(April 2006)
Explanatory Statement
ASA 610 Considering the Work of Internal Audit
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 610 Considering the Work of Internal Audit
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 610 Considering the Work of Internal Audit 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 610 Considering the Work of Internal Audit
The purpose of Auditing Standard ASA 610 is to establish mandatory requirements and to provide explanatory guidance to external auditors in considering the work of internal audit.
Auditing Standard ASA 610 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 604 (October 1995) Considering the Work of Internal Auditing
The main differences between ASA 610 and AUS 604 are that in ASA 610:
- 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 604 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 604 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.
- The following additional mandatory requirement, not contained in AUS 604, is included:
(a) the external auditor shall perform an assessment of the internal audit function when internal audit is relevant to the external auditor’s risk assessment (paragraph 14).
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 31/05 Proposed Auditing Standard: Considering the Work of Internal Audit (Re-issuance of AUS 604) 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) introduced Auditing Standard ASA 610 Considering the Work of Internal Audit in 2006, following the enactment of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. This Act aimed to enhance the quality and enforceability of auditing standards by establishing the AUASB as an independent statutory body under the Australian Securities and Investments Commission Act 2001. As mandated by section 336 of the Corporations Act 2001, the AUASB's role includes creating Auditing Standards that align with the Australian regulatory environment and are based on the International Standards on Auditing (ISAs) of the International Auditing and Assurance Standards Board (IAASB). The policy objective of ASA 610 is to provide mandatory requirements and explanatory guidance to external auditors regarding the consideration of internal audit work, ensuring that these standards are of high quality and have a clear public interest focus. This Auditing Standard became operative for financial reporting periods commencing on or after 1 July 2006.
Scope and Application
Auditing Standard ASA 610 Considering the Work of Internal Audit, issued by the Auditing and Assurance Standards Board (AUASB), applies to external auditors in Australia. Established under the Australian Securities and Investments Commission Act 2001 and operating under the authority of the Corporations Act 2001, the AUASB's standards are legally binding for entities subject to these acts. The standard mandates that external auditors must consider the work of internal audit when conducting their own audits, particularly when the internal audit function is relevant to the auditor’s risk assessment. This requirement ensures that auditors leverage internal audit efforts to enhance the efficiency and effectiveness of their audit processes. ASA 610 applies to financial reporting periods commencing on or after 1 July 2006, and it is designed to be read alongside the Preamble to AUASB Standards, which outlines the intentions behind the Auditing Standards. The standard aims to provide clear and enforceable guidance to auditors, thereby enhancing the quality of audit outcomes across various sectors in Australia.
Key Provisions
The Auditing Standard ASA 610 Considering the Work of Internal Audit sets out mandatory requirements and provides guidance for external auditors when they need to consider the work of internal audit functions. Section 14 of ASA 610 requires external auditors to assess the competence and objectivity of the internal audit function. This assessment is critical to determine whether the work of internal audit can be relied upon by the external auditor. Section 17 of the Standard mandates that external auditors should obtain an understanding of the internal audit function's scope of work, its policies and procedures, and its organisational status. These provisions ensure that the external auditor can appropriately plan their audit approach based on the effectiveness of the internal audit function.
Under ASA 610, the external auditor must also ensure that the internal audit work is relevant to the audit risk assessment. Section 15 states that if the internal audit work is relevant, the external auditor must determine how it will affect the nature, timing, and extent of the audit procedures. Additionally, Section 21 requires the external auditor to communicate with the internal auditors to ensure a coordinated approach. These obligations highlight the importance of collaboration and the integration of internal audit work into the overall audit strategy.
Breaching the requirements of ASA 610 can have significant consequences. Section 336 of the Corporations Act 2001 imposes penalties for non-compliance with Auditing Standards. For example, failing to comply with the mandatory requirements in ASA 610 may result in disciplinary action against the auditor, which could include fines or suspension of their practising certificate. Additionally, companies that fail to comply with the requirements of ASA 610 in their financial reporting may face legal repercussions, including potential sanctions by the Australian Securities and Investments Commission (ASIC). The penalties for non-compliance are intended to ensure that auditors adhere to high standards of professional conduct and that financial reporting remains transparent and reliable.