ISA 265 – Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
ISA Implementation Support Module
Notes for Select Slides
The following supporting notes accompany the PowerPoint slides for this module and do
not amend or override the ISAs, the texts of which alone are authoritative. Reading these
notes is not a substitute for reading the ISAs. The notes are not meant to be exhaustive and
reference to the ISAs themselves should always be made. In conducting an audit in
accordance with ISAs, the auditor is required to comply with all the ISAs that are relevant
to the engagement.
Slide 3 Notes
 The context for developing the standard
o An important part of the auditor’s communication responsibilities under the old ISAs was
the communication of material weaknesses in internal control noted during the audit.
During the Clarity project, the IAASB resolved to clarify the definition of the term
“material weakness.” It recognized that this definition was rather general. There was
therefore a need to revisit it to help improve the consistency with which auditors treat
identified weaknesses in internal control as material, and how such matters are reported.
A further impetus to reconsider the definition of material weakness came from a number
of regulatory and standard-setting developments around the world.
o As part of this project, the IAASB also noted the need to clarify the auditor’s
responsibilities in relation to the evaluation and communication of internal control-related
matters identified during the audit to those charged with governance and management.
o As the project evolved and new considerations emerged, the original aim of the project to
develop a revised definition of material weakness shifted to a focus on developing a clear
definition of the threshold of significance at which deficiencies in internal control should
be communicated to those charged with governance.
o As a result, the IAASB determined that the term material weakness should be replaced
with the term “significant deficiency.”
o In addition, the IAASB determined that there would be benefit in establishing a new
communication standard to deal with the auditor’s responsibilities regarding
communication of deficiencies in internal control to those charged with governance and
management.
Module – ISA 265 – Notes for Select Slides
Slide 8 Notes
 Also communicate significant deficiencies in writing to management on timely basis,
unless inappropriate to do so in the circumstances
o E.g. it may not be appropriate to communicate significant deficiencies in internal control
that call into question the integrity or competence of management
 Standard provides guidance on the timing of the communication (see paras A13-A14)
 It also provides guidance on factors that may affect the level of detail of the communication
(see para A15)
 Requirement also applies if significant deficiencies have been communicated in prior
audit but no remedial action has been taken
o A failure to take remedial action, in the absence of a rational explanation, may in itself
represent a significant deficiency
Slide 10 Notes
 However, if “material weakness” has not been defined in law or regulation, standard
provides guidance to explain how interpretation of such a requirement might be made
in context of the standard
o In particular, if the purpose of the legal or regulatory requirement is to bring to the
attention of those charged with governance (TCWG) certain internal control matters of
which they should be aware, it may be appropriate to regard such matters as being
generally equivalent to the significant deficiencies required by the standard to be
communicated to TCWG
Slide 11 Notes
 Based on what auditor believes is of sufficient importance to merit attention by TCWG
o The use of professional judgment is key. This is why it has been made an integral part of
the definition of a significant deficiency
o IAASB does not expect the auditor to undertake an elaborate evaluation exercise to make
this determination. It is simply a matter of whether, having considered the relevant facts
and circumstances, the auditor believes that the deficiency (or the combination of
deficiencies) is sufficiently important that it should be brought to the attention of TCWG
Slide 15 Notes
 These other deficiencies may be of importance to management in effectively discharging
their internal control responsibilities
o IAASB believes that it is in the public interest that every opportunity should be taken to
help management improve internal control
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Module – ISA 265 – Notes for Select Slides
o IAASB also recognizes that the communication of such deficiencies may already be part
and parcel of current practice by auditors as part of their client service objectives
Slide 16 Notes
 However, no requirement to
communicated to management
re-communicate
other
deficiencies
previously
o However, it may be appropriate to do so if there has been a change of management or if
new information has come to the auditor’s attention that alters the prior understanding of
the auditor and management regarding the deficiencies
o Note also that the failure of management to remedy other deficiencies previously
communicated may become a significant deficiency requiring communication with those
charged with governance – this depends on the auditor’s judgment in the circumstances
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ISBN: 978-1-60815-044-1
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