(April 2006)
Explanatory Statement
ASA 500 Audit Evidence
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 500 Audit Evidence
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 500 Audit Evidence, 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 500 Audit Evidence
The purpose of Auditing Standard ASA 500 is to establish mandatory requirements and to provide explanatory guidance on what constitutes audit evidence in an audit of a financial report, the quantity and quality of audit evidence to be obtained, and the audit procedures that auditors use for obtaining that audit evidence.
Auditing Standard ASA 500 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 502 (February 2004) Audit Evidence
The main differences between ASA 500 and AUS 502 are that in ASA 500:
- 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 502 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 502 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.
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 3/05 Proposed Auditing Standard: Audit Evidence (Re-issuance of AUS 502) was issued on 31 August 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) has issued Auditing Standard ASA 500 Audit Evidence pursuant to the legislative provisions established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. This Act created the AUASB as an independent statutory body under the Australian Securities and Investments Commission Act 2001, empowering it to develop Auditing Standards for corporations legislation. The Auditing Standards are legally enforceable instruments under the Corporations Act 2001. The AUASB has ensured that these standards are of high quality, clearly focused on the public interest, based on the International Standards on Auditing (ISAs), conform to the Australian regulatory environment, and are enforceable. ASA 500 provides mandatory requirements and guidance on audit evidence in financial report audits, detailing the nature, quantity, quality of evidence, and procedures for obtaining it, to be read in conjunction with the AUASB Standards Preamble. The Standard became operative for financial reporting periods starting on or after 1 July 2006. This Auditing Standard was developed following public consultation, with the AUASB considering submissions received during the exposure draft comment period before finalisation.
Scope and Application
Auditing Standard ASA 500 Audit Evidence applies to auditors engaged in the auditing of financial reports, ensuring that these audits meet specific criteria for the quality and quantity of audit evidence, and the procedures used for obtaining that evidence. This standard is applicable to all auditors who perform audits of financial reports under the Corporations Act 2001. It is designed to ensure that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion on the financial report. The geographic reach of this Act is national, as it applies across Australia in accordance with federal legislative provisions. The Act does not explicitly exclude any entities or industries, but rather sets out general principles that must be adhered to by all auditors. The application of ASA 500 is further detailed and potentially extended or restricted through subordinate instruments, such as the Preamble to AUASB Standards, which provides additional context and guidance on the interpretation and application of the Auditing Standards.
Key Provisions
Auditing Standard ASA 500 Audit Evidence, issued by the Auditing and Assurance Standards Board (AUASB), establishes mandatory requirements and provides guidance on what constitutes audit evidence in the audit of financial reports. This includes the quality and quantity of evidence needed and the procedures for obtaining it. The Standard was issued under section 336 of the Corporations Act 2001, which allows the AUASB to create Auditing Standards. ASA 500 became effective for financial reporting periods commencing on or after 1 July 2006.
Auditors are obligated to obtain sufficient appropriate audit evidence to form a basis for their opinion on the financial report. This means they must ensure the evidence is both relevant and reliable, and of a sufficient quantity to support their conclusions. The Standard mandates that auditors use appropriate audit procedures to gather this evidence, which can include inspection, observation, confirmation, recalculation, and analytical procedures. The evidence must be documented in the audit file and auditors must ensure that it is clearly linked to the assertions in the financial report.
Breaching the requirements of ASA 500 can lead to serious consequences for auditors and their firms. If an auditor fails to obtain sufficient appropriate audit evidence, they may be unable to support their opinion on the financial report, potentially resulting in a misstated audit opinion. Such failures can lead to professional misconduct proceedings, fines, or other penalties imposed by regulatory bodies such as the Australian Securities and Investments Commission (ASIC). Additionally, clients may seek compensation for any losses incurred due to reliance on an incorrect audit opinion. The severity of the penalties depends on the nature and extent of the breach, as well as any mitigating or aggravating factors.