Dated: 16 March 2005 
 
In November 2004, The Australian Securities and Insurance Commission (ASIC) approved an Auditing Competency Standard that can be used when applying for registration as a Registered Company Auditor (the standard). In essence, the standard enables accountants with the necessary skills and knowledge to demonstrate their audit competency, record details of such demonstrations in a log book, and submit the log book to ASIC as evidence of their competency. 
 
This article provides advice on the practical application of some aspects of the standard. It does not provide a detailed description of the standard. This and other information such as how the standard was developed, definitions, special circumstances, documents to be submitted and the like, are fully described in the standard itself and the related log book, which together provide some 35 pages of information. Also, for information on how ASIC intends to approach applications for registration, refer to ASIC Policy Statement 180: Auditor Registration. Attached are a series of Frequently Asked Questions (FAQs) that provide comment on some o f the more common Issues that arise when applying the Auditing Competency Standard. 
 
Background 
Some years ago, The Institute of Chartered Accountants in Australia (Institute) and CPA Australia (the professional bodies) became aware of the fact that a significant number of its members were having difficulty in demonstrating that they were able to meet the requirements necessary to become a Registered Company Auditor (RCA). In particular, the then Corporations Act and associated Regulations required applicants to have a minimum number of hours of auditing experience. The Australian Securities Commission, the forerunner to ASIC, required this auditing experience to be reasonably complex and cover a wide range of types of companies. In addition, the Australian Securities Commission required applicants’ experience in company auditing to comprise at least 25% of their audit experience.  
 
Many members, especially those in country areas or not employed by large accounting firms, found these procedural tests difficult quantify. Further exacerbating the problem was the fact that an RCA was required not only for company audits, but also for other audits, such as audits under the Superannuation Industry (Supervision) Act 1993, of regulated superannuation funds with more than four members, as well as under various Commonwealth, State and Territory Acts including the Fire Brigade Act 1989 (NSW), Co-operative Industrial Societies Act 1928 (Tasmania), and the Dairy Industry Act 1984 (Victoria). 
 
The professional bodies made extensive representations on this and related issues to the Commonwealth Government, including representations on the Commonwealth Law Economic Reform Program No.9 (CLERP 9). The ultimate outcome has been an amendment to s.1280 of the current Corporations Act (the Act). This section now states that ASIC must grant an application for registration as an auditor if, among certain other things, ASIC is satisfied that the applicant either (i) has such practical audit experience as is prescribed (currently at least 3000 hours over the last five years, including 750 hours as a supervisor) or as an alternative to the procedural tests, where an auditor (ii) has satisfied all the components of an approved auditing competency standard. As mentioned above, ASIC recently approved such a standard. 
 
Prerequisites 
Apart from demonstrating audit competence, which is discussed below, applicants must address the other requirements of s.1280 of the Act. In very broad terms, these include a degree from a prescribed institution that includes three years of accounting studies (including auditing) and two years of commercial law (including company law), as well as completion of a subsequent prescribed course in auditing, such as is included in the CA (or former PY) or CPA Program.  
 
Demonstrating competencies 
Assuming prerequisites are in hand, applicants then have to demonstrate that they are able to competently perform company financial statement audits. Competency requires certain skills and knowledge and these require time to obtain. Although much of this knowledge and some of these skills may be acquired during undergraduate studies and while undertaking the CA or CPA Program, some will not have been acquired. Therefore, it is unlikely that recent graduates or newly admitted members will be able to immediately demonstrate their competencies. However, refer to the standard for detailed information on the skills and knowledge which an applicant requires to competently perform a company financial statement audit. 
 
What is competency and how is it described in relation to auditing? 
Competency refers to the ability to perform a particular task in a competent manner. A person is competent in performing a task when that person has acquired the necessary skills and knowledge to competently perform the task. As an auditor must be able to competently perform a number of tasks, the approved standard describes the tasks required to be able to competently perform a company financial statement audit as well as the basic skills and knowledge required to perform each task.  
 
The standard identifies the four generic tasks that are common to all financial statement audits (planning, evidence gathering, evidence evaluation and decision-making) and the five contexts in which each of these tasks are performed (client acceptance/continuance, audit planning, control testing, substantive testing and opinion formulation). There are thus four tasks performed by auditors in five different contexts (or 20 task/context combinations) in which applicants are required to demonstrate competency.  
 
Assessment of competencies 
Before demonstrating competency in a particular task, a prospective applicant must first find a suitable assessor - the person to whom competency is demonstrated. This should be an existing RCA working in the same office as the prospective applicant who has the responsibility for reviewing or supervising the applicant’s work. The assessor and the applicant will need to liaise and jointly prepare a plan as to how and when the applicant will demonstrate the various competencies. This is particularly important, bearing in mind that at the time the plan is prepared, an applicant will most likely still lack many of the necessary skills and knowledge, which may take some years to acquire. Additionally, as a precaution, so that competencies do not lapse over time, an applicant needs to demonstrate all tasks to the assessor within a five-year period. 
 
The assessor is the sole person responsible for determining whether an applicant has performed a particular task in a competent manner. Although the assessor is not responsible for ensuring the applicant has acquired the necessary knowledge and skills to perform a task, the assessor should not require an applicant to demonstrate a task when the assessor is aware the applicant does not have the necessary skills or knowledge to competently perform the task. For guidance, assessors should refer to the standard which describes (i) basic skills, which may have been acquired during tertiary or CA/CPA Program studies, (ii) skills indicative of a competent RCA, which may have been acquired, for example, in the years after admission as a member of the Institute or CPA Australia, and (iii) advanced skills, which applicants may have acquired but are not necessary to competently perform tasks at RCA level. The standard includes similar information in relation to knowledge levels.  
 
The standard also identifies various sub-tasks that are indicative of the competent performance of each of the 20 task/context combinations  
 
Tasks and sub-tasksAn example of a task/context combination is the planning task in the context of client acceptance/retention. This task is more fully described as the identification of the criteria necessary for the client acceptance/retention decision on a potential/existing audit engagement.Sub-tasks which are indicative of the competent performance of this task are to guide, supervise and review the audit team in (i) the development of a discussion document on the nature of an audit; (ii) the requirements relating to the audit; (iii) the development of preliminary policies on client acceptance/retention. As well as indicative sub-tasks, the standard also describes basic sub-tasks, in which applicants should be proficient but are not indicators of competency, and advanced sub-tasks, in which applicants may be proficient but are not required to assess competency at the RCA level. 
 
These may not be the only sub-tasks that are indicative of the competent performance of the task, but they may be considered as indicators of an applicant’s ability to competently perform the related task. 
 
It is possible for an applicant to demonstrate competency in a particular task/context combination on just one audit engagement. If, however, the total number of audits on which an applicant is engaged is limited in number, or if all the audits are straightforward in nature, the applicant may find it difficult to demonstrate sufficient competency.  
 
Additionally, although it is not necessary for an applicant to be able to demonstrate competence in every possible situation that could be encountered during a career, the standard states that an applicant needs to be able to demonstrate that he or she can proficiently perform various task (or sub-tasks) in unusual situations that the assessor believes is likely to be encountered by the applicant in the foreseeable future. Therefore, not only should applicants demonstrate their competency in task/context combinations on more than one audit engagement, but on engagements with differing environmental factors (such as engagements with different risks, different structures, and/or different reporting legislation).  
 
It follows from this that not only will assessors observe applicants performing a task or review evidence that the task has been competently performed, but assessors will also need to question applicants on how a task might be performed on another audit engagement with different environmental factors. The various methods that an assessor may use to gather evidence of competence are outlined in the standard, which states that one method alone should not be used as the sole method of assessment. 
 
The Log Book 
Applicants are required to maintain a Log Book, which shows the name of the audit engagement(s) on which the tasks are performed and demonstrated, the audit firm, the assessor’s name and the date (month and year) during which the tasks were performed.  
 
Applicants only record in the Log Book details of audit engagements where the relevant task/context combination has been demonstrated to the satisfaction of the assessor. The assessor then signs the appropriate line of the Statement by Assessor at the back of the Log Book to indicate that he or she considers the applicant to be competent in that task/context combination.  
 
After all task/context combinations have been demonstrated to the satisfaction of an assessor, and the current assessor is satisfied as to the overall competency of the applicant, the assessor should sign the section in the Statement by Assessor stating that the assessor believes the applicant is sufficiently competent to be a registered company auditor.  
 
* The assistance of Howard Holmes FCA is gratefully acknowledged in the preparation of this Article. Howard is the Principal Consultant for the Institute and CPA Australia on the Auditing Competency Standard and LogBook.