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Audit Rotation Q&As
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Auditor rotation 
as reported in ANT39/2007 
 
Q: I have been the auditor of XYZ Club Limited for the last 10 years and have 2 questions: 
a) am I required to rotate off the audit? 
b) if I do need to rotate, do I need to notify ASIC? 
 
A: 
a) As the auditor of a non-listed public company, you are not required by the Corporations Act or by APES 110 to rotate. The pre-defined mandatory rotation period of 5 years within a 7-year period is only applicable under the Act and APES 110 to listed entities. However, you are correct to consider the threat to independence caused by your long service as auditor of the club.  
 
APES 110 290.153 recognises that “Using the same senior personnel on an Assurance Engagement over a long period of time may create a familiarity threat. The significance of the threat will depend upon factors such as:

  • The length of time that the individual has been a member of the Assurance Team; 
  • The role of the individual on the Assurance Team; 
  • The nature of the Assurance Engagement.
The significance of the threat should be evaluated and, if the threat is other than Clearly Insignificant, safeguards should be considered and applied to reduce the threat to an acceptable level. Such safeguards might include:
  • Rotating the senior personnel off the Assurance Team; 
  • Involving an additional professional accountant who was not a member of the Assurance Team to review the work done by the senior personnel or otherwise advise as necessary; or 
  • Independent internal quality reviews.
b) If you do determine that the appropriate course of action is to rotate from the audit, whether you will need to notify ASIC depends on how you were appointed auditor. 
 
If your firm was appointed auditor, or if your firm is an authorised audit company, and the audit will be taken over by another registered company auditor within your firm, then there has not been a change of auditor in accordance with the Corporations Act. It is an internal matter for your firm to determine which member of the firm is appropriate to act as lead auditor. 
 
Alternatively: 
  • if you were appointed auditor as an individual, or  
  • your firm was appointed as auditor and you are the only partner who is a registered company auditor, then another auditor will need to be appointed. In this case you will need to resign as auditor including notifying ASIC, and the company will need to appoint a new auditor.
Note: The requirements for the resignation of auditors are set out at section 329 of the Corporations Law. An excellent step-by-step guide is set out in ASIC's RG 26. 
 
 
 
Non-listed to listed client 
as reported in ANT31/2007 
 
Q: A firm has already served as the auditor of a non-listed company for four financial years using the same lead engagement partner, when the client goes through an IPO in March 2008. What are the rotation requirements for the lead engagement partner? 
 
A: Since the company has become a listed entity, the partner is now subject to the rotation requirements, which date from their appointment to the then non-listed client.  
 
The lead engagement partner has acted in that role for each of the 2004, 2005, 2006 and 2007 years, before the rotation provisions of Section 290 of the Code of Ethics apply to the 2008 audit of the financial year beginning 1 July 2007. 
 
Accordingly, the lead engagement partner can continue to act in that role for the 2008 year, but should rotate off for the 2009 audit. 
 
Eligibility to play a significant role in the audit in each financial year:  
 
2004 - yes 
2005 - yes  
2006 - yes  
2007 - yes  
IPO - March 2008 
2008 - yes  
2009 - no  
 
Para 290.154 provides that the time served is from the commencement of the financial period in which the lead engagement partner, the audit review partner (if any) or Engagement Quality Control Reviews (EQCR) served in those roles, not the date the audit client listed. In accord with the international standard, Para 290.155 also provides for two additional years when an audit client becomes a listed entity.  
 
However, the Corporations Act does not specifically address the situation where an audit client becomes a listed entity. The Act's rotation requirements (s324DA, DB, DC and DD) applied to a financial year commencing on or after 1 July 2006, to listed entities, where an individual played a significant role in the audit for 5 successive financial years. Further under the Commentary to the CLERP 9 transitional arrangements applying to the rotation obligations, "where a person has already conducted three or more successive annual audits for a listed company or scheme at the time that the legislation takes effect, they, their audit firm and the client company or scheme will need to be aware that the auditor must be replaced for the audit following the date at which the rotation provisions take effect (that is, two years following commencement of the Act)" i.e. two years following 1 July 2004. 
 
Accordingly it would appear that the legislation was intended to be prospective in its application regarding the rotation requirements (on 1 July 2006) but recognised the role played by the lead engagement partner and audit review partner prior to 1 July 2006. It would thus be prudent to consider all the time served as a lead engagement partner, audit review partner (if any) or EQCR from the commencement of the financial period in which the individual served in those roles, not the financial period in which the client listed. In all such circumstances when a person is not rotated after the pre-defined five (5) year period equivalent safeguards, including the possible obtaining of an extension under the Corporations Act, should be applied to reduce any threats to an acceptable level. 
 
 
 
Auditor rotation  
as reported in ANT17/2006 
 
Q: The 2006 audit of a listed client with a 30 June year end will be the seventh audit of the client for the person currently serving as the lead engagement partner. F.1 specifies that the firm is not independent when the lead engagement partner has served for more than five years. How should the transition be handled? 
 
A: The period to be considered is the period from the date of the financial statements that were first reported on (in this case 1 July 1999) in the capacity of lead engagement or audit review partner. The rotation revisions to F.1, recognise that some degree of flexibility over the timing of rotation may be necessary. 
 
The additional guidance issued by the ICAA and CPA Australia in 2003 drew on IFAC Interpretation 2003-01 and allowed a transitional period of two years. The introduction of the rotation requirements in May 2002 being seen as an example of circumstances in which some degree of flexibility over the timing of rotation is accepted. In certain circumstances this could enable the lead engagement partner to be the auditor for a maximum period of up to 9 years (up to and including the 30 June 2006 audit). 
 
Revisions to F.1 in December 2004, to achieve alignment with CLERP 9, varied the period of seven years to five years for financial periods beginning on or after 1 July 2006. There are no further transitional provisions applicable as members providing audit services to listed entities are considered to have had sufficient notice to implement the revised rotation requirements for audits of listed companies for financial periods beginning on or after 1 July 2006*. 
 
Consequently, while the length of time the lead engagement partner has served the audit client should be considered in determining when rotation should occur the partner may not continue to serve as the lead engagement partner for the financial year ending 30 June 2007 and must rotate off the engagement 
 
*It should be noted that ASIC has the power to extend the five year rotation period by up to two further years under Section 324A of the Corporations Act and ASIC has released a draft Policy Proposal on how it might exercise its Relief Powers. Any such Relief granted would be recognised as a safeguard by F.1. 
 
 
 
Rotation Requirements 
as reported in ANT05/2006  
 
Q: When do the CLERP 9 rotation requirements for 'listed' clients commence? 
 
A. The five-year rotation period is applicable to financial reporting periods beginning on or after 1 July 2006. The key issue here is that the time served is from the commencement of the financial period in which the lead engagement partner and the audit review partner (if any) served in those roles, not 1 July 2006. 
 
There are extensive Question and Answers dealing with the partner rotation requirements for listed entities aligned to the Corporations Act requirements posted on the Institute's website as part of the Independence Guide. The Guide reflects the co-regulatory approach to independence arrangements and is intended to assist in the practical application of professional independence statement F.1 for members, their clients and staff. 
 
Please note that Auditor Rotation only applies to 'listed' company audits.  
 
The practical case studies and Q&As can be used as an effective tool to both prevent and resolve potential conflicts of interest.