Impact of 'force of law' auditing standards on professional indemnity insurance
as reported in ANT30/2007
Q: I conduct a number of audits under the provisions of the Corporations Act 2001. Now that auditing standards are legally enforceable for Corporations Act audits what is the impact on my professional indemnity (PI) insurance?
A: This is a risk management matter for you and your practice to which you should give some immediate attention. It is common for PI policies to include a clause that denies cover for criminal offences. However, that clause would normally have been inserted before the CLERP 9 legislation, which made auditing standards legally enforceable in respect of Corporations Act audits, was enacted.
In summary:
- Auditing standards are now legally enforceable for audits conducted under the provisions of the Corporations Act 2001
- This is in respect of reporting periods commencing on or after 1 July 2006 (ie 30 June 2007 financial year ends)
- Breaches of the auditing standards are a criminal offence
If you have not already done so, you should review your PI policy and discuss it with your broker and / or insurer. The Institute's experience is that insurers are amenable to amending the policy. However, you are urged not to ignore this matter.
Force of law - ethical standards
As reported in ANT19/2007
Q: I understand that the new auditing standards – the ASAs – have the force of law for Corporations Act audits for financial reporting periods commencing on or after 1 July 2006. Does this force of law extend to other professional regulations eg the ethical standards?
A: Yes, the auditing standards refer to compliance with “relevant ethical requirements” relating to audit engagements, and specifically the quality control standards issued by the professional bodies. This means that APES 110 - Code of Ethics for Professional Accountants and APES 320 – Quality Control for Firms, have force of law for Corporations Act audits. The relevant introductory paragraphs from each of these standards are reproduced below.
APES 110 - Code of Ethics for Professional Accountants
Members who conduct audits of companies, registered schemes and disclosing entities in accordance with Chapter 2M or financial services licencees in accordance with Chapter 7 of the Corporations Act 2001 are reminded that, in relation to such audits, this Code will have the force of law. This is because auditing standards issued by the Auditing and Assurance Standards Board (AUASB) are legislative instruments under the Legislative Instruments Act 2003, and as such have the force of law in respect of Corporations Act audits. These auditing standards make reference to compliance with “relevant ethical requirements” relating to audit engagements. This Code of Ethics for Professional Accountants is a relevant ethical requirement for these purposes.
APES 320 – Quality Control for Firms
The Auditing and Assurance Standards Board (AUASB) has issued revised auditing standards as legislative instruments under the Corporations Act 2001, effective for financial reporting periods commencing on or after 1 July 2006. For Corporations Act audits and reviews, those standards will have the force of law. To the extent that those force of law auditing standards make reference to the quality control requirements for firms issued by a professional accounting body, the requirements of APES 320 have the same level of legal enforceability as the explanatory guidance in which such reference is included in respect of Corporations Act audits and reviews. This is so because of the linkages with Auditing Standards ASA 200 Objective and General Principles Governing an Audit of a Financial Report and ASA 220 Quality Control for Audits of Historical Financial Information.
Applicability of "force of law" auditing standards
As reported in ANT18/2007
Q: I am the auditor for an incorporated association/superannuation fund/other non-Corporate entity. I know the auditing standards are now ‘force of law’ ASA auditing standards – does this impact on my audit?
A: Yes, almost all the auditing standards have been reissued as ASAs by the reconstituted auditing standards board, the AUASB. These supersede the previous AUS auditing standards for the audits of all entities, regardless of whether or not they are companies.
For Corporations Act audits, the newly issued ASAs have the force of law by virtue of Section 307A - "the auditor ... must conduct the audit or review in accordance with the auditing standards". Note that compliance with the auditing standards is also required by section 989CA for full and half year audits of financial services licensees. Section 989CA is basically in the same terms as section 307A which applies for full and half year audits under Chapter 2M.
For entities that do not come within the scope of the Corporations Act, APES 410 “Conformity with Auditing and Assurance Standards”, issued by the Accounting Professional and Ethical Standards Board, requires members to apply the auditing standards.
Applicability of "force of law" auditing standards
As reported in ANT37/2006
Q: Do the new "force of law" auditing standards (ASA’s) have the force of law on all audit engagements?
A: The newly issued ASAs have the force of law by virtue of the Corporations Act, Section 307A - "the auditor ... must conduct the audit or review in accordance with the auditing standards". For entities that do not come within the scope of the Corporations Act, the applicability of auditing standards to members of the Institute and CPA Australia is set out in APES 410APES 410.
Note that compliance with the auditing standards is also required by section 989CA for full and half year audits of financial services licensees. Section 989CA is basically in the same terms as section 307A which applies for full and half year audits under Chapter 2M.
'Force of Law' Audit Standards
As reported in ANT06/2006
Q: I am auditing a client where specific legislation requires me to use wording that differs to the auditing standards. Will this put me in breach of the 'force of law' auditing standards when applicable?
A: The answer is no, but there are a few aspects to this.
The proposed auditing standard to replace AUS 702 on audit reports includes in paragraph 8:
"Unless required by law or regulation to use different wording, the auditor's opinion on a general purpose financial report prepared in accordance with a financial reporting framework that is designed to achieve fair presentation shall state whether the financial report "gives a true and fair view" or "is presented fairly, in all material respects," in accordance with the applicable financial reporting framework. "
Therefore, if necessary, an auditor can present an audit report worded differently to those in the auditing standards. We remind members that they should always take care in signing non-standard audit reports or 'certifications', and to only sign a form of words which, based on the circumstances of their client relationship and the level of work able to be performed, is appropriate to the engagement.
The 'force of law' mentioned in the question refers to s336 of the Corporations Act, which gives the AUASB power to make auditing standards for the purposes of Corporations Act audits. This means the auditing standards have legal backing for Corporations Act audits, or the 'force of law'.
However, the Institute continues to require that members apply auditing standards to all audit engagements, and existing case law holds compliance with the auditing standards as necessary for the conduct of an audit.
In other words, members must continue to apply auditing standards regardless of the type of audit. |
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