ASA 508 - Enquiry Regarding Litigation and Claims - April 2006

Administered by Department of the Treasury

Legislation au F2006L01384 Not in force Legislative Instrument

Legislation content

 (April 2006)

 

 

 

 

Explanatory Statement

 

ASA 508 Enquiry Regarding Litigation and Claims

 

 

Issued by the Auditing and Assurance Standards Board

 

Explanatory Statement

Reasons for Issuing ASA 508 Enquiry Regarding Litigation and Claims

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 508 Enquiry Regarding Litigation and Claims 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 508 Enquiry Regarding Litigation and Claims

The purpose of Auditing Standard ASA 508 is to establish mandatory requirements and provide explanatory guidance on obtaining sufficient appropriate audit evidence regarding legal matters affecting the entity. In particular, this Auditing Standard identifies the appropriate method of communication with the entity’s lawyers in connection with litigation by or against the entity.

Auditing Standard ASA 508 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.

The AUASB is aware that due to recent legal developments the disclosure of certain information by the entity’s lawyers to the auditor in a representation letter may in some situations impinge on legal professional privilege between the entity and its lawyers. The AUASB intends to develop separate audit guidance on this matter at a later date.

Operative Date

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

Main changes from Auditing Standard AUS 508 (July 2002) Enquiry Regarding Litigation and Claims

The main differences between ASA 508 and AUS 508 are that in ASA 508:

  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 508 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 508 some obligations are implied within certain explanatory paragraphs. Accordingly, these paragraphs have been amended to clarify that these matters form part of the explanatory guidance.
  3. This Auditing Standard includes explanatory guidance, not included in AUS 508, regarding circumstances when it may be difficult to either obtain a representation letter or be provided with information about legal matters from the entity’s lawyers, and alternative audit procedures that the auditor may consider in such circumstances (paragraphs 27 and 28).

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 27/05 Proposed Auditing Standard: Enquiry Regarding Litigation and Claims (Re-issuance of AUS 508) was issued on 9 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 508 Enquiry Regarding Litigation and Claims in 2006 to address the need for clear, enforceable standards on auditors' obligations when dealing with litigation and claims. This Act was established under the Corporations Act 2001, which mandates that the AUASB create Auditing Standards for corporations legislation. The purpose of ASA 508 is to set mandatory requirements and provide guidance on obtaining sufficient appropriate audit evidence regarding legal matters affecting the entity, including the appropriate method of communication with the entity's lawyers. The AUASB developed this Auditing Standard in accordance with the Financial Reporting Council's Strategic Direction, ensuring it aligns with international standards and the Australian regulatory environment, while being enforceable and sector neutral. This Auditing Standard became operative for financial reporting periods commencing on or after 1 July 2006, replacing the previous Auditing Standard AUS 508 with updated terminology and additional explanatory guidance.

Scope and Application

Auditing Standard ASA 508 Enquiry Regarding Litigation and Claims applies to auditors of entities in Australia, particularly those preparing financial reports. The Auditing and Assurance Standards Board, established under the Australian Securities and Investments Commission Act 2001, issues this Auditing Standard for the purposes of the corporations legislation, specifically under section 336 of the Corporations Act 2001. The Standard is operative for financial reporting periods commencing on or after 1 July 2006 and is intended to ensure auditors obtain sufficient appropriate audit evidence regarding legal matters affecting the entity. The Standard mandates that auditors communicate with the entity’s lawyers to understand litigation by or against the entity, and it provides guidance on handling situations where obtaining such information may be challenging. The Standard also clarifies the distinction between mandatory requirements and explanatory guidance, with 'shall' denoting mandatory requirements and explanatory guidance offering further assistance to auditors in fulfilling these requirements.

Key Provisions

The Auditing Standard ASA 508, issued by the Auditing and Assurance Standards Board (AUASB), contains several key provisions that pertain to the auditor's responsibility in obtaining sufficient appropriate audit evidence regarding litigation and claims affecting the entity. Section 5 of the Auditing Standard requires the auditor to perform specific procedures to identify litigation and claims that may materially affect the financial report. This involves obtaining an understanding of the entity's processes for identifying and accounting for such matters, including reviewing board minutes, communications with external legal counsel, and reviewing any documentation related to litigation and claims. Section 6 further mandates that the auditor communicate with the entity's external legal counsel to obtain information pertinent to the audit, such as the status of any litigation and the potential impact on the financial statements. This communication should typically be documented in the form of a representation letter from the entity’s lawyers. The Auditing Standard imposes specific obligations on both the auditor and the entity’s legal counsel. Auditors must conduct inquiries as outlined in the Standard to ensure that all material litigation and claims are identified and appropriately reflected in the financial statements. The entity, on the other hand, is expected to cooperate fully with the auditor's inquiries, providing all necessary information and documentation, including a representation letter from their legal counsel. Failure to provide this information or providing misleading information can lead to significant issues in the audit process. Failure to comply with the requirements of ASA 508 can result in various consequences. If the auditor does not adhere to the Standard, it may lead to an inadequate audit, potentially resulting in an incorrect audit opinion. This, in turn, can have serious ramifications, including financial losses for investors and stakeholders who rely on the audit opinion. Additionally, the auditor's firm may face professional discipline, including fines or suspension of their registration as an auditor, under the Corporations Act 2001. For the entity, non-compliance with the Standard could result in the need for reissuing the financial statements or facing regulatory action if the audit opinion is found to be materially misstated.

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