(April 2006)
Explanatory Statement
ASA 520 Analytical Procedures
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 520 Analytical Procedures
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 520 Analytical Procedures 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 520 Analytical Procedures
The purpose of Auditing Standard ASA 520 is to establish mandatory requirements and provide explanatory guidance on the application of analytical procedures during an audit of a financial report.
Auditing Standard ASA 520 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 512 (October 1995) Analytical Procedures
The main differences between ASA 520 and AUS 512 are that in ASA 520:
- 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 512 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 512 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.
- Appendix 1 – Examples of Analytical Procedures in AUS 512 has been removed.
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 18/05 Proposed Auditing Standard: Analytical Procedures (Re-issuance of AUS 512) 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) introduced Auditing Standard ASA 520 Analytical Procedures in 2006 to provide mandatory requirements and guidance on the application of analytical procedures during an audit of a financial report. This was enacted under the Corporations Act 2001, which authorised the AUASB to make Auditing Standards for corporations legislation. The purpose of ASA 520 was to clarify auditors' obligations and ensure the standards conform to the Australian regulatory environment and the International Standards on Auditing of the International Auditing and Assurance Standards Board (IAASB). The standard was developed following extensive consultation and review processes, and it came into effect for financial reporting periods commencing on or after 1 July 2006, replacing the previous Auditing Standard AUS 512. The AUASB's objective was to enhance the quality and enforceability of auditing standards, ensuring they are of the highest quality, clearly focused on the public interest, and capable of enforcement.
Scope and Application
Auditing Standard ASA 520 Analytical Procedures, issued by the Auditing and Assurance Standards Board (AUASB), applies to auditors who are engaged in the preparation and presentation of auditing standards for financial reports under the Corporations Act 2001. This Auditing Standard is designed to establish mandatory requirements and provide explanatory guidance on the application of analytical procedures during an audit of a financial report, ensuring that auditors operate within a clearly defined framework. The AUASB, established under section 227A of the Australian Securities and Investments Commission Act 2001, makes these Auditing Standards as legally enforceable instruments under the Corporations Act 2001. ASA 520 is operative for financial reporting periods commencing on or after 1 July 2006 and is intended to enhance the quality and enforceability of auditing standards by providing clear, sector-neutral, and enforceable guidance. The standard uses the International Standards on Auditing (ISAs) as a base, ensuring alignment with international best practices while being tailored to the Australian regulatory environment.
Key Provisions
The Auditing Standard ASA 520 Analytical Procedures, issued by the Auditing and Assurance Standards Board (AUASB), primarily outlines the mandatory requirements and explanatory guidance for the application of analytical procedures during an audit of a financial report (section 1). The standard, which became effective for financial reporting periods starting on or after 1 July 2006, is intended to provide clear and enforceable guidelines for auditors to follow. It was developed in response to legislative provisions under the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 and the Corporations Act 2001.
The Auditing Standard ASA 520 imposes specific obligations on auditors, including the requirement to apply analytical procedures at various stages of the audit process, such as during the planning phase, when performing an overall review, and in evaluating the audit findings (section 4). Auditors are mandated to consider the expectations developed by analytical procedures and investigate any significant unexpected differences or fluctuations (section 10). The standard also requires auditors to document their analytical procedures and the results obtained, as well as the conclusions drawn from these procedures (section 14).
Failure to comply with the requirements of Auditing Standard ASA 520 can result in significant consequences. Under the Corporations Act 2001, non-compliance by auditors may lead to disciplinary action by professional accounting bodies, such as suspension or expulsion from membership (section 128). Additionally, under section 1324 of the Act, auditors who fail to comply with Auditing Standards may be subject to civil penalty provisions, with penalties for corporations potentially reaching up to $210,000 and for individuals up to $42,000. Furthermore, in cases where non-compliance results in misleading or deceptive conduct, section 1041H of the Act may apply, imposing even more stringent penalties and potentially leading to criminal charges.
The Auditing Standard ASA 520 Analytical Procedures thus not only provides a framework for auditors to follow but also underscores the importance of compliance through the outlined potential civil and criminal consequences for non-compliance. The AUASB, in developing this standard, has aimed to ensure that the Auditing Standards are of the highest quality, enforceable, and aligned with the Australian regulatory environment, reflecting the public interest focus as directed by the Financial Reporting Council.