ASA 560 - Subsequent Events - April 2006

Administered by Department of the Treasury

Legislation au F2006L01396 Not in force Legislative Instrument

Legislation content

 (April 2006)

 

 

 

 

Explanatory Statement

 

ASA 560 Subsequent Events

 

 

Issued by the Auditing and Assurance Standards Board

 

Explanatory Statement

Reasons for Issuing ASA 560 Subsequent Events

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 560 Subsequent Events 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 560 Subsequent Events

The purpose of Auditing Standard ASA 560 is to establish mandatory requirements and to provide explanatory guidance on the auditor’s responsibility regarding subsequent events.

Auditing Standard ASA 560 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 706 (October 1995) Subsequent Events

The main differences between ASA 560 and AUS 706 are that in ASA 560:

  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 706 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 706 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.
  3. The following implied obligations, in AUS 706, have been elevated and re-stated as specific mandatory requirements:

(a)                when the financial report is amended, the auditor shall carry out the audit procedures necessary in the circumstances and shall provide management and those charged with governance with a new report on the amended financial report (paragraph 15);

(b)                when the auditor’s report has been released to the entity, the auditor shall notify those charged with governance not to issue the financial report and the auditor’s report thereon to third parties (paragraph 18);

(c)                if the financial report is subsequently released, the auditor shall take action to prevent reliance on the auditor’s report (paragraph 19);

(d)                when the financial report is revised, the auditor shall carry out the audit procedures necessary in the circumstances, shall review the steps taken by management and those charged with governance to ensure that anyone in receipt of the previously issued financial report together with the auditor’s report thereon is informed of the situation, and shall issue a new report on the revised financial report (paragraph 23); and

(e)                when those charged with governance do not:

(i) take the necessary steps to ensure that anyone in receipt of the previously issued financial report together with the auditor’s report thereon is informed of the situation; or

(ii) revise the financial report in circumstances where the auditor believes it needs to be revised;

the auditor shall take action with the objective of preventing future reliance on the auditor’s report and shall notify those charged with governance of this action (paragraph 26).

4.                   The explanatory paragraphs on the definitions of “reporting date”, “date of approval of the financial report”, “date of the auditor’s report” and “date the financial report is issued” as contained in ISA 560, are adopted and adjusted, where appropriate, to align to the wording in AASB 110 Events after the Balance Sheet Date.

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 22/05 Proposed Auditing Standard: Subsequent Events (Re-issuance of AUS 206) 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) enacted Auditing Standard ASA 560 Subsequent Events in 2006, responding to the need for clearer guidelines on auditors' responsibilities concerning subsequent events in financial reporting. This Auditing Standard was established under the legislative framework provided by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 and the Corporations Act 2001. The purpose of ASA 560 is to set mandatory requirements and provide explanatory guidance on the auditor's obligations regarding events that occur after the reporting date but before the financial report is issued. This Auditing Standard aims to ensure that auditors are adequately informed and responsive to any material changes that might affect the financial statements, thereby enhancing the reliability and transparency of financial reporting. The AUASB, in its role as an independent statutory body, undertook a thorough review and revision of the existing Auditing Standards to ensure these new standards are clear, enforceable, and aligned with the Australian regulatory environment.

Scope and Application

Auditing Standard ASA 560 Subsequent Events applies to auditors and entities subject to auditing in Australia. It is designed to ensure that auditors meet their responsibilities in relation to events that occur after the reporting date but before the auditor's report is issued. The standard is applicable nationally and is enforced under the Corporations Act 2001. ASA 560 establishes mandatory requirements for auditors to identify and assess subsequent events that may require adjustment of or disclosure in the financial reports, and to determine the appropriate audit procedures and reporting actions if such events are identified. The standard extends its application through subordinate instruments that provide further detail on the auditor's obligations in specific contexts, such as the auditor's responsibilities when financial reports are amended or revised post-issuance. Entities that are subject to audit under the Corporations Act 2001 must ensure compliance with this standard, which includes public interest entities, listed companies, and other entities that are required to have their financial reports audited.

Key Provisions

Auditing Standard ASA 560 Subsequent Events, issued by the Auditing and Assurance Standards Board (AUASB), was created pursuant to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 and sections 336 and 1455 of the Corporations Act 2001 (sections 227A and 225 of the ASIC Act). It is designed to establish mandatory requirements and provide explanatory guidance on an auditor's responsibility regarding subsequent events. This standard is to be read in conjunction with the Preamble to AUASB Standards and is operative for financial reporting periods commencing on or after 1 July 2006. ASA 560 replaces Auditing Standard AUS 706 Subsequent Events (October 1995) with some significant changes. Firstly, the terminology has been updated to use the word'shall' in bold-type paragraphs to describe mandatory requirements, replacing the previous use of 'should' in AUS 706. Secondly, explanatory guidance paragraphs have been enhanced to provide more explicit guidance and illustrative examples to assist auditors in fulfilling these mandatory requirements. Thirdly, certain implied obligations in AUS 706 have been elevated and re-stated as specific mandatory requirements, including the obligation to carry out necessary audit procedures when financial reports are amended, revised, or released, and to notify those charged with governance of such actions. Auditing Standard ASA 560 imposes several obligations on auditors regarding subsequent events. Primarily, auditors must carry out the necessary audit procedures when financial reports are amended, revised, or released. This includes reviewing steps taken by management and those charged with governance to ensure that anyone in receipt of the previously issued financial report together with the auditor's report is informed of the situation. Auditors are also required to issue a new report on the revised financial report and take action to prevent future reliance on the auditor's report if those charged with governance do not take the necessary steps to inform recipients of previously issued financial reports. Furthermore, if the financial report is subsequently released after the auditor's report has been released to the entity, the auditor must notify those charged with governance not to issue the financial report and the auditor's report thereon to third parties, and take action to prevent reliance on the auditor's report if the financial report is released despite this notification. Failure to comply with the requirements of Auditing Standard ASA 560 may result in civil or criminal consequences. While the standard itself does not explicitly outline penalties for non-compliance, breaches of Auditing Standards can lead to legal actions under the Corporations Act 2001. Auditors who fail to meet their obligations may face sanctions from professional bodies, such as the Australian Accounting Standards Board (AASB) and Chartered Accountants Australia and New Zealand (CA ANZ). Such sanctions could include reprimands, fines, suspension, or revocation of registration. Additionally, in severe cases, auditors could be subject to civil litigation from entities or individuals who suffer losses due to the non-compliance, or even criminal charges if the non-compliance constitutes fraud or other criminal conduct. The exact penalties depend on the specific circumstances of the breach and the relevant provisions of the Corporations Act 2001 and other applicable laws.

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