Accounting and Auditing News Today (ANT) Issue No 25 - 29 June 2007

Welcome to the twenty-fifth edition of Accounting & Auditing News Today for 2007. What follows is a brief update on changes and proposed changes in the financial reporting sphere.

1. Revised size tests now apply

The Australian Government's Simpler Regulatory System Act received Royal Assent on 28 June 2007. Two key components of the company reporting obligations contained in the Act - increases to the monetary thresholds to define a large proprietary company and distribution of annual reports via the internet - will apply to the current 2006-07 financial reporting period ending 30 June 2007.

• Increases to the thresholds:

  Under the new size test, a company will be defined as a large proprietary company if it satisfies two of the following tests:

  • revenue of $25 million;
  • assets of $12.5 million; and
  • 50 employees.

  The new thresholds will result in 33 per cent fewer proprietary companies requiring to report.

• Distribution of annual reports. Companies will be able to elect to publish their 2006-07 annual reports online. Companies which opt to use this method of distribution will be required to advise their members of the right to choose to receive a copy free of charge and also be required to notify members of the direct website address where the annual report will be available. Alternatively, companies can continue to send their annual reports as the default method of distribution.

Details of the other elements of the Act and the application provisions will be available shortly at http://www.comlaw.gov.au.

The media release from Chris Pearce, Parliamentary Secretary to the Treasurer is available for download.

Thanks to Treasury for this update
Top

The Auditing and Assurance Standards Board (AUASB) met in Melbourne last Wednesday.

• The Board approved Auditing Standard ASA 2007-1 which effects changes to ASA 700 "The Auditor's Report on a General Purpose Financial Report". Please note - these changes are applicable for audit reports signed and dated on or after 1 July 2007 (applies to 30 June 2007 financial year ends and beyond).

  The following mandatory requirement is inserted as paragraph 49A:

  49A When an entity, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, has included in the notes to the financial statements, an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRSs), and the auditor agrees with the entity's statement of compliance, the auditor shall state that in the auditor's opinion, the financial report complies with IFRSs.

  Note - This is an additional requirement that is designed to give more prominence to IFRS compliance.

  Paragraph 33 (a) is amended to read as follows:

  33 (a) establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error;

  Note - Paragraph 33 (a) formerly used the following words to describe the responsibility of those charged with governance for the financial report as " . . . designing, implementing and maintaining internal controls . . ." This change was made because the AUASB determined that the description of the responsibilities of those charged with governance may have the potential for ambiguity and therefore may result in different interpretations in relation to the responsibility for establishing and maintaining internal controls relevant to the preparation and presentation of the financial report.

  Consequential amendments are required to the wording contained in a number of other Auditing Standards - ASAs 200, 210, 510, 570,701, 710, 800 and ASRE 2410.

• The Board approved the revised "Framework for Assurance Engagements", subject to some minor changes. The Framework defines and describes the elements of an assurance engagement and identifies engagements to which ASAs, Standards on Review Engagements (ASREs) and Standards on Assurance Engagements (ASAEs) apply. The Framework does not itself establish mandatory requirements for undertaking and reporting on audit, review or other assurance engagements. It will be effective from date of issuance.

• The Board considered a revised version of proposed ASAE 3000 "Assurance Engagements Other than Audits or Reviews of Historical Financial Information" (re-issuance of AUS 110). Some further changes were requested, and it is anticipated that this standard will be approved out of session and be effective for reporting periods commencing on or after 1 July 2007.

• The Board requested some minor changes to Guidance Statement - "Special Considerations in the Audit of Risk Management Requirements for Registrable Superannuation Entities and Licensees", which is a revision of the current AGS 1070, to update references and changes to legislation and APRA requirements. It is expected to be approved out of session and will be effective from date of issue.

• Proposed Guidance Statement -"Audit Requirements for Australian Financial Services Licensees under the Corporations Act 2001" was discussed. It is an update of existing AGS 1068, to revise and redraft the guidance statement to conform to the Board's drafting rules and to update references and changes to legislation and ASIC requirements, and is expected to be approved at the Board's next meeting in July.

• Other projects currently underway:
  • Concise Financial Reports - proposed Guidance Statement
  • Review Engagements - proposed revision of AUS 902 "Review of Financial Reports"
  • Performance Auditing - proposed revisions of AUS 806 "Performance Auditing" and AUS 808 "Planning Performance Audits"
  • Update of AGS 1050 "Audit Issues Relating to Electronic Presentation of Financial Reports"
  • Compliance Engagements - proposed new standard on assurance engagements
  • Update of AGS 1064 "Audit Implications of Prudential Reporting Requirements for General Insurers"
  • A new AGS tentatively titled "Audit Implications of the use of Service Organisations for Investment Management Services". This will lead to the withdrawal of AGS 1042 - Reporting on Control Procedures at Outsourcing Entities and AGS 1026 - Superannuation Funds - Auditor Reports on Externally Managed Assets.
  • Auditing of SMEs - the Board is awaiting the ISA guide being developed by the IFAC Small and Medium Practices committee, which is scheduled to be completed in the second half of 2007.
  • Update of 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" - proposed revision.

Following an extensive domestic and international review, the Institute is enhancing its Quality Review program. This will mean changes that affect a number of practices, offering more feedback while eliminating unnecessary duplication.

To ensure the Quality Review program continues to meet global best practice, the Institute conducted a strategic review, taking a fresh, critical look at its work. The evolving co-regulatory environment was examined, along with quality reviews by overseas professional accounting bodies.

Two enhancements will be introduced from 1 July 2007 this year:

1. ALL practices that sign-off on audits requiring a registered company auditor registration will be reviewed at least once every three years (previously they were reviewed every five years, unless the practice audited public listed companies). However, this does not apply to a sole practitioner holding a concessional certificate of public practice
2. Quality reviews will assess and, if appropriate, place reliance on reviews by other bodies (such as the Audit Quality Review Board) to avoid duplication and minimise disruptions and costs to practices. This is subject to the other body's work being sufficient to rely upon.

Earlier this year, a letter was sent to members who are registered company auditors (but who do not audit a public listed company) to explain the changes. Articles have also appeared in the Institute's online newsletters (e-Bulletins) as well as on the Institute website. Flyers were also distributed at Business Forums across the country in May. As always, practices will be contacted in the normal way when their next review becomes due.

Enquiries can be directed to the Institute's Quality Review team on 1300 137 322.
Top

The Australian Accounting Standards Board (AASB) held their June meeting on Thursday 28 June 2007 where it discussed:

• GAAP/GFS harmonisation including illustrative examples to accompany ED 155
• Insurance Contracts ITC
• Superannuation entities - fair value and consolidation issues
• Consideration of reports on director and executive disclosures and interpretations

Following from their meeting on 28 June 2007, the AASB has made AASB 2007-7 "Amendments to Australian Accounting Standards". This new amending standard:

• removes the encouragement to adopt a particular format for the cash flow statement in AASB 107 "Cash Flow Statements"
• deletes superseded implementation guidance accompanying AASB 4 "Insurance Contracts"
• makes editorial amendments to six standards

The AASB Interpretations Advisory Panel has published on its website the recommendations of its advisory panel concerning the issue of whether Australian Petroleum Resource Rent Tax (PRRT) should or should not be accounted for as an income tax under AASB 112 "Income Taxes".

The issue was referred to an advisory panel as a result of the AASB's December 2006 Board meeting (refer ANT48: 15 December 2006).

Six out of the eight panel members concluded that the PRRT should be accounted for as an income tax under AASB 112.

Comments on the advisory panel recommendation are requested by 16 July 2007 for the AASB's consideration at their August meeting.
Top

APRA has released a new approved form of audit report for reporting entities under the SIS Act replacing the old form in Superannuation Circular IV.A.6. This approved form is to be used for reporting periods commencing on or after 1 July 2006.
Top

The "Technical focus" section of this month's Charter includes

• our regular update of changes in the financial reporting sphere "The Panel"
• "What's new in auditing for 30 June 2007" by Stephanie Kemp of the Institute's Technical Standards team
• an article by Lee White of ASIC on important AIFRS and audit issues for 30 June 2007
• an article by Max Williamson on impairment issues in the mining sector
• an article explaining the forthcoming enhancements to the Institute's Quality Improvements Programme

Q: My audit client was a large proprietary company but became small at 30 June 2007 due to the threshold changes in the Simpler Regulatory System Bill referred to in item 1 above. What do I need to do?

A: The Simpler Regulatory Bill changed the thresholds for proprietary companies to $25 million in revenue and $12.5 million in assets. The threshold regarding the number of employees remains at 50 employees. The test remains passing 2 out of 3 to be classified as large.

Note that foreign controlled companies are generally unaffected by these changes because the Corporations Act treats these types of entities as large (subject to the requirments of s292 of the Act and ASIC class order 98/0098. Also small companies can still be required to report by either a shareholder or ASIC direction (sections 293 and 294)

If your client is one of the approximately 1600 companies that will be immediately affected by these changes there are several steps you need to take.

1. If you have not already done so, advise your client of the changes immediately, including the fact that they will no longer be required to undergo a statutory audit for the 30 June 2007 financial year.
2. Discuss whether they still wish to avail themselves of your audit services. Audits provide many benefits to clients over and above the statutory obligations fulfilled. You and your client should discuss these benefits and make an appropriate decision in the circumstances.
3. If the client chooses not to require an auditor then you should resign as promptly as possible. A letter to the directors is required and ASIC is required to be notified under section 327(5). However because the audit is of a proprietary company, ASIC permission is not required and therefore the resignation can take effect from (at the earliest) the date the client receives your letter).
4. Be aware of your section 311 responsibilities up until the date of your resignation and your obligations under the auditing standards especially ASA 300" Planning an audit of a financial report". You may also need to remind the client of their obligations under section 331 to pay you reasonable fees and expenses for any work necessarily performed up until such time as your resignation takes effect. This may include year end cash counts/stocktakes and preliminary planning work that you may have already performed.

New Employees Audit Workshop
(Sydney 4 July)
Designed to help members conducting their first audits and/or those who are new to the auditing field (with less than 6 months of commercial experience) gain the audit knowledge and skills essential for them to confidently conduct their first audits.

Accounting Update
(Sydney 10 July)
Keeping up-to-date with the many changes occurring in accounting can be a constant challenge. Obtain a solid grounding in the latest accounting issues and reforms as they unfold with this series. Covering the latest accounting issues to strengthen your technical and practical understanding, the information provided in this series is accurate, relevant, and concise and will keep you up-to-date with the latest developments.

Auditor Independence Checklist
As an Auditor are you interested in quickly validating the independence of each and every audit job? Updated with reference to the new components of the Corporations Act the Auditor Independence checklist is one again available to small to medium sized public firms.
Top

Outlined below are the comment closing dates for all current exposure drafts. Members are encouraged to prepare their own submission on each document and submit them to the Institute no later than one week before the closing date shown.

For more information, refer to the Institute's Technical Standards' exposure drafts web page

Forward all ED submission/comment emails to techsubmissions@icaa.org.au.

16 July 2007
AASB Interpretations Advisory Panel recommendation on Petroleum Resource Rent Tax

17 July 2007
AASB Proposed Rejection Statements

27 July 2007
APRA Implementation of Basel II report and draft prudential standards

31 July 2007
ISA 250 (redrafted) 'The Auditor's Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements'

17 August 2007
AASB ED 155 "Financial Reporting by Whole of Governments

31 August 2007
APES ED 03/07 "Proposed Amendment to Network Firms in Section 290: Independence - Assurance Engagements of APES 110 Code of Ethics for Professional Accountants"

1 September 2007
AASB SME ITC "A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities"

3 September 2007
AASB ED 156 "Proposals Arising from the Short-term Review of the Requirements in AAS 27, 29 and 31"

14 September 2007
APES ED 04/07 "Terms of Engagement"

15 September 2007
ISA 200 (revised and redrafted) 'Overall Objective of the Independent Auditor, and the Conduct of an Audit in accordance with International Standards on auditing'
ISA 500 (redrafted) 'Considering the Relevance and Reliability of Audit Evidence'

26 October 2007
AASB ITC 13 'Preliminary Views on Insurance Contracts'

16 November 2007
IASB Discussion Paper "Preliminary Views on Insurance Contracts"

Technical Query Service
The Institute's Technical Standards Team responds to inquiries from members on auditing and financial reporting issues. This service provides general assistance and guidance only. Members have the responsibility to apply their own professional judgment. The service can be contacted on (02) 9290 5702.

Do you know someone interested in receiving ANT?
We welcome new subscriptions. To subscribe, unsubscribe or to update your mailing details, please visit http://www.charteredaccountants.com.au/enewsletters/enewsletters

More information is available at our website.

TECHNICAL/XFILES/ARTICLES/ANT/ANT25_07_06_29.doc. The Technical Standards team comprises, Jeanette Dawes CA, Roslyn Hatton CA, Stephanie Kemp CA, Claire Locke CA, Andrew Stringer; Benjamin Lau and Jane Ma - Technical Standards Assistants.