Rule Atlas
AU-C § 260: Auditor Communications and Corporate Governance: The Dialogue with Leadership
Under AU-C § 260 (AICPA / FASB / IRS), auditor Communications and Corporate Governance: The Dialogue with Leadership establishes the authoritative rules tested on the CPA Exam. Explore the critical communications required between auditors and those charged with governance, including the audit committee. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
Current Statutory Thresholds & Limits in Effect
Chain of Accountability in Corporate Governance
| Level | Player(s) | Role & Responsibility |
|---|---|---|
| Ownership | Shareholders | Elect the Board of Directors and approve major corporate actions. |
| Oversight | Board of Directors | Elected by shareholders, they have the ultimate responsibility for overseeing the company's long-term strategy and appointing senior management. |
| Specific Oversight | Audit Committee | A subcommittee of the Board, composed of independent directors. They are the primary liaison with the external and internal auditors. This is the group auditors communicate with. |
| Execution | Management (CEO, CFO, etc.) | Responsible for the day-to-day operations and for preparing the financial statements in accordance with the applicable financial reporting framework. |
During the audit of Innovate Corp., a nonissuer, the auditor, Patel, identified several internal control deficiencies. These included one material weakness, two significant deficiencies, and several other minor control deficiencies. Under AU-C 265, what is Patel required to communicate in writing to Innovate Corp.'s audit committee (those charged with governance)?
Application Scenario: Zenith Manufacturing Corp.
Scenario. You are the audit manager for the 20X5 audit of Zenith Manufacturing Corp., a nonissuer. During the audit, three key issues arise:
- 1. Issue 1: Management has changed its revenue recognition method for a new type of long-term contract. You believe the new method prematurely recognizes revenue and is an unacceptable departure from ASC 606. The CFO disagrees vehemently. After extensive debate, the CFO refuses to adjust the financial statements, and the resulting misstatement is material. 2. Issue 2: Your team identifies a control flaw where purchase orders over $10,000 can be issued by mid-level managers without the required VP-level sign-off. This has led to several unauthorized purchases, though none are individually material. You've concluded this is a significant deficiency. 3. Issue 3: During a review of board minutes, you discover that Zenith is in late-stage, confidential negotiations to sell its largest subsidiary. This is a material event that has not been disclosed in the draft financial statement footnotes.
- Numbered Steps for Communication:
- 1. Identify the Recipient: Your primary communication for these matters is with Zenith's audit committee, as they are designated as those charged with governance (TCWG).
- 2. Address Issue 1 (Disagreement): Per AU-C 260, you must communicate this disagreement with management to the audit committee. This communication should be formal and detail the specific accounting policy, your conclusion that it departs from US GAAP, management's opposing view, and the fact that the material misstatement remains uncorrected. This will directly impact your audit opinion, which must also be discussed.
Common CPA Exam Distractors on AU-C § 260
- 1Use this systematic approach to deconstruct any question on auditor communications.
- 2Step 2: Pinpoint the Communication Recipient. The question is testing who needs to know. Is it management, those charged with governance (TCWG), the audit committee, or some combination? Remember, significant issues are almost always elevated to TCWG.
- 3Step 3: Determine the Subject Matter. What is being communicated? Is it a routine matter like the audit plan, a serious issue like a disagreement with management, an illegal act, or an internal control weakness? The subject dictates the required action.
- 4To remember the key matters that MUST be communicated to those charged with governance, use the I-PASSED memory aid. This mnemonic helps you quickly recall the high-level categories of required communications.
- 5I - Independence Issues: Provide written confirmation of independence.
Frequently Asked Questions: AU-C § 260
What is the core rule under AU-C § 260 (Auditor Communications and Corporate Governance: The Dialogue with Leadership)?
Under AU-C § 260 (AICPA / FASB / IRS), auditor Communications and Corporate Governance: The Dialogue with Leadership establishes the authoritative rules tested on the CPA Exam. Explore the critical communications required between auditors and those charged with governance, including the audit committee. VoraPrep verifies every threshold, worked table, and practice question below against the current CPA Exam blueprint.
How is AU-C § 260 tested on the CPA Exam?
Use this systematic approach to deconstruct any question on auditor communications. Step 2: Pinpoint the Communication Recipient. The question is testing who needs to know. Is it management, those charged with governance (TCWG), the audit committee, or some combination? Remember, significant issues are almost always elevated to TCWG.
Where can I practice CPA Exam questions on Auditor Communications and Corporate Governance: The Dialogue with Leadership?
Test yourself instantly with the free playable CPA Exam question on this page, or launch VoraPrep's full CPA Exam adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cpa.