Auditor Communications

AU-C Section 260, The Auditor's Communication with Those Charged with Governance, requires auditors to communicate certain information to those charged with governance of the municipality. Who that might be varies from one municipality to the next, but generally includes the local governing body. If the municipality has established an audit committee or finance committee with responsibility for overseeing the audit function, that committee may also have a role in receiving auditor communications.

Tennessee Code Annotated § 6-56-105 states that the governing body of each municipality shall cause an annual audit to be made of the accounts and records of all departments, boards, and agencies under its jurisdiction that receive and disburse funds. The audit must include, but is not limited to, general funds, highway funds, school funds, public utilities, and municipal courts.

Those Charged with Governance and Management
If there is an audit committee or finance committee with responsibility for overseeing the audit function, that committee may serve as those charged with governance for purposes of auditor communication. If there is no such committee, the full governing body generally serves as those charged with governance.

Auditing standards define those charged with governance as the person or persons with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity. This includes oversight of the financial reporting process.

Auditor communication does not relieve management of its responsibilities. Management is responsible for the financial statements, including designing, implementing, and maintaining effective internal control over financial reporting. Management is defined as the person or persons with executive responsibility for the conduct of the entity's operations.

Management in a city or town could include the mayor, city manager, city administrator, finance officer, or other officials with responsibility for the municipality's operations and financial reporting. The specific responsibilities will vary depending on the municipality's form of government and how the governing body and city charter delegate the responsibilities of municipal government.

Purpose of Communication
The purpose of auditor communication with those charged with governance is to:

• Communicate the responsibilities of the auditor as related to the financial statement audit and provide an overview of the scope and timing of the audit;
• Obtain information relevant to the audit;
• Provide timely observations arising from the audit that are significant and relevant to their oversight responsibilities; and
• Promote effective two-way communication between the auditor and those charged with governance.

Form of Communication
Communication may be written or oral, as appropriate. The auditor should use professional judgment to determine the appropriate form and timing of communication. Required communications should be made directly to those charged with governance; the auditor cannot rely solely on municipal management to relay the required information to the governing body or other appropriate governance body.

Content of Communication
Municipal officials should receive auditor communication at the beginning of the audit process explaining:

• The auditor's responsibilities for the audit;
• An overview of the planned scope and timing of the audit; and
• The expected general content of communications.

This communication may be included in an audit engagement letter or provided separately.

Communication should also occur during and at the conclusion of the audit regarding significant matters arising from the audit. Significant matters may include:

• Significant or inappropriate accounting practices;
• Difficulties experienced during the audit;
• Significant uncorrected misstatements in the financial statements;
• Disagreements with management;
• Significant matters discussed with management; and
• Other matters that are significant and relevant to the responsibilities of those charged with governance.

Difficulties experienced during the audit may include significant delays in receiving information from management, unexpected difficulties obtaining sufficient appropriate audit evidence, unavailable information, or restrictions imposed by management.

Two-way Communication
It is the responsibility of the auditor to ensure that communication with those charged with governance is adequate. Effective communication should provide an opportunity for the auditor and those charged with governance to discuss matters relevant to the audit and the municipality's financial reporting. If communication is not adequate, the auditor should take appropriate steps to address the issue.

In Summary
Municipal elected officials and municipal management should be aware of the communications that auditors make related to the annual audit. The governing body is responsible for ensuring that the municipality obtains the required annual audit and for overseeing the municipality's financial affairs. The governing body, audit committee, or finance committee should make every effort to understand auditor communications and ask questions when matters are not clear.

Tennessee law requires the completed audit to be furnished to the mayor, chief executive officer, each member of the governing body, and the Comptroller of the Treasury. Copies must also be made available to the press. The audit is a public and permanent record of the municipality and is subject to inspection by citizens and taxpayers. T.C.A. § 6-56-105.

References:
AICPA, AU-C Section 260, The Auditor's Communication with Those Charged with Governance.

Tennessee Code Annotated § 6-56-105, Audit of subordinate agencies.