(April 2006)
Explanatory Statement
ASA 720 Other Information in Documents Containing Audited Financial Reports
Issued by the Auditing and Assurance Standards Board
Explanatory Statement
Reasons for Issuing ASA 720 Other Information in Documents Containing Audited Financial Reports
The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 720 Other Information in Documents Containing Audited Financial Reports 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 720 Other Information in Documents Containing Audited Financial Reports
The purpose of Auditing Standard ASA 720 is to establish mandatory requirements and provide explanatory guidance on the auditor’s consideration of other information, on which the auditor has no obligation to report, in documents containing audited financial reports.
Auditing Standard ASA 720 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 212 (October 1995) Other Information in Documents Containing Audited Financial Reports
The main differences between ASA 720 and AUS 212 are that in ASA 720:
- 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 212 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 212 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.
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 13/05 Proposed Auditing Standard: Other Information in Documents Containing Audited Financial Reports (Re-issuance of AUS 212) 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 720 Other Information in Documents Containing Audited Financial Reports in 2006, as mandated by the requirements of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004. This Act established the AUASB as an independent statutory body under the Australian Securities and Investments Commission Act 2001, with the authority to create Auditing Standards that are legally enforceable under the Corporations Act 2001. The purpose of Auditing Standard ASA 720 is to establish clear, mandatory requirements and provide explanatory guidance on the auditor's consideration of other information, which is not subject to the auditor's reporting obligations, within documents containing audited financial reports. This standard aims to ensure that auditors are well-informed about all relevant information when preparing their reports and to maintain the highest quality of auditing standards within Australia.
Scope and Application
The Auditing and Assurance Standards Board (AUASB) has established Auditing Standard ASA 720 Other Information in Documents Containing Audited Financial Reports to meet the requirements of the Corporations Act 2001 and to enhance the quality and enforceability of auditing standards. This Act applies to auditors and entities subject to an audit, ensuring that auditors consider other information in documents containing audited financial reports. ASA 720 sets mandatory requirements for auditors and provides guidance to assist in the application of these requirements. The Act has a national reach, being applicable across all states and territories in Australia, as it is a legislative instrument under the Corporations Act 2001. While the Act itself provides the overarching framework, the AUASB may extend or restrict its application through subordinate instruments, such as specific guidelines or clarifications issued under the authority of the Financial Reporting Council. These subordinate instruments aim to ensure that the Auditing Standards are enforced consistently and effectively across the Australian jurisdiction.
Key Provisions
The Auditing Standard ASA 720 Other Information in Documents Containing Audited Financial Reports sets out the mandatory requirements for auditors when dealing with documents that contain audited financial reports. Section 1 of the standard articulates the auditor's responsibility to consider other information, not subject to audit, which is included in documents that contain the audited financial reports. This includes the auditor's responsibility to identify and assess the consistency of such information with the audited financial reports (section 2). If the auditor identifies inconsistencies between the audited financial reports and the other information, they must communicate these to those charged with governance and take appropriate actions to address the issues (section 3). Furthermore, the standard mandates that the auditor must ensure that the other information does not contradict the audited financial reports and that it is not misleading (section 4).
The Auditing Standard ASA 720 imposes specific obligations on auditors to ensure that the other information accompanying the audited financial reports is consistent, accurate, and not misleading. Auditors are required to perform procedures to identify and assess the consistency of the other information with the audited financial reports (section 5). This includes evaluating whether the other information is presented in a manner that does not contradict the audited financial reports. If inconsistencies are identified, the auditor must report these to those charged with governance and recommend appropriate corrective actions (section 6). Additionally, the auditor must ensure that the other information is not misleading and that it appropriately reflects the information contained in the audited financial reports (section 7).
Failure to comply with the provisions of Auditing Standard ASA 720 can result in significant legal and professional consequences for auditors. The standard does not explicitly outline specific offences or penalties, but non-compliance may lead to disciplinary actions by professional accounting bodies and potential legal liabilities. Auditors who fail to adequately consider the other information in documents containing audited financial reports may face allegations of professional misconduct, which could result in sanctions such as fines, suspension, or revocation of their professional licenses. Furthermore, if the auditor's failure to address inconsistencies or misleading information leads to financial losses for stakeholders, they may also face civil litigation for negligence or breach of duty.