The Auditor’s Responsibilities in Relation to the Financial Report Audit (Ref: Para. 14)
The auditor’s responsibilities in relation to the financial report audit are often included in the engagement letter or other suitable form of written agreement that records the agreed terms of the engagement.[7] Law, regulation or the governance structure of the entity may require those charged with governance to agree the terms of the engagement with the auditor. When this is not the case, providing those charged with governance with a copy of that engagement letter or other suitable form of written agreement may be an appropriate way to communicate with them regarding such matters as:
The auditor’s responsibility for performing the audit in accordance with Australian Auditing Standards, which is directed towards the expression of an opinion on the financial report. The matters that Australian Auditing Standards require to be communicated, therefore, include significant matters arising during the audit of the financial report that are relevant to those charged with governance in overseeing the financial reporting process.
The fact that Australian Auditing Standards do not require the auditor to design procedures for the purpose of identifying supplementary matters to communicate with those charged with governance.
When ASA 701[8] applies, the auditor’s responsibilities to determine and communicate key audit matters in the auditor’s report.
When applicable, the auditor’s responsibility for communicating particular matters required by law or regulation, by agreement with the entity or by additional requirements applicable to the engagement.
Law or regulation, an agreement with the entity or additional requirements applicable to the engagement may provide for broader communication with those charged with governance. For example, (a) an agreement with the entity may provide for particular matters to be communicated when they arise from services provided by a firm or network firm other than the financial report audit; or (b) the mandate of a public sector auditor may provide for matters to be communicated that come to the auditor’s attention as a result of other work, such as performance audits.
Planned Scope and Timing of the Audit (Ref: Para. 15)
Communication regarding the planned scope and timing of the audit may:
Assist those charged with governance to understand better the consequences of the auditor’s work, to discuss issues of risk and the concept of materiality with the auditor, and to identify any areas in which they may request the auditor to undertake additional procedures; and
Assist the auditor to understand better the entity and its environment.
Communicating significant risks identified by the auditor helps those charged with governance understand those matters and why they were determined to be significant risks. The communication about significant risks may assist those charged with governance in fulfilling their responsibility to oversee the financial reporting process.
Matters communicated may include:
How the auditor plans to address the significant risks of material misstatement, whether due to fraud or error.
How the auditor plans to address areas of higher assessed risks of material misstatement.
The auditor’s approach to the entity’s system of internal control.
The application of the concept of materiality in the context of an audit.[9]
The nature and extent of specialised skill or knowledge needed to perform the planned audit procedures or evaluate the audit results, including the use of an auditor’s expert.[10]
When ASA 701 applies, the auditor’s preliminary views about matters that may be areas of significant auditor attention in the audit and therefore may be key audit matters.
The auditor’s planned approach to addressing the implications on the individual statements and the disclosures of any significant changes within the applicable financial reporting framework or in the entity’s environment, financial condition or activities.
Other planning matters that it may be appropriate to discuss with those charged with governance include:
[Deleted by the AUASB. Refer Aus A14.1]
Aus A14.1 Where the entity has an internal audit function, how the external auditor and internal auditors can work together in a constructive and complementary manner, including any planned use of the work of the internal audit function.[11]
The views of those charged with governance about:
The appropriate person(s) in the entity’s governance structure with whom to communicate.
The allocation of responsibilities between those charged with governance and management.
The entity’s objectives and strategies, and the related business risks that may result in material misstatements.
Matters those charged with governance consider warrant particular attention during the audit, and any areas where they request additional procedures to be undertaken.
Significant communications between the entity and regulators.
Other matters those charged with governance consider may influence the audit of the financial report.
The attitudes, awareness, and actions of those charged with governance concerning (a) the entity’s internal control and its importance in the entity, including how those charged with governance oversee the effectiveness of internal control, and (b) the detection or possibility of fraud.
The actions of those charged with governance in response to developments in accounting standards, corporate governance practices, exchange listing rules, and related matters, and the effect of such developments on, for example, the overall presentation, structure and content of the financial report, including:
The relevance, reliability, comparability and understandability of the information presented in the financial report; and
Considering whether the financial report is undermined by the inclusion of information that is not relevant or that obscures a proper understanding of the matters disclosed.
The responses of those charged with governance to previous communications with the auditor.
The documents comprising the other information (as defined in ASA 720) and the planned manner and timing of the issuance of such documents. When the auditor expects to obtain other information after the date of the auditor’s report, the discussions with those charged with governance may also include the actions that may be appropriate or necessary if the auditor concludes that a material misstatement of the other information exists in other information obtained after the date of the auditor’s report.
While communication with those charged with governance may assist the auditor to plan the scope and timing of the audit, it does not change the auditor’s sole responsibility to establish the overall audit strategy and the audit plan, including the nature, timing and extent of procedures necessary to obtain sufficient appropriate audit evidence.
Care is necessary when communicating with those charged with governance about the planned scope and timing of the audit so as not to compromise the effectiveness of the audit, particularly where some or all of those charged with governance are involved in managing the entity. For example, communicating the nature and timing of detailed audit procedures may reduce the effectiveness of those procedures by making them too predictable.
Significant Findings from the Audit (Ref: Para. 16)
The communication of findings from the audit may include requesting further information from those charged with governance in order to complete the audit evidence obtained. For example, the auditor may confirm that those charged with governance have the same understanding of the facts and circumstances relevant to specific transactions or events.
When ASA 701 applies, the communications with those charged with governance required by paragraph 16, as well as the communication about the significant risks identified by the auditor required by paragraph 15, are particularly relevant to the auditor’s determination of matters that required significant auditor attention and which therefore may be key audit matters.[12]
Significant Qualitative Aspects of Accounting Practices (Ref: Para. 16(a))
Financial reporting frameworks ordinarily allow for the entity to make accounting estimates, and judgements about accounting policies and financial report disclosures, for example, in relation to the use of assumptions in the development of accounting estimates. In addition, law, regulation or financial reporting frameworks may require disclosure of a summary of significant accounting policies or make reference to “critical accounting estimates” or “critical accounting policies and practices” to identify and provide additional information to users about the most difficult, subjective or complex judgements made by management in preparing the financial report.
As a result, the auditor’s views on the subjective aspects of the financial report may be particularly relevant to those charged with governance in discharging their responsibilities for oversight of the financial reporting process. For example, in relation to the matters described in paragraph A19, those charged with governance may be interested in the auditor’s views on the degree to which complexity, subjectivity or other inherent risk factors affect the selection or application of the methods, assumptions and data used in making a significant accounting estimate, as well as the auditor’s evaluation of whether management’s point estimate and related disclosures in the financial report are reasonable in the context of the applicable financial reporting framework. Open and constructive communication about significant qualitative aspects of the entity’s accounting practices also may include comment on the acceptability of significant accounting practices and on the quality of the disclosures. When applicable, this may include whether a significant accounting practice of the entity relating to accounting estimates is considered by the auditor not be most appropriate to the particular circumstances of the entity, for example, when an alternative acceptable method for making an accounting estimate would, in the auditor’s judgment, be more appropriate. Appendix 2 identifies matters that may be included in this communication.
Significant Difficulties Encountered during the Audit (Ref: Para. 16(b))
Significant difficulties encountered during the audit may include such matters as:
Significant delays by management, the unavailability of entity personnel, or an unwillingness by management to provide information necessary for the auditor to perform the auditor’s procedures.
An unreasonably brief time within which to complete the audit.
Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
The unavailability of expected information.
Restrictions imposed on the auditor by management.
Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification of the auditor’s opinion.[13]
Significant Matters Discussed, or Subject to Correspondence with Management (Ref: Para. 16(c)(i))
Significant matters discussed, or subject to correspondence with management may include such matters as:
Significant events or transactions that occurred during the year.
Business conditions affecting the entity, and business plans and strategies that may affect the risks of material misstatement.
Concerns about management’s consultations with other accountants on accounting or auditing matters.
Discussions or correspondence in connection with the initial or recurring appointment of the auditor regarding accounting practices, the application of auditing standards, or fees for audit or other services.
Significant matters on which there was disagreement with management, except for initial differences of opinion because of incomplete facts or preliminary information that are later resolved by the auditor obtaining additional relevant facts or information.
Circumstances that Affect the Form and Content of the Auditor’s Report (Ref: Para 16(d))
ASA 210 requires the auditor to agree the terms of the audit engagement with management or those charged with governance, as appropriate.[14] The agreed terms of the audit engagement are required to be recorded in an audit engagement letter or other suitable form of written agreement and include, among other things, reference to the expected form and content of the auditor’s report.[15] As explained in paragraph A9, if the terms of engagement are not agreed with those charged with governance, the auditor may provide those charged with governance with a copy of the engagement letter to communicate about matters relevant to the audit. The communication required by paragraph 16(d) is intended to inform those charged with governance about circumstances in which the auditor’s report may differ from its expected form and content or may include additional information about the audit that was performed.
Circumstances in which the auditor is required or may otherwise consider it necessary to include additional information in the auditor’s report in accordance with the Australian Auditing Standards, and for which communication with those charged with governance is required, include when:
The auditor expects to modify the opinion in the auditor’s report in accordance with ASA 705.[16]
A material uncertainty related to going concern is reported in accordance with ASA 570.[17]
Key audit matters are communicated in accordance with ASA 701.[18]
The auditor considers it necessary to include an Emphasis of Matter paragraph or Other Matters paragraph in accordance with ASA 706[19] or is required to do so by other Australian Auditing Standards.
The auditor has concluded that there is an uncorrected material misstatement of the other information in accordance with ASA 720.[20]
In such circumstances, the auditor may consider it useful to provide those charged with governance with a draft of the auditor’s report to facilitate a discussion of how such matters will be addressed in the auditor’s report.
In the rare circumstances that the auditor intends not to include the name of the engagement partner in the auditor’s report in accordance with ASA 700, the auditor is required to discuss this intention with those charged with governance to inform the auditor’s assessment of the likelihood and severity of a significant personal security threat.[21] The auditor also may communicate with those charged with governance in circumstances when the auditor elects not to include the description of the auditor’s responsibilities in the body of the auditor’s report as permitted by ASA 700.[22]
Other Significant Matters Relevant to the Financial Reporting Process (Ref: Para. 16(e))
ASA 300[23] notes that, as a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan and thereby the resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of assessed risks. The auditor may communicate with those charged with governance about such matters, for example, as an update to initial discussions about the planned scope and timing of the audit.
Other significant matters arising during the audit that are directly relevant to those charged with governance in overseeing the financial reporting process may include such matters as material misstatements the other information that have been corrected.
To the extent not already addressed by the requirements in paragraphs 16(a)–(d) and related application material, the auditor may consider communicating about other matters discussed with, or considered by, the engagement quality reviewer, if one has been appointed.
Auditor Independence (Ref: Para. 17–18)
The auditor is required to comply with relevant ethical requirements, including those related to independence, relating to financial report audit engagements[24] and to communicate with those charged with governance about the requirements the auditor applies. Relevant ethical requirements may:
Establish independence requirements that are specific to audits of financial reports of certain entities specified in the relevant ethical requirements, such as the independence requirements for audits of financial reports of public interest entities in the APES 110 Code of Ethics for Professional Accountants (including Independence Standards) issued by the Accounting Professional & Ethical Standards Board Limited (the Code). If applicable in the circumstances of the audit engagement, this ASA requires that the auditor also communicates with those charged with governance that the auditor applies such independence requirements.
Require the auditor to publicly disclose when the auditor applied independence requirements specific to audits of financial reports of certain entities specified in the relevant ethical requirements. [25] ASA 700 addresses the requirements for the auditor’s report relating to the auditor’s independence and the relevant ethical requirements the auditor applied.[26]
[Deleted by the AUASB. Refer to Aus A29.1(c).]
Aus A29.1(c) Require the auditor to determine whether it is appropriate to apply independence requirements that are specific to audits of financial reports of certain entities to audits of financial reports of other entities not specified in the relevant ethical requirements.[27] If this is the case and the auditor is required to publicly disclose when the auditor applied such independence requirements, the auditor may discuss with management or those charged with governance whether there is a risk of misunderstanding the nature of the entity and any need for additional disclosure.
The communication about relationships and other matters, and how threats to independence that are not at an acceptable level have been addressed varies with the circumstances of the engagement and generally addresses the threats to independence, safeguards to reduce the threats, and measures to eliminate the circumstances that created the threats.
Relevant ethical requirements or law or regulation may also specify particular communications to those charged with governance in circumstances where breaches of independence requirements have been identified.[*] For example, the Code requires the auditor to communicate with those charged with governance in writing about any breach and the action the firm has taken or proposes to take [28].
The communication requirements relating to auditor independence that apply in the case of listed entities may also be appropriate in the case of some other entities, including those that may be of significant public interest, for example because they have a large number and wide range of stakeholders and considering the nature and size of the business. Examples of such entities may include financial institutions (such as banks, insurance companies, and superannuation funds), and other entities such as charities. On the other hand, there may be situations where communications regarding independence may not be relevant, for example, where all of those charged with governance have been informed of relevant facts through their management activities. This is particularly likely where the entity is owner‑managed, and the auditor’s firm and network firms have little involvement with the entity beyond a financial report audit.
Supplementary Matters (Ref: Para. 3)
The oversight of management by those charged with governance includes ensuring that the entity designs, implements and maintains appropriate internal control with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.
The auditor may become aware of supplementary matters that do not necessarily relate to the oversight of the financial reporting process but which are, nevertheless, likely to be significant to the responsibilities of those charged with governance in overseeing the strategic direction of the entity or the entity’s obligations related to accountability. Such matters may include, for example, significant issues regarding governance structures or processes, and significant decisions or actions by senior management that lack appropriate authorisation.
In determining whether to communicate supplementary matters with those charged with governance, the auditor may discuss matters of this kind of which the auditor has become aware with the appropriate level of management, unless it is inappropriate to do so in the circumstances.
If a supplementary matter is communicated, it may be appropriate for the auditor to make those charged with governance aware that:
Identification and communication of such matters is incidental to the purpose of the audit, which is to form an opinion on the financial report;
No procedures were carried out with respect to the matter other than any that were necessary to form an opinion on the financial report; and
No procedures were carried out to determine whether other such matters exist.