(April 2006)
Explanatory Statement
ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report 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 250 Consideration of Laws and Regulations in an Audit of a Financial Report
The purpose of Auditing Standard ASA 250 is to establish mandatory requirements and to provide explanatory guidance on the auditor’s responsibility to consider laws and regulations in an audit of a financial report.
Auditing Standard ASA 250 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 218 (January 2002) Consideration of Laws and Regulations in an Audit of a Financial Report
The main differences between ASA 250 and AUS 218 are that in ASA 250:
- 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 218 by the word ‘should’.
- The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, in AUS 218 some obligations are implied within certain explanatory paragraphs. Accordingly, these paragraphs have been re-drafted to clarify that the matter forms part of the explanatory guidance.
- Guidance has not been included on the interpretation of terms used in section 311 of the Corporations Act 2001 regarding an auditor’s responsibilities to report suspected contraventions of the Corporations Act 2001 to the Australian Securities and Investments Commission (ASIC), in light of amendments to section 311 and re-issuance of ASIC Practice Note 34 “Auditors’ obligations: reporting to ASIC”.
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 14/05 Proposed Auditing Standard: Consideration of Laws and Regulations in an Audit of a Financial Report (Re-issuance of AUS 218) 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 Auditing Standard ASA 250, titled "Consideration of Laws and Regulations in an Audit of a Financial Report," in 2006 to address the need for clear, mandatory requirements and explanatory guidance regarding the auditor’s responsibility to consider laws and regulations in an audit of a financial report. This standard was developed under the authority granted by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, which established the AUASB as an independent statutory body, and the Corporations Act 2001, which allows the AUASB to create auditing standards. The aim was to ensure that these standards are of high quality, focus on the public interest, and conform to the Australian regulatory environment. ASA 250 became operative for financial reporting periods commencing on or after 1 July 2006, and it represents a significant revision from the previous standard AUS 218, notably by using the term 'shall' to denote mandatory requirements and providing more explicit explanatory guidance to assist auditors in fulfilling these requirements.
Scope and Application
Auditing Standard ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report applies to auditors engaged in the audit of financial reports for entities subject to the Corporations Act 2001. The standard sets out mandatory requirements and provides explanatory guidance on the auditor’s responsibility to consider laws and regulations in an audit, ensuring that the financial reports are accurate and comply with relevant legal requirements. The standard is effective for financial reporting periods commencing on or after 1 July 2006. It extends to all auditors within the scope of the Corporations Act 2001, thereby covering a broad range of industries and entities, including public and proprietary companies, and other bodies corporate as defined under the Act. The standard also extends its reach through subordinate instruments and guidelines issued by the Auditing and Assurance Standards Board (AUASB), which is mandated under section 336 of the Corporations Act 2001. There are no explicit exclusions or exemptions mentioned in the explanatory statement, though the application of the standard may vary based on the specific circumstances of each audit and the nature of the entity being audited.
Key Provisions
Auditing Standard ASA 250, which came into effect for financial reporting periods commencing on or after 1 July 2006, sets out the auditor's responsibility to consider laws and regulations during an audit of a financial report. The purpose of this standard is to provide mandatory requirements and explanatory guidance to ensure that auditors properly account for legal and regulatory factors when auditing financial reports. Key provisions of ASA 250 (sections 10-18) require auditors to identify and assess the compliance with laws and regulations that may have a material impact on the financial report, and to design and implement appropriate audit procedures to address identified risks of material misstatement. This includes understanding the legal framework and regulatory environment in which the entity operates, as well as evaluating the design and implementation of internal controls related to compliance with laws and regulations.
The Auditing Standard imposes several obligations on auditors, such as maintaining professional scepticism and exercising professional judgement when considering the potential effects of laws and regulations on the financial report. Auditors must also communicate with management and, where appropriate, those charged with governance, about the auditor's responsibilities under the standard and any identified non-compliance with laws and regulations. Additionally, auditors are required to document their consideration of laws and regulations and the related audit procedures and findings. These obligations are essential to ensure that auditors provide a thorough and accurate assessment of compliance with relevant laws and regulations, and to maintain the integrity and reliability of the financial reporting process.
Failure to comply with Auditing Standard ASA 250 may result in various consequences, including potential legal and professional liability for the auditor. Under section 336 of the Corporations Act 2001, Auditing Standards, such as ASA 250, are legally enforceable, and non-compliance may be subject to review and enforcement by the Australian Securities and Investments Commission (ASIC). In the case of civil penalties, ASIC may impose penalties for breaches of Auditing Standards, with maximum penalties varying depending on the nature and severity of the breach. Additionally, non-compliance with ASA 250 may result in disciplinary action by professional accounting bodies, reputational damage, and loss of client trust and confidence. It is therefore crucial for auditors to adhere to the requirements of ASA 250 to avoid such negative consequences.