(April 2006)
Explanatory Statement
ASA 300 Planning an Audit of a Financial Report
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 300 Planning an Audit of a Financial Report
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 300 Planning 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 300 Planning an Audit of a Financial Report
The purpose of Auditing Standard ASA 300 is to establish mandatory requirements and to provide explanatory guidance on the considerations and activities applicable to planning an audit of a financial report. This Auditing Standard is framed in the context of recurring audits. In addition, matters that the auditor is required to perform in initial audit engagements are included in paragraph 31.
Auditing Standard ASA 300 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 302 (October 1995) Planning
The main differences between ASA 300 and AUS 302 are that in ASA 300:
- 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 302 by the word ‘should’.
- The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 302 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.
- Additional mandatory requirements, which are not in AUS 302, have been included. Under this Auditing Standard the auditor is required to:
(i) perform various preliminary engagement activities at the commencement of the audit engagement, including evaluating the auditor’s independence (paragraph 9);
(ii) establish an overall audit strategy, setting out the scope, timing and direction of the audit as a guide to the development of the more detailed audit plan (paragraph 12);
(iii) develop an audit plan for the audit in order to reduce audit risk to an acceptably low level (paragraph 18);
(iv) update the overall audit strategy and the audit plan for any changes as necessary during the course of the audit (paragraph 21);
(v) plan the nature, timing and extent of direction and supervision of the audit engagement team members and review of their work (paragraph 23); and
(vi) perform various procedures prior to starting an initial audit assignment (paragraph 31).
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 15/05 Proposed Auditing Standard: Planning an Audit of a Financial Report (Re-issuance of AUS 302) 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) issued Auditing Standard ASA 300 Planning an Audit of a Financial Report in 2006. This standard was introduced to provide mandatory requirements and explanatory guidance on the planning process for an audit of a financial report, aiming to enhance the quality and effectiveness of audits. The AUASB, established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, operates under the legislative framework of the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001. The primary policy objective behind ASA 300 is to ensure that auditors approach the planning phase with due diligence, thereby reducing audit risk and improving the reliability of financial reports. This standard updates previous guidance by clarifying auditor responsibilities and introducing new mandatory requirements, such as the need to establish an overall audit strategy and develop a detailed audit plan.
Scope and Application
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 300 Planning an Audit of a Financial Report to provide mandatory requirements and explanatory guidance for auditors when planning an audit of a financial report. The AUASB, established under section 227A of the Australian Securities and Investments Commission Act 2001, has the authority to make such Auditing Standards under section 336 of the Corporations Act 2001, which are legislative instruments under the Legislative Instruments Act 2003. ASA 300 applies to auditors who are engaged in the planning of audits for financial reports, and it is particularly relevant for recurring audits, although it also addresses specific considerations for initial audits. The Standard mandates the performance of various preliminary engagement activities, the establishment of an overall audit strategy, the development of a detailed audit plan, and the planning of direction and supervision of the audit engagement team. It is designed to ensure that audit risks are reduced to an acceptably low level. ASA 300 is operative for financial reporting periods commencing on or after 1 July 2006, and it supersedes the previous standard AUS 302, incorporating additional mandatory requirements and clarifying the distinctions between mandatory obligations and explanatory guidance. The AUASB undertook extensive consultation with stakeholders before issuing this Auditing Standard, ensuring its alignment with the highest quality standards and the Australian regulatory environment.
Key Provisions
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 300 Planning an Audit of a Financial Report (section 1) as an independent statutory body established under section 227A of the Australian Securities and Investments Commission Act 2001, with a mandate to make Auditing Standards for the purposes of the corporations legislation under section 336 of the Corporations Act 2001. Auditing Standard ASA 300 sets out the mandatory requirements and explanatory guidance for planning an audit of a financial report, aimed at establishing a clear public interest focus and conforming to the Australian regulatory environment (section 1). The Auditing Standard, which is operative for financial reporting periods commencing on or after 1 July 2006 (section 1), was developed 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 (section 1). The AUASB has undertaken a process of thorough review and revision that has addressed the enforceability of mandatory requirements, clarified auditors’ obligations, provided for sector neutrality in the Auditing Standards, and included other amendments as necessary (section 1).
Auditing Standard ASA 300 requires the auditor to perform various preliminary engagement activities at the commencement of the audit engagement, including evaluating the auditor’s independence (paragraph 9). The auditor must establish an overall audit strategy, setting out the scope, timing and direction of the audit as a guide to the development of the more detailed audit plan (paragraph 12). The auditor is required to develop an audit plan for the audit in order to reduce audit risk to an acceptably low level (paragraph 18), update the overall audit strategy and the audit plan for any changes as necessary during the course of the audit (paragraph 21), plan the nature, timing and extent of direction and supervision of the audit engagement team members and review of their work (paragraph 23), and perform various procedures prior to starting an initial audit assignment (paragraph 31). These requirements are intended to ensure that the auditor has a clear understanding of the audit engagement, and that the audit is planned in a manner that will reduce the risk of material misstatement in the financial report.
The Auditing Standard imposes obligations and requirements on the parties or entities it governs, including auditors, audit firms, and their clients. The auditor is required to perform the preliminary engagement activities, establish an overall audit strategy, develop an audit plan, update the strategy and plan as necessary, plan the direction and supervision of the audit engagement team, and perform various procedures prior to starting an initial audit assignment. These requirements are intended to ensure that the auditor has a clear understanding of the audit engagement, and that the audit is planned in a manner that will reduce the risk of material misstatement in the financial report.
The Auditing Standard does not explicitly state any offences, penalties, or civil/criminal consequences for breach. However, the Auditing and Assurance Standards Board (AUASB) has the power to make Auditing Standards that are capable of enforcement under section 336 of the Corporations Act 2001. The AUASB has undertaken a process of thorough review and revision that has addressed the enforceability of mandatory requirements, clarified auditors’ obligations, provided for sector neutrality in the Auditing Standards, and included other amendments as necessary (section 1). Therefore, it is reasonable to assume that the AUASB has the power to impose penalties or other consequences for non-compliance with Auditing Standard ASA 300. The specific penalties or consequences would depend on the nature and severity of the non-compliance, and would be determined by the AUASB or other relevant regulatory body.