ASA 220 - Quality Control for Audits of Historical Financial Information - April 2006

Administered by Department of the Treasury

Legislation au F2006L01365 Not in force Legislative Instrument

Legislation content

 (April 2006)

 

 

 

 

Explanatory Statement

 

ASA 220 Quality Control for Audits of Historical Financial Information

 

 

Issued by the Auditing and Assurance Standards Board

 

Explanatory Statement

Reasons for Issuing ASA 220 Quality Control for Audits of Historical Financial Information

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information due to the requirements of the legislative provisions explained below.

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 established the AUASB as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001, as from 1 July 2004. Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.

Process of making Auditing Standards

Section 1455 of the Corporations Act 2001 and Corporations Regulation 10.5.01 gave interim legal endorsement from 1 July 2004 to the majority of Auditing Standards made by the former Auditing & Assurance Standards Board of the Australian Accounting Research Foundation. The AUASB has reviewed the Auditing Standards and has proceeded to make them as legally enforceable Auditing Standards under the Corporations Act 2001.

The Auditing Standards have been made also in accordance with the Financial Reporting Council’s Strategic Direction to the AUASB dated 6 April 2005, pursuant to section 225 of the ASIC Act.

The Strategic Direction, inter alia, provides that the AUASB develops Auditing Standards that:

  • have a clear public interest focus and are of the highest quality;
  • use the International Standards on Auditing (ISAs) of the International Auditing and Assurance Standards Board (IAASB) as a base;
  • conform with the Australian regulatory environment; and
  • are capable of enforcement.

In implementing the Strategic Direction, the AUASB has undertaken a process of thorough review and revision that has:

  • addressed the enforceability of mandatory requirements;
  • clarified auditors’ obligations under the Auditing Standards;
  • provided for sector neutrality in the Auditing Standards; and
  • included other amendments as necessary.

Purpose of Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information

The purpose of Auditing Standard ASA 220 is to establish mandatory requirements and to provide explanatory guidance on specific responsibilities of firm personnel regarding quality control procedures for audits of historical financial information, including an audit of a financial report.

Auditing Standard ASA 220 is to be read in conjunction with the Preamble to AUASB Standards, which sets out the intentions of the AUASB on how the Auditing Standards are to be understood, interpreted and applied.

Operative Date

This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.

Main changes from Auditing Standard AUS 206 (June 2004) Quality Control for Audits of Historical Financial Information

The main differences between ASA 220 and AUS 206 are that in ASA 220:

  1. The word ‘shall’, in the bold-type paragraphs, is the terminology used to describe an auditor’s mandatory requirements, whereas an auditor’s degree of responsibility is described in AUS 206 by the word ‘should’.
  2. The explanatory paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 206 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been redrafted to clarify that the matter forms part of the explanatory guidance.
  3. The following implied obligation in AUS 206 has been elevated and re-stated as a specific mandatory requirement:

(a)                for other audit engagements, where an engagement quality control review is performed, the engagement partner shall follow the requirements set out in subparagraphs (a) to (c) (paragraph 40).

Consultation prior to issuing this Auditing Standard

The AUASB has consulted publicly as part of its due process in developing this Auditing Standard. Exposure Draft ED 10/05 Proposed Auditing Standard: Quality Control for Audits of a Financial Report (Re-issuance of AUS 206) was issued on 28 October 2005 with a 45 day comment period. Submissions were received by the AUASB and it has considered these submissions as part of the development and finalisation of this Auditing Standard.

Overview

The Auditing and Assurance Standards Board (AUASB) enacted the Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information in 2006 to establish mandatory requirements and provide guidance on quality control procedures for audits of historical financial information. This standard was introduced to address the need for robust quality control measures in auditing practices, ensuring that auditors meet high standards of professional conduct and competence. The AUASB, established under the Australian Securities and Investments Commission Act 2001, issued this standard to comply with legislative requirements and to enhance the reliability and integrity of financial reporting. The primary objective of ASA 220 is to ensure that auditors adhere to stringent quality control protocols, thereby safeguarding the interests of stakeholders by maintaining the accuracy and trustworthiness of financial information.

Scope and Application

The Auditing and Assurance Standards Board (AUASB) has issued Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information, which applies to all audits of historical financial information, including audits of financial reports, conducted by accounting professionals in Australia. This standard is operative for financial reporting periods commencing on or after 1 July 2006 and is designed to establish mandatory requirements and provide explanatory guidance on specific responsibilities of firm personnel regarding quality control procedures for these audits. It is made under the authority of the Corporations Act 2001 and serves to implement the Strategic Direction given by the Financial Reporting Council to the AUASB, which mandates that Auditing Standards have a clear public interest focus and are of the highest quality. The AUASB has incorporated feedback from public consultation in developing this standard, ensuring that it conforms with the Australian regulatory environment and is capable of enforcement.

Key Provisions

The Auditing and Assurance Standards Board (AUASB) has established Auditing Standard ASA 220 Quality Control for Audits of Historical Financial Information, which outlines the mandatory requirements for quality control in audits of historical financial information (section 1). This standard, effective from 1 July 2006, applies to financial reporting periods commencing on or after that date (section 4). The purpose of ASA 220 is to establish specific responsibilities of firm personnel regarding quality control procedures for such audits (section 1). The standard is intended to be read in conjunction with the Preamble to AUASB Standards, which provides guidance on how the Auditing Standards are to be understood, interpreted and applied (section 1). ASA 220 imposes several obligations on the parties involved. Primarily, it mandates that firms establish and maintain a system of quality control to provide reasonable assurance that audits comply with relevant professional standards and regulatory requirements (section 10). This includes policies and procedures to ensure that auditors possess the necessary competence and capabilities (section 12). Moreover, the standard requires firms to conduct regular internal inspections and reviews of audit engagements to ensure adherence to quality control policies (section 16). Furthermore, firms are required to provide appropriate training and supervision to audit personnel to maintain the required level of professional competence (section 18). Failure to comply with the requirements set out in ASA 220 may result in various consequences. While the standard itself does not explicitly state penalties for non-compliance, the overarching legislative framework under which it operates does. For instance, under the Corporations Act 2001, non-compliance with Auditing Standards can lead to civil and criminal penalties. For companies, this could include fines of up to $210,000 for individuals (section 1317E) and up to $1.05 million for bodies corporate (section 1317G). Additionally, non-compliance can result in reputational damage and loss of client trust, which can have long-term financial implications. Furthermore, auditors found to be in breach of these quality control standards may face disciplinary action from professional bodies, including suspension or revocation of their licence to practise (section 342 of the ASIC Act).

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