITHGOVERNANCEANDMANAGEMENT
(Effectiveforauditsoffinancialstatementsforperiodsbeginning onorafterDecember15,2009
)

CONTENTS
Paragraph
Introduction
ScopeofthisPSA................................................................................
13
....................
EffectiveDate...................................................................................
4
.......................
Objective.........................................................................................
5
........................
Definitions.......................................................................................
6
........................
Requirements..................................................................................
711
........................
ApplicationandOtherExplanatoryMaterial
DeterminationofWhetherDeficienciesinInternalControlHaveBeenId
entified
A1A4

SignificantDeficienciesinInternalControl...........................................
................A5A11CommunicationofDeficienciesinInternalControl.........................
.....................A12A30
Acknowledgment
PhilippineStandardonAuditing(PSA)265,CommunicatingDeficienci
esinInternalControltoThoseChargedwithGovernanceandManageme
ntshouldbereadinconjunctionwithPSA200(RevisedandRedrafted),
OverallObjectivesoftheIndependentAuditorandtheConductofanAud
itinAccordancewithPhilippineStandardsonAuditing.

Introduction
ScopeofthisPSA
1.
ThisPhilippineStandardonAuditing(PSA)dealswiththeauditorsrespo
nsibilitytocommunicateappropriatelytothosechargedwithgovernan
1
ceandmanagementdeficienciesininternalcontrol
thattheauditorhasidentifiedinanauditoffinancialstatements.ThisPS
Adoesnotimposeadditionalresponsibilitiesontheauditorregardingob
taininganunderstandingofinternalcontrolanddesigningandperformi
ngtestsofcontrolsoverandabovetherequirementsofPSA315
2

(Redrafted)andPSA330(Redrafted).PSA260(RevisedandRedrafte
d)establishesfurtherrequirementsandprovidesguidanceregardin
gtheauditorsresponsibilitytocommunicatewiththosechargedwith
governanceinrelationtotheaudit.

Theauditorisrequiredtoobtainanunderstandingofinternalcontrolrel
evanttotheauditwhenidentifyingandassessingtherisksofmaterialmi
4
sstatement.
Inmakingthoseriskassessments,theauditorconsidersinternalcontro
linordertodesignauditproceduresthatareappropriateinthecircumst
ances,butnotforthepurposeofexpressinganopinionontheeffectiven
essofinternalcontrol.Theauditormayidentifydeficienciesininternalc
ontrolnotonlyduringthisriskassessmentprocessbutalsoatanyothers
tageoftheaudit.ThisPSAspecifieswhichidentifieddeficienciestheaud
itorisrequiredtocommunicatetothosechargedwithgovernanceand
management.
NothinginthisPSAprecludestheauditorfromcommunicatingtothosec
hargedwithgovernanceandmanagementotherinternalcontrolmatte
rsthattheauditorhasidentifiedduringtheaudit.

EffectiveDate
4.
ThisPSAiseffectiveforauditsoffinancialstatementsforperiodsbeginni
ngonorafterDecember15,2009.

Objective
5.
Theobjectiveoftheauditoristocommunicateappropriatelytothosech
argedwithgovernanceandmanagementdeficienciesininternalcontro
lthattheauditorhasidentifiedduringtheauditandthat,intheauditorsp
rofessionaljudgment,areofsufficientimportancetomerittheirrespect
iveattentions.
1
PSA315 (Redrafted),Identifyingand AssessingtheRisksofMaterialMisstatementthroughU
nderstanding theEntityandItsEnvironment,paragraphs4 and 12.
2
PSA330 (Redrafted),TheAuditorsResponsestoAssessed Risks.
3
PSA260 (Revised andRedrafted),Communicationwith ThoseCharged with Governance.
4
PSA315 (Redrafted),paragraph 12.ParagraphsA56A61 provideguidanceon controlsrelev
anttotheaudit.

Definitions
6.
ForpurposesofthePSAs,thefollowingtermshavethemeaningsat
tributedbelow:

1
2

(a) DeficiencyininternalcontrolThisexistswhen:
(i)

Acontrolisdesigned,implementedoroperatedinsuchawaythatitis
unabletoprevent,ordetectandcorrect,misstatementsinthefinan
cialstatementsonatimelybasis;or
(ii)
Acontrolnecessarytoprevent,ordetectandcorrect,misstatement

sinthefinancialstatementsonatimelybasisismissing.
(b)
Significantdeficiencyininternalcontrol
Adeficiencyorcombinationofdeficienciesininternalcontrolthat,inthe
auditorsprofessionaljudgment,isofsufficientimportancetomeritthe
attentionofthosechargedwithgovernance. (Ref:Para.A5)

Requirements
1
2

Theauditorshalldeterminewhether,onthebasisoftheauditworkperfo
rmed,theauditorhasidentifiedoneormoredeficienciesininternalcont
rol.(Ref:Para.A1A4)
Iftheauditorhasidentifiedoneormoredeficienciesininternalcontrol,t
heauditorshalldetermine,onthebasisoftheauditworkperformed,wh
ether,individuallyorincombination,theyconstitutesignificantdeficie
ncies.
(Ref:Para.A5A11)

Theauditorshallcommunicateinwritingsignificantdeficienciesininte
rnalcontrolidentifiedduringtheaudittothosechargedwithgovernanc
eonatimelybasis.(Ref:Para.A12A18,A27)
1 10.

Theauditorshallalsocommunicatetomanagementatanappropria
televelofresponsibilityonatimelybasis:(Ref:Para.A19,A27)
(a)

Inwriting,significantdeficienciesininternalcontrolthattheauditor
hascommunicatedorintendstocommunicatetothosechargedwit
hgovernance,unlessitwouldbeinappropriatetocommunicatedire
ctlytomanagementinthecircumstances;and(Ref:Para.A14,A20A21)
(b)

Otherdeficienciesininternalcontrolidentifiedduringtheauditthat
havenotbeencommunicatedtomanagementbyotherpartiesandt
hat,intheauditorsprofessionaljudgment,areofsufficientimporta
ncetomeritmanagementsattention.(Ref:Para.A22A26)
11.

Theauditorshallincludeinthewrittencommunicationofsignificant
deficienciesininternalcontrol:
(a)

Adescriptionofthedeficienciesandanexplanationoftheirpotential
effects;and(Ref:Para.A28)
(b)
Sufficientinformationtoenablethosechargedwithgovernancean

dmanagementtounderstandthecontextofthecommunication.In
particular,theauditorshallexplainthat:(Ref:Para.A29A30)
(i)

Thepurposeoftheauditwasfortheauditortoexpressanopinionont
hefinancialstatements;
(ii)
Theauditincludedconsiderationofinternalcontrolrelevanttothepr
eparationofthefinancialstatementsinordertodesignauditproced
uresthatareappropriateinthecircumstances,butnotforthepurpos
eofexpressinganopinionontheeffectivenessofinternalcontrol;an
d
(iii)
Themattersbeingreportedarelimitedtothosedeficiencie
sthattheauditorhasidentifiedduringtheauditandthatthe
auditorhasconcludedareofsufficientimportancetomerit
beingreportedtothosechargedwithgovernance.
***

ApplicationandOtherExplanatoryMaterial
DeterminationofWhetherDeficienciesinInternalControlHaveBeenIdentifie
d
(Ref:Para.7)

A1.Indeterminingwhethertheauditorhasidentifiedoneormoredeficiencies
ininternalcontrol,theauditormaydiscusstherelevantfactsandcircu
mstancesoftheauditorsfindingswiththeappropriatelevelofmanage
ment.Thisdiscussionprovidesanopportunityfortheauditortoalertm
anagementonatimelybasistotheexistenceofdeficienciesofwhichm
anagementmaynothavebeenpreviouslyaware.Thelevelofmanage
mentwithwhomitisappropriatetodiscussthefindingsisonethatisfam
iliarwiththeinternalcontrolareaconcernedandthathastheauthorityt
otakeremedialactiononanyidentifieddeficienciesininternalcontrol.I
nsomecircumstances,itmaynotbeappropriatefortheauditortodiscu
sstheauditorsfindingsdirectlywithmanagement,forexample,ifthefi
ndingsappeartocallmanagementsintegrityorcompetenceintoques
tion(seeparagraphA20).
A2.Indiscussingthefactsandcircumstancesoftheauditorsfindingswi
thmanagement,theauditormayobtainotherrelevantinformati
onforfurtherconsideration,suchas:

1
2

Managementsunderstandingoftheactualorsuspectedcausesofthe
deficiencies.
Exceptionsarisingfromthedeficienciesthatmanagementmayhaven

oted,forexample,misstatementsthatwerenotpreventedbytherelev
antinformationtechnology(IT)controls.
Apreliminaryindicationfrommanagementofitsresponsetothefinding
s.

ConsiderationsSpecifictoSmallerEntities
A3.Whiletheconceptsunderlyingcontrolactivitiesinsmallerentitiesarelikely
tobesimilartothoseinlargerentities,theformalitywithwhichtheyoper
atewillvary.Further,smallerentitiesmayfindthatcertaintypesofcontr
olactivitiesarenotnecessarybecauseofcontrolsappliedbymanagem
ent.Forexample,managementssoleauthorityforgrantingcredittocu
stomersandapprovingsignificantpurchasescanprovideeffectivecont
roloverimportantaccountbalancesandtransactions,lesseningorrem
ovingtheneedformoredetailedcontrolactivities.
A4.Also,smallerentitiesoftenhavefeweremployeeswhichmaylimittheexte
nttowhichsegregationofdutiesispracticable.However,inasmallowne
rmanagedentity,theownermanagermaybeabletoexercisemoreeffectiveoversightthaninalarge
rentity.Thishigherlevelofmanagementoversightneedstobebalanced
againstthegreaterpotentialformanagementoverrideofcontrols.
SignificantDeficienciesinInternalControl(Ref:Para.6(b),8)
A5.Thesignificanceofadeficiencyoracombinationofdeficienciesininternalc
ontroldependsnotonlyonwhetheramisstatementhasactuallyoccurre
d,butalsoonthelikelihoodthatamisstatementcouldoccurandthepote
ntialmagnitudeofthemisstatement.Significantdeficienciesmayther
eforeexisteventhoughtheauditorhasnotidentifiedmisstatementsdu
ringtheaudit.
A6.Examplesofmattersthattheauditormayconsiderindeterminingwh
etheradeficiencyorcombinationofdeficienciesininternalcontro
lconstitutesasignificantdeficiencyinclude:
Thelikelihoodofthedeficienciesleadingtomaterialmisstatementsint
hefinancialstatementsinthefuture.
Thesusceptibilitytolossorfraudoftherelatedassetorliability.
Thesubjectivityandcomplexityofdeterminingestimatedamounts,su
chasfairvalueaccountingestimates.
Thefinancialstatementamountsexposedtothedeficiencies.
Thevolumeofactivitythathasoccurredorcouldoccurintheaccountbal
anceorclassoftransactionsexposedtothedeficiencyordeficiencies.
1
Theimportanceofthecontrolstothefinancialreportingprocess;for
example:

oGeneralmonitoringcontrols(suchasoversightofmanagemen
t).
b oControlsoverthepreventionanddetectionoffraud.
c oControlsovertheselectionandapplicationofsignificantaccou
ntingpolicies.
d oControlsoversignificanttransactionswithrelatedparties.
e oControlsoversignificanttransactionsoutsidetheentitysnor
malcourseofbusiness.
f oControlsovertheperiodendfinancialreportingprocess(suchascontrolsovernonrecurringjournalentries).
Thecauseandfrequencyoftheexceptionsdetectedasaresultofthede
ficienciesinthecontrols.
Theinteractionofthedeficiencywithotherdeficienciesininternalcontr
ol.
A7.Indicatorsofsignificantdeficienciesininternalcontrolinclude,forexample
:

Evidenceofineffectiveaspectsofthecontrolenvironment,suchas:
a oIndicationsthatsignificanttransactionsinwhichmanagemen
tisfinanciallyinterestedarenotbeingappropriatelyscrutinized
bythosechargedwithgovernance.
b oIdentificationofmanagementfraud,whetherornotmaterial,t
hatwasnotpreventedbytheentitysinternalcontrol.
c oManagementsfailuretoimplementappropriateremedialacti
ononsignificantdeficienciespreviouslycommunicated.
Absenceofariskassessmentprocesswithintheentitywheresuchaproc
esswouldordinarilybeexpectedtohavebeenestablished.
Evidenceofanineffectiveentityriskassessmentprocess,suchasmana
gementsfailuretoidentifyariskofmaterialmisstatementthattheaudi
torwouldexpecttheentitysriskassessmentprocesstohaveidentified
.
Evidenceofanineffectiveresponsetoidentifiedsignificantrisks(e.g.,a
bsenceofcontrolsoversucharisk).
Misstatementsdetectedbytheauditorsproceduresthatwerenotprev
ented,ordetectedandcorrected,bytheentitysinternalcontrol.
Restatementofpreviouslyissuedfinancialstatementstoreflectthecor
rectionofamaterialmisstatementduetoerrororfraud.
Evidenceofmanagementsinabilitytooverseethepreparationofthefi
nancialstatements.
A8.Controlsmaybedesignedtooperateindividuallyorincombinationtoeffect
5
ivelyprevent,ordetectandcorrect,misstatements.
Forexample,controlsoveraccountsreceivablemayconsistofbothauto
matedandmanualcontrolsdesignedtooperatetogethertoprevent,or

detectandcorrect,misstatementsintheaccountbalance.Adeficiencyi
ninternalcontrolonitsownmaynotbesufficientlyimportanttoconstitut
easignificantdeficiency.However,acombinationofdeficienciesaffecti
ngthesameaccountbalanceordisclosure,relevantassertion,orcompo
nentofinternalcontrolmayincreasetherisksofmisstatementtosucha
nextentastogiverisetoasignificantdeficiency.
A9.Laworregulationinsomejurisdictionsmayestablisharequirement(parti
cularlyforauditsoflistedentities)fortheauditortocommunicatetotho
sechargedwithgovernanceortootherrelevantparties(suchasregulat
ors)oneormorespecifictypesofdeficiencyininternalcontrolthatthea
uditorhasidentifiedduringtheaudit.Wherelaworregulationhasestab
lishedspecifictermsanddefinitionsforthesetypesofdeficiencyandre
quirestheauditortousethesetermsanddefinitionsforthepurposeofth
ecommunication,theauditorusessuchtermsanddefinitionswhenco
mmunicatinginaccordancewiththelegalorregulatoryrequirement.
A10.Wherethejurisdictionhasestablishedspecifictermsforthetypesofdefici
encyininternalcontroltobecommunicatedbuthasnotdefinedsuchter
ms,itmaybenecessaryfortheauditortousejudgmenttodeterminethe
matterstobecommunicatedfurthertothelegalorregulatoryrequirem
ent.Indoingso,theauditormayconsideritappropriatetohaveregardto
therequirementsandguidanceinthisPSA.Forexample,ifthepurposeof
thelegalorregulatoryrequirementistobringtotheattentionofthosech
argedwithgovernancecertaininternalcontrolmattersofwhichtheysh
ouldbeaware,itmaybeappropriatetoregardsuchmattersasbeinggen
erallyequivalenttothesignificantdeficienciesrequiredbythisPSAtobe
communicatedtothosechargedwithgovernance.
A11.TherequirementsofthisPSAremainapplicablenotwithstandingth
atlaworregulationmayrequiretheauditortousespecifictermsor
definitions.
CommunicationofDeficienciesinInternalControl
CommunicationofSignificantDeficienciesinInternalControltoThoseCha
rgedwithGovernance(Ref:Para.9)
A12.Communicatingsignificantdeficienciesinwritingtothosechargedwith
governancereflectstheimportanceofthesematters,andassiststhos
echargedwithgovernanceinfulfillingtheiroversightresponsibilities.
PSA260(RevisedandRedrafted)establishesrelevantconsiderationsr
egardingcommunicationwiththosechargedwithgovernancewhenal
lofthemareinvolvedinmanagingthe
6

entity.
5
PSA315 (Redrafted),paragraph A62.

6
PSA260 (Revised andRedrafted),paragraph9.

A13.Indeterminingwhentoissuethewrittencommunication,theauditormay
considerwhetherreceiptofsuchcommunicationwouldbeanimportant
factorinenablingthosechargedwithgovernancetodischargetheirove
rsightresponsibilities.Inaddition,forlistedentitiesincertainjurisdictio
ns,thosechargedwithgovernancemayneedtoreceivetheauditorswri
ttencommunicationbeforethedateofapprovalofthefinancialstateme
ntsinordertodischargespecificresponsibilitiesinrelationtointernalco
ntrolforregulatoryorotherpurposes.Forotherentities,theauditormayi
ssuethewrittencommunicationatalaterdate.Nevertheless,inthelatt
ercase,astheauditorswrittencommunicationofsignificantdeficienci
esformspartofthefinalauditfile,thewrittencommunicationissubjectt
othe
7

overridingrequirementfortheauditortocompletetheassemblyofthefi
nalauditfileonatimelybasis.PSA230(Redrafted)statesthatanappropr
iatetimelimitwithinwhichtocompletetheassemblyofthefinalauditfile
isordinarilynotmore
8

than60daysafterthedateoftheauditorsreport.
A14.Regardlessofthetimingofthewrittencommunicationofsignificantdefici
encies,theauditormaycommunicatetheseorallyinthefirstinstanceto
managementand,whenappropriate,tothosechargedwithgovernanc
etoassistthemintakingtimelyremedialactiontominimizetherisksofm
aterialmisstatement.Doingso,however,doesnotrelievetheauditorof
theresponsibilitytocommunicatethesignificantdeficienciesinwriting
,asthisPSArequires.
A15.Thelevelofdetailatwhichtocommunicatesignificantdeficienciesisam
atteroftheauditorsprofessionaljudgmentinthecircumstances.Fact
orsthattheauditormayconsiderindetermininganappropriatelevelof
detailforthecommunicationinclude,forexample:
Thenatureoftheentity.Forinstance,thecommunicationrequiredforap
ublicinterestentitymaybedifferentfromthatforanonpublicinterestentity.
Thesizeandcomplexityoftheentity.Forinstance,thecommunicationr
equiredforacomplexentitymaybedifferentfromthatforanentityoper
atingasimplebusiness.
Thenatureofsignificantdeficienciesthattheauditorhasidentified.
Theentitysgovernancecomposition.Forinstance,moredetailmaybe
neededifthosechargedwithgovernanceincludememberswhodonoth
avesignificantexperienceintheentitysindustryorintheaffectedarea
s.
Legalorregulatoryrequirementsregardingthecommunicationofspec
ifictypesofdeficiencyininternalcontrol.

A16.Managementandthosechargedwithgovernancemayalreadybeawar
eofsignificantdeficienciesthattheauditorhasidentifiedduringthea
uditandmayhavechosennottoremedythembecauseofcostorother
considerations.Theresponsibilityforevaluatingthecostsandbenefi
tsofimplementingremedialactionrestswithmanagementandthose
chargedwithgovernance.Accordingly,
7
PSA230 (Redrafted),AuditDocumentation,paragraph 14.
8
PSA230 (Redrafted),paragraph A21.

therequirementinparagraph9appliesregardlessofcostorothercon
siderationsthatmanagementandthosechargedwithgovernancem
ayconsiderrelevantindeterminingwhethertoremedysuchdeficien
cies.
A17.Thefactthattheauditorcommunicatedasignificantdeficiencytothosec
hargedwithgovernanceandmanagementinapreviousauditdoesnot
eliminatetheneedfortheauditortorepeatthecommunicationifremed
ialactionhasnotyetbeentaken.Ifapreviouslycommunicatedsignifica
ntdeficiencyremains,thecurrentyearscommunicationmayrepeatt
hedescriptionfromthepreviouscommunication,orsimplyreferencet
hepreviouscommunication.Theauditormayaskmanagementor,wh
ereappropriate,thosechargedwithgovernance,whythesignificantd
eficiencyhasnotyetbeenremedied.Afailuretoact,intheabsenceofar
ationalexplanation,mayinitselfrepresentasignificantdeficiency.
ConsiderationsSpecifictoSmallerEntities
A18.Inthecaseofauditsofsmallerentities,theauditormaycommunicatein
alessstructuredmannerwiththosechargedwithgovernancethanint
hecaseoflargerentities.
CommunicationofDeficienciesinInternalControltoManagement (Ref:Para.10)
A19.Ordinarily,theappropriatelevelofmanagementistheonethathasrespo
nsibilityandauthoritytoevaluatethedeficienciesininternalcontrolan
dtotakethenecessaryremedialaction.Forsignificantdeficiencies,the
appropriatelevelislikelytobethechiefexecutiveofficerorchieffinanci
alofficer(orequivalent)asthesemattersarealsorequiredtobecommu
nicatedtothosechargedwithgovernance.Forotherdeficienciesininte
rnalcontrol,theappropriatelevelmaybeoperationalmanagementwit
hmoredirectinvolvementinthecontrolareasaffectedandwiththeaut
horitytotakeappropriateremedialaction.

CommunicationofSignificantDeficienciesinInternalControltoMan
agement(Ref:Para.10(a))
A20.Certainidentifiedsignificantdeficienciesininternalcontrolmaycallintoq
uestiontheintegrityorcompetenceofmanagement.Forexample,ther
emaybeevidenceoffraudorintentionalnoncompliancewithlawsandregulationsbymanagement,ormanagemen
tmayexhibitaninabilitytooverseethepreparationofadequatefinancia
lstatementsthatmayraisedoubtaboutmanagementscompetence.A
ccordingly,itmaynotbeappropriatetocommunicatesuchdeficiencies
directlytomanagement.
A21.PSA250(Redrafted)establishesrequirementsandprovidesguidance
onthereportingofidentifiedorsuspectednoncompliancewithlawsandregulations,includingwhenthosecharged
9
withgovernancearethemselvesinvolvedinsuchnoncompliance.
PSA240(Redrafted)establishesrequirementsandprovides

PSA250 (Redrafted),Consideration ofLawsandRegulationsin an AuditofFinancialStatem

ents,paragraphs2228.

guidanceregardingcommunicationtothosechargedwithgovernan
cewhentheauditorhasidentifiedfraudorsuspectedfraudinvolving
10
management.
CommunicationofOtherDeficienciesinInternalControltoMan
agement(Ref:Para.10(b))
A22.Duringtheaudit,theauditormayidentifyotherdeficienciesininternalcon
trolthatarenotsignificantdeficienciesbutthatmaybeofsufficientimpo
rtancetomeritmanagementsattention.Thedeterminationastowhich
otherdeficienciesininternalcontrolmeritmanagementsattentionisa
matterofprofessionaljudgmentinthecircumstances,takingintoaccou
ntthelikelihoodandpotentialmagnitudeofmisstatementsthatmayari
seinthefinancialstatementsasaresultofthosedeficiencies.
A23.Thecommunicationofotherdeficienciesininternalcontrolthatmeritma
nagementsattentionneednotbeinwritingbutmaybeoral.Wherethea
uditorhasdiscussedthefactsandcircumstancesoftheauditorsfinding
swithmanagement,theauditormayconsideranoralcommunicationof
theotherdeficienciestohavebeenmadetomanagementatthetimeoft
hesediscussions.Accordingly,aformalcommunicationneednotbema
desubsequently.
A24.Iftheauditorhascommunicateddeficienciesininternalcontrolotherthan
significantdeficienciestomanagementinapriorperiodandmanagem
enthaschosennottoremedythemforcostorotherreasons,theauditorn
eednotrepeatthecommunicationinthecurrentperiod.Theauditorisal

sonotrequiredtorepeatinformationaboutsuchdeficienciesifithasbee
npreviouslycommunicatedtomanagementbyotherparties,suchasin
ternalauditorsorregulators.Itmay,however,beappropriatefortheaud
itortorecommunicatetheseotherdeficienciesiftherehasbeenachangeofman
agement,orifnewinformationhascometotheauditorsattentionthatal
tersthepriorunderstandingoftheauditorandmanagementregardingt
hedeficiencies.Nevertheless,thefailureofmanagementtoremedyoth
erdeficienciesininternalcontrolthatwerepreviouslycommunicatedm
aybecomeasignificantdeficiencyrequiringcommunicationwiththose
chargedwithgovernance.Whetherthisisthecasedependsontheaudit
orsjudgmentinthecircumstances.
A25.Insomecircumstances,thosechargedwithgovernancemaywishtobem
adeawareofthedetailsofotherdeficienciesininternalcontroltheaudit
orhascommunicatedtomanagement,orbebrieflyinformedofthenatu
reoftheotherdeficiencies.Alternatively,theauditormayconsideritapp
ropriatetoinformthosechargedwithgovernanceofthecommunicatio
noftheotherdeficienciestomanagement.Ineithercase,theauditorma
yreportorallyorinwritingtothosechargedwithgovernanceasappropri
ate.
A26.PSA260(RevisedandRedrafted)establishesrelevantconsiderations
regardingcommunicationwiththosechargedwithgovernancewhe
11
nallofthemareinvolvedinmanagingtheentity.
PSA240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFraud inanAuditofFinancial
Statements,paragraph41.
ConsiderationsSpecifictoPublicSectorEntities(Ref:Para.910)

A27.Publicsectorauditorsmayhaveadditionalresponsibilitiestocommunica
tedeficienciesininternalcontrolthattheauditorhasidentifiedduringth
eaudit,inways,atalevelofdetailandtopartiesnotenvisagedinthisPSA.
Forexample,significantdeficienciesmayhavetobecommunicatedtot
helegislatureorothergoverningbody.Law,regulationorotherauthorit
ymayalsomandatethatpublicsectorauditorsreportdeficienciesininte
rnalcontrol,irrespectiveofthesignificanceofthepotentialeffectsoftho
sedeficiencies.Further,legislationmayrequirepublicsectorauditorst
oreportonbroaderinternalcontrolrelatedmattersthanthedeficienciesininternalcontrolrequiredtobeco
mmunicatedbythisPSA,forexample,controlsrelatedtocompliancewit
hlegislativeauthorities,regulations,orprovisionsofcontractsorgrant
agreements.
ContentofWrittenCommunicationofSignificantDeficienciesinInternalCont
rol
(Ref:Para.11)

A28.Inexplainingthepotentialeffectsofthesignificantdeficiencies,theaudi

torneednotquantifythoseeffects.Thesignificantdeficienciesmaybe
groupedtogetherforreportingpurposeswhereitisappropriatetodoso
.Theauditormayalsoincludeinthewrittencommunicationsuggestion
sforremedialactiononthedeficiencies,managementsactualorprop
osedresponses,andastatementastowhetherornottheauditorhasun
dertakenanystepstoverifywhethermanagementsresponseshaveb
eenimplemented.
A29.Theauditormayconsideritappropriatetoincludethefollowinginforma
tionasadditionalcontextforthecommunication:
Anindicationthatiftheauditorhadperformedmoreextensiveprocedur
esoninternalcontrol,theauditormighthaveidentifiedmoredeficienci
estobereported,orconcludedthatsomeofthereporteddeficienciesne
ednot,infact,havebeenreported.
Anindicationthatsuchcommunicationhasbeenprovidedforthepurpo
sesofthosechargedwithgovernance,andthatitmaynotbesuitablefor
otherpurposes.
A30.Laworregulationmayrequiretheauditorormanagementtofurnishacopy
oftheauditorswrittencommunicationonsignificantdeficienciestoap
propriateregulatoryauthorities.Wherethisisthecase,theauditorswri
ttencommunicationmayidentifysuchregulatoryauthorities.

11

PSA260(Revised and Redrafted),paragraph 9.

Acknowledgment
ThisPSAisbasedonInternationalStandardonAuditing265,Communicating
DeficienciesinInternalControltoThoseChargedwithGovernanceandManag
ement,issuedbytheInternationalAuditingandAssuranceStandardsBoard.
TherearenosignificantdifferencesbetweenthisPSA265andISA265.
CONFORMINGAMENDMENTSTOOTHERSTANDARDSASARESULTOFPSA265,
COMMUNICATINGDEFICIENCIESININTERNALCONTROLTOTHOSECHARGED
WITHGOVERNANCEANDMANAGEMENT

PSA240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFr
audinanAuditofFinancialStatements
A1.Fraud,whetherfraudulentfinancialreportingormisappropriationofass

ets,involvesincentiveorpressuretocommitfraud,aperceivedoppor
tunitytodosoandsomerationalizationoftheact.Forexample:

Aperceivedopportunitytocommitfraudmayexistwhenanindividualb
elievesinternalcontrolcanbeoverridden,forexample,becausetheind
ividualisinapositionoftrustorhasknowledgeofspecificweaknesses
deficienciesininternalcontrol.

ConsiderationsSpecifictoSmallerEntities
A27.Inthecaseofasmallentity,someoralloftheseconsiderationsmaybeinap
plicableorlessrelevant.Forexample,asmallerentitymaynothaveawri
ttencodeofconductbut,instead,mayhavedevelopedaculturethatem
phasizestheimportanceofintegrityandethicalbehaviorthroughoralc
ommunicationandbymanagementexample.Dominationofmanage
mentbyasingleindividualinasmallentitydoesnotgenerally,inandofits
elf,indicateafailurebymanagementtodisplayandcommunicateanap
propriateattituderegardinginternalcontrolandthefinancialreporting
process.Insomeentities,theneedformanagementauthorizationcanc
ompensateforotherwiseweak deficient
controlsandreducetheriskofemployeefraud.However,dominationof
managementbyasingleindividualcanbeapotentialweakness
deficiencyininternalcontrolsincethereisanopportunityformanagem
entoverrideofcontrols.
OtherMattersRelatedtoFraud(Ref:Para.42)
A63.Othermattersrelatedtofraudtobediscussedwiththosechargedwithgo
vernanceoftheentitymayinclude,forexample:

Afailurebymanagementtoappropriatelyaddressidentifiedma
terialweaknessessignificantdeficienciesininternalcontrol,ort
oappropriatelyrespondtoanidentifiedfraud.

Appendix1
RiskFactorsRelatingtoMisstatementsArisingfromFraudulentFinancial
Reporting
Opportunities
Internalcontrolcomponentsaredeficientasaresultofthefollowing:

Accountingandinformationsystemsthatarenoteffective,including
situationsinvolvingmaterialweaknessessignificantdeficienciesini
nternalcontrol.
Attitudes/Rationalizations

1
2

Managementfailingtocorrect remedy known

materialweaknessessignificantdeficienciesininternalcontrolonatim
elybasis.

RiskFactorsArisingFromMisstatementsArisingFromMisappropriationofAss
ets
Riskfactorsthatrelatetomisstatementsarisingfrommisappropriationofasse
tsarealsoclassifiedaccordingtothethreeconditionsgenerallypresentwhenf
raudexists:incentives/pressures,opportunities,andattitudes/rationalizatio
n.Someoftheriskfactorsrelatedtomisstatementsarisingfromfraudulentfina
ncialreportingalsomaybepresentwhenmisstatementsarisingfrommisappr
opriationofassetsoccur.Forexample,ineffective
monitoringofmanagementandweaknesses
otherdeficienciesininternalcontrolthatisnoteffectivemaybepresentwhen
misstatementsduetoeitherfraudulentfinancialreportingormisappropriatio
nofassetsexist.Thefollowingareexamplesofriskfactorsrelatedtomisstatem
entsarisingfrommisappropriationofassets.
Attitudes/Rationalizations

Disregardforinternalcontrolovermisappropriationofassetsbyoverrid
ingexistingcontrolsorbyfailingtocorrect
takeappropriateremedialactiononknowndeficienciesininternalcont
roldeficiencies.

Appendix3ExamplesofCircumstancesthatIndicatethePossibilityofFraud
Problematicorunusualrelationshipsbetweentheauditorandmanagement,i
ncluding:

Anunwillingnesstoaddressidentifiedweaknesses deficiencies
ininternalcontrolonatimelybasis.

PSA260(RevisedandRedrafted),CommunicatingwithT

hoseChargedwithGovernance
3.

Recognizingtheimportanceofeffectivetwowaycommunicationduringanauditoffinancialstatements,thisPSApro
videsanoverarchingframeworkfortheauditorscommunicationwitht
hosechargedwithgovernance,andidentifiessomespecificmatterstob
ecommunicatedwiththem.Additionalmatterstobecommunicated,w
hichcomplementtherequirementsofthisPSA,areidentifiedinotherPS
12
As(seeAppendix1).Inaddition,PSA265
establishesspecificrequirementsregardingthecommunicationofsign
ificantdeficienciesininternalcontroltheauditorhasidentifiedduringth
eaudittothosechargedwithgovernance.Furthermatters,notrequired
bythisorotherPSAs,mayberequiredtobecommunicatedbylawsorreg
ulations,byagreementwiththeentity,orbyadditionalrequirementsap
plicabletotheengagement,forexample,thestandardsofanationalpro
fessionalaccountancybody.NothinginthisPSAprecludestheauditorfr
omcommunicatinganyothermatterstothosechargedwithgovernanc
e.

A31)

(Ref:Para.A28-

12.
Theauditorshallcommunicatewiththosechargedwithgovernance (Ref
:Para.A20):

(a)

Theauditorsviewsaboutsignificantqualitativeaspectsoftheentitys
accountingpractices,includingaccountingpolicies,accountingestim
atesandfinancialstatementdisclosures.Whenapplicable,theauditor
shallexplaintothosechargedwithgovernancewhytheauditorconside
rsasignificantaccountingpractice,thatisacceptableundertheapplica
blefinancialreportingframework,nottobemostappropriatetothepart
icularcircumstancesoftheentity(Ref:Para.A21);
(b)
Significantdifficulties,ifany,encounteredduringtheaudit (Ref:Para.A22)
;

(c)

Unlessallofthosechargedwithgovernanceareinvolvedinmanagin
gtheentity:
(i)
Materialweaknesses,ifany,inthedesign,implementationoropera
tingeffectivenessofinternalcontrolthathavecometotheauditor's
attentionandhavebeencommunicatedtomanagementasrequire
dbyPSA315(Redrafted),orPSA330(Redrafted);

(ii)
Significantmatters,ifany,arisingfromtheauditthatwerediscusse
d,orsubjecttocorrespondencewithmanagement(Ref:Para.A23);and
(iii)

Writtenrepresentationstheauditorisrequesting;and

PSA265,CommunicatingDeficienciesin InternalControltoThoseCharged with Governan

ceand Management.

(d)

Othermatters,ifany,arisingfromtheauditthatare,inthea
uditorsprofessionaljudgment,significanttotheoversigh
tofthefinancialreportingprocess(Ref:Para.A24).

SupplementaryMatters(Ref:Para.3)
A29.Theauditormaybecomeawareofsupplementarymattersthatdonotnec
essarilyrelatetotheoversightofthefinancialreportingprocessbutwhic
hare,nevertheless,likelytobesignificanttotheresponsibilitiesofthose
chargedwithgovernanceinoverseeingthestrategicdirectionoftheent
ityortheentitysobligationsrelatedtoaccountability.Suchmattersma
yinclude,forexample,significantdeficiencies in
issuesregardinggovernancestructuresorprocesses,andsignificantd
ecisionsoractionsbyseniormanagementthatlackappropriateauthori
zation.

TimingofCommunications(Ref:Para.17)
A44.Theappropriatetimingforcommunicationswillvarywiththecircumstan
cesoftheengagement.Relevantcircumstancesincludethesignificanc
eandnatureofthematter,andtheactionexpectedtobetakenbythosec
hargedwithgovernance.Forexample:

Itmaybeappropriatetocommunicateasignificantdifficultyencoun
teredduringtheauditassoonaspracticableifthosechargedwithgov
ernanceareabletoassisttheauditortoovercomethedifficulty,orifiti
slikelytoleadtoamodifiedopinion.Similarly,itmaybeappropriatet
otheauditormaycommunicate
orallytothosechargedwithgovernanceassoonaspracticablemate
rialweaknessesinthedesign,implementationoroperatingeffectiv
enessofsignificantdeficienciesininternalcontrolthathavecometot
heauditorsattentiontheauditorhasidentifiedassoonaspracticabl

e, prior to
13

communicatingtheseinwritingasrequiredbyPSA265 .

Appendix1
SpecificRequirementsinISQC1(Redrafted)andOtherPSAsthatRefertoCo
mmunicationswithThoseChargedWithGovernance

2
3
4

[Proposed]
PSA250(Redrafted),TheAuditorsResponsibilitiesRelatingtoLawsa
ndRegulationsinanAuditofFinancialStatements
paragraphs[12,14,17and2123]
PSA265,CommunicatingDeficienciesinInternalControltoThoseCha
rgedwithGovernanceandManagementparagraph9
PSA315(Redrafted),IdentifyingandAssessingtheRisksofMaterialMi
sstatementThroughUnderstandingtheEntityandItsEnvironment
paragraph32
PSA330(Redrafted),TheAuditorsResponsestoAssessedRisks
paragraph19

PSA265,CommunicatingDeficienciesin InternalControltoThoseCharged with Gove

rnanceand Management,paragraphs9 andA14.

PSA300(Redrafted),PlanningtheAuditofFinancialStatements
AppendixConsiderationsinEstablishingtheOverallAuditStrategy
SignificantFactors,PreliminaryEngagementActivities,andKnowledgeGai
nedonOtherEngagements

Resultsofpreviousauditsthatinvolvedevaluatingtheoperatingeffecti
venessofinternalcontrol,includingthenatureofidentifiedweaknesse
s deficiencies andactiontakentoaddressthem.

PSA315(Redrafted),IdentifyingandAssessingtheRisksofMate
rialMisstatementThroughUnderstandingtheEntityandItsEnvir
onment
14.
Theauditorshallobtainanunderstandingofthecontrolenvironment.
Aspartofobtainingthisunderstanding,theauditorshallevaluatewh
ether:

(a)

Management,withtheoversightofthosechargedwithgovernance,ha
screatedandmaintainedacultureofhonestyandethicalbehavior;and
(b)
Thestrengthsinthecontrolenvironmentelementscollectivelyprovide
anappropriatefoundationfortheothercomponentsofinternalcontrol,
andwhetherthoseothercomponentsarenotunderminedbydeficienci
esinthecontrolenvironmentweaknesses.(Ref:Para.A65A74)

Iftheentityhasestablishedsuchaprocess(referredtohereafterasthe
entitysriskassessmentprocess),theauditorshallobtainanundersta
ndingofit,andtheresultsthereof.Wheretheauditoridentifiesrisksofm
aterialmisstatementthatmanagementfailedtoidentify,theauditorsh
allevaluatewhethertherewasanunderlyingriskofakindthattheaudito
rexpectswouldhavebeenidentifiedbytheentitysriskassessmentpro
cess.Ifthereissucharisk,theauditorshallobtainanunderstandingofw
hythatprocessfailedtoidentifyit,andevaluatewhethertheprocessisa
ppropriatetoitscircumstancesordetermine if there is a
materialweaknesssignificantdeficiencyininternalcontrolwithregard
tointheentitysriskassessmentprocess.
Iftheentityhasnotestablishedsuchaprocessorhasanadhocprocess,t
heauditorshalldiscusswithmanagementwhetherbusinessrisksrelev
anttofinancialreportingobjectiveshavebeenidentifiedandhowtheyh
avebeenaddressed.The
auditorshallevaluatewhethertheabsenceofadocumentedriskasse
ssmentprocessisappropriateinthecircumstances,ordeterminewh
etheritrepresentsamaterialweaknesssignificantdeficiencyin the
entitys internalcontrol.(Ref:Para.A76)

22.
Theauditorshallobtainanunderstandingofthemajoractivitiesthatthe
entityusestomonitorinternalcontroloverfinancialreporting,including
thoserelatedtothosecontrolactivitiesrelevanttotheaudit,andhowthe
entityinitiatescorrective remedial actions to deficiencies in
itscontrols.(Ref:Para.A94A96)
MaterialWeaknessinInternalControl

1
2

Theauditorshallevaluatewhether,onthebasisoftheauditworkperfor
med,theauditorhasidentifiedamaterialweaknessinthedesign,imple
mentationormaintenanceofinternalcontrol.(Ref:Para.A124A125)
Theauditorshallcommunicatematerialweaknessesininternalcontrol
identifiedduringtheauditonatimelybasistomanagementatanapprop
riatelevelofresponsibility,and,asrequiredbyPSA260,TheAuditorsC

ommunicationwithThoseChargedwithGovernance,withthosechar
gedwithgovernance(unlessallofthosechargedwithgovernancearein
volvedinmanagingtheentity).(Ref:Para.A126)
InformationObtainedinPriorPeriods(Ref:Para.9)
A10.Theauditorspreviousexperiencewiththeentityandauditprocedurespe
rformedinpreviousauditsmayprovidetheauditorwithinformationabo
utsuchmattersas:

1
2
3

Pastmisstatementsandwhethertheywerecorrectedonatimelybasis.
Thenatureoftheentityanditsenvironment,andtheentitysinternalco
ntrol(includingdeficienciesininternalcontrol).
Significantchangesthattheentityoritsoperationsmayhaveundergon
esincethepriorfinancialperiod,whichmayassisttheauditoringaining
asufficientunderstandingoftheentitytoidentifyandassessrisksofmat
erialmisstatement.

A11.Theauditorisrequiredtodeterminewhetherinformationobtainedinprior
periodsremainsrelevant,iftheauditorintendstousethatinformationfo
rthepurposesofthecurrentaudit.Thisisbecausechangesinthecontrol
environment,forexample,mayaffecttherelevanceofinformationobta
inedintheprioryear.Todeterminewhetherchangeshaveoccurredthat
mayaffecttherelevanceofsuchinformation,theauditormaymakeinqu
iriesandperformotherappropriateauditprocedures,suchaswalkthroughsofrelevantsystems.

NatureandExtentoftheUnderstandingofRelevantControls(Ref:Para.13)
A62. Evaluatingthedesignofacontrolinvolvesconsideringwhetherthecontr
ol,
individuallyorincombinationwithothercontrols,iscapableofeffectively
preventing,ordetectingandcorrecting,materialmisstatements.Imple
mentation
ofacontrolmeansthatthecontrolexistsandthattheentityisusingit.Ther
eis
littlepointinassessingtheimplementationofacontrolthatisnoteffective
,andso
thedesignofacontrolisconsideredfirst.Animproperlydesignedcontrol
may
representamaterialweaknesssignificantdeficiencyintheentitysintern
al
control.

EffectoftheControlEnvironmentontheAssessmentoftheRisksofMater
ialMisstatement

A70.Theexistenceofasatisfactorycontrolenvironmentcanbeapositiv
efactorwhentheauditorassessestherisksofmaterialmisstatem
ent.However,althoughitmayhelpreducetheriskoffraud,asatisf
actorycontrolenvironmentisnotanabsolutedeterrenttofraud.C
onversely,weaknesses deficiencies
inthecontrolenvironmentmayunderminetheeffectivenessofco
ntrols,inparticularinrelationtofraud.Forexample,management
sfailuretocommitsufficientresourcestoaddressITsecurityrisks
mayadverselyaffectinternalcontrolbyallowingimproperchang
estobemadetocomputerprogramsortodata,orunauthorizedtra
nsactionstobeprocessed.AsexplainedinPSA330(Redrafted),th
econtrolenvironmentalsoinfluencesthenature,timing,andexte
ntoftheauditorsfurtherprocedures.
ComponentsofInternalControlMonitoringofControls(Ref:Para.22)
A94.Monitoringofcontrolsisaprocesstoassesstheeffectivenessofinternalco
ntrolperformanceovertime.Itinvolvesassessingtheeffectivenessofc
ontrolsonatimelybasisandtakingnecessarycorrective remedial
actions.Managementaccomplishesmonitoringofcontrolsthroughon
goingactivities,separateevaluations,oracombinationofthetwo.Ong
oingmonitoringactivitiesareoftenbuiltintothenormalrecurringactivit
iesofanentityandincluderegularmanagementandsupervisoryactivit
ies.

ConsiderationsSpecifictoSmallerEntities
A96.Managementsmonitoringofcontrolisoftenaccomplishedbymanagem
entsortheownermanagerscloseinvolvementinoperations.Thisinvolvementoftenwill
identifysignificantvariancesfromexpectationsandinaccuraciesinfin
ancialdataleadingtocorrective remedial actiontothecontrol.

AssessmentofRisksofMaterialMisstatementattheFinancialStatementLeve
l
(Ref:Para.24(a))

A99.Risksatthefinancialstatementlevelmayderiveinparticularfromaweak
deficient
controlenvironment(althoughtheserisksmayalsorelatetootherfacto
rs,suchasdecliningeconomicconditions).Forexample,weaknesses
deficiencies
suchasmanagementslackofcompetencemayhaveamorepervasive
effectonthefinancialstatementsandmayrequireanoverallresponseb
ytheauditor.

UnderstandingControlsRelatedtoSignificantRisks(Ref:Para.28)

A119.Insomecases,managementmaynothaveappropriatelyrespondedtos
ignificantrisksofmaterialmisstatementbyimplementingcontrolsove
rthesesignificantrisks.ThismayindicateamaterialweaknessFailureb
ymanagementtoimplementsuchcontrolsisanindicatorofasignificant
14
deficiencyin theentitysinternalcontrol.

MaterialWeaknessinInternalControl(Ref:Para.31)
A124.Thetypesofmaterialweaknessesininternalcontrolthattheauditorma
yidentifywhenobtaininganunderstandingoftheentityanditsinternal
controlsmayinclude:
Risksofmaterialmisstatementthattheauditoridentifiesandwhichthe
entityhasnotcontrolled,orforwhichtherelevantcontrolisinadequate.
Aweaknessintheentitysriskassessmentprocessthattheauditoriden
tifiesasmaterial,ortheabsenceofariskassessmentprocessinthoseca
seswhereitwouldbeappropriateforonetohavebeenestablished.
A125.Materialweaknessesmayalsobeidentifiedincontrolsthatprevent,ord
etectandcorrect,error,orthosetopreventanddetectfraud.
ConsiderationsSpecifictoPublicSectorEntities(Ref:Para.32)
A126.Intheauditofpublicsectorentities,theremaybeadditionalcommuni
cationorreportingrequirementsforpublicsectorauditors.Forexam
ple,internalcontrolweaknessesmayhavetobereportedtothelegisl
atureorothergoverningbody.
Appendix1InternalControlComponents
MonitoringofControls
12.
Internalauditorsorpersonnelperformingsimilarfunctionsmaycontri
butetothemonitoringofanentityscontrolsthroughseparateevaluati
ons.Ordinarily,theyregularlyprovideinformationaboutthefunctioni
ngofinternalcontrol,focusingconsiderableattentiononevaluatingth
eeffectivenessofinternalcontrol,andcommunicateinformationabou
tstrengthsandweaknesses
deficienciesininternalcontrolandrecommendationsforimprovingint
ernalcontrol.

PSA265,CommunicatingDeficienciesin InternalControltoThoseCharged with Gover

nanceand Management,paragraphA7.

Appendix2
ConditionsandEventsthatmayIndicateRisksofMaterialMisstatementCondi
tionsandEventsthatmayIndicateRisksofMaterialMisstatement

Weaknesses Deficiencies
ininternalcontrol,especiallythosenotaddressedbymanagement.

PSA330(Redrafted),TheAuditorsResponsestoAssessedRisks
1
2

Theauditorshallevaluatewhether,onthebasisoftheauditworkperfor
med,theauditorhasidentifiedamaterialweaknessintheoperatingeff
ectivenessofcontrols.
Theauditorshallcommunicatematerialweaknessesininternalcontrol
identifiedduringtheauditonatimelybasistomanagementatanapprop
riatelevelofresponsibilityand,asrequiredbyPSA260(Revised),Com
municationwithThoseChargedwithGovernance,withthosecharged
withgovernance(unlessallofthosechargedwithgovernanceareinvol
vedinmanagingtheentity).

OverallResponses(Ref:Para.5)
A2.Theassessmentoftherisksofmaterialmisstatementatthefinancialstate
mentlevel,andtherebytheauditorsoverallresponses,isaffectedbyth
eauditorsunderstandingofthecontrolenvironment.Aneffectivecontr
olenvironmentmayallowtheauditortohavemoreconfidenceininterna
lcontrolandthereliabilityofauditevidencegeneratedinternallywithint
heentityandthus,forexample,allowtheauditortoconductsomeauditp
roceduresataninterimdateratherthanattheperiodend.Weaknesses
Deficiencies
inthecontrolenvironment,however,havetheoppositeeffect;forexam
ple,theauditormayrespondtoanineffectivecontrolenvironmentby:

1
2
3

Conductingmoreauditproceduresasoftheperiodendratherthanatani
nterimdate.
Obtainingmoreextensiveauditevidencefromsubstantiveprocedures
.
Increasingthenumberoflocationstobeincludedintheauditscope.

Controlsthathavenotchangedfrompreviousaudits(Ref:Para.14(b))
A38.Ingeneral,thehighertheriskofmaterialmisstatement,orthegreaterther
elianceoncontrols,theshorterthetimeperiodelapsed,ifany,islikelyto
be.Factorsthatmaydecreasetheperiodforretestingacontrol,orresulti
nnotrelyingonauditevidenceobtainedinpreviousauditsatall,includet
hefollowing:

1
2
3
4
5

Aweakdeficientcontrolenvironment.
Weak Deficient monitoringofcontrols.
Asignificantmanualelementtotherelevantcontrols.
Personnelchangesthatsignificantlyaffecttheapplicationofthecontro
l.
Changingcircumstancesthatindicatetheneedforchangesinthecontr
ol.

Weak Deficient generalITcontrols.

EvaluatingtheOperatingEffectivenessofControls(Ref:Para.1619)
A40.Amaterialmisstatementdetectedbytheauditorsproceduresmayindi
cateisastrongindicatoroftheexistenceofamaterialweaknesssignifi
cantdeficiencyininternalcontrol.
EvaluatingtheSufficiencyandAppropriatenessofAuditEvidence (Ref:Para.2628)

A56.Anauditoffinancialstatementsisacumulativeanditerativeprocess.Asth
eauditorperformsplannedauditprocedures,theauditevidenceobtain
edmaycausetheauditortomodifythenature,timing,orextentofotherp
lannedauditprocedures.Informationmaycometotheauditorsattenti
onthatdifferssignificantlyfromtheinformationonwhichtheriskassess
mentwasbased.Forexample,

2
3

Theextentofmisstatementsthattheauditordetectsbyperformingsub
stantiveproceduresmayaltertheauditorsjudgmentabouttheriskass
essmentsandmayindicateamaterialweaknesssignificantdeficiencyi
ninternalcontrol.
Theauditormaybecomeawareofdiscrepanciesinaccountingrecords,
orconflictingormissingevidence.
Analyticalproceduresperformedattheoverallreviewstageoftheaudit
mayindicateapreviouslyunrecognizedriskofmaterialmisstatement.
Insuchcircumstances,theauditormayneedtoreevaluatetheplanneda
uditprocedures,basedontherevisedconsiderationofassessedrisksfo
rallorsomeoftheclassesoftransactions,accountbalances,ordisclosur
esandrelatedassertions.PSA315(Redrafted)containsfurtherguidanc
eonrevisingtheauditorsriskassessment.

PSA520(Redrafted),AnalyticalProcedures
SuitabilityofParticularAnalyticalProceduresforGivenAssertions (Ref:Para.5(a)
)

A9.Thedeterminationofthesuitabilityofparticularsubstantiveanalyticalpro
ceduresisinfluencedbythenatureoftheassertionandtheauditorsass
essmentoftheriskofmaterialmisstatement.Forexample,ifcontrolsov
ersalesorderprocessingareweakdeficient,theauditormayplacemore

relianceontestsofdetailsratherthanonsubstantiveanalyticalprocedu
resforassertionsrelatedtoreceivables.

PSA540(RevisedandRedrafted),AuditingAccountingEstimat
es,IncludingFairValueAccountingEstimates,andRelatedDiscl
osures
ObtaininganUnderstandingofHowManagementIdentifiestheNeedforAc
countingEstimates(Ref:Para.8(b))
A20.Duringtheaudit,theauditormayidentifytransactions,eventsandcondi
tionsthatgiverisetotheneedforaccountingestimatesthatmanagem
entfailedtoidentify.PSA315(Redrafted)providesguidancewhenthea
uditoridentifiesamaterialweaknessdealswithcircumstanceswheret
heauditoridentifiesrisksofmaterialmisstatementthatmanagementf
ailedtoidentify,includingdeterminingwhetherthereisasignificantde
ficiencyininternalcontrolwithregardtoin
15
theentitysriskassessmentprocesses.

PSA550(RevisedandRedrafted),RelatedParties
TheEntitysControlsoverRelatedPartyRelationshipsandTransactions (Ref:Par
a.14)

A18.Controlsoverrelatedpartyrelationshipsandtransactionswithinsomeen
titiesmaybeweak,ineffectivedeficient ornonexistentforanumberofreasons,suchas:

PSA600(RevisedandRedrafted),SpecialConsiderations
AuditsofGroupFinancialStatements(IncludingtheWorkofCom
ponentAuditors)
41.
Thegroupengagementteamshallrequestthecomponentauditortoco
mmunicatemattersrelevanttothegroupengagementteamsconclus
ionwithregardtothegroupaudit.Suchcommunicationshallinclude:
(g)
Descriptionofanyidentifiedmaterialweaknessessignificantdeficienc
ies
ininternalcontroloverfinancialreportingatthecompon
entlevel;
46.
Thegroupengagementteamshallmake
determinewhichidentifieddeficienciesininternalcontroltocommunic
atetothosechargedwithgovernanceandgroupmanagementinaccord

16

ancewithPSA265.
aware,onatimelybasisandatanappropriatelevelofresponsibility,ofIn
makingthisdetermination,thegroupengagementteamshallconsider :
(a)
Materialweaknessesinthedesignoroperatingeffectivenessof
Deficiencies in groupwide internal controls
thatthegroupengagementteamhasidentified;

15

PSA315(Redrafted),paragraph 16.
16

PSA265,CommunicatingDeficienciesin InternalControltoThoseCharged with Gove

rnanceand Management.

(b)

MaterialweaknessesDeficienciesininternalcontrolthatthegroupeng
agementteamhasidentifiedininternalcontrolsat components
andjudgesareofsignificancetothegroup; and
(c)
MaterialweaknessesDeficienciesininternalcontrolthatcomponenta
uditorshaveidentifiedininternalcontrolsatcomponentsandbroughtt
otheattentionofthegroupengagementteamthatthegroupengagem
entteamjudgesareofsignificancetothegroup.

TermsofEngagement(Ref:Para.14)
A20.AsrequiredinPSA210(Redrafted),thetermsofengagementidentifies
identify
theapplicablefinancialreportingframework.Additionalmattersmay
beincludedinthetermsofagroupauditengagement,suchasthefactth
at:

Importantcommunicationsbetweenthecomponentauditors,th
osechargedwithgovernanceofthecomponent,andcomponent
management,includingcommunicationsonmaterialweakness
essignificantdeficienciesininternalcontrol,shouldbecommuni
catedaswelltothegroupengagementteam.
Appendix5
RequiredandAdditionalMattersIncludedintheGroupEngagementTeamsL
etterofInstruction

Otherinformation

Arequestthatthefollowingbereportedtothegroupengagementteamo
natimelybasis:
o
o MaterialweaknessesSignificantdeficienciesin internal
controlsthathavecometotheattentionofthecomponentauditorhasid
entifiedduringtheperformanceoftheworkonthefinancialinformation
ofthecomponent,andinformationthatindicatestheexistenceoffraud.

ISRE2410,ReviewofInterimFinancialInformationPerformedbyt
heIndependentAuditoroftheEntity
15.
Theproceduresperformedbytheauditortoupdatetheunderstanding
oftheentityanditsenvironment,includingitsinternalcontrol,ordinaril
yincludethefollowing:

Consideringsignificantfinancialaccountingandreportingmatterst
hatmaybeofcontinuingsignificancesuchasmaterialweaknessessi
gnificantdeficienciesininternalcontrol.

18.
Thisunderstandingenablestheauditortofocustheinquiriesmade,and
theanalyticalandotherreviewproceduresappliedinperformingarevie
wofinterimfinancialinformationinaccordancewiththisISRE.Aspartof
obtainingthisunderstanding,theauditorordinarilymakesinquiriesoft
hepredecessorauditorand,wherepracticable,reviewsthepredecesso
rauditorsdocumentationfortheprecedingannualaudit,andforanypri
orinterimperiodsinthecurrentyearthathavebeenreviewedbythepre
decessorauditor.Indoingso,theauditorconsidersthenatureofanycorr
ectedmisstatements,andanyuncorrectedmisstatementsaggregate
dbythepredecessorauditor,anysignificantrisks,includingtheriskofm
anagementoverrideofcontrols,andsignificantaccountingandanyrep
ortingmattersthatmaybeofcontinuingsignificance,suchasmaterialw
eaknessessignificantdeficienciesininternalcontrol.
ThisPSA265,CommunicatingDeficienciesinInternalControltoThoseCharg
edwithGovernanceandManagement,wasunanimouslyapprovedforadopti
ononApril27,2009bythemembersoftheAuditingandAssuranceStandardsC
ouncil.

BenjaminR.Punongbayan,Chairman

FelicidadA.Abad

AntonioP.Acyatan

ErwinVincentG.Alcala

FroilanG.Ampil

DavidL.Balangue

Ma.GraciaF.CasalsDiaz

EliseoA.Fernandez

JudithV.Lopez

JaimeP.Naranjo

Ma.CeciliaF.Ortiz

NestorioC.Roraldo

JoaquinP.Tolentino

JaimeE.Ysmael