ASA 320 - Materiality and Audit Adjustments - April 2006

Administered by Department of the Treasury

Legislation au F2006L01375 Not in force Legislative Instrument

Legislation content

 (April 2006)

 

 

 

 

Explanatory Statement

 

ASA 320 Materiality and Audit Adjustments

 

 

Issued by the Auditing and Assurance Standards Board

 

Explanatory Statement

Reasons for Issuing ASA 320 Materiality and Audit Adjustments

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 320 Materiality and Audit Adjustments, 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 320 Materiality and Audit Adjustments

The purpose of Auditing Standard ASA 320 is to establish mandatory requirements and to provide explanatory guidance on materiality and its relationship with audit risk.

Auditing Standard ASA 320 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

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

Main changes from Auditing Standard AUS 306 (June 2001) Materiality and Audit Adjustments

The main differences between ASA 320 and AUS 306 are that in ASA 320:

  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 306 by the word ‘should’.
  2. The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 306 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been re-drafted to clarify that they form part of the explanatory guidance.
  3. The following implied obligations, in AUS 306, have been elevated and re-stated as specific mandatory requirements:

(a)                an auditor shall make a preliminary assessment of materiality to establish an appropriate quantitative materiality level to plan risk assessment procedures, further audit procedures at the assertion level, selection strategies and other audit procedures (paragraph 12);

(b)                the auditor shall consider qualitative factors, which impact on the materiality of individual misstatements, to assess:

(i) the significance of the misstatement to the particular entity;

(ii) the pervasiveness of the misstatement; and

(iii) the effect of misstatement on the financial report as a whole (paragraph 21);

(c)                the auditor shall bring to the attention of management, misstatements identified during the audit, other than those that are clearly trivial, for correction prior to evaluating the effect of the remaining uncorrected misstatements (paragraph 24); and

(d)                when the auditor concludes that uncorrected misstatements are immaterial individually and in aggregate to the financial report, the auditor shall endeavour to obtain representations from management to acknowledge:

(i) uncorrected misstatements have been brought to their attention by the auditor; and

(ii) they have considered the effect of any uncorrected misstatements, aggregated during and pertaining to the latest period, on the financial report and consider the misstatements are immaterial individually and in aggregate to the financial report taken as a whole (paragraph 35).

4.                   Additional explanatory guidance is provided in relation to misstatements, identified during the audit, that an auditor shall bring to the attention of management (paragraphs 25 and 26).

5.                   The objective of an audit of a financial report is included within explanatory guidance and refers to Auditing Standard ASA 200 Objective and General Principles Governing an Audit of a Financial Report (paragraph 8). AUS 306, however, requires that the objective of an audit of a financial report is to enable the auditor to express an opinion whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.

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 33/05 Proposed Auditing Standard: Materiality and Audit Adjustments (Re-issuance of AUS 306) was issued on 16 December 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 320 Materiality and Audit Adjustments in 2006, as required by the legislative provisions outlined in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 and the Corporations Act 2001. The AUASB, established as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001, is empowered to develop Auditing Standards that are of the highest quality, use the International Standards on Auditing as a base, conform with the Australian regulatory environment, and are capable of enforcement. Auditing Standard ASA 320 was developed in accordance with the Financial Reporting Council’s Strategic Direction to the AUASB, dated 6 April 2005. The purpose of Auditing Standard ASA 320 is to set mandatory requirements and provide explanatory guidance on materiality and its relationship with audit risk, ensuring that auditors have a clear understanding of their obligations when assessing materiality in financial reports. The standard is operative for financial reporting periods commencing on or after 1 July 2006, and it supersedes the previous Auditing Standard AUS 306 with several key differences, including the use of mandatory terminology and the elevation of implied obligations into specific mandatory requirements.

Scope and Application

Auditing Standard ASA 320 Materiality and Audit Adjustments, issued by the Auditing and Assurance Standards Board (AUASB), applies to auditors who are responsible for the audit of financial reports of companies and other entities that are required to comply with the Corporations Act 2001. This includes both individual auditors and audit firms that conduct audits within Australia, given the Act's national jurisdictional reach. The AUASB, established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, has the authority to set these standards under the Corporations Act 2001. The standard provides mandatory requirements and explanatory guidance on materiality and its relationship with audit risk, and it must be read in conjunction with the Preamble to AUASB Standards. The standard became operative for financial reporting periods commencing on or after 1 July 2006. The AUASB has incorporated feedback from public consultation and aligned the standard with the International Standards on Auditing while ensuring compliance with the Australian regulatory environment.

Key Provisions

Auditing Standard ASA 320 Materiality and Audit Adjustments, issued by the Auditing and Assurance Standards Board (AUASB), outlines key provisions for auditors conducting audits of financial reports. This standard, effective from financial reporting periods commencing on or after 1 July 2006, establishes mandatory requirements and provides explanatory guidance on materiality and its relationship with audit risk. The main sections of this standard include the mandatory requirements for auditors (paragraph 12), considerations of qualitative factors impacting materiality (paragraph 21), the requirement to bring misstatements to management's attention (paragraph 24), and obtaining representations from management regarding uncorrected misstatements (paragraph 35). Under ASA 320, auditors must make a preliminary assessment of materiality to establish a quantitative materiality level for planning purposes. They must also consider qualitative factors that affect the materiality of misstatements, such as the significance to the particular entity, the pervasiveness of the misstatement, and the effect on the financial report as a whole. Auditors are required to communicate misstatements identified during the audit to management, except those that are clearly trivial, before evaluating the effect of any uncorrected misstatements. Furthermore, when concluding that uncorrected misstatements are immaterial individually and in aggregate, auditors must seek representations from management acknowledging that they have been informed about these misstatements and have considered their effect on the financial report. The Auditing Standard imposes specific obligations on auditors, including the need to perform a preliminary assessment of materiality, consider qualitative factors impacting materiality, communicate misstatements to management, and obtain management representations regarding uncorrected misstatements. These requirements aim to ensure that auditors effectively manage materiality and audit risk throughout the audit process. Failure to comply with these obligations may result in non-compliance with the Auditing Standard, potentially leading to legal and professional repercussions for the auditor. Breaches of Auditing Standard ASA 320 may result in various consequences, including legal penalties and professional sanctions. While the specific penalties for non-compliance are not detailed in the explanatory statement, non-compliance with Auditing Standards generally can lead to legal actions under the Corporations Act 2001 and disciplinary actions by professional bodies. Additionally, non-compliance may undermine the integrity and reliability of the audit, potentially leading to adverse outcomes for the audited entity and its stakeholders. Auditors are therefore expected to adhere to the mandatory requirements and guidance provided by ASA 320 to ensure the quality and effectiveness of their audits.

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