What does those charged with governance mean on the CPA exam?
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Those charged with governance. The people responsible for overseeing the entity's strategic direction and its accountability, including the financial reporting process. Often the board or its audit committee.
Defined against AU-C 260.06.
Worked example
A privately held software company has a five-member board, three of whom sit on its audit committee. The chief executive sits on the board but not on the committee. At the close of the audit, management has declined to correct three misstatements totaling $70,000, against overall materiality of $500,000, and the auditor has already walked the chief executive through them.
Who must hear about the uncorrected misstatements, and is the conversation with the chief executive enough?
- Governance here means the people overseeing the company's direction and its financial reporting: the board, with the audit committee acting for it on the audit.
- The chief executive is part of management. Telling management does not discharge a communication the standards direct to governance, even when that person also holds a board seat.
- The uncorrected misstatements, each one and their total, and their effect on the opinion, go to the audit committee even though the $70,000 is well under materiality.
Answer: The auditor communicates the three uncorrected misstatements, and what they mean for the opinion, to the audit committee. The earlier conversation with the chief executive does not count as that communication.
The trap: Assuming that immaterial uncorrected misstatements need not reach governance, or that informing an executive who sits on the board is the same thing. The requirement exists precisely so that governance sees what management chose not to fix.
Based on AU-C 260.06; AU-C 260.14.
Which CPA exam sections use those charged with governance?
Those charged with governance appears in the AUD section of the CPA exam.
Other terms defined against AU-C 260
- audit committee: A subcommittee of the board of directors that oversees financial reporting and the external audit.
- senior management: The people who direct and control the entity day to day, as distinct from those charged with governance, whose job is to oversee them.
Related terms
- control environment: The governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's system of internal control.
- internal audit: An in-house function that evaluates controls and processes and reports to those charged with governance.
- significant deficiency: A deficiency, or combination of deficiencies, less severe than a material weakness but important enough to merit attention by those charged with governance.
- service organization: A third party whose processing affects a user entity's financial reporting, such as a payroll bureau or a claims processor.
- single audit: The combined financial statement and federal compliance audit required of an entity spending above a threshold in federal awards.
- Safeguards Rule: The FTC rule requiring financial institutions to maintain a written information security program with a named qualified individual responsible for it.