(April 2006)
Explanatory Statement
ASA 505 External Confirmations
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 505 External Confirmations
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 505 External Confirmations, 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 505 External Confirmations
The purpose of Auditing Standard ASA 505 is to establish mandatory requirements and to provide explanatory guidance on the auditor’s use of external confirmations as a means of obtaining audit evidence.
Auditing Standard ASA 505 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 504 (July 2002) External Confirmations
The main differences between ASA 505 and AUS 504 are that in ASA 505:
- 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 504 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 504 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 4/05 Proposed Auditing Standard: External Confirmations (Re-issuance of AUS 504) 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 505 External Confirmations in 2006, addressing the need for a clear and enforceable framework governing the use of external confirmations in auditing processes. This standard was enacted in response to legislative provisions under the Corporations Act 2001, which mandates the AUASB to create Auditing Standards that ensure high-quality, enforceable, and sector-neutral auditing practices. ASA 505 aims to establish mandatory requirements and provide explanatory guidance to auditors, ensuring they obtain reliable audit evidence through external confirmations. The standard was developed following consultations and revisions based on feedback to align with the Financial Reporting Council’s Strategic Direction and the International Standards on Auditing (ISAs). ASA 505, operative for financial reporting periods starting from 1 July 2006, replaces the earlier AUS 504, with key changes including the use of mandatory terminology and more explicit explanatory guidance.
Scope and Application
The Auditing and Assurance Standards Board (AUASB), established under the Australian Securities and Investments Commission Act 2001, issues Auditing Standard ASA 505 External Confirmations to meet the legislative requirements outlined in the Corporations Act 2001. This standard applies to auditors who conduct audits of financial reports and other historical financial information, with a clear focus on enhancing the quality and enforceability of auditing practices. The standard mandates the use of external confirmations as a method for auditors to obtain audit evidence, ensuring that these practices align with the highest quality standards and the Australian regulatory environment. The scope of ASA 505 encompasses all financial reporting periods commencing on or after 1 July 2006, thereby extending its reach to all entities subject to auditing under the Corporations Act. The standard is designed to clarify auditors' obligations, promote sector neutrality, and provide comprehensive guidance on the use of external confirmations, making it a crucial component of the auditing framework in Australia.
Key Provisions
Auditing Standard ASA 505 External Confirmations, issued by the Auditing and Assurance Standards Board (AUASB), sets out specific requirements and guidance for auditors regarding the use of external confirmations to gather audit evidence. Section 1 of the standard outlines the mandatory requirements for auditors, stipulating that they shall use external confirmations when they deem it appropriate to obtain audit evidence. This is to ensure that the auditor has a reliable basis for forming an opinion on the financial report (Section 4). The standard also provides detailed guidance on how to effectively use external confirmations, including the form of confirmations and the circumstances under which they should be used (Section 5).
The Auditing Standard imposes several obligations on auditors. Auditors must assess the reliability of external confirmations by considering the source and the circumstances under which the confirmation was obtained. They must also determine the nature, timing, and extent of the confirmation procedures based on the assessed risks of material misstatement (Section 6). Additionally, auditors are required to perform alternative audit procedures if they believe the confirmations are not reliable, or if they do not receive a response (Section 8). The standard also mandates that auditors document their use of external confirmations, including the rationale for the approach taken and the results obtained (Section 10).
Failure to comply with the requirements of Auditing Standard ASA 505 may have significant consequences. If an auditor does not adequately use external confirmations or fails to perform alternative procedures when necessary, it could result in a breach of auditing standards. Such breaches could lead to disciplinary actions by the AUASB or other regulatory bodies, and may also result in legal consequences for the auditor or the audited entity. For example, if the non-compliance leads to a materially misstated financial report, it could result in penalties under the Corporations Act 2001, including fines and, in some cases, imprisonment for directors or officers of the entity (Section 1300). The exact penalties will depend on the specific circumstances and the extent of the non-compliance.