List of Q&As relating to Auditing Standards - overview:
Changes in audit appointments
Solicitors' trust accounts (ANT08/2008)
Compilation word reporting
Audit clarity update
Solicitors' trust accounts (ANT45/2007)
Signing compilation reports
Engagement quality review reviewer (ANT35/2007)
Old AUS standards
Engagement quality review reviewers (ANT35/2006)
Loan declaration
Application of auditing standards
New auditing standards
Changes in audit appointments
as reported in ANT12/2008
Q: The new auditor of my former audit client has approached me, requesting access to my audit work papers in order to avoid qualifying his report on the basis of opening balances. What information am I required to share with the new auditor?
A: N1 “Books and Papers”, the Institute guidance statement specifically dealing with this topic, makes it clear at paragraph 3 that the auditor's working papers are the property of the auditor. Therefore, the provision of access to anyone else is entirely a matter for the outgoing auditor to decide, provided that there is no overriding statutory requirement. Client consent to providing information is essential.
However, several other professional pronouncements and Institute regulations provide guidance on the appropriate procedures for transitional arrangements between auditors, and members should consider these requirements before making their decision.
In particular, reference should be made to:- Auditing Guidance Statement AGS 1004 “Transitional arrangements on changes in audit appointments under the Corporations Act 2001”
This pronouncement outlines the responsibilities of both incoming and outgoing auditors under the Corporations Act. It is still in force because its requirements were unchanged by the amendments to that Act and the “force of law” auditing standards. Paragraph 13 states that there is no obligation for the outgoing auditor to respond to any inquiries made by the incoming auditor – other than those of an ethical nature as required in APES 110 “//Code of Ethics for Professional Accountants//” – paragraph 210.10 onwards. However, the AGS does acknowledge that it may be appropriate for the incoming auditor to be provided with assistance in such areas as documentation of internal control and assessment of risk.
- R9 “Regulations relating to public practice”
This regulation outlines the professional regulations applying to public practices. Paragraph 1215 contains the commentary that “//following the appointment of another auditor, the outgoing auditor does not have any obligation to provide such information and advice to the incoming auditor as will enable the incoming auditor to substantiate the existence and value of assets and liabilities as at the end of the previous financial year. However, the outgoing auditor is encouraged to do so as a professional courtesy and with the knowledge and consent of the client. The audit working papers of the outgoing auditor are the property of that auditor and there is no obligation to make available any information contained therein.”
- AGS 1038 “Access to Audit Working Papers”
Paragraphs 41 and 42 address this issue. Paragraph 41 mentions that “The financial report on which the recently appointed auditor reports is affected by the account balances brought forward from the previous reporting period on which the outgoing auditor issued an audit report. Consequently, the new auditor will need to form a view about whether the opening balances for the year are fairly stated in accordance with Auditing Standard (AUS 510) Initial Engagements–Opening Balances; accordingly, it is for this purpose access to the outgoing auditor’s audit working papers may be sought.” (Note: the reference to AUS 510 should now be to ASA 510 “Initial Engagements – Opening Balances”.)
Paragraph 42 – “Where the outgoing auditor agrees to provide the recently appointed auditor access to the auditor’s audit working papers, such access ordinarily involves an exchange of letters between the two auditors.”
To this end, AGS 1038 provides assistance by way of specimen letters setting out appropriate terms and conditions to formalise the inspection process. It also considers client consent to be an essential requirement of the information sharing process.
- APES 110 “Code of Ethics for Professional Accountants”
Section 210 deals with changes in professional appointments. This section makes it clear that the extent to which a practitioner can and should discuss the affairs of his or her client will depend on both whether the client’s permission has been obtained, and any other legal or ethical requirements.
In summary, audit working papers are the property of the auditor and therefore it is entirely up to the discretion of the outgoing auditor as to what, if any, material is shared with the incoming auditor.
However, the Institute encourages such sharing of information (provided client permission is granted) in the interests of professional courtesy and risk management.
If material is shared, the duties of the incoming auditor are not reduced by the involvement of the outgoing auditor. The incoming auditor must carefully consider the requirements of ASA 710 “Comparatives”, particularly paragraphs 20 and 21 which deal with the situation where the prior period financial report was audited by another auditor, as well as ASA 510 “Initial Engagements - Opening Balances” and ASA 600 “Using the Work of Another Auditor”.
Solicitors' trust accounts
as reported in ANT08/2008
Q: Where do I find the regulations governing the audit of solicitors' trust accounts in NSW? I have heard that there have been some changes.
A: Changes to the solicitors’ trust account audit (external examinations) requirements were made in 2007 and the new requirements apply for years beginning on, or after, 1 April 2007. These audits are now called "external examinations" and practitioners no longer need to be registered company auditors in order to be able to conduct these. Instead, practitioners who conduct “external examinations” have to be accredited by the Law Society of New South Wales. Members of the Institute who hold a current certificate of public practice and who have completed an education course run by the Law Society can also be accredited.
All of the Law Society's information related to NSW solicitors' trust accounting is located under the link to "External Examinations", or by emailing tcopas@lawsocnsw.asn.au.
Compilation word reporting
as reported in ANT49/2007
Q: I am a practitioner and compile financial reports for my clients. I understand that a compilation report must contain a statement that I am not independent of an entity when this is relevant as required by APS 9 ‘Statement on compilation of financial reports’ paragraph 32(h). Can the Institute provide sample wording for this?
A: You are correct that you do need to include a statement in the compilation report that you are not independent of the entity, when relevant. The wording will depend on your particular circumstances. As a starting point we suggest the following wording be expanded and included at the bottom of the compilation report, before the signature.
Independence (if required)
We are not independent of (the entity) because (reason why not independent, for example, the member is a close relative of the proprietor of the entity).
Audit clarity update
as reported in ANT46/2007
Q: ANT recently made reference to an announcement by the International Audit and Assurance standards Board (IAASB) about the application of its new Auditing standards. What implications, if any, does this have for Australia?
A: Over the past 3 years, the International Auditing and Assurance Standards Board (IAASB) has been undertaking a project which involved a review of all its auditing standards in the interests of improving the clarity of wording and implementing new drafting conventions to ensure they were easy to consistently apply. Referred to as the “Clarity Project”, the IAASB was particularly focused on ensuring that the responsibilities of the professional accountant were clearly stated and that the standards were well structured.
The IAASB has now announced that the complete set of clarified international auditing standards will be effective for audits of financial statements for periods beginning on, or after, 15 December 2009. The purpose of the announcement was to enable national standard setters and regulators to effectively plan the implementation of new standards.
In response to the IAASB’s announcement, the AUASB agreed at its October meeting to revise and reissue the Australian Auditing Standards (ASAs) using the IAASB Clarity format. The revised suite of standards will be effective for audits of financial reports commencing on, or after, 1 January 2010 and will be released as exposure drafts during 2008 and early 2009.
For more information about the IAASB's clarity project and timetable, refer to the October 2007 communique on the IAASB website.
Solicitors' trust accounts
as reported in ANT45/2007
Q: I have heard that there have been recent changes to solicitors’ trust account rules in NSW. Can you give me more details?
A: Changes to the solicitors' trust account audit (external examinations) requirements apply for years beginning 1 April 2007. Note that the auditor is now called the "external examiner" and no longer has to be a registered company auditor, but has to be designated by the Law Society of NSW and appointed by the law practice.
Under the Legal Profession Act 2004, the person must be a designated person in order to be eligible to be appointed by a law practice to conduct the practice's trust account examination. The Legal Profession Regulation 2005 gives the Law Society Council power to designate persons as eligible to be appointed as external examiners. The Law Society Council has determined that persons eligible to be appointed as external examiners are:- a member of CPA Australia who holds a current public practice certificate, or
- a member of Institute of Chartered Accountants Australia who holds a current certificate of public practice, or
- a member of the National Institute of Accountants who holds a current certificate of public practice, or
- registered as an auditor under Part 9.2 of the Corporations Act 2001 (Cth);
and have successfully completed an education course required by the Law Society Council.
The education course is conducted by the Law Society and the person must complete the course to be eligible to undertake external examinations in NSW. At present, the course must be completed by the principal responsible for signing off the report.
Course dates have not yet been set but it is intended that the courses will start in November/December 2007. Registered company auditors who completed the 2007 External Examiner's Report will be notified of the course dates as they are on the Law Society's mailing list. However, if there are any Institute members (who are not registered company auditors but are in public practice) who have not done the 2007 External Examiner's Report but are interested in attending the course in preparation for the 2008 External Examiner's Report, they should send an email (with their contact details) to tcopas@lawsocnsw.asn.au to go on a mailing list to be contacted when course dates are set.
Signing compilation reports
as reported in ANT43/2007
Q: My practice is incorporated as a company, an entity which is not specifically mentioned in APS 9. Do we need to sign compilation reports differently in these circumstances?
A: No. While APS 9 was drafted before incorporation was common, the use of the word “firm” in clause 32 (j), (k) and (l) of APS 9 has a wider meaning that is analogous to ‘practice entity’ and this term covers both the concepts of partnerships and companies.
The term ‘firm’ is a defined term in the Code of Ethics APES 110 and in the quality control standard APES 320. The APES 320 definition reads as follows:
‘Firm’ - any entity where one or more members holds or are required to hold a Certificate of Public Practice in accordance with the Regulations of the Institute or CPA Australia –- a sole practitioner, partnership, corporation or other entity of professional accountants;
- an entity that controls such parties; and
- an entity controlled by such parties
This definition is very similar to the one in the Code of Ethics, and is based on an IFAC definition. Therefore directors of an audit company should sign compilation reports in exactly the same way as they would have under previous partnership arrangements and as they do to sign any document that seeks to bind the practice entity. This would commonly be by including the name of the practice entity involved and their individual name and date.
Engagement quality control reviewer
as reported in ANT35/2007
Q: My client company was unlisted at 30 June 2007, but has since listed, before I have completed the audit for June 2007. Is the auditor required to have a second partner review as for a listed client?
A: An Engagement Quality Control Reviewer (as set out in ASA 220 and APES 320) is required for all audits of listed entities. However, in this case, you are giving an opinion on a company for a year-end for which it was not listed, and thus the EQCR is not required.
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Nevertheless, as a risk management strategy, because the risk profile of the client has changed significantly subsequent to the year end, it would be prudent to have a second partner review.
Old AUS standards
as reported in ANT39/2006
Q: I have just been going through the list of new force of law auditing standards and note that not everything has been converted to an ASA. What is the status of those old AUSs that have not been converted, namely 106, 108, 110, 522, 524, 804, 806, 808, 810, 902 (partly covered by ASRE 2410) and 904?
A: The applicability of auditing pronouncements, including these remaining pronouncements issued by the old AuASB is covered in APES 410, which replaces the old APS 1.1.
In short, the old standards that have not been reissued as ASAs or withdrawn are still considered to be standards to the extent that they do not conflict with the new ASA standards.
Engagement quality control reviewers
as reported in ANT35/2006
Q: Is an Engagement Quality Control Review (EQCR) needed for a half year review of a listed entity for 30 June 2006 half years?
A: Auditors of listed entitities are required to appoint an EQCR for all listed entity audits of historical financial information. This includes half year and full year audits.
An EQCR is not technically required for half year reviews, although each firm must have a written policy setting our the criteria for determining whether an ECQR should be appointed for reviews. However, if the firm has been appointed auditor of a listed entity the Institute's view is that it would generally be appropriate to appoint an ECQR for the half year review.
The requirement to appoint an ECQR for listed entity audits and set out criteria for reviews and other audits is included in AUS 206 paragraph 36 (effective for audits of historical financial information for audits commencing on or after 15 June 2005). This is mirrored in the Quality Control standard - APS 5 (paragraph 62(a)) from 31 December 2005, now superceded by APES 320 (paragraph 60(a)).
Loan Declarations
as reported in ANT34/2006
Q: I have been requested by a client to sign a declaration relating to a business loan, stating that I had explained the financial consequences of signing the documents, the nature of the loan facility and the risks of the borrower not repaying the loan on the due date to the client. What should I do?
A: Members must exercise caution when signing these documents. We have published a couple of articles in Charter on these "certificates" to assist members. They are on the following links:
http://www.icaa.org.au/upload/download/Financial_advisers.pdf
http://www.icaa.org.au/upload/download/Financial_Advice_Cert.pdf
For additional assistance there are several articles dealing with a client’s solvency that may also assist. An article that relates to declarations of solvency required by insurers of building contractors contains some relevant material and is on the following link: Builder's solvency declarations.
AGS 1040 Franchising Code of Conduct - Auditor's Reports is also relevant and a copy is in the members handbook.
Application of auditing standards
as reported in ANT33/2006
Q: Corporations Amendment Regulations 2006 (No 4) contains an amendment relating to the application dates of auditing standards (see new subregulation 10.5.01(3)). I thought the new "force of law" standards applied for financial reporting periods beginning on or after 1 July 2006. So now I’m wondering what the purpose of this amendment referring to 29 June 2007 is?
A: The purpose of this regulation is to avoid a gap in the application of the auditing standards.
When the CLERP 9 legislation was made, the profession's auditing standards were recognised for financial years ending 30 June 2006 (see section 1455(4)) of the Corporations Act). This was on the assumption that the AUASB would make its new standards applicable for years ending on or after 1 July 2006.
However, the new AUASB standards are applicable for years commencing on or after 1 July 2006. That meant that no auditing standards are recognised for years ending from 1 July 2006 to 29 June 2007.
The amendment makes the old professional standards applicable for years ending on or before 29 June 2007 so as to remove the gap. For 30 June year ends, the old standards apply for years for years ended 30 June 2006 and the new standards apply for years ending 30 June 2007.
Note that while the old standards are recognised in the Corporations Act they are not enforceable by ASIC (see section 1455(4)). However the new standards have the force of law and are enforceable by ASIC (see section 307A)
Thanks to Doug Niven, Deputy Chief Accountant at ASIC for his help with this query of the week.
New auditing standards
as reported in ANT21/2006
Q: I have just been going through the list of new force of law auditing standards and note that not everything has been converted to an ASA. What is the status of those old AUSs that have not been converted, namely 106, 108, 110, 522, 524, 804, 806, 808, 810, 902 (partly covered by ASRE 2410) and 904?
A: All these AUSs apart from AUSs 522 and 524 apply to non-statutory assurance engagements, such as Assurance Engagements Other Than Audits or Reviews of Historical Financial Information (AUS 110). They would therefore still be applicable on non-statutory engagements until such time that they are revised and reissued by the AUASB. The AUASB plan is to revise them in the course of 2006-2007.
AUS 522: Audit Evidence Implications of Externally Managed Assets of Superannuation Provident or Similar Funds and AUS 524: The Auditor's Use of the Work of the Actuary and the Actuary's Use of the Work of the Auditor in Connection with the Preparation and Audit of a Financial Report, are listed in regulation 10.5.01(1) and so are auditing standards under the Corporations Act for years ending on or before 30 June 2006 (s.1455(4)) but aren't enforceable by ASIC (s.1455(5)). Of course, they continue to be apply to members of the Institute and CPAA through APS 1.1, assuming that they are not withdrawn.
For years ending on or after 1 July 2006, it would seem appropriate to regard AUS 522 and AUS 524 as providing guidance. However, they wouldn't be relevant to the extent (if any) that they were found to be inconsistent with the legally enforceable standards (eg the standard on audit evidence). |
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