ASRE 2410 - Review of an Interim Financial Report Performed by the Independent Auditor of the Entity - April 2006
STANDARD ON Review Engagements asRE 2410STANDARD ON Review Engagements asRE 2410
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Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity
Application
1 This Standard on Review Engagements (ASRE) applies to:
(a) a review by the independent auditor of the entity, of a financial report for a half-year in accordance with Part 2M.3 of the Corporations Act 2001; and
(b) a review, by the independent auditor of the entity, of an interim or other financial report, comprising historical financial information, for any other purpose.
Operative Date
2 This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.
[Note: For operative dates of paragraphs changed or added by an amending Standard, see Compilation Details]
Introduction
3 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on the auditor’s professional responsibilities when an auditor undertakes an engagement to review an interim financial report of an audit client, and on the form and content of the auditor’s review report. The term “auditor” is used throughout this Auditing Standard, not because the auditor is performing an audit function but because the scope of this Auditing Standard is limited to a review of an interim financial report performed by the independent auditor of the financial report of the entity.
4 For purposes of this Auditing Standard, an interim financial report is a financial report that is prepared in accordance with an applicable financial reporting framework[1] for a period that is shorter than the entity’s financial year.
(a) A financial report is a complete financial report which ordinarily includes accompanying notes and an assertion by those responsible for the financial report. The requirements of the applicable financial reporting framework determine the form and content of the financial report and what constitutes a complete financial report. For example, a financial report, as defined under section 303 of the Corporations Act 2001 consists of financial statements for the half-year, notes to the financial statements and the directors’ declaration about the statements and notes.
(b) A financial report is prepared in accordance with a financial reporting framework that is designed to achieve fair presentation.
5 The auditor who is engaged to perform a review of a financial report shall perform the review in accordance with this Auditing Standard.
6 Through performing the audit of the annual financial report, the auditor obtains an understanding of the entity and its environment, including its internal control. When the auditor is engaged to review the interim financial report, under paragraph 19 of this Auditing Standard, the auditor needs to update this understanding through enquiries made in the course of the review, to assist the auditor in focusing the enquiries to be made and the analytical and other review procedures to be applied. A practitioner who is engaged to perform a review of an interim financial report, and who is not the auditor of the entity, does not perform the review in accordance with ASRE 2410, as the practitioner ordinarily does not have the same understanding of the entity and its environment, including its internal control, as an auditor of the entity.
Part STANDARD ON Review Engagements asRE 2410 - ASRE 2410 - Review of an Interim Financial Report Performed by the Independent Auditor of the Entity - April 2006 - STANDARD ON Review Engagements asRE 2410 | Zoe
6(a) This ASRE is directed towards a review of an interim financial report by an entity’s auditor. It is also to be applied when an entity’s auditor undertakes an engagement to review a financial report comprising historical financial information.
7 Where in rare and exceptional circumstances, factors outside the auditor’s control prevent the auditor from complying with a relevant mandatory requirement in this Auditing Standard, the auditor shall:
(a) if possible, perform appropriate alternative procedures; and
(b) document in the working papers:
(i) the circumstances surrounding the inability to comply;
(ii) the reasons for the inability to comply; and
(iii) justification of how alternative procedures achieve the objectives of the mandatory requirement.
When the auditor is unable to perform appropriate alternative procedures, the auditor shall consider the implications for the auditor’s review report.
General Principles of a Review of an Interim Financial Report
8 The auditor shall comply with the ethical requirements relevant to the audit of the annual financial report of the entity.
9 These relevant ethical requirements[2] govern the auditor’s professional responsibilities in the following areas: independence, integrity, objectivity, professional competence and due care, confidentiality, professional behaviour, and technical standards.
10 The auditor shall implement quality control procedures that are applicable to the individual engagement.
11 The elements of quality control that are relevant to an individual engagement include leadership responsibilities for quality on the engagement, ethical requirements, acceptance and continuance of client relationships and specific engagements, assignment of engagement teams, engagement performance, and monitoring.[3]
12 The auditor shall plan and perform the review by exercising professional judgement and with an attitude of professional scepticism, recognising that circumstances may exist that cause the interim financial report to require a material adjustment for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework.
13 An attitude of professional scepticism means that the auditor makes a critical assessment, with a questioning mind, of the validity of evidence obtained and is alert to evidence that contradicts or brings into question the reliability of documents or representations by management of the entity.
Objective of an Engagement to Review an Interim Financial Report
14 The objective of an engagement to review an interim financial report is to enable the auditor to express a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not prepared, in all material respects, in accordance with an applicable financial reporting framework. Under paragraph 19 of this Auditing Standard, the auditor needs to make enquiries, and performs analytical and other review procedures in order to reduce to a limited level the risk of expressing an inappropriate conclusion when the interim financial report is materially misstated.
15 The objective of a review of an interim financial report differs significantly from that of an audit conducted in accordance with Auditing Standards. A review of an interim financial report does not provide a basis for expressing an opinion whether the financial report gives a true and fair view, or is presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
16 A review, in contrast to an audit, is not designed to obtain reasonable assurance that the interim financial report is free from material misstatement. A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review may bring significant matters affecting the interim financial report to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit.
Agreeing the Terms of the Engagement
17 The auditor shall agree the terms of the engagement with the entity, which shall be recorded in writing by the auditor and forwarded to the entity. When the review engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation.
18 Such a communication helps to avoid misunderstandings regarding the nature of the engagement and, in particular, the objective and scope of the review, the responsibilities of those charged with governance, the extent of the auditor’s responsibilities, the assurance obtained, and the nature and form of the report. The communication ordinarily covers the following matters:
the objective of a review of an interim financial report;
the scope of the review;
the responsibilities of those charged with governance for:
♦ the interim financial report;
♦ establishing and maintaining effective internal control relevant to the preparation of the interim financial report; and
♦ making all financial records and related information available to the auditor;
agreement from those charged with governance:
♦ to provide written representations to the auditor to confirm representations made orally during the review, as well as representations that are implicit in the entity’s records; and
♦ that where any document containing the interim financial report indicates that the interim financial report has been reviewed by the entity’s auditor, the review report also will be included in the document; and
the anticipated form and content of the report to be issued, including the identity of the addressee of the report.
An illustrative engagement letter is set out in Appendix 1 to this Auditing Standard. The terms of engagement to review an interim financial report can also be combined with the terms of engagement to audit the annual financial report.
Procedures for a Review of an Interim Financial Report
Understanding the Entity and its Environment, Including its Internal Control
19 The auditor shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim financial reports, sufficient to plan and conduct the engagement so as to be able to:
(a) identify the types of potential material misstatements and consider the likelihood of their occurrence; and
(b) select the enquiries, analytical and other review procedures that will provide the auditor with a basis for reporting whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework.
20 Under ASA 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, the auditor who has audited the entity’s financial report for one or more annual periods has obtained an understanding of the entity and its environment, including its internal control, as it relates to the preparation of the annual financial report that was sufficient to conduct the audit. In planning a review of an interim financial report, under paragraph 19 of this Auditing Standard, the auditor needs to update this understanding. Under paragraph 19 of this Auditing Standard, the auditor also needs to obtain a sufficient understanding of internal control as it relates to the preparation of the interim financial report as it may differ from internal control as it relates to the annual financial report.
21 Under paragraph 19 of this Auditing Standard, the auditor needs to use the understanding of the entity and its environment, including its internal control, to determine the enquiries to be made and the analytical and other review procedures to be applied, and to identify the particular events, transactions or assertions to which enquiries may be directed or analytical or other review procedures applied.
22 The procedures performed by the auditor to update the understanding of the entity and its environment, including its internal control, ordinarily include the following:
reading the documentation, to the extent necessary, of the preceding year’s audit and reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year, to enable the auditor to identify matters that may affect the current-period interim financial report;
considering any significant risks, including the risk of management override of controls, that were identified in the audit of the prior year’s financial report;
reading the most recent annual and comparable prior period interim financial report;
considering materiality with reference to the applicable financial reporting framework as it relates to the interim financial report to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements;
considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial report;
considering significant financial accounting and reporting matters that may be of continuing significance such as material weaknesses in internal control;
considering the results of any audit procedures performed with respect to the current year’s financial report;
considering the results of any internal audit performed and the subsequent actions taken by management;
enquiring of management about the results of management’s assessment of the risk that the interim financial report may be materially misstated as a result of fraud;
enquiring of management about the effect of changes in the entity’s business activities;
enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of the interim financial report; and
enquiring of management of the process by which the interim financial report has been prepared and the reliability of the underlying accounting records to which the interim financial report is agreed or reconciled.
23 Under paragraph 19, the auditor needs to determine the nature of the review procedures, if any, to be performed for components and, where applicable, communicate these matters to other auditors involved in the review. Factors considered ordinarily include the materiality of, and risk of misstatement in, the interim financial report components, and the auditor’s understanding of the extent to which internal control over the preparation of such reports is centralised or decentralised.
24 In order to plan and conduct a review of an interim financial report, a recently appointed auditor, who has not yet performed an audit of the annual financial report in accordance with Auditing Standards, shall obtain an understanding of the entity and its environment, including its internal control, as it relates to the preparation of both the annual and interim financial reports.
25 This understanding enables the auditor to focus the enquiries made, and the analytical and other review procedures applied in performing a review of the interim financial report in accordance with this Auditing Standard. As part of obtaining this understanding, ordinarily the auditor makes enquiries of the predecessor auditor and, where practicable, reviews the predecessor auditor’s documentation for the preceding annual audit and for any prior interim periods in the current year that have been reviewed by the predecessor auditor. In doing so, ordinarily the auditor considers the nature of any corrected misstatements, and any uncorrected misstatements aggregated by the auditor, any significant risks, including the risk of management override of controls, and significant accounting and any reporting matters that may be of continuing significance, such as material weaknesses in internal control.
Materiality
26 The auditor shall consider materiality, using professional judgement, when:
(a) determining the nature, timing and extent of review procedures; and
(b) evaluating the effect of misstatements.
27 Under paragraph 26 of this Auditing Standard, the auditor needs to use professional judgement and consider qualitative and quantitative factors in determining materiality.
28 Ordinarily the auditor’s consideration of materiality for a review of an interim financial report is based on the interim period financial data and accordingly materiality based on interim period financial data may be less than materiality for annual financial data. If the entity’s business is subject to cyclical variations or if the financial results for the current period show an exceptional decrease or increase compared to prior interim periods and expected results for the current year, the auditor may, for example, conclude that materiality is more appropriately determined using a normalised figure for the interim period.
29 The auditor’s consideration of materiality, in evaluating the effects of misstatements, is a matter of professional judgement and is affected by the auditor’s perception of the financial information needs of users of the interim financial report.
30 If the applicable financial reporting framework contains a definition of materiality, it will ordinarily provide a frame of reference to the auditor when determining materiality for planning and performing the review.
31 Under paragraph 26 of this Auditing Standard, the auditor needs, when relevant, to consider materiality from the perspective of both the entity and the consolidated entity.
Enquiries, Analytical and Other Review Procedures
32 The auditor shall make enquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude whether, on the basis of the procedures performed, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework.
33 A review ordinarily does not require tests of the accounting records through inspection, observation or confirmation. Procedures for performing a review of an interim financial report ordinarily are limited to making enquiries, primarily of persons responsible for financial and accounting matters and applying analytical and other review procedures, rather than corroborating information obtained concerning matters relating to the interim financial report. The auditor’s understanding of the entity and its environment, including its internal control, the results of the risk assessments relating to the preceding audit and the auditor’s consideration of materiality as it relates to the interim financial report, affects the nature and extent of the enquiries made, and analytical and other review procedures applied.
34 The auditor ordinarily performs the following procedures:
Reading the minutes of the meetings of shareholders, those charged with governance and other appropriate committees to identify matters that may affect the interim financial report, and enquiring about matters dealt with at meetings for which minutes are not available that may affect the interim financial report.
Considering the effect, if any, of matters giving rise to a modification of the audit or review report, accounting adjustments or unadjusted misstatements, at the time of the previous audit or reviews.
Communicating, where appropriate, with other auditors who are performing a review of the interim financial report of the entity’s significant components.
Enquiring of members of management responsible for financial and accounting matters, and others as appropriate, about the following:
♦ whether the interim financial report has been prepared and presented in accordance with the applicable financial reporting framework;
♦ whether there have been any changes in accounting principles or in the methods of applying them;
♦ whether any new transactions have necessitated the application of a new accounting principle;
♦ whether the interim financial report contains any known uncorrected misstatements;
♦ unusual or complex situations that may have affected the interim financial report, such as a business combination or disposal of a segment of the business;
♦ significant assumptions that are relevant to the fair value measurement or disclosures and management’s intention and ability to carry out specific courses of action on behalf of the entity;
♦ whether related party transactions have been appropriately accounted for and disclosed in the interim financial report;
♦ significant changes in commitments and contractual obligations;
♦ significant changes in contingent assets and contingent liabilities including litigation or claims;
♦ compliance with debt covenants;
♦ matters about which questions have arisen in the course of applying the review procedures;
♦ significant transactions occurring in the last several days of the interim period or the first several days of the next interim period;
♦ knowledge of any fraud or suspected fraud affecting the entity involving:
○ management;
○ employees who have significant roles in internal control; or
○ others where the fraud could have a material effect on the interim financial report; and
♦ knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s interim financial information communicated by employees, former employees, analysts, regulators or others; and
♦ knowledge of any actual or possible non-compliance with laws and regulations that could have a material effect on the interim financial report.
Applying analytical procedures to the interim financial report designed to identify relationships and individual items that appear to be unusual and that may reflect a material misstatement in the interim financial report. Analytical procedures may include ratio analysis and statistical techniques such as trend analysis or regression analysis and may be performed manually or with the use of computer-assisted auditing techniques. Appendix 2 to this Auditing Standard contains examples of analytical procedures the auditor may consider when performing a review of an interim financial report.
Reading the interim financial report and considering whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report is not in accordance with the applicable financial reporting framework.
35 The auditor may perform many of the review procedures before or simultaneously with the entity’s preparation of the interim financial report. For example, it may be practicable to update the understanding of the entity and its environment, including its internal control, and begin reading applicable minutes before the end of the interim period. Performing some of the review procedures earlier in the interim period permits also early identification and consideration of significant accounting matters affecting the interim financial report.
36 The auditor performing the review of the interim financial report is also the auditor of the annual financial report of the entity. For convenience and efficiency, the auditor may decide to perform certain audit procedures concurrently with the review of the interim financial report. For example, information gained from reading the minutes of meetings of the board of directors in connection with the review of the interim financial report also may be used for the annual audit. The auditor may decide also to perform, at the time of the interim review, auditing procedures that would need to be performed for the purpose of the audit of the annual financial report, for example, performing auditing procedures on:
significant or unusual transactions that occurred during the period, such as business combinations, restructurings, or significant revenue transactions, or
opening balances (when applicable).
37 A review of an interim financial report ordinarily does not require corroborating the enquiries about litigation or claims. It is, therefore, ordinarily not necessary to send an enquiry letter to the entity’s lawyer. Direct communication with the entity’s lawyer with respect to litigation or claims, or alternative procedures, may, however, be appropriate if a matter comes to the auditor’s attention that causes the auditor to question whether the interim financial report is in accordance with the applicable financial reporting framework.
38 The auditor shall obtain evidence that the interim financial report agrees or reconciles with the underlying accounting records.
39 The auditor may obtain evidence that the interim financial report agrees or reconciles with the underlying accounting records by tracing the interim financial report to:
(a) the accounting records, such as the general ledger, or a consolidating schedule that agrees or reconciles with the accounting records; and
(b) other supporting data in the entity’s records as necessary.
40 The auditor shall enquire whether management has identified all events up to the date of the review report that may require adjustment to or disclosure in the interim financial report.
41 Under paragraph 40 of this Auditing Standard, the auditor need not perform procedures to identify events occurring after the date of the review report.
42 The auditor shall enquire whether those charged with governance have changed their assessment of the entity’s ability to continue as a going concern. When, as the result of this enquiry or other review procedures, the auditor becomes aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall:
(a) enquire of those charged with governance as to their plans for future actions based on their going concern assessment, the feasibility of these plans, and whether they believe that the outcome of these plans will improve the situation; and
(b) consider the adequacy of the disclosure about such matters in the interim financial report.
43 Events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern may have existed at the date of the annual financial report or may be identified as a result of enquiries of management or in the course of performing other review procedures. When such events or conditions come to the auditor’s attention, under paragraph 42 of this Auditing Standard, the auditor needs to enquire of those charged with governance as to their plans for future action, such as their plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital. Under paragraph 42 of this Auditing Standard, the auditor needs to enquire also as to the feasibility of the plans of those charged with governance and whether they believe that the outcome of these plans will improve the situation. Ordinarily, the auditor considers, based on procedures performed, whether it is necessary to corroborate the feasibility of the plans of those charged with governance and whether the outcome of these plans will improve the situation.
44 When a matter comes to the auditor’s attention that leads the auditor to question whether a material adjustment should be made for the interim financial report to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall make additional enquiries or perform other procedures to enable the auditor to express a conclusion in the review report.
45 For example, if the auditor’s review procedures lead the auditor to question whether a significant sales transaction is recorded in accordance with the applicable financial reporting framework, the auditor performs additional procedures sufficient to resolve the auditor’s questions, such as discussing the terms of the transaction with senior marketing and accounting personnel or reading the sales contract.
Comparatives – First Interim Report
46 When comparative information is included for the first time in an interim financial report, an auditor shall perform similar procedures on the comparative information as applied to the current period interim financial report.
47 When comparative information is included in the first interim financial report and the auditor is unable to obtain sufficient appropriate review evidence to achieve the review objective, a limitation on the scope of the review exists. Under paragraph 84 of this Auditing Standard, the auditor needs to modify[4] the review report. In such cases, ordinarily an auditor encourages clear disclosure, in the interim financial report, that the auditor has been unable to review the comparatives. An example of a modified review report is included in Appendix 4.
48 When comparative information is included in the first interim financial report and the auditor believes a material adjustment should be made to the interim financial report, under paragraph 72 this Auditing Standard, the auditor needs to modify the review report.
49 When an entity has come into existence only within the first interim period, comparative information will not be provided in the first interim financial report and no modified review report is required.
50 Accounting Standard AASB 101 Presentation of Financial Statements, provides requirements and explanatory guidance relating to comparative information included in a financial report prepared in accordance with Australian Accounting Standards. Accounting Standard AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, provides requirements and guidance relating to comparative information when an entity adopts Australian Equivalents to International Financial Reporting Standard (AIFRS) for the first time.
Evaluation of Misstatements
51 The auditor shall evaluate, individually and in the aggregate, whether uncorrected misstatements that have come to the auditor’s attention are material to the interim financial report.
52 A review of an interim financial report, in contrast to an audit engagement, is not designed to obtain reasonable assurance that the interim financial report is free from material misstatement. However, under paragraph 51 of this Auditing Standard, misstatements which come to the auditor’s attention, including inadequate disclosures, need to be evaluated individually and in the aggregate to determine whether a material adjustment is required to be made to the interim financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework.
53 Under paragraph 51 of this Auditing Standard, the auditor needs to exercise professional judgement in evaluating the materiality of any misstatements that the entity has not corrected. Ordinarily, the auditor considers matters such as the nature, cause and amount of the misstatements, whether the misstatements originated in the preceding year or interim period of the current year, and the potential effect of the misstatements on future interim or annual periods.
54 The auditor may designate an amount below which misstatements need not be aggregated, because the auditor expects that the aggregation of such amounts clearly would not have a material effect on the interim financial report. In so doing, under paragraph 26 of this Auditing Standard, the auditor needs to consider the fact that the determination of materiality involves quantitative as well as qualitative considerations and that misstatements of a relatively small amount could nevertheless have a material effect on the interim financial report.
Management Representations
55 The auditor shall endeavour to obtain written representation from management that:
(a) they acknowledge their responsibility for the design and implementation of internal control to prevent and detect fraud and error;
(b) the interim financial report is prepared and presented in accordance with the applicable financial reporting framework;
(c) they believe the effect of those uncorrected misstatements aggregated by the auditor during the review are immaterial, both individually and in the aggregate, to the interim financial report taken as a whole. A summary of such items is included in or attached to the written representations;
(d) they have disclosed to the auditor all significant facts relating to any frauds or suspected frauds known to them that may have affected the entity;
(e) they have disclosed to the auditor the results of their assessment of the risk that the interim financial report may be materially misstated as a result of fraud;
(f) they have disclosed to the auditor all known actual or possible non-compliance with laws and regulations the effects of which are to be considered when preparing the interim financial report; and
(g) they have disclosed to the auditor all significant events that have occurred subsequent to the balance sheet date and through to the date of the review report that may require adjustment to or disclosure in the interim financial report.
56 Under paragraph 55 of this Auditing Standard, the auditor needs to endeavour to obtain additional representations as are appropriate to matters specific to the entity’s business or industry. An illustrative management representation letter is set out in Appendix 1 to this Auditing Standard.
57 If those charged with governance refuse to provide a written representation that the auditor considers necessary, this constitutes a limitation on the scope of the auditor’s work and the auditor shall express a qualified conclusion or a disclaimer of conclusion.
Auditor’s Responsibility for Accompanying Information
58 The auditor shall read the other information that accompanies the interim financial report to consider whether any such information is materially inconsistent with the interim financial report.
59 If the auditor identifies a material inconsistency, under paragraph 58 of this Auditing Standard, the auditor needs to consider whether the interim financial report or the other information needs to be amended. If an amendment is necessary in the interim financial report and those charged with governance refuse to make the amendment, under paragraph 65 of this Auditing Standard, the auditor needs to consider the implications for the review report. If an amendment is necessary in the other information and those charged with governance refuse to make the amendment, the auditor may, for example, consider including in the review report an additional paragraph (emphasis of matter) describing the material inconsistency or taking other actions, such as withholding the issuance of the review report or withdrawing from the engagement. For example, those charged with governance may present alternative measures of earnings that more positively portray financial performance than the interim financial report, and such alternative measures are given excessive prominence, are not clearly defined, or not clearly reconciled to the interim financial report such that they are confusing and potentially misleading.
60 If a matter comes to the auditor’s attention that causes the auditor to believe that the other information appears to include a material misstatement of fact, the auditor shall discuss the matter with the entity’s management.
61 While reading the other information for the purpose of identifying material inconsistencies, an apparent material misstatement of fact may come to the auditor’s attention (i.e. information, not related to matters appearing in the interim financial report, that is incorrectly stated or presented). When discussing the matter with the entity’s management, ordinarily the auditor considers the validity of the other information and management’s responses to the auditor’s enquiries, whether valid differences of judgement or opinion exist and whether to request management to consult with a qualified third party to resolve the apparent misstatement of fact. If an amendment is necessary to correct a material misstatement of fact and management refuses to make the amendment, ordinarily the auditor considers taking further action as appropriate, such as notifying those charged with governance and, if necessary, obtaining legal advice.
Communication
62 When, as a result of performing the review of interim financial report, a matter comes to the auditor’s attention that causes the auditor to believe that it is necessary to make a material adjustment to the interim financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall communicate this matter as soon as practicable to the appropriate level of management.
63 When, in the auditor’s judgement, management does not respond appropriately within a reasonable period of time, the auditor shall inform those charged with governance.
64 Such communications are made as soon as practicable, either orally or in writing. The auditor’s decision whether to communicate orally or in writing ordinarily is affected by factors such as the nature, sensitivity and significance of the matter to be communicated and the timing of the communications. If the information is communicated orally, under paragraph 97 of this Auditing Standard, the auditor needs to document the communication.
65 When, in the auditor’s judgement, those charged with governance do not respond appropriately within a reasonable period of time, the auditor shall consider:
(a) whether to modify the report; or
(b) the possibility of withdrawing from the engagement; and
(c) the possibility of resigning from the appointment to audit the annual financial report.
66 When, as a result of performing the review of interim financial report, a matter comes to the auditor’s attention that causes the auditor to believe in the existence of fraud or non-compliance by the entity with laws and regulations the auditor shall communicate the matter as soon as practicable to those charged with governance and shall consider the implications for the review.
67 The determination of which level of management may also be informed is affected by the likelihood of collusion or the involvement of a member of management. Under paragraph 66 of this Auditing Standard, the auditor needs to report such matters to those charged with governance.
68 The auditor shall communicate relevant matters of governance interest arising from the review of the interim financial report to those charged with governance.
69 As a result of performing the review of the interim financial report, the auditor may become aware of matters that in the opinion of the auditor are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process. Under paragraph 68 of this Auditing Standard, the auditor needs to communicate such matters to those charged with governance.
Reporting the Nature, Extent and Results of the Review of an Interim Financial Report
70 The auditor shall issue a written report that contains the following:
(a) An appropriate title clearly identifying it as a review report of the independent auditor of the entity.
(b) An addressee, as required by the circumstances of the engagement.
(c) Identification of the interim financial report reviewed including identification of the title of each of the statements contained in the financial report and the date and period covered by the interim financial report.
(d) A statement that those charged with governance are responsible for the preparation and fair presentation of the interim financial report in accordance with the applicable financial reporting framework.
(e) [Deleted by the AUASB].
(f) A statement that the auditor is responsible for expressing a conclusion on the interim financial report based on the review.
(g) A statement that the review of the interim financial report was conducted in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity, and that that Auditing Standard requires the auditor to comply with ethical requirements relevant to the audit of the annual financial report.
(h) A statement that a review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
(i) A statement that a review is substantially less in scope than an audit conducted in accordance with Auditing Standards and consequently does not enable the auditor to obtain assurance that the auditor would become aware of all significant matters that might be identified in an audit and that accordingly no audit opinion is expressed.
(j) A conclusion as to whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial report does not present fairly, or if applicable, is not true and fair, in all material respects, in accordance with the applicable financial reporting framework (including a reference to the jurisdiction or country of origin of the financial reporting framework when Australia is not the origin of the financial reporting framework used).
(k) The date of the auditor’s review report.
(l) The location in the country or jurisdiction where the auditor practices.
(m) The auditor’s signature.
71 In some cases, law or regulation governing the review of an interim financial report may prescribe wording for the auditor’s conclusion that is different from the wording described in paragraph 70(j). Although the auditor may be obliged to use the prescribed wording, the auditor’s responsibilities as described in this Auditing Standard for coming to the conclusion remain the same.[5] Illustrative review reports are set out in Appendices 3 and 4 to this Auditing Standard.
Departure from the Applicable Financial Reporting Framework
72 The auditor shall express a qualified or adverse conclusion when a matter has come to the auditor’s attention that causes the auditor to believe that a material adjustment should be made to the interim financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework. The auditor shall include a basis for modification paragraph in the report, that describes the nature of the departure and, if practicable, state the effects on the interim financial report. If the effects or possible effects are incapable of being measured reliably, a statement to that effect and the reasons therefore shall be included in the basis for modification paragraph. The conclusion paragraph shall be headed ‘Qualified Conclusion’ or “Adverse Conclusion’ whichever is relevant.
73 If matters have come to the auditor’s attention that cause the auditor to believe that the interim financial report is or may be materially affected by a departure from the applicable financial reporting framework, and those charged with governance do not correct the interim financial report, under paragraph 72 of this Auditing Standard, the auditor needs to modify the review report. If the information that the auditor believes is necessary for adequate disclosure is not included in the interim financial report, under paragraph 72 of this Auditing Standard, the auditor needs to modify the review report and, if practicable, include the necessary information in the review report. Illustrative review reports with a qualified conclusion are set out in Appendix 4 to this Auditing Standard.
74 When the effect of the departure is so material and pervasive to the interim financial report that the auditor concludes a qualified conclusion is not adequate to disclose the misleading or incomplete nature of the interim financial report, the auditor shall express an adverse conclusion.
75 An illustrative review report with an adverse conclusion is set out in Appendix 4 to this Auditing Standard.
Limitation on Scope
76 Ordinarily a limitation on scope prevents the auditor from completing the review.
77 When the auditor is unable to complete the review, the auditor shall communicate, in writing, to the appropriate level of management and to those charged with governance the reason why the review cannot be completed, and consider whether it is appropriate to issue a review report.
Limitation on Scope Imposed by Management
78 Unless required by law or regulation, an auditor shall not accept an engagement to review an interim financial report when management has imposed a limitation on the scope of the auditor’s review.
79 Under paragraph 78 of this Auditing Standard, the auditor needs to refuse to accept an engagement to review an interim financial report if the auditor’s preliminary knowledge of the engagement circumstances indicates that the auditor would be unable to complete the review because there will be a limitation on the scope of the auditor’s review imposed by management of the entity.
80 If, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor shall request management to remove the limitation. If management refuses the auditor’s request to remove the limitation, the auditor shall communicate, in writing, to the appropriate level of management and those charged with governance, the reason(s) why the review cannot be completed.
81 If, after accepting the engagement, management imposes a limitation on the scope of the review, under paragraph 80 of this Auditing Standard, the auditor needs to request the removal of that limitation. If management refuses to do so, the auditor is unable to complete the review and express a conclusion. In such cases, under paragraph 80 of this Auditing Standard, the auditor needs to communicate, in writing, to the appropriate level of management and those charged with governance, the reason(s) why the review cannot be completed. Nevertheless, if a matter comes to the auditor’s attention that causes the auditor to believe that a material adjustment to the interim financial report is necessary for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, under paragraphs 62, 63 and 66 of this Auditing Standard, the auditor needs to communicate such matters to the appropriate level of management.
82 If management refuses the auditor’s request to remove a limitation that has been imposed on the scope of the review, but there is a legal or regulatory requirement for the auditor to issue a report, the auditor shall issue a disclaimer of conclusion or qualified conclusion report containing the reason(s) why the review cannot be completed.
83 Under paragraph 82 of this Auditing Standard, the auditor needs to consider the legal and regulatory responsibilities, including whether there is a legal requirement for the auditor to issue a report. If there is such a requirement, under paragraph 82 of this Auditing Standard, the auditor needs to disclaim a conclusion, and provide in the review report the reason why the review cannot be completed. However, if a matter comes to the auditor’s attention that causes the auditor to believe that a material adjustment to the interim financial report is necessary for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, under paragraph 84 of this Standard, the auditor needs to communicate such a matter in the report.
Other Limitations on Scope not Imposed by Management
84 When the auditor concludes that an unqualified conclusion cannot be expressed, the auditor shall express a qualified conclusion when in rare circumstances there is a limitation on the scope of an auditor’s work, that is confined to one or more specific matters that, while material, are not in the auditor’s judgement pervasive to the interim financial report. A qualified conclusion shall be expressed as being “except for” the effects of the matter to which the qualification relates. The conclusion paragraph shall be headed “Qualified Conclusion”.
85 A limitation on scope may occur due to circumstances other than a limitation on scope imposed by those charged with governance. In such circumstances, the auditor is ordinarily unable to complete the review and express a conclusion and is guided by paragraphs 82 and 84. There may be, however, some rare circumstances where the limitation on the scope of the auditor’s work is clearly confined to one or more specific matters that, while material, are not in the auditor’s judgement pervasive to the interim financial report. In such circumstances, under paragraph 84 of this Auditing Standard, the auditor needs to modify the review report by indicating that, except for the matter which is described in an explanatory paragraph to the review report, the review was conducted in accordance with this Auditing Standard, and by qualifying the conclusion. Illustrative review reports with a qualified conclusion are set out in Appendix 4 to this Auditing Standard.
86 The auditor may have expressed a qualified opinion on the audit of the latest annual financial report because of a limitation on the scope of that audit. Under paragraph 84 of this Auditing Standard, the auditor needs to consider whether that limitation on scope still exists and, if so, the implications for the review report.
Going Concern and Significant Uncertainties
87 In certain circumstances, an emphasis of matter paragraph may be added to a review report, without affecting the auditor’s conclusion, to highlight a matter that is included in a note to the interim financial report that more extensively discusses the matter. The paragraph would preferably be included after the conclusion paragraph and ordinarily refers to the fact that the conclusion is not qualified in this respect.
88 If adequate disclosure is made in the interim financial report, the auditor shall add an emphasis of matter paragraph to the review report to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
89 The auditor may have modified a prior audit or review report by adding an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern. If the material uncertainty still exists and adequate disclosure is made in the interim financial report, under paragraph 88 of this Auditing Standard, the auditor needs to modify the review report on the current interim financial report by adding a paragraph to highlight the continued material uncertainty.
90 If, as a result of enquiries or other review procedures, a material uncertainty relating to an event or condition comes to the auditor’s attention that may cast significant doubt on the entity’s ability to continue as a going concern, and adequate disclosure is made in the interim financial report, under paragraph 88 of this Auditing Standard, the auditor needs to modify the review report by adding an emphasis of matter paragraph.
91 If a material uncertainty that casts significant doubt about the entity’s ability to continue as a going concern is not adequately disclosed in the interim financial report, the auditor shall express a qualified or adverse conclusion, as appropriate. The report shall include specific reference to the fact that there is such a material uncertainty.
92 The auditor shall modify the review report by adding a paragraph to highlight a significant uncertainty (other than a going concern problem) that is adequately disclosed in the interim financial report, that came to the auditor’s attention, the resolution of which is dependent upon future events and which may materially affect the interim financial report.
93 If a significant uncertainty (other than a going concern problem) is not adequately disclosed in the interim financial report, the auditor shall express a qualified or adverse conclusion, as appropriate. The report shall include specific reference to the fact that there is such a significant uncertainty.
Other Considerations
94 The terms of the engagement include agreement by those charged with governance that where any document containing an interim financial report indicates that the report has been reviewed by the entity’s auditor, the review report will be also included in the document. If those charged with governance have not included the review report in the document, ordinarily the auditor considers seeking legal advice to assist in determining the appropriate course of action in the circumstances.
95 If the auditor has issued a modified review report and those charged with governance issue the interim financial report without including the modified review report in the document containing the interim financial report, ordinarily the auditor considers seeking legal advice to assist in determining the appropriate course of action in the circumstances, and the possibility of resigning from the appointment to audit the annual financial report.
96 An interim financial report consisting of a summarised financial report does not include all of the information that would be included in a general purpose financial report, but may rather present an explanation of the events and changes that are significant to an understanding of the changes in the financial position and performance of the entity since the annual reporting date. This is because it is presumed that the users of the interim financial report will have access to the latest audited financial report, such as is the case with listed entities. In other circumstances, ordinarily the auditor discusses with management the need for the interim financial report to include a statement that it is to be read in conjunction with the latest audited financial report. In the absence of such a statement, ordinarily the auditor considers whether, without a reference to the latest audited financial report, the interim financial report is misleading in the circumstances and the implications for the review report.
Documentation
97 The auditor shall prepare review documentation that is sufficient and appropriate to provide a basis for the auditor’s conclusion and to provide evidence that the review was performed in accordance with this Auditing Standard and applicable legal and regulatory requirements.
98 Under paragraph 97 of this Auditing Standard, the auditor needs to prepare documentation that enables an experienced auditor having no previous connection with the engagement to understand the nature, timing and extent of the enquiries made and analytical and other review procedures applied, information obtained, and any significant matters considered during the performance of the review, including the disposition of such matters.
Conformity with International Standards on Review Engagements
99 ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity is directed towards a review of interim financial information by an entity’s auditor. For purposes of ISRE 2410, financial information comprises either a complete or condensed set of financial statements for a period that is shorter than the entity’s financial year. ISRE 2410 is directed towards the review of interim financial information. Further to amendments effected by the International Auditing and Assurance Standards Board in December 2007, it is to be applied, adapted as necessary in the circumstances, when an auditor undertakes an engagement to review historical financial information other than interim financial information of an audit client.
Following consultation with constituents in Australia in accordance with normal exposure draft processes, the AUASB has decided that:
due to the nature of reviews of other historical financial information, a separate Standard is more appropriate than ASRE 2410 being adapted by the auditor for this purpose; and
ASRE 2405 Review of Historical Financial Information Other than a Financial Report, as developed by the AUASB, will more comprehensively deal with reviews of other historical financial information.
Accordingly, ASRE 2410 is intended to conform, with the exceptions listed below, to ISRE 2410 to the extent that ISRE 2410 deals with the review of financial statements by the auditor of the entity.
Except as noted below, this ASRE conforms, to the extent described above, with International Standard on Review Engagements ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main differences between this ASRE and ISRE 2410 are:
This Auditing Standard contains the following mandatory requirements that are not contained in ISRE 2410:
This Auditing Standard applies to:
(a) A review, by the independent auditor of the entity, of a financial report for a half-year in accordance with Part 2M.3 of the Corporations Act 2001; and
(b) A review, by the independent auditor of the entity, of an interim or other financial report, comprising historical financial information, for any other purpose (paragraph 1).
Where in rare and exceptional circumstances, factors outside the auditor’s control prevent the auditor from complying with a relevant mandatory requirement, the auditor shall:
♦ if possible, perform appropriate alternative procedures; and
♦ document in the working papers:
the circumstances surrounding the inability to comply;
the reasons for the inability to comply; and
justification of how alternative procedures achieve the objectives of the mandatory requirement.
When the auditor is unable to perform appropriate alternative procedures, the auditor shall consider the implications for the auditor’s review report (paragraph 7).
The terms of the engagement are to be recorded in writing and forwarded to the entity. When the engagement is undertaken pursuant to legislation the minimum applicable terms are those contained in the legislation (paragraph 17).
The auditor shall consider materiality when:
♦ determining the nature, timing and extent of review procedures; and
♦ evaluating the effect of misstatements (paragraph 26).
When comparative information is included for the first time in an interim financial report, an auditor shall perform the same procedures on the comparative information as applied to the current period interim financial report (paragraph 46).
If those charged with governance refuse to provide a written representation that the auditor considers necessary, this constitutes a limitation of the scope of the auditor’s work and the auditor shall express a qualified conclusion or a disclaimer of conclusion (paragraph 57).
Where a matter comes to the auditor’s attention that causes the auditor to believe in the existence of fraud or non-compliance by the entity with laws and regulations, the auditor shall consider the implications for the review (paragraph 66).
When the auditor believes a material adjustment should be made to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall include a basis for modification paragraph in the report, that describes the nature of the departure and, if practicable, state the effects on the interim financial report. If the effects or possible effects are incapable of being measured reliably, a statement to that effect and the reasons therefore shall be included in the basis for modification paragraph. The conclusion paragraph shall be headed ‘Qualified Conclusion’ or “Adverse Conclusion’ whichever is relevant (paragraph 72).
When the effect of the departure is so material and pervasive to the interim financial report that the auditor concludes a qualified conclusion is not adequate to disclose the misleading or incomplete nature of the interim financial report, the auditor shall express an adverse conclusion (paragraph 74).
Unless required by law or regulation, an auditor shall not accept an engagement to review interim financial report when management has imposed a limitation on the scope of the auditor’s review (paragraph 78).
If, after accepting the engagement, management imposes a limitation on the scope of the review, the auditor shall request management to remove the limitation. If management refuses the auditor’s request to remove the limitation, the auditor shall communicate, in writing, to the appropriate level of management and those charged with governance, the reasons why the review cannot be completed (paragraph 80).
If management refuses the auditor’s request to remove a limitation that has been imposed on the scope of the review, but there is a legal or regulatory requirement for the auditor to issue a report, the auditor shall issue a disclaimer of conclusion or qualified conclusion report containing the reason(s) why the review cannot be completed (paragraph 82).
When the auditor concludes that an unqualified conclusion cannot be expressed, the auditor shall express a qualified conclusion when in rare circumstances there is a limitation on the scope of an auditor’s work, that is confined to one or more specific matters that, while material, are not in the auditor’s judgement pervasive to the interim financial report. A qualified conclusion shall be expressed as being “except for” the effects of the matter to which the qualification relates. The conclusion paragraph shall be headed “Qualified Conclusion” (paragraph 84).
If a significant uncertainty (other than a going concern problem) is not adequately disclosed in the interim financial report, the auditor shall express a qualified or adverse conclusion, as appropriate. The report shall include specific reference to the fact that there is such a significant uncertainty (paragraph 93).
In order to maintain consistency with the reporting requirements of Auditing Standard ASA 800 The Auditor’s Report on Special Purpose Audit Engagements, the following requirements in ISRE 2410, paragraph 43(e) and paragraph 43(j), are not contained in this Auditing Standard:
Paragraph 43(e)
‘In other circumstances, a statement that management is responsible for the preparation and presentation of the interim financial information in accordance with the applicable financial reporting framework’.
Paragraph 43(j)
‘In other circumstances, a conclusion as to whether anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with the applicable financial reporting framework (including a reference to the jurisdiction or country of origin of the financial reporting framework when the financial reporting framework used is not International Financial Reporting Standards).’
This Auditing Standard includes explanatory guidance not contained within ISRE 2410 on:
Materiality (paragraphs 27 to 31); and
Comparatives (paragraphs 47 to 50).
This Auditing Standard provides illustrative examples that differ in form and content from those contained in ISRE 2410, namely:
An engagement letter.
A management representation letter.
The auditor’s unmodified review reports.
The auditor’s modified review reports.
This Auditing Standard provides illustrative detailed procedures that may be performed in an engagement to review an interim financial report that are not contained in ISRE 2410.
ISRE 2410 includes a Public Sector Perspective section. This Auditing Standard does not include a separate section on the public sector as it is sector neutral.
Compliance with this Auditing Standard enables compliance with ISRE 2410 to the extent described above.