Carmen Ridley explains what the audit preamble means in relation to the new, legally enforceable audit standards.
ASA 100 Preamble to the AUASB standards is a document issued in Australia to provide a 'plain English' basis for the new suite of auditing standards effective for financial periods beginning on or after 1 July 2006.
It contains important information about the application and the basis for the auditing standards. Published by the Auditing and Assurance Standards Board (AUASB), the Preamble has been given same legal backing as all other auditing standards. Its purpose is to clarify the intentions of the AUASB with regards to the understanding, interpretation and application of the suite of auditing standards.
All standards should be applied with the Preamble, which confirms the different authority of the paragraphs within the auditing standards, these being mandatory requirements (black-letter) and explanatory guidance (grey-letter).
Black-letter requirements
These requirements consist of basic principles and procedures to be completed on each engagement unless one of the following conditions applies:
(a) 'Application of the mandatory requirement(s) would relate to classes of transactions, account balances or disclosures that are immaterial; (b) An auditor, using professional judgement, has chosen not to adopt a particular approach or procedure where the AUASB standard permits or requires the auditor to choose from alternative approaches or procedures; (c) A mandatory requirement(s) is conditional and the condition is not present.'
This means that in the vast majority of cases, when a balance or class of transaction is material, the relevant mandatory requirements must be complied with, unless the rationale for non-compliance with alternative procedures performed was documented.
This would include, for example, related-party transaction audit testing for all audits, and not just those that comply with the related-party accounting standards. To put this into perspective, there are more than 400 mandatory requirements within the standards.
Explanatory guidance
'Grey-letter' paragraphs are there to support the black-letter requirements; their purpose is not to provide more or less onerous requirements, merely to provide clarification of the black-letter requirements. The guidance might include example procedures or illustrative examples to assist in the understanding of the mandatory requirements.
Glossary
The Preamble also refers to the AUASB glossary document that contains numerous auditing phrases used within the auditing standards, and guidance as to their intended meaning. This glossary document is a reference document and does not form part of the suite of legally enforceable auditing standards. However, their meaning should be used when applying the auditing standards.
Types of entity
It is important to mention that it is the Preamble that considers the applicability of these standards to particular auditing engagements.
Paragraph 33 of the Preamble states:
'AUASB standards are:
(a) Neutral with respect to the audited or reviewed entitys sector and size; and (b) Intended to be applied, as appropriate, to all audit, review, assurance and related-service engagements conducted by an external firm in both the public and private sectors'.
This means that the standards are intended to apply to all audited entities regardless of size or type. These standards are given force of law through their inclusion in the Corporations Act and therefore could be considered to be applicable only to entities reporting under that Act. There is no alternative set of auditing standards for non Corporations Act entities and therefore each audit performed will be in conjunction with these standards.
Many entities are governed by other forms of legislation, such as Incorporated Associations Acts, which contain a requirement for audits to be performed in accordance with Australian auditing standards.
The Accounting Professional and Ethical Standards Board established by CPA Australia and the Institute of Chartered Accountants in Australia has recently put out an exposure draft for APS 1.1: 'Conforming with Auditing and Assurance Standards'. It proposes extension of the application of the new legally enforceable auditing standards to any engagements auditors who are members of the two professional bodies.
Professional judgement
The Preamble notes that the updated auditing standards are principles rather than rules-based, which means that the concept of professional judgement of auditors in applying these standards has been retained.
The professional judgement in this context relates more to using judgement in applying each of the mandatory requirements rather than using judgement not to apply a particular requirement in the standards. This means that the choice of procedures performed to satisfy a mandatory requirement rest with the auditor. However, the auditor cannot choose not to perform any.
Ethics
While auditors have always been bound by the ethical pronouncements published by the professional accounting bodies, compliance with these pronouncements has been due to the membership of the accounting body rather than due to compliance with law.
The auditing standards now refer to the relevant ethical requirements, which means that auditors are legally bound to comply with each of these and provide documentary evidence to support their compliance.
This has imposed a burden on some auditors to ensure procedures and policies are sufficient to satisfy the documents requirements of pronouncements such as APS5: 'Quality Control for Firms', which has in most cases been inherently complied with without necessarily having quality control manuals available for inspection. The auditing standards also contain references to Professional Statement F1 Professional Independence.
