Audit Independence and AIFRS
as reported in ANT11/2007
Q: I am concerned about the possible independence issues that might arise when I advise my audit client concerning changes to their financial statements to comply with all the new AIFRS reporting requirements and then perform the audit work on the statements. What guidance is available to assist me in working through these issues?
A: The section of the Code of Ethics for Professional Accountants/APES 110 dealing with Professional Independence (section 290) allows audit and accounting firms to provide this kind of advice to their audit clients without it being considered as a threat to their independence (paragraph 290.168). This is on the basis that this kind of work is an integral part of the audit process in order to ensure the fair presentation of the annual report.
However the extent of the work required to assist the client will need to be assessed on a case by case basis to ensure it does not become a situation of the auditor reviewing his or her own work. This is because the independence requirements assume that management is conversant with the changes being proposed and can and will still take responsibility for the final financial statement.
If the client's only knowledge of new AIFRS issues comes from its auditors, then their effective exercise of this responsibility may prove difficult and so both the auditor and client will need to address how best to resolve the independence issue arising. Further guidance on what constitutes acceptable 'accounting work" for clients is contained in paragraphs 290.170-172 of the Code Note that the requirements are more stringent for listed entities than they are for unlisted ones.
An appropriately worded and discussed letter of engagement between the client and the auditor should help clarify these issues.
APES 110 is available on the Institute website.
Auditor Independence Declarations
As reported in ANT03/2007
Q: When is an auditor required to provide a written independence declaration?
A: Auditors have both professional and legal obligations to communicate in writing regarding their independence and are required to comply with both the spirit and letter of the law. While similar, the specific requirements of the professional standards and the law do differ in detail.
The Code of Ethics APES 110 adopts a conceptual framework that requires the identification and evaluation of threats to independence and, where possible, the application of safeguards to eliminate or reduce any threats created to an acceptable level.
The Corporations Act itself includes both a general independence requirement and also specific independence requirements concerning financial and other relationships. The general requirement concerns conflict of interest situations where:
(a) The auditor, or a professional member of the audit team, is not capable of exercising objective and impartial judgment in relation to the conduct of the audit of the audited body; or
(b) A reasonable person, with full knowledge of all relevant facts and circumstances, would conclude that the auditor, or a professional member of the audit team, is not capable of exercising objective and impartial judgment in relation to the conduct of the audit of the audited body.
There can be circumstances that contravene the independence requirements of the Act itself that do not contravene the requirements of APES 110. Conversely, there can be circumstances that contravene the requirements of APES 110 that do not contravene the requirements of the Act.
In summary then:
- The relevant provisions of the Code of Ethics APES 110, section 290 Independence - Assurance Engagements provides that:
290.30 Firms should establish policies and procedures relating to Independence communications with audit committees, or others charged with governance of the client. In the case of Listed Entities, disclosing entities and registered schemes the Firm should communicate orally and in writing, for each financial and half year report, all relationships and other matters between the Firm, Network Firms and the Audit Client that in the Firm's professional judgment may reasonably be thought to bear on Independence. Matters to be communicated will vary in each circumstance and should be decided by the Firm, but should generally address the relevant matters set out in this section and must include a written statement that, to the best of the knowledge and belief of the Lead Engagement Partner there have been no contraventions of the Independence requirements of this Code.
- Corporations Act 2001 Section 307C(1) provides:
If an individual auditor conducts:
(a) an audit of the financial report for a financial year; or
(b) an audit or review of the financial report for a half-year;
the individual auditor must give the directors of the company, registered scheme or disclosing entity:
(c) a written declaration that, to the best of the individual auditor's knowledge and belief, there have been:
(i) no contraventions of the auditor independence requirements of this Act in relation to the audit or review; and
(ii) no contraventions of any applicable code of professional conduct in relation to the audit or review; or
(d) a written declaration that, to the best of the individual auditor's knowledge and belief, the only contraventions of:
(i) the auditor independence requirements of this Act in relation to the audit or review; or
(ii) any applicable code of professional conduct in relation to the audit or review;
are those contraventions details of which are set out in the declaration. Note that S307C applies to companies as well as to registered schemes and disclosing entities. For more details, visit the Institute's website at http://www.charteredaccountants.com.au.
Audit Independence Declarations
As reported in ANT04/2006
Q: When is an auditor independence declaration required?
A: Where an entity is required to prepare a financial report in accordance with Chapter 2M of the Corporations Act then an "Auditor Independence Declaration" is required by Section 307C. <p>
Entities required to report under Chapter 2M are:- Disclosing entity;
- Public company;
- Large proprietary company;
- Registered schemes;
- Small proprietary company when shareholders direct the company to provide an audited financial report; and
- Small proprietary company directed to provide an audited financial report by ASIC.
For an example of a declaration, refer to Page 25 of the Ernst and Young publication by clicking here.
Audit Independence and AIFRS
As reported in ANT03/2006
Q: I am concerned about the possible independence issues that might arise when I advise my audit client concerning changes to their financial statements to comply with all the new 2005 reporting requirements and then perform the audit work on the statements. What guidance is available to assist me in working through these issues?
A: The Institute's statement on professional independence F1 allows audit and accounting firms to provide this kind of advice to their audit clients without it being considered as a threat to their independence (paragraph 2.78 of Appendix 2). This is on the basis that this kind of work is an integral part of the audit process in order to ensure the fair presentation of the annual report.
However, the extent of the work required to assist the client will need to be assessed on a case by case basis to ensure it does not become a situation of the auditor reviewing his or her own work. This is because F1 assumes that management is conversant with the changes being proposed and can and will still take responsibility for the final financial statements.
If the client's only knowledge of 2005 issues comes from its auditors, then their effective exercise of this responsibility may prove difficult. This will necessitate both the auditor and client needing to address how best to resolve the independence issue arising. Further guidance on what constitutes acceptable ‘accounting work’ for clients is contained in paragraphs 2.80 to 2.82. Note that the requirements are more stringent for listed entities than they are for unlisted ones.
An appropriately worded and discussed letter of engagement between the client and the auditor should help clarify these issues.
Independence Declarations for Super Funds
as reported in ANT49/2005
Q: Does an Auditor Independence Declaration need to be provided in relation to a superannuation fund or its trustee?
A: Superannuation funds prepare accounts in accordance with the SIS Act and Financial Services (Collection of Data) Act. As a result the accounts are not prepared in accordance with Chapter 2M and an Audit Independence Declaration is not required.
In respect of a trustee company, the discussion in relation to AFS Licensees will apply.
Independence Declarations Continued
as reported in ANT09/2005
Q: Where can I find additional guidance on the new audit independence declarations?
A: Last week's ANT08/2005 "Query of the Week" directed members to Audit and Assurance Alert 11 "Communicating with Entities in relation to Auditor Independence" for guidance on the wording of these new statements which are required under the Corporations Law for financial years beginning on or after 1 July 2004.
In addition, the Institute and CPA Australia have recently revised and released Professional Statement F1 Independence that now includes in Appendix 4 guidance and specimen wording for these declarations.
Guidance on Audit Independence
as reported in ANT08/2005
Q: Where can I find more guidance on the wording of the new audit independence declarations now required by the Corporations Law as discussed in “Query of the Week” in ANT06/2005?
A: In May 2002, the Auditing and Assurance Standards Board (AUASB) issued Audit and Assurance Alert 11 "Communicating with Entities in relation to Auditor Independence". At that time, the provision of this information was not mandatory but was increasingly being requested, as auditor independence became a topical issue. In response the AUASB released guidance to assist members in communicating their independence to clients.
The CLERP 9 reforms have since mandated the provision of this information for financial years beginning on or after 1 July 2004 and so AAA 11's guidance is now of even more relevance to members performing Corporations Law audits.
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