1. Introduction
The National Financial Reporting Authority (NFRA), vide its circular dated 7th January 2026, has emphasised the need to strengthen effective, robust and documented two-way communication between “Statutory Auditors” and “Those Charged with Governance” (TCWG). The circular highlights the statutory responsibilities of the “Board of Directors”, “Independent Directors”, “Audit Committees” and “Auditors” in ensuring high-quality financial reporting and audit oversight. NFRA reiterates that the auditors must appropriately determine TCWG at the commencement of the audit and maintain continuous, meaningful communication throughout the audit cycle, covering audit planning, significant risks, materiality, key judgments, internal control deficiencies, fraud risks, going concern issues and auditor independence.The circular also notes several common non-compliances observed during NFRA investigations, including incorrect identification of TCWG, inadequate or last-minute communications, poor documentation, failure to communicate significant unusual transactions, internal control weaknesses and regulatory non-compliances.
2. Commonly observed non-compliances by NFRA with regard to SA 260 and SA 265
NFRA, based on its investigations into cases of professional misconduct, has identified several recurring and serious non-compliances by statutory auditors in relation to the requirements of SA 260, Communication with Those Charged with Governance and SA 265,Communicating Deficiencies in Internal Control to Those Charged with Governance and Management indicating ineffective communication with Those Charged with Governance (TCWG). Some of these non-compliances discussed in the circular are explained below:
1. Incorrect identification of TCWG
The NFRA observed that the auditor have identified management executives or executive director as TCWG in many cases, which is fundamentally inconsistent with the definition under the SA 260 and thereby resulted in critical audit matters not being escalated to the full Board.
2. Incomplete and inadequately documented communication
NFRA observed that communications with TCWG were often fragmented and inadequately documented. Auditors improperly relied on the audit engagement letter as evidence of compliance with SA 260, without demonstrating ongoing, two-way communication. Critical matters such as planned audit scope and timing, materiality, key audit matters, significant risks (including going concern and valuation issues) were either not communicated or insufficiently recorded.
3. Failure to establish two-way communication
Auditors failed to document the form, timing and reciprocal nature of communication with TCWG. NFRA identified that in many cases there was no evidence that auditors sought or obtained TCWG’s inputs on strategic decisions, fraud risks, management integrity or governance concerns. The expected communications as required under SA 260 such as information on suspected fraud, significant strategic actions or regulatory concerns were not documented.
4. Last minute communication
NFRA also observed that the communication with the “Audit Committee” was limited to a presentation made shortly before approval of the financial statements, effectively converting the interaction into a compliance ritual rather than meaningful oversight.
5. Failure to communicate significant unusual transactions
Auditors failed to communicate significant and unusual transactionssuch as large advances to suppliers, land advances, borrowing and lending arrangements to TCWG. These transactions are often outside the normal course of business and hence requires high governance scrutiny but were not escalated as required.
6. Inadequate communication on related party transactions
Auditors often did not communicate deficiencies in related party transactions (RPTs) policies or concerns such as sudden increases in RPT volumes, doubts over arm’s length pricing, or whether transactions were in the ordinary course of business.
7. Non-communication of internal control deficiencies
Despite explicit requirements under SA 265 and the Companies Act, auditors in certain cases failed to communicate identified weaknesses or even the absence of internal controls to TCWG. NFRA highlighted serious lapses such as deficiencies in credit policies and prolonged non-functioning of the “Risk Management Committee”, were not escalated to governance bodies.
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