(April 2006)
Explanatory Statement
ASA 580 Management Representations
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 580 Management Representations
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 580 Management Representations 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 580 Management Representations
The purpose of Auditing Standard ASA 580 is to establish mandatory requirements and provide explanatory guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting management representations and the action to be taken if management refuses to provide appropriate representations.
Auditing Standard ASA 580 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 520 (June 2002) Management Representations
The main differences between ASA 580 and AUS 520 are that in ASA 580:
- 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 520 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 520 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been redrafted to clarify that the matter forms part of explanatory guidance.
- The following additional mandatory requirement is included (this mandatory requirement is not contained in AUS 520):
The auditor shall endeavour to obtain written representations from management that:
(a) It acknowledges its responsibility for the design and implementation of internal control to prevent and detect error.
(b) It believes the effects of those uncorrected financial report misstatements aggregated by the auditor during the audit are immaterial, both individually and in the aggregate, to the financial report taken as a whole. A summary of such items shall be included in or attached to the written representations (paragraph 12).
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 19/05 Proposed Auditing Standard: Management Representations (Re-issuance of AUS 520) 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) issued Auditing Standard ASA 580 Management Representations in 2006 as part of a broader reform initiative to enhance the quality and enforceability of auditing standards in Australia. The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 established the AUASB as an independent statutory body, giving it the authority to develop Auditing Standards under the Corporations Act 2001. The purpose of ASA 580 is to establish clear mandatory requirements and provide guidance on the use of management representations as audit evidence, ensuring that auditors can effectively evaluate and document such representations and take appropriate actions if management refuses to provide them. This Auditing Standard aims to ensure a high standard of audit quality by clarifying auditors' obligations and improving the enforceability of the auditing process. ASA 580 became operative for financial reporting periods commencing on or after 1 July 2006, replacing the previous Auditing Standard AUS 520 with more stringent requirements and explanatory guidance.
Scope and Application
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 580 Management Representations to meet the requirements of the legislative provisions under the Corporations Act 2001, which mandates the AUASB to establish auditing standards. This standard applies to auditors of entities, particularly those preparing financial reports that are required to be audited under the corporations legislation. The scope of the Act extends nationally across Australia, as it is enforced under the Commonwealth jurisdiction. The primary purpose of ASA 580 is to establish mandatory requirements and provide guidance on the use of management representations as audit evidence, including the procedures for evaluating and documenting these representations, and the actions to be taken if management refuses to provide appropriate representations. The standard is operative for financial reporting periods commencing on or after 1 July 2006 and represents a revision from the previous Auditing Standard AUS 520, incorporating additional mandatory requirements and clarifying the explanatory guidance. The AUASB has undertaken public consultation as part of the development of this Auditing Standard, ensuring that the standard is both enforceable and reflective of industry needs.
Key Provisions
The main sections of Auditing Standard ASA 580 Management Representations (ASA 580) establish the mandatory requirements and provide explanatory guidance on the use of management representations as audit evidence, the procedures to be applied in evaluating and documenting these representations, and the actions to be taken if management refuses to provide appropriate representations. Section 10 of ASA 580 requires auditors to obtain written representations from management, confirming that they acknowledge their responsibility for the design and implementation of internal control to prevent and detect errors (section 10(a)) and that they believe the effects of uncorrected financial report misstatements are immaterial, both individually and in aggregate, to the financial report as a whole (section 10(b)). The auditors must also document the representations they obtain from management (section 12).
The obligations imposed by ASA 580 on auditors include obtaining written representations from management regarding the design and implementation of internal control, as well as the immateriality of uncorrected misstatements (section 10). Auditors must also document the representations received from management, including any summary of uncorrected misstatements (section 12). Furthermore, the standard requires auditors to perform procedures to evaluate the reasonableness of the representations provided by management (section 11). If management refuses to provide the required representations, auditors must modify their audit opinion or issue an adverse opinion, depending on the significance of the refusal (section 13).
Breach of the requirements set out in ASA 580 can lead to civil or criminal consequences for both auditors and companies. If an auditor fails to obtain the necessary management representations or does not document them properly, they may be subject to disciplinary action by professional bodies, such as the Accounting Professional and Ethical Standards Board (APESB) or the Australian Securities and Investments Commission (ASIC). Companies whose financial reports are audited by non-compliant auditors may also face legal repercussions. Under the Corporations Act 2001, failure to comply with Auditing Standards can result in fines for both the company and its directors, as well as potential disqualification from managing corporations. Additionally, if the breach of ASA 580 leads to the issuance of a materially misstated financial report, the company and its directors may be subject to civil liability for damages resulting from reliance on the misstated report.