Accounting and Auditing News Today (ANT) Special Audit Edition - 10 July 2007

Welcome to a special edition of Accounting & Auditing News Today, dealing specifically with the auditing Standards that are legally enforceable for audits that are conducted under the provisions of the Corporations Act. The auditing Standards are to be applied to all other audits as well. This edition is to provide you with a quick overview of the 'force of law' standards. However, there is no substitute for a complete reading and comprehension of the standards.

1. Introduction

The CLERP 9 legislation reconstituted the Auditing and Assurance Standards Board (AUASB) and gave it the power to issue auditing standards that are legally enforceable under the Corporations Act. This has led to the withdrawal and reissue of almost all the auditing standards.

These auditing standards are referred to as ASAs, and replace the previous AUSs. They are applicable for all financial reporting periods beginning on or after 1 July 2006 ie the major impact is thus for 30 June 2007 financial year ends.

The standards are legally enforceable by virtue of Section 307A of the Corporations Act - "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.)

Importantly, you should note that these standards also apply to the audits of all entities that do not come within the scope of the Corporations Act, such as self managed superannuation funds, trusts and incorporated associations.

This is by virtue of APES 410 "Conformity with Auditing and Assurance Standards", issued by the Accounting Professional and Ethical Standards Board, which requires members of professional bodies that have adopted this standard (the Institute, CPA Australia and the NIA) to apply the auditing standards.

Since breaches of the 'force of law' auditing standards are potentially a criminal offence, practitioners should recognise this as a risk management issue, to be considered in relation your Professional Indemnity cover. It should be discussed with your broker and insurance provider.
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The terms defined or used in the AUASB Standards are set out in the AUASB Glossary. The words are defined in the context of the principal usage.

The AUASB Glossary does not itself establish mandatory requirements for the performance of audit, review, assurance or related service engagements.
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ASA 100 "Preamble to Auditing Standards"
This very important Standard sets out the intentions of the AUASB as to how the Standards are to be understood, interpreted and applied. An auditor shall apply AUASB Standards in conjunction with paragraphs 1 to 49 of the ASA 100.

Mandatory Requirements
An auditor's obligations or mandatory requirements are those basic principles and essential procedures set out in bold-type within each Standard.

Explanatory guidance
Explanatory guidance:

1. is to be used to improve knowledge and understanding of the scope and application of the basic principles and essential procedures (the mandatory requirements)
2. may include practical examples to assist in understanding the application of mandatory requirements

Applying AUASB Standards: ethics
References to compliance with relevant ethical requirements are included in certain mandatory requirements and explanatory guidance paragraphs in AUASB Standards. Note that references in the Auditing Standards to compliance with the ethical standards effectively makes the ethical standards legally enforceable, notably independence.

AUASB Drafting Approach: Words and Phrases
It is essential to refer to paragraph 48 of ASA 100 to identify the correct meaning of particular words and phrases used in the Standards.
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ASA 200 "Objective and General Principles Governing an Audit of a Financial Report"
ASA 200 states that the objective of an audit of a financial report is to enable the auditor to express an opinion as to whether the financial report is prepared in accordance with an applicable reporting framework in all material aspects.

ASA 210 "Terms of Audit Engagements"
ASA 210 provides that the auditor shall agree on the terms of the audit engagement with the entity. The auditor shall record this in writing and forward it to the entity. When the audit engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation.

ASA 220 "Quality Control for Audits of Historical Financial Information"
ASA 220 requires the engagement team to implement quality control procedures that are applicable to the individual audit engagement.

ASA 230 "Audit Documentation"
ASA 230 requires auditors to prepare on a timely basis, audit documentation that provides:

1. a sufficient and appropriate record of the basis for the auditor's report, and
2. evidence that the audit was performed in accordance with Auditing Standards and applicable legal and regulatory requirements

Note that the Standard requires that the auditor ordinarily presumes that there are risks of fraud in revenue recognition, that are to be addressed via mandatory paragraphs 61, 65 and 119.

ASA 250 "Consideration of Laws and Regulations in an Audit of a Financial Report"
When designing and performing audit procedures and evaluating and reporting the results thereof, ASA 250 requires auditors to recognise that non-compliance by the entity with laws and regulations may materially affect the financial report.

ASA 260 "Communication of Audit Matters with Those Charged With Governance"
ASA 260 requires auditors to communicate audit matters of governance interest arising from the audit of the financial report with those charged with the governance of that entity.

ASA 300 "Planning an Audit of a Financial Report"
ASA 300 states that the auditor shall plan the audit so that the engagement will be performed in an effective manner.

ASA 315 "Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement"
ASA 315 requires auditors to obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial report whether due to fraud or error, and sufficient to design and perform further audit procedures.

ASA 320 "Materiality and Audit Adjustments"
ASA 320 requires auditors to consider materiality and its relationship with audit risk.

ASA 330 "The Auditor's Procedures in Response to Assessed Risks"
In order to reduce audit risk to an acceptably low level, ASA 330 requires auditors to determine overall responses to assessed risks at the financial report level, and to design and perform further audit procedures to respond to assessed risks at the assertion level.

ASA 402 "Audit Considerations Relating to Entities Using Service Organisations"
Under ASA 402, the auditor shall consider how an entity's use of a service organisation affects the entity's internal control, so as to identify and assess the risk of material misstatement and to design and perform further audit procedures.

ASA 500 "Audit Evidence"
ASA 500 states that the auditor shall obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

The auditor is also required to use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures.

ASA 501 "Existence and Valuation of Inventory"
ASA 501 requires the auditor to obtain sufficient appropriate audit evidence regarding the existence and valuation of inventory material to the financial report.

ASA 505 "External Confirmations"
ASA 505 require auditors to determine whether the use of external confirmations is necessary in obtaining sufficient appropriate audit evidence at the assertion level. In making this determination, the auditor shall consider the assessed risk of material misstatement at the assertion level and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the assertion level to an acceptably low level.

ASA 508 "Enquiry Regarding Litigation and Claims"
ASA 508 requires the auditor to obtain sufficient appropriate audit evidence regarding:

1. whether all material legal matters have been identified
2. the probability of any material revenue or expense arising from such matters and the estimated amount thereof, and
3. the adequacy of the accounting treatment of such matters including their disclosure in the financial report

1. the opening balances do not contain misstatements that materially affect the current period's financial report
2. the prior period's closing balances have been correctly brought forward to the current period, or when appropriate, have been restated, and
3. appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately presented and disclosed

ASA 530 "Audit Sampling and Other Means of Testing"
When designing audit procedures, ASA 530 provides that the auditor shall determine appropriate means for selecting items for testing so as to gather sufficient appropriate evidence to meet the objectives of the audit procedures.

ASA 540 "Audit of Accounting Estimates"
ASA 540 states that the auditor shall obtain sufficient appropriate audit evidence regarding accounting estimates.

ASA 545 "Auditing Fair Value Measurements and Disclosures"
The auditor shall obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with the entity's applicable financial reporting framework.

ASA 550 "Related Parties"
ASA 550 requires auditors to perform audit procedures designed to:

1. obtain sufficient appropriate audit evidence regarding the:
   1. identification and
   2. disclosure in accordance with the applicable financial reporting framework,
   by those charged with governance and management of related parties and the effect of related party transactions that are material to the financial report, and
2. reduce to an acceptably low level the risks of material misstatement in the financial report resulting from the existence of related parties and related party transactions

ASA 570 "Going Concern"
When planning and performing audit procedures and in evaluating the results thereof, the auditor shall under ASA 570, consider the appropriateness of management's use of the going concern assumption in the preparation of the financial report.

ASA 580 "Management Representations"
ASA 580 stipulates that the auditor shall endeavour to obtain appropriate representations from management.

ASA 600 "Using the Work of Another Auditor"
When the principal auditor uses the work of another auditor, ASA 600 requires the principal auditor to determine how the work of the other auditor will affect the audit.

ASA 610 "Considering the Work of Internal Audit"
ASA 610 requires the external auditor to assess the activities of the internal audit function and their effect on external audit procedures.

ASA 620 "Using the Work of an Expert"
When using the work of an expert, ASA 620 requires auditors to obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.

ASA 700 "The Auditor's Report on a General Purpose Financial Report"
ASA 700 provides that the auditor's report shall contain a clear expression of the auditor's opinion on the financial report.

Note the changes to the audit report wording approved by the AUASB on 27 June 2007, effective for audit reports signed and dated on or after 1 July 2007.

Paragraph 33(a) is amended to reflect the responsibility of those charged with governance as "... establishing and maintaining internal controls..." (replacing "... designing, implementing and maintaining internal controls").

Paragraph 49A is added so that, when an entity, in accordance with 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 (IFRS) and the auditor agrees with the statement of compliance, the auditor shall state that, in the auditor's opinion, the financial report complies with IFRS.

ASA 701 "Modifications to the Auditor's Report"
ASA 701 describes how the auditor's report wording is modified in the following situations:

• Matters that Do Not Affect the Auditor's Opinion
  1. Emphasis of matter
• Matters that Do Affect the Auditor's Opinion
  1. Qualified opinion
  2. Disclaimer of opinion
  3. Adverse opinion

ASA 720 "Other Information in Documents Containing Audited Financial Reports" The auditor shall under ASA 720, read the other information to identify material inconsistencies with the audited financial report.

ASA 800 "The Auditor's Report on Special Purposes Audit Engagements"
ASA 800 stipulates that the auditor shall review and assess the conclusions drawn from the audit evidence obtained during the special purpose audit engagement as the basis for an expression of opinion. This expression of opinion shall be clearly written in the report.

ASRE 2410 "Review of an Interim Financial Report Performed by the Independent Auditor of the Entity"
The auditor who is engaged to perform a review of an interim financial report shall perform the review in accordance with ASRE 2410.
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The following AUS standards were issued by the AuASB and have not yet been replaced by new material.

Introduction

• AUS 106 "Explanatory Framework for Standards on Audit and Audit Related Services"
• AUS 108 "Framework for Assurance Engagements"
• AUS 110 "Assurance Engagements other than Audits or Reviews of Historical Financial Information"

• AUS 522 "Audit Evidence Implications of Externally Managed Assets of Superannuation, Provident or Similar Funds"
• 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"

• AUS 804 "The Audit of Prospective Financial Information"
• AUS 806 "Performance Auditing"
• AUS 808 "Planning Performance Audits"
• AUS 810 "Special Purpose Reports on the Effectiveness of Control Procedures"

• AUS 902 "Review of Financial Reports"
• AUS 904 "Engagements to Perform Agreed-upon Procedures"

The following Auditing and Assurance Guidance Statements (AGS) are still in effect:

• AGS 1002 "Bank Confirmation Requests"
• AGS 1004 "Transitional Arrangements on Changes in Audit Appointments under the Corporations Act 2001"
• AGS 1006 "Expression of an Opinion on Internal Control"
• AGS 1008 "Audit Implications of Prudential reporting Requirements for Authorised Deposit-taking Institutions (ADIs)
• AGS 1014 "Privity Letter Requests"
• AGS 1016 "Audit and Review Reports on Half-Year Financial Reports of Disclosing Entities Under the Corporations Act 2001"
• AGS 1024" Life Insurance Act 1995 - Audit Obligations"
• AGS 1026 "Superannuation Funds - Auditor Reports on Externally Managed Assets"
• AGS 1030 "Auditing Derivative Financial Instruments"
• AGS 1032 "The Audit Implications of Accounting for Investments in Associates"
• AGS 1036 "The Consideration of Environmental Matters in the Audit of a Financial Report"
• AGS 1038 "Access to Audit Working Papers"
• AGS 1040 "Franchising Code of Conduct"
• AGS 1042 "Reporting on Control Procedures at Outsourcing Entities"
• AGS 1046 "Responding to Questions at an Annual General Meeting"
• AGS 1048 "The Special Considerations in the Audit of Small Entities"
• AGS 1050 "Audit Issues Relating to the Electronic Presentation of Financial Reports"
• AGS 1052 "Special Considerations in the Audit of Compliance Plans of Managed Investment Schemes"
• AGS 1054 "Auditing Revenue of Charitable Entities"
• AGS 1056 "Electronic Commerce - "Effect on the Audit of a Financial Report"
• AGS 1058 "Auditing Mortgage Investment Schemes"
• AGS 1062 "Reporting in Connection with Proposed Fundraisings"
• AGS 1064 "Audit Implications of Prudential Reporting Requirements for General Insurers"
• AGS 1066 "Reporting by Auditors on Compliance with International Financial Reporting Standards"
• AGS 1068 "Audit Requirements for Australian Financial Services Licencees under the Corporations Act 2001"
• AGS 1070 "Special Considerations in the Audit of Risk Management Requirements for Registrable Superannuation Entities and Licencees"

• AGS 1010 "Audit Obligations of the Financial Institutions Scheme"
• AGS 1012 "Share Buy-Backs - Auditor's Report"
• AGS 1018 "IT Environments - Stand-Alone Personal Computers"
• AGS 1020 "IT Environments - On-Line Computer Systems"
• AGS 1022 "IT Environments - Database Systems"
• AGS 1028 "Uncertainty"
• AGS 1034 "Implications for Management and Auditors of the Year 2000 Systems Issue"
• AGS 1044 "Audit Reports on Information Provided Other than in a Financial Report"
• AGS 1060 "Computer Assisted Audit Techniques"

Practitioners should be conversant with the independence requirements of section 290 - Independence - Assurance Engagements of APES 110 - Code of Ethics for Professional Accountants.

Note also the additional auditor independence requirements contained in sections 323CA to 324 DD of the Corporations Act 2001.
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Charter July 2007: What's New?
An insight into the new audit environment that resulted from the changes in 2006, written by Stephanie Kemp from the Technical Standards team.

Mandatory Requirements of Auditing Standards Checklist
The Mandatory Requirements of Auditing Standards Checklist sets out only the mandatory paragraphs of the Auditing Standards as at 30 June 2007, which are the minimum requirements for conducting an audit. Practitioners may find this document to be of assistance in comparing their current audit procedures to the minimum requirements of the standards.

Independence Guide
This Guide assist members in the practical application of the professional independence standards.

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, and would be of particular interest to small to medium sized public firms.

Australian GAAS 2007 'Auditing Standards Checklists'
"Australian GAAS 2007 'Auditing Standards Checklists'" is available to assist auditors to complying with all mandatory requirements of the over 400 auditing standards in the new Australian Auditing Standards. It is written by an acknowledged expert in auditing, Colin Parker FCA, Principal GAAP Consulting, and previously Chairman of the Institute's Audit Advisory Committee. The checklist is in word format. It is available for annual licence fee of $299.00 for one site. Please place your order by contacting colin@gaap.com.au or visiting the above website address.

Institute's Audit DVD Coming Soon
Following on from the highly successful National Audit Conference, the Institute will be releasing a DVD highlighting a selection of topics such as force of law and audit independence. To register your interest in this product, please contact margots@icaa.org.au. Details will be available in coming weeks.
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Outlined below are the comment closing dates for all current audit 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.

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

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"

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'

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.

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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/ANTaudit_07_07_10.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.