Frequently asked questions about the Australian Auditing Standards

Frequently asked questions

Q.	What is the approach adopted by the Auditing and Assurance Standards Board (AUASB) and how are the new auditing standards likely to be different from the existing ones?
A.	The new auditing standards will use International Standards on Auditing (ISAs) as a base. The AUASB will be adopting a two-phase approach to the review and re-issuance of auditing standards as statutory instruments. Phase one of the exercise will focus on ensuring the legal enforceability of the new auditing standards in view of the date of 1 July 2006, on and after which the re-issued auditing standards will have the force of law. In addition to this main focus, the AUASB will also examine avenues to clarify guidance and explanatory paragraphs and appendices, as well as incorporating improvements originating from other standard setters. Phase two of the exercise will focus on enhancements to the new auditing standards. It is intended that this be done in a series of projects closely linked to the work program of the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC). The aim is to incorporate this into the new auditing standards international initiatives and matters occurring in the Australian business and regulatory environment, where appropriate. The new auditing standards will use international standards of accounting as a base, so Australias new auditing standards are expected to be aligned more closely with those issued by the IAASB.
Q.	What are the key changes likely to be seen in the new legally enforceable auditing standards, and what public consultation was undertaken?
A .	The new suite of legally enforceable Australian Auditing Standards (ASAs) do not differ significantly from the existing standards (AUSs). Following are some of the key changes outlined in the AUASB's Exposure Drafts. The word 'shall' in the bold-type paragraphs, will be the term used to describe an auditors mandatory requirements, replacing the existing word 'should'. Explanatory paragraphs and appendices will be clarified so as to provide guidance and illustrative examples only, to assist auditors in fulfilling the mandatory requirements. Accordingly, explanatory paragraphs may have been: elevated and restated as a specific mandatory requirement when the requirement improves audit quality amended with the word 'ordinarily' to qualify and reinforce that the matter forms part of the explanatory guidance, or explicitly linked to mandatory requirements where the explanatory text either duplicates, in part or whole, a mandatory requirement of the standard or another standard, or expands on existing mandatory requirements Auditors will have to comply with relevant ethical requirements relating to audit engagements when conducting audits. The relevant ethical requirements are presently contained in the respective codes of professional conduct of the professional accounting bodies in Australia. Mandatory requirements and explanatory guidance contained in AUS 702 will be split into two separate auditing standards. One standard will be applicable when the auditor is able to express an unqualified opinion and no modification to the prescribed auditors report is necessary. The other standard will apply when a modification to the standard auditors report is necessary. New terminology relating to the type of opinion issued by the auditor will be adopted. The term 'unmodified auditors reports' will refer only to a 'clean' opinion. A 'modified auditors report,' on the other hand, is the term used to describe an auditors report containing: an emphasis of matter a qualified opinion (referred to in AUS 702 as an 'except for' opinion) a disclaimer of opinion (referred to in AUS 702 as an 'inability to form an opinion'), or an adverse opinion Prescribed wording to the example auditors report will be revised. Explanatory guidance on concise financial reports, included in AUS 702, is not contained in the new auditing standards. The audit of concise financial reports will be addressed in a separate guidance note. Another feature will be the introduction of the concept of 'those charged with governance' and amendment to the definition of 'management'. There will also be a new standard based on the International Standard on Review Engagements 2410, applicable to the review of half-year financial reports prepared in accordance with the Corporations Act (2001). The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 established the Auditing and Assurance Standards Board (AUASB) as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001 from 1 July 2004. This legislation requires the AUASB to review the then-existing body of auditing standards for reissue as disallowable instruments by 1 July 2006. The board released its first group of exposure drafts (EDs) of proposed auditing standards on 31 August 2005. A total of five groups of EDs were subsequently released containing a total of 36 proposed legally enforceable auditing standards. Five months of public exposure of the EDs concluded on 31 January 2006, with the AUASB addressing public comments and feedback at its meeting early in February.
Q.	What is CPA Australia doing to monitor and restore investors' confidence in corporate financial reporting and the auditing function in Australia?
A.	Together with other major key stakeholders in the accounting profession and the Australian National Centre for Audit and Assurance Research at the Australian National University, CPA Australia has embarked on a two-year comprehensive study of capital market concerns and expectations of the value and future of audit. Many stakeholders representing the users, preparers and regulators of audited financial information will also be involved. The project will also involve a variety of data-gathering methods, including focus groups, telephone and mail-out surveys and interviews. Strategic initiatives will be developed as part of the project to assist the profession to ensure that future audit and audit-related services are of the highest quality. Outcomes will also inform and provide advice to regulatory authorities of avenues to improve the credibility of, and confidence in, the market for audit and audit-related services. CPA Australia will be a key partner to this project. In view of the dynamic and diverse background to which they belong, CPAs will be playing significant roles in helping to shape the outcomes of the project. A consultative forum will also be held aimed at enabling the projects outcomes to be considered by a wider audience. The forum will provide a platform for debate to take place between prominent business people, auditing professionals, politicians, regulators, and other major stakeholders with an interest in corporate financial reporting and the auditing profession.
Q.	How will interactions between the auditor and clients change with auditing standards having the force of law from 1 July?
A.	Although the new legally enforceable Australian Auditing Standards (ASAs) do not differ significantly from the existing standards (AUSs), new requirements in the legally enforceable standards will see subtle changes to auditor-client interactions. There will be greater audit documentation requirements. For example, audit standard ASA 230 Documentation requires auditors to document on a timely basis discussions of significant matters with those charged with governance, management and others. There will also be greater requirement for communication between auditors and businesses. ASA 260 Communication of Audit Matters with Those Charged with Governance introduces several new requirements for auditors to communicate with those charged with governance for corporate audits. Auditors are to communicate the auditors independence, significant relationships that may have a bearing on the auditors independence and the safeguards in place. There will also be scrutiny on related-party relationships and transactions. ASA 550 Related Parties requires the auditor to review information provided by those charged with governance and management, identifying the names of all known related parties, and auditors shall perform audit procedures to reduce audit risk to a sufficiently low level. Auditors are also urged to obtain a written representation from management concerning the completeness and the adequacy of related-party information and disclosures. The changes introduced by the new regime require businesses to start planning for an educational process to take place not just for senior management and company directors but also for shareholders and potential investors. CLERP 9 has put in place the requirement for auditors to attend Annual General Meetings (AGMs) of listed companies. Therefore, this can effectively take place at the AGM with the external auditor present. Questions that should be asked include: When will the new legally enforceable auditing standards apply? Will there be changes to the auditors report? What are these changes and should users of financial reports and the auditors report be alert to any fundamental differences? With the force of law and new requirements in the standards, how will the conduct of the audit change? How will this affect audit quality? The smooth transition to the new legally enforceable standards will depend significantly on efforts put into and effectiveness of communication between auditors and business. The suggested questions above could be a good starting point.

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Page last updated: Friday, 4 August 2006