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Small Entities Audit Manual (SEAM)

CPA Australia Ltd (‘CPA Australia’) is the largest professional organisation in Australia with more than 132,000 members of the financial, accounting and business profession in Australia and overseas.

For information about CPA Australia, visit our website: <cpaustralia.com.au>.

Published in Melbourne

First Edition ....................................... SAPSE Edition 2008

Second Edition .................................. SAPSE Edition 2009

Third Edition ...................................... SAPSE Edition 2010

Fourth Editiion ................................... SAPSE Edition 2011

Fifth Edition ....................................... SEAM Edition 2012

Sixth Edition ...................................... SEAM Edition 2013

ISBN 978-1-876874-52-0

Legal notice

© 2013 CPA Australia Ltd (ABN 64 008 392 452) (‘CPA Australia’). All rights reserved.

This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Enquiries should be addressed to: Legal & Compliance, CPA Australia Ltd, 28 Freshwater Place, Southbank VIC 3006.

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Foreword

Foreword CPA Australia is pleased to present the 2013 edition of the Small Entities Audit Manual (SEAM).

Auditing small entities brings many unique challenges. The applicable audit standards are the same as those for much larger audits. There is no substitute for knowledge of those standards in scaling the approach to each different audit situation.

This publication is designed to help auditors in this process. Along with updated sample audit programs (previously issued in Sample Audit Programs for Small to Medium Enterprises (SAPSE), this manual contains extensive and practical explanation of many key areas that you are likely to come across in the audit of small entities. The content is organized into explanation and guidance on audit, review and compilations engagements; and specific sections applicable to engagements with:

• a self managed superannuation fund (including overview of SMSF, Audit Plan, Financial Report Audit, Compliance Audit and Finalising the Audit);

• an association – incorporated or unincorporated (for example, a junior sporting association);

• a company limited by guarantee;

• a real estate agent’s trust account;

• a member’s trust account; and

• a solicitor’s trust account.

Much of this specific content can also be appropriately tailored to suit different situations – for example audits and reviews different entities of a similar size.

These materials may assist audit and assurance practitioners in the performance of the audit or where appropriate, review of small entities. They do not relieve members of their specific responsibilities in relation to the requirements of auditing standards and are not a substitute for reading the auditing standards. Members are reminded of the professional requirement that an audit or review shall be performed and the report prepared with due professional care by persons who have adequate training, experience and competence in auditing and assurance.

Each audit is different and these sample audit programs should not be used without appropriate tailoring to the circumstances of individual engagements. These guides incorporate changes up until March 2012 and may not comply with auditing standards and statutory requirements issued after this date. To keep up-to-date with subsequent changes to auditing standards, you should refer to the CPA Australia’s Members’ Handbook or the Auditing and Assurance Standards Board (AUASB) website: <www.AUASB.gov.au>.

These sample audit programs should complement your existing planning and risk identification. They do not relieve you of your obligation, as an auditor, assurance practitioner and member of CPA Australia, to ensure that you comply with professional and auditing standards during the conduct of all audits and review engagements.

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Table of contents

Foreword i

Acknowledgements v

Before you start! v

1. Overview of audits and reviews of financial statements 1:2

Introduction to the chapter 1:2

What is an audit? 1:2

What is a review? 1:3

Australian Auditing and Assurance Standards 1:3

Detailed methodology 1:6

Audit 1:6

Review engagements 1:28

Appendices 1:33

2. The audit of a self managed superannuation fund 2:2

Introduction to this chapter 2:2

Financial report audit 2:5

Appendices 2:8

3. The audit or review of an association 3:2

Audit or review of an incorporated association: Overview 3:2

Audit or review approach 3:3

Planning the audit or review 3:3

Business understanding, associated risks and financial statement assertions 3:4

Reporting 3:6

Appendices 3:8

4. Audit or review of a company limited by guarantee 4:2

Audit or review of a company limited by guarantee: Overview 4:2



Reporting 4:6

Appendices 4:8

5. Overview of a compliance audit 5:2

Standards on Assurance Engagements 5:2

What is a compliance audit? 5:2

Overview of ASAE 3100 5:2

Ethical requirements 5:3

Quality control 5:3

Professional scepticism 5:3

Acceptance and continuance 5:3

Overview of the audit approach under ASAE 3100 5:5

Planning 5:6

Small entities audit manual 2013

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Performing 5:7

Evaluate, report and wrap-up 5:7

6. Compliance audit of a real estate agent’s trust account 6:2

Audit of a real estate agent’s trust account: Overview 6:2

Audit approach 6:2

Appendices 6:5

7. The audit of client monies 7:2

Introduction 7:2

Methodology 7:3

Appendices 7:5

8. Audit of a solicitor’s trust account 8:2

Audit of a solicitor’s trust account: Overview 8:2

Audit methodology 8:2

Appendices 8:5

Introduction

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AcknowledgementsOriginal contributionsStuart Horsburgh, BDO Melbourne

Shirley Schaefer, BDO Adelaide

Material updatesClare Azzopardi, External Audit Manager, Grant Thornton, Victoria (2008)

Margaret M Salter, Director MMS Consulting Pty Ltd (2008)

Greg Hayes from Hayes Knight Pty Ltd (2009)

Dr Christine Jubb, The Australian National University (2010)

Dr Christine Jubb, The Australian National University (2011)

CPA Australia (2012 and 2013)

Before you start!Purpose of this guideThe SEAM sets out the methodology to be applied for the financial statements and compliance audits of certain entities as well as some example audit procedures. This guide is split into the following sections:

Part A• Chapter 1: Overview of audits and reviews of financial statements.

• Chapter 2: The audit of a self managed superannuation fund – financial statement audit and compliance audit.

• Chapter 3: The audit or review of an association (both incorporated and unincorporated associations).

• Chapter 4: The audit or review of a company limited by guarantee.

Part B• Chapter 5: Overview of a compliance audit.

• Chapter 6: The audit of a real estate agent’s trust account.

• Chapter 7: The audit of client monies.

• Chapter 8: The audit of a solicitor’s trust account.

The first part of this guide provides guidance for the auditors of historical financial statements in the format of financial statements. These audits are performed in accordance with the Auditing Standards as documented in table 1 of Appendix 1.

The application of these auditing standards for two specific entities, an Association and Self-Managed Superannuation Fund (SMSF) has been illustrated in Chapters 2 and 3 respectively.

The second part of the guide is for compliance audits performed using ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information and ASAE 3100 Compliance Engagements. These engagements are determining compliance with particular rules/legislation and the application of the methodology has been illustrated with the engagements in Chapter 6–8 as well as the SMSF compliance audit in Chapter 2.

Appendices which contain information specific to the chapter are included at the end of each chapter (shown by the numbering convention Appendix 1A which is Appendix A at the end of Chapter 1) and appendices which are relevant to a number of chapters included at the end of the book (shown at Appendix A).

How to use this guideThe overview chapter for the specific engagement should be read (either Chapter 1 for financial statement audits or Chapter 5 for compliance audits) followed by the relevant chapter relating to the engagement.

The example working papers/tools in the chapter can then be used to supplement your own audit documents.


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DisclaimerAt all times, the audit is required to be conducted in accordance with Australian Auditing Standards relevant to the engagement. Reading this guide is not a substitute for reading the relevant auditing standards and specific legislation/guidance on the engagement.

Whilst the SEAM should not be seen as a comprehensive audit methodology, it nonetheless provides a good framework for the engagements covered.

Overview of the auditing standardsIn Australia, our auditing standards are based on the International Auditing Standards issued by the International Auditing and Assurance Standards Board (IAASB). The use of international standards ensures consistent quality audits across a number of jurisdictions.

The professional bodies in Australia require compliance with the Australian Auditing Standards for all audits covered by this guide.

The over-riding theme throughout these standards are that an ‘Audit is an Audit’ and therefore all requirements in the standards need to be complied with, smaller audits would however have less complexity and therefore a number of auditing standards would not be relevant, for example Service Entities.

In addition, the auditing standards acknowledge that the volume of audit documentation is less and certain documents may be able to be combined (for example, audit plan and audit strategy) nevertheless auditors of these smaller organisations have to consider the relevance of each requirement in the auditing standards.

This means that the fundamental methodology, being risk based, is applicable for all audit engagements covered in this guide.

The auditing standards contain a requirements section which includes all the mandatory requirements (the traditional ‘black letter’ paragraphs) which is supported by the guidance section (the traditional ‘grey letter’ paragraphs).

Auditors however are required to consider all paragraphs within each standard. Auditing standards can be accessed on the AUASB website: <www.auasb.gov.au>.

This guide refers to:

• Auditing standards (ASAs) which are the Australian auditing standards issued by the Australian Auditing and Assurance Standards Board (AUASB);

• Standards on Review Engagements (ASREs) issued by the AUASB;

• Standards on Assurance Engagements (ASAEs) issued by the AUASB; and

• Accounting Professional and Ethical Standards (APES) issued by the APESB.

Relevant dateThe content of this publication is based on pronouncements and standards in place at January 2013. It is the responsibility of the auditor to ensure that they are using the most up-to-date legislation, guidance and standards.

Australian Charities and Not-for-Profit Commission (ACNC) updateSome of the entities covered in this guide may be impacted by the establishment in 2012 of the Australian Charities and Not-for-Profit Commission (ACNC).

At the time of writing, the scope of the ACNC is registered charities only, and the ACNC Act has established the following financial reporting provisions which will come into effect on 1 July 2013.

Introduction

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Type of charity Definition Financial Reporting/Audit Requirements

Small Income less than $250k No financial reporting obligations but will have to submit an Annual Information Statement.

Medium Income between $250k and $1m Submit an annual information statement.

Prepare and file audited/reviewed financial reports for the year ended 30 June 2014 onwards.

Large Income greater than $1m Submit an annual information statement.

Prepare and file audited financial reports for the year ended 30 June 2014 onwards.

Note: the Government is currently consulting on the proposed financial reporting requirements applying to registered charities and therefore there may be some changes in these proposals and the contents of financial reports.

© Commonwealth of Australia 2013

All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s. 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing from the following:

For reproduction of Australian Accounting Standards – Requests in the first instance should be to the Director of Finance and Administration, Australian Accounting Standards Board, PO Box 204, Collins Street West, Melbourne, VIC 8007;

For reproduction of Australian Auditing & Assurance Standards – Requests should be addressed to The Executive Director, Auditing and Assurance Standards Board, PO Box 204, Collins St. West, Melbourne VIC 8007.

1. Overview of audits and reviews of financial statements1. Overview of audits and reviews of financial statements 1:2

Introduction to the chapter 1:2

What is an audit? 1:2

What is a review? 1:3

Australian Auditing and Assurance Standards 1:3

Over-arching principles 1:3

Independence and ethical principles 1:3

Professional judgment and scepticism 1:4

Documentation 1:5

Quality control 1:5

Detailed methodology 1:6

Audit 1:6

Acceptance and continuance phase 1:8

Planning 1:9

Performing the audit 1:18


Review engagements 1:28

Over-arching principles 1:29


Planning 1:29

Performing 1:30

Evaluation, report and wrap-up 1:31

Appendices 1:33

Appendix 1A – Ethical clearance letter 1:34

Appendix 1B – Example consent to act letter 1:35

Appendix 1C – Planning memorandum 1:36

Appendix 1D – Fraud testing workpaper 1:42

Appendix 1E – Completion memorandum 1:44

Appendix 1F – Auditing standards relevant to the conduct of a financial report 1:48


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1. Overview of audits and reviews of financial statementsIntroduction to the chapterThis chapter is applicable for audits and reviews of financial statements, it provides an overview of the requirements of the Australian Auditing Standards and a methodology which can be followed in performing these engagements.

In this guide, this chapter should be used as reference for the following engagements:

• Audit of a Self Managed Superannuation Fund (SMSF) – audit of the financial report – Chapter 2;

• Audit/review of an association – Chapter 3;

• Audit/review of a company limited by guarantee – Chapter 4.

What is an audit?An audit is an independent examination of the financial statements to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.

An audit provides reasonable assurance. To be in a position to express an audit conclusion in the positive form required in a reasonable assurance engagement, it is necessary for the auditor to obtain sufficient appropriate evidence as part of a systematic engagement process involving the following:

• Obtaining an understanding of the subject matter and other engagement circumstances which, depending on the subject matter, includes obtaining an understanding of internal control.

• Based on that understanding, assessing the risks that the subject matter information may be materially misstated.

• Responding to assessed risks, including developing overall responses, and determining the nature, timing and extent of further procedures.

• Performing further procedures clearly linked to the identified risks, using a combination of inspection, observation, confirmation, re-calculation, re-performance, analytical procedures and enquiry. Such further procedures involve substantive procedures including, where applicable, obtaining corroborating information from sources independent of the responsible party, and depending on the nature of the subject matter, tests of the operating effectiveness of controls.

• Evaluating the sufficiency and appropriateness of evidence.

The auditor obtains sufficient, appropriate audit evidence to ensure the risk of a material misstatement is reduced to an acceptably low level.

All steps of the audit are linked together and are illustrated below:

Each of these phases, key tasks within each component and deliverable documents will be discussed in this chapter.

1. Overview of audits and reviews of financial statements

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What is a review?A review is designed to provide limited assurance (rather than the higher, ‘reasonable’ assurance in an audit) that the financial report is free from material misstatement. A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review may bring significant matters affecting the financial report to the reviewer’s attention, but it does not provide all of the evidence that would be required in an audit. Hence a review does not provide a basis for expressing an opinion whether the financial report is presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

The objective of the reviewer is to plan and perform the review to form a conclusion whether, on the basis of the review, anything has come to the reviewer‘s attention that causes the reviewer to believe that the financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework (i.e. a negative opinion is provided).

Australian Auditing and Assurance StandardsAll audits and reviews of financial statements, regardless of size and nature, must be conducted in accordance with Australian Auditing Standards (ASAs) and Standards on Review Engagements (ASREs) as issued by the Auditing and Assurance Standards Board (AUASB).

These standards are available on: <www.auasb.gov.au> or in the CPA Australia Auditing, Assurance and Ethics Handbook.

Appendix 1 to this guide includes a list of all Auditing and Assurance Standards which are current at the date of publication.

Over-arching principlesPrior to discussing the detailed phases of an audit and a review, we will cover the over-arching principles for both an audit and a review:

• Independence and ethical principles;

• Professional judgment and scepticism;

• Documentation; and

• Quality control.

Independence and ethical principlesASA 102 Compliance with ethical requirements when performing audits, reviews and other assurance engagements provides that the auditor shall comply with relevant ethical requirements, including those pertaining to independence, when performing audits, reviews and other assurance engagements.

ASA 102 defines relevant ethical requirements as including the applicable requirements of APES 110 Code of Ethics for Professional Accountants, the applicable provisions of the Corporations Act 2001 and other applicable law or regulation. APES 110 would be the guidance for the engagements covered in this publication with the Corporations Act 2001 also to be consulted where an audit/review of a Company Limited by Guarantee is being performed.

APES 110 states that ethical principles governing the auditor’s professional responsibilities include:

• integrity;

• objectivity;

• professional competence and due care;

• confidentiality;

• professional behaviour.

The concepts of objectivity and independence are fundamental to auditing, since the auditor’s objective is to enhance, through the expression of an independent opinion, the credibility of the reported financial information of an entity.

The conceptual framework approach in APES 110 requires auditors to identify, evaluate and respond to any identified threats that may compromise compliance with the fundamental principles. If the identified threats


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are anything other than clearly insignificant, auditors are required to apply safeguards to eliminate such threats or reduce them to an acceptably low level so that compliance with the fundamental principles is no longer compromised. If appropriate safeguards cannot be implemented then the engagement should be declined or discontinued.

ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information requires the engagement partner on an audit to form a conclusion on compliance with the independence requirements applying to the audit engagement which are contained in the Code of Ethics –this should be considered as part of the acceptance and continuance phase early in the audit cycle and the conclusion should be documented.

Additional resources available on independence are:

• Independence guide (version 3, June 2008) issued by the Joint Accounting Bodies;

• APES 110 Code of Ethics published by the Accounting Professional and Ethical Standards Board;

• Guidance Statement GS009 Auditing Self-Managed Superannuation Funds (August 2011) published by the Auditing and Assurance Standards Board;

• Corporations Act 2001 – section 324.

Professional judgment and scepticism

Professional judgment

The auditor applies professional judgment to reach appropriate decisions concerning the engagement in the given situation. When exercising professional judgment, the auditor maintains independence and objectivity and adopts an attitude of professional scepticism in order to achieve the audit objectives.

Professional judgment is necessary in particular regarding decisions about:

• Materiality and audit risk.

• The nature, timing and extent of audit procedures in accordance with auditing standards.

• Evaluating whether sufficient appropriate audit evidence has been obtained, or further procedures are required to meet the audit objectives and the requirements of standards.

• The evaluation of management’s judgments in applying the entity’s applicable financial reporting framework.

• The drawing of conclusions based on the audit evidence obtained.

Professional scepticism

The auditor is required to maintain an attitude of professional scepticism while planning and performing the audit engagement.

Professional scepticism means:

• Not accepting the evidence you have gathered at face value.

• Continuing to pursue all avenues of inquiry on the topic at hand.

• Critically assessing evidence without being overly suspicious or cynical.

• Increasing your awareness of how supporting documentation is selected and the amount of documentation that is collected.

• Corroborating management explanations or representations concerning material matters.

Professional scepticism does not mean placing doubt on the honesty of the management, if the auditor has previously found management honest and operating with integrity then this should be considered.

Professional scepticism includes being alert to, for example:

• Audit evidence that contradicts other audit evidence obtained.

• Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence.

• Conditions that may indicate possible fraud.

• Circumstances that suggest the need for audit procedures in addition to those required by the Australian Auditing Standards.


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Documentation Documentation is vital to understanding the auditor’s process and conclusions, on smaller audits which are performed by a small team (or a sole practitioner), the documentation on an audit file is often insufficient, this is mainly because most of the knowledge is contained within the auditor’s mind – it is important to remember that an experienced auditor with practical audit experience should be able to reach the same conclusions as the auditor from reviewing the audit documentation.

The detailed requirements and guidance for audit documentation are included in ASA 230 Audit documentation. Although in smaller audits the documentation may be limited, the auditor is required to document matters which are important to support the audit opinion and provide evidence that the audit was carried out in accordance with Australian Auditing Standards.

On a timely basis, the auditor will prepare audit documentation that provides:

• A sufficient and appropriate record of the basis for the audit report; and

• Evidence that the audit was performed in accordance with Auditing Standards and applicable legal and regulatory requirements.

The audit documentation will be prepared to allow an experienced auditor, having no previous connection with the audit, to understand:

• The nature, timing and extent of the audit procedures performed to comply with Auditing Standards and applicable legal and regulatory requirements;

• The results of the audit procedures and the audit evidence obtained; and

• Significant matters arising during the audit and the conclusion reached thereon.

The audit workpapers should record:

• The identifying characteristics of the specific items or matters tested (i.e. receivables greater than 60 days);

• Who performed the audit work and the date such work was completed; and

• Who reviewed the audit work performed and the date and extent of such review.

The current years working paper files document the planning, execution and results of the audit procedures supporting the audit reports for that financial year: the files should stand alone in providing sufficient appropriate audit evidence unless they are appropriately referenced to other files.

Procedures for maintaining the confidentiality, safe custody, integrity, accessibility and retrievability of audit documentation should be established and documented as part of the auditor’s quality control processes.

Quality controlThe relevant standards for an auditor to consider with respect to quality control are:

• ASA 220 Quality Control for an Audit of a Financial Report and Other Historical Financial Information;

• ASQC 1 Quality Controls for Firms that Perform Audits and Reviews of Financial Reports, Other Financial Information and other Assurance Engagements; and

• APES 320 Quality Control for Firms.

These standards deal with the auditor’s responsibilities for its system of quality control for audits and reviews of financial reports, other financial information, and other assurance engagement, i.e. they are relevant for all engagements covered by this guide.

The auditor has an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:

a) The firm and its personnel comply with Australian Auditing Standards, relevant ethical requirements, and applicable legal and regulatory requirements; and

b) The Reports issued by the firm or engagement partners are appropriate in the circumstances.

The engagement partner is responsible for implementing procedures to ensure quality control systems are applied to both the financial audit and compliance engagements including:

• Taking responsibility for overall quality on the financial audit and compliance engagement.

• Considering whether members of the engagement team have complied with relevant ethical requirements.


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• Forming a conclusion on compliance with relevant independence requirements.

• Ensuring that requirements in relation to acceptance and continuance of client relationships and specific audit engagements have been followed and that conclusions reached are appropriate and have been adequately documented.

• Assigning audit engagement teams which possess collectively the appropriate capabilities, competence and time to perform the engagements in accordance with AUASB Standards and regulatory and legal requirements.

• Directing, supervising and performing the audit engagement in accordance with AUASB Standards and regulatory and legal requirements.

• Issuing an auditor’s report that is appropriate in the circumstances and supported by sufficient appropriate audit evidence.

• Consulting appropriately on difficult or contentious matters both within the engagement team and with others within or outside the firm, and documenting and implementing agreed conclusions.

• Monitoring quality adequately against firm and professional standards, including the ASAs and ASAEs.

Further information on the Quality Control Manual and relevant standards does not form part of this guide, however CPA Australia has the following resources available to assist in the development and maintenance of the manual.

• Quality Control Manual – Published by CPA Australia – Revised October 2010.

• Quality Control – A Short-Form Guide – Published by CPA Australia – December 2009.

Detailed methodology This section provides an overview of a methodology for:

• The audit of financial statements; and

• The review of financial statements.

The methodology is written for a generic small entity and specific requirements for the entities covered in this guide, SMSFs, Incorporated Associations and Companies Limited by Guarantee, can be found in the relevant chapter.

This methodology is a guide only and is not a substitute for reading the Australian Auditing Standards. Auditors need to satisfy themselves that their audits are in compliance with all relevant requirements of the Auditing Standards.

AuditThe audit approach is risk-based with a focus on understanding each client’s business and identifying risks associated with the client, the audit engagement and financial statements.

The audit is split into different phases as illustrated and the purpose of each summary phase of the audit is shown below:

Acceptance and continuance – to ensure that the audits undertaken by the auditor are appropriate.

Planning – to obtain an understanding of the entity and its environment, including its internal control and the risks of material misstatement, to allow the audit approach to be set.

Performance and review – to obtain sufficient, appropriate audit evidence which reduces the risk of material misstatement to an acceptably low level.

Evaluation, report and wrap-up – to ensure that the final audit file supports the audit opinion and the deliverables as set out in the engagement letter are provided.

The diagram shows an overview of the methodology and each phase is discussed further.


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Acceptance and continuance phase

Client acceptance and continuance evaluation process

An evaluation process shall take place for both new clients/engagements and on an ongoing basis to ensure that the auditor is not performing an audit or review that:

• he or she is not sufficiently experienced or resourced to perform;

• has an unacceptably high risk level or;

• would cause a breach of independence requirements.

This process is required to be documented and updated throughout the engagement, as appropriate.

The factors to consider during this process include:

• conflicts of interest/independence issues;

• known or suspected breaches of legislation;

• use of experts or the need for specialist skills;

• reputation of those charged with governance;

• appropriateness of the fees based on the work to be performed;

• ethical issues arising, i.e. could the business sector cause any reputational risk for the auditor;

• reporting requirements of the entity;

• whether the auditor has appropriate resources.

For an existing client, the auditor should consider whether there has been any change in circumstances, for example:

• new business activities;

• changes in key personnel;

• ownership changes.

Appointment and resignation of auditors

Once the auditor has completed the acceptance procedures and consents to act as auditor then ethical clearance should be requested from the existing auditor (see Appendix 1A) and if this is satisfactory then a consent to act letter is issued to the client (see Appendix 1B).

Australian Securities and Investments Commission (ASIC) permission for resignation is not required for any of the entities covered in this guide.

Agreeing the terms of an audit engagement (ASA 210)

Once the evaluation process described above has been undertaken then the auditor needs to:

a) Establish whether the preconditions for an audit are present (see below); and

b) Confirm that there is a common understanding between the auditor and management and, where appropriate, those charged with governance of the terms of the audit engagement.

Preconditions for an audit

The preconditions require an auditor to:

• Determine whether the financial reporting framework to be applied in the preparation of the financial report is acceptable – where special purpose financial statements are being prepared then the auditor needs to understand the compliance with Australian Accounting Standards and form a view on whether this is an acceptable framework;


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• Obtain the agreement of client management that it acknowledges and understands its responsibility:

+ For the preparation of the financial report in accordance with the applicable financial reporting framework, including where relevant their fair presentation;

+ For such internal control as management determines is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error; and

+ To provide the auditor with:

a) Access to all information of which management is aware that is relevant to the preparation of the financial report such as records, documentation and other matters;

b) Additional information that the auditor may request from management for the purpose of the audit; and

c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Engagement letter

The engagement letter provides the means of agreeing the terms of the engagement with the client and should include at least the following:

a) The objective and scope of the audit of the financial statements;

b) The responsibilities of the auditor;

c) The responsibilities of management;

d) Identification of the applicable financial reporting framework for the preparation of the financial report; and

e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content.

The letter should also outline the general audit procedures to be performed, including a review of internal controls over accounting information.

An engagement letter does not need to be issued each year, unless there is a change in the terms of the engagement, however best practice is that that letter is reissued at least every 3 years.

An example of an engagement letter is included in Appendix 1 of ASA 210 and example letters have been included in the relevant chapters of this guide.

Planning

In this phase of the audit, the auditor needs to:

• obtain sufficient knowledge of the client to identify and understand the events, transactions and practices, that in their judgement, may have a significant impact on the financial statements or audit reports, to enable them to plan the audits and design effective audit strategies;

• document and perform an initial design assessment of systems and key controls in place to assess the financial statement assertions;

• gain an understanding of the risks in the business and assess the risk of misstatement of each account balance at the assertion level;


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• establish an audit approach and procedures which reflects the results of the initial systems and controls assessment, risk assessment and understanding of the business and will ensure that the risk of a material misstatement is reduced to an acceptably low level.

Audit plan

The auditor plans an audit in accordance with ASA 300 Planning an audit of a financial report and set out how the audit will be conducted. It is essential that all audit planning is documented, the level of documentation will vary based on the size and complexity of the audit. Small, simple engagements may cover the planning phase of an audit in just a few pages, whereas larger or more complex audits may have substantial audit plans. In determining whether the documentation is appropriate, consider the experienced auditor with practical audit experience and whether he or she would be able to come to the same planning decisions as you.

The key outcome from the planning phase of the audit is the proposed audit plan which is compiled using various sources of information available to the auditor. Planning should be continuous throughout the engagement and the audit plan should be updated during the course of the audit, as necessary.

The plan should be based on the auditor’s knowledge of the business, including a thorough knowledge of all legislative, accounting and auditing requirements. The auditor should also understand the process for the preparation of financial information and deadlines. ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment emphasises the importance of such knowledge in identifying where the risks of material misstatement are likely to occur.

This information, together with background knowledge of the client, should be documented and included in the planning memorandum. As well as the above, the planning memorandum should cover a number of areas including:

• understanding the client – e.g. industry, regulatory and other external factors (nature of the entity, including accounting policies;

• objectives, strategies and related business risks;

• measurement and review of performance;

• control environment;

• identification of critical audit objectives;

• reporting deadlines;

• materiality;

• budgets and staffing;

• items noted from prior years;

• preliminary analytical reviews;

• overall intended approach.

Using information obtained in prior audits

When the auditor intends to use information about the client and its environment obtained in prior periods, they need to determine whether changes have occurred that may affect the relevance of such information in the current audit.

Superseding another auditor

A new auditor is required to consider the opening balances of the financial statements for the year in which the auditor was appointed, in accordance with ASA 510 Initial audit engagements — opening balances.

ASA 510 requires the auditor to obtain sufficient appropriate evidence that:

• the opening balances do not contain misstatements that could materially affect the current year’s financial statements;

• the prior year’s closing balances were correctly brought forward to the current year or, when appropriate, were restated;

• appropriate accounting policies were consistently applied or changes to accounting policies have been adequately presented and disclosed.


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To obtain the required evidence, the auditor may need to inspect the previous auditor’s work papers to gain comfort over the prior year financial statements and audit. The auditor should liaise with the other auditor during the planning stage to arrange access to the prior year audit file and other relevant documentation (if required).

Where the auditor is unable to review the previous auditor’s work, or has decided not to rely on such work, then additional audit procedures should be performed. Other suggested procedures are contained in ASA 510 (paragraph 7 and A6-A7) and the auditor should plan the extent and timing of these to ensure that the audit or review of the financial report will be completed efficiently and on time.

Business understanding

Significant effort is spent in understanding the business, performing risk assessments and understanding systems and controls to plan better focused and more efficient substantive audit procedures, which should mean that the auditor is better able to identify relevant risks, understand their true impact, and design the most effective way of obtaining the necessary audit evidence as well as providing better management of the auditors professional risk and management of the client relationship.

Under ASA 315, the auditor must understand the following aspects of the client’s business on all engagements. The specific considerations under each aspect should be documented in the audit plan.

• Industry, regulatory and other external factors, i.e. understanding of:

+ Industry conditions including:

– Competitive environment.

– Supplier and customer relationships.

– Technological developments.

+ Regulatory environment including:

– Applicable financial reporting framework.

– The legal and political environment and environmental requirements.

+ General economic conditions.

• Nature of the entity (including accounting policies), i.e. understanding of:

+ Business operations.

+ Ownership and governance arrangements.

+ Investments and investment activities.

+ Structure and financing.

+ Financial reporting:

– Appropriate for the business?

– Consistent with the applicable financial reporting framework?

– Consistent with policies adopted by the relevant industry?

• Entity’s selection and application of accounting policies, i.e. understanding of:

+ Methods used to account for significant and unusual transactions.

+ Effect of significant accounting policies in controversial or emerging areas.

+ Changes in the entity’s accounting policies.

+ Financial reporting standards and laws and regulations that are new to the entity.

• Objectives, strategies and related business risks, i.e. understanding of:

+ Future direction of the business.

+ Risks which may prevent the business achieving its objectives.

• Measurement and review of performance, e.g. understanding of:

+ Key performance indicators.


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Components of internal control – entity level

In addition, the auditor needs to gain an understanding of the five components of internal control, i.e. understanding of:

• Control environment: this refers to the attitude of the company, management, and staff regarding internal controls. Do they take internal controls seriously, or do they ignore them?

• Risk assessment: the auditor needs to evaluate whether management has identified its riskiest areas and implemented controls to prevent or detect errors or fraud that could result in material misstatements. For example, has management considered the risk of unrecorded revenue or expense transactions?

• Control activities: These are the policies and procedures that help ensure that management’s directives are carried out. For example, is there a policy that all company cheques for amounts more than $5,000 require two signatures?

• Information and communication: The auditor has to understand management’s information technology, accounting, and communication systems and processes. This includes internal controls to safeguard assets, maintain accounting records, and back up data.

• Monitoring: This component involves understanding how management monitors its controls — and how effective the monitoring is. The best internal controls are worthless if the company doesn’t monitor them and make changes when they aren’t working.

Analytical procedures

Auditors also perform analytical procedures during this phase to obtain an initial understanding of what the financial statements reflect, (e.g. what has changed, what has not, in what direction and by how much). They also help to identify relevant financial information and trends to see areas in which audit effort needs to be focussed which may assist to identify possible areas of audit risk, e.g. new finance obtained which has covenants attached.

The analytical procedures within this phase are high-level procedures using review of management accounts/trial balance and key ratios for the client, for example current ratio, interest cover to add to the understanding of the business. The Auditor does not need to corroborate figures at this time.

Trends that are inconsistent with the auditor’s knowledge of the activities of the entity during the year may indicate areas of increased risk of error or misstatement.

Audit risk

Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial report is materially misstated. In an audit engagement where the auditor provides reasonable assurance, the auditor reduces audit risk to an acceptably low level as the basis for a positive form of expression of the auditor’s opinion.

Audit risk is comprised of the following components:

i. Inherent risk: the susceptibility of the subject matter information to a material misstatement, assuming that there are no related controls (i.e. ignore the existence of controls in place);

ii. Control risk: the risk that a material misstatement that could occur will not be prevented, or detected and corrected, on a timely basis by related internal controls. When control risk is relevant to the subject matter, some control risk will always exist because of the inherent limitations of the design and operation of internal control (i.e. consider the strength of controls put in place by the client); and

iii. Detection risk: the risk that the auditor will not detect a material misstatement that exists.


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Inherent risk

There are a number of factors which can increase inherent risk, some of these have been described below

• Environment and external factors:

+ State of the economy: The general level of economic growth is affects all businesses.

+ Availability of financing: Another external factor is interest rates and the associated availability of financing.

• Prior-period misstatements: If a company has made mistakes in prior years that weren’t material, those errors still exist in the financial statements. The Auditor has to aggregate prior-period misstatements with current year misstatements to see if they need to ask the client to adjust the account for the total misstatement.

• Susceptibility to theft or fraud: If a certain asset is susceptible to theft or fraud, the account or balance level may be considered inherently risky. For example, if a client has a lot of customers who pay in cash, the cash account is going to have risk associated with theft or fraud because of the fact that cash is more easily diverted than customer cheques or credit card payments.

Looking at industry statistics relating to inventory theft, the Auditor may also decide to consider the inventory account as inherently risky. Small inventory items can further increase the risk of this account valuation being incorrect because those items are easier to conceal (and therefore easier to steal).

Items which have a high inherent risk are significant risks and subject to additional procedures as discussed below.

Significant risks

When considering the inherent risks faced by the entity, the auditor determines whether any of the risks identified are, in the auditor’s judgement, a significant risk. In exercising this judgement, the auditor shall exclude the effects of identified controls related to the risk (i.e. the assessment should be based on inherent risk only).

Significant risk means an identified and assessed risk of material misstatement that, in the auditor’s judgement, requires special audit consideration.

In exercising judgement as to which risks are significant risks, the auditor shall consider at least the following:

a) Whether the risk is a risk of fraud;

b) Whether the risk is related to recent significant economic, accounting or other developments and, therefore, requires specific attention;

c) The complexity of transactions;

d) Whether the risk involves significant transactions with related parties;

e) The degree of subjectivity in the measurement of financial information related to the risk, especially those measurements involving a wide range of measurement uncertainty; and

f) Whether the risk involves significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual.

If the auditor has determined that a significant risk exists, the auditor shall obtain an understanding of the entity’s controls, including control activities, relevant to that risk. The audit tests should also cover this specific risk.

Control risk

The internal controls put in place by the entity have the goal of producing accurate and effective reporting.

Some examples of control activities and the specific procedures that should be in place in an adequate control environment:

• Segregation of duties: In particular, this applies to authorisation, custody, and recordkeeping. For example, the person who requests an order of computer components shouldn’t be the person who authorizes the request. The physical custody of the computer components after receipt should be the task of a third employee. The business should also have yet another employee keeping files of the related purchase orders and paid invoices.

• Adequate documents and records: The entity must maintain source documents like purchase orders, paid invoices, and customer invoices in a proper filing system. A classic documentation control is using prenumbered documents and saving voided documents. If the Auditors sees a missing invoice number with no void information, they know that the entity may have sales that haven’t hit its financial records.


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• Physical control of assets and records: This includes providing safe and secure locations for the assets, tagging furniture and equipment, and having backup procedures for records should they be misplaced or lost in a fire or flood.

If control risk is high, the Auditor has to perform increased substantive testing since they place a lot of trust in the information the client gives them.

In many smaller entities, the controls in place over the key information systems are not adequate and therefore control risk is high.

Detection risk

Detection risk is the risk of the auditor not detecting an error in the financial statements and can occur when the auditor does not use the right audit procedures, doesn’t use them correctly or as a result of an audit not testing every transaction.

The auditor assesses inherent and control risk and then determines the appropriate detection risk to reduce your audit risk to an acceptable level. Detection risk can never be completely eliminated because the auditor will never look at each and every transaction.

Good planning can assist with minimising detection risk which has three components:

• Incorrectly performing an audit test;

• Incorrectly interpreting results of an audit test;

• Choosing the incorrect audit test for the assertion.

ASA 315 requires the auditor to identify and assess the risks of material misstatement at the financial report level and at the assertion level for classes of transactions, account balances and disclosure.

The extent to which, in a small assignment, the auditor undertakes the risk assessment and audit work plan will, by its very nature, depend on the size of the entity. However, the auditor must be able to demonstrate that the assessment and resultant work plan have been done.

The results of the risk assessment procedures enable the auditor to design and perform further audit procedures to respond to the assessed risks.

Fraud risk assessment

For all audits, ASA 240 The auditor’s responsibilities relating to fraud in an audit of a financial report requires an auditor to assess the risk of fraud. ASA 240 distinguishes fraud from error by acknowledging that fraud is an intentional act of misstatement or omission. Fraud risk factors should be considered during the planning phase and documented in the audit plan as part of the team discussions.

For the purposes of the audit opinion the auditor is concerned with fraud that causes a material misstatement in the financial report.

ASA 240 provides some specific tests which are to be performed which have been reproduced in Appendix 1D. These procedures are to be performed whenever management has the ability to over-ride controls, which is likely to be the case for all entities covered by this guide.

Internal control

The auditor is required to develop an understanding of the entity’s accounting systems and internal control structure to determine the risks of material misstatement at both the financial report level and the assertion level, including disclosures. ASA 315 requires an auditor to perform audit procedures to understand an entity’s environment, including a specific requirement to evaluate the design and implementation of internal controls.

In the case of entity covered by this guide, controls are often simple or non-existent, however an understanding of the internal control environment must be obtained and documented for the audit or review to comply with the applicable standards. Due to insufficient internal controls, a primarily substantive approach would normally be taken in an audit.

Discussions with management to discuss how well they thinks their internal controls work during the initiating, authorizing, recording, and reporting of significant accounts can help to identify areas where material misstatements due to error (mistake) or fraud (intentional) could occur which can be used in planning the audit approach.


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In every audit, the Auditor must get at least a preliminary understanding of the client’s internal controls that affect each business and financial process. But after gaining that preliminary understanding, they may decide not to conduct a full audit of internal controls.

Materiality

Materiality addresses the significance of financial report information to economic decisions of users taken on the basis of the financial statements.

The concept of materiality recognizes that some matters, either individually or in the aggregate, are important to people making an economic decision based on the financial statements. This could include decisions such as whether to invest in, purchase, do business with, or lend money to an entity.

A preliminary assessment of materiality should be made in the planning stage in accordance with ASA 320 Materiality in planning and performing an audit.

The auditor’s assessment of risk, based on his or her understanding of the business per ASA 315, also will have an impact on the proposed level of materiality.

Materiality is determined by the auditor based on his or her perception of the needs of users. Misstatements may arise from a number of causes and can be based on the following:

• Size: the monetary amount involved (quantitative);

• Nature of the item (qualitative); and

• Circumstances surrounding the occurrence.

Materiality is not an absolute number. It represents a grey area between what is very likely not material and what is very likely material. Consequently, the assessment of what Is material is always a matter of professional judgement. In some situations, a matter well below the quantitative materiality level may be determined as material based on the nature of the item or the circumstances related to the misstatement. For example, the information that there are a number of transactions with related parties may be very significant to a person making a decision based on the financial statements.

Selecting an appropriate base is the starting point in determining materiality for the financial statements as a whole. Profit from continuing operations before tax is generally recognized as the quantitative measure of greatest significance to financial statement users of ‘for-profit’ entities. Other bases may be deemed more appropriate for other entities and could include:

• Current assets;

• Net working capital;

• Gross assets;

• Total revenue;

• Gross profit;

• Total expenses;

• Net assets;

• Cash flows from operations.

Determining a percentage to be applied to a chosen base involves the exercise of professional judgment.

The percentages used may be for example:

• 5% of profit before tax from continuing operations;

• 1% of total revenues or total expenses.

In certain circumstances, the auditor may deem higher or lower percentages than those shown above to be more appropriate in calculating materiality for the financial statements as a whole. In such instances, it is critical to document the reasons for selecting a percentage threshold outside of the guided range.

Materiality must be evaluated for:

• The financial report as a whole (overall materiality);

• Particular classes of transactions, account balances or disclosures (where appropriate); and

• Performance materiality.


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The overall materiality level (the financial report as a whole) will be used by the auditor for:

• Determining the nature, timing and extent of risk assessment procedures;

• Identifying and assessing the risks of material misstatement; and

• Determining the nature, timing and extent of further audit procedures.

Because the determination of materiality levels is based on the auditor’s professional judgement, it is important that the considerations involved be properly documented at the planning stage of the engagement. This will include:

• The materiality level for the financial statements as a whole and the materiality level for a particular class of transaction, account balance or disclosure, if applicable;

• The amount(s) determined for purposes of assessing the risks of material misstatement and designing further audit procedures; and

• Any changes made to the above factors as the audit progresses.

As the audit progresses, materiality should be revised for any new information gained during the engagement – if such information would have caused a different amount to have been determined initially.

At the conclusion of the audit, both the overall materiality and the amounts established for particular transactions, account balances or disclosures will be used for evaluating the effect of identified misstatements on the financial statements and the opinion in the auditor’s report.

When a misstatement (or the aggregate of all misstatements) is significant enough to change or influence the decision of an informed person, a material misstatement has occurred. Below this level, the misstatement is regarded as not material. For example, if it is determined that the decision of a financial report user group would be influenced by a misstatement of $10,000 in the financial statements, the auditor would plan the engagement to detect any misstatements in excess of this amount or a combination of smaller misstatements that would exceed that amount in total.

Guidance Statement GS19 Auditing Fundraising Revenue of Not-for-Profit Entities

Associations and Companies Limited by Guarantee may receive a significant amount of revenue from fundraising activities and therefore may form part of the business understanding and risk assessment during the planning phase of an audit/review.

Unlike other types of revenue, the collection of fundraising revenue may not be supported by invoices or equivalent documents and therefore GS19 provides guidance to auditor when planning, performing and reporting on the completeness of fundraising revenue for not-for-profit entities such as cash donations, appeals, raffles and other fundraising activities.

Based on the significance and materiality of the fundraising revenue, whether the not-for-profit entity has received all cash donations to which it has a right can be an audit risk/focus area as the controls in place over this revenue may not be adequate. This means that an auditor may find it difficult to perform tests of controls or substantive procedures that would reduce the risk of material misstatement in relation to completeness of cash donations to an acceptably low level.

There are some instances where a scope of limitation for the audit exists and therefore a qualified opinion should be expressed, however this should not occur as a matter of course for all not-for-profit entities and the auditor needs to consider materiality and other mitigating factors.

GS19 includes some example controls and audit procedures which can be used by an auditor in obtaining sufficient, appropriate audit evidence over completeness of fundraising revenue.

Appendix 3F (Audit) and Appendix 3J (Review) provides example emphasis of matter paragraphs and qualified opinions/conclusions which can be used if sufficient, appropriate audit evidence is not able to be obtained whether there is significant revenue derived from fundraising sources.

Audit assertions

Financial statement assertions are the representations made by those charged with governance in compiling the numbers in the financial statements. The assertions are features relevant to the balances/transactions in the financial statements about which audit evidence is required.

Assertions have varying risk profiles for different balances/transactions and therefore the assertions should be considered during the planning phase of the audit so that audit procedures are designed to ensure that the risk of material misstatements at for each balance/transaction assertion is at an acceptably low level.


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A description of each assertion is provided below:

Assertion Explanation Balance sheet

Income statement

Classification Is the balance or transaction recorded in the proper account? ✓ ✓

Existence Does the asset, liability or equity interest exist? ✓

Accuracy Are the amounts recorded correctly? ✓ ✓

Occurrence Did the transaction actually occur? ✓

Rights and obligations

Does the entity have the right or obligation associated with the balance?

✓

Valuation and allocation

Is the balance correctly valued and any resulting valuation or allocation adjustments appropriately recorded?

✓

Cut-off Is the transaction recorded in the correct period? ✓

Completeness Have all assets, liabilities and equity interests, transactions and events been recorded?

✓ ✓

Presentation and dislosure

Is the balance or transaction appropriately disclosed in terms of occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation?

✓ ✓

The design of the audit tests take into account the assertion that is being confirmed.

When testing existence or occurrence assertions the auditor tests for overstatement and therefore the testing should begin with the accounting records and progress toward the supporting evidence.

When conducting tests to verify the completeness assertion, auditors search for understatements, this testing begins with the supporting source documents and progresses toward the accounting records. For example, an auditor may search for unrecorded purchases by selecting a sample of delivery notes and tracing the transactions to the purchases journal and the accounts payable records.

Valuation often represents a high-risk assertion because of the wide variety of methods used to value assets and the estimates and judgements involved.

Depending on the account tested, auditors may have to evaluate a host of estimates and assumptions, such as the useful life of fixed assets, the default rate on past due receivables and attrition rates/future payrises for long service leave calculations.

Audit procedures designed to test rights and obligations assertions often involve reviewing documents such as deeds, contracts, and loan agreements to determine whether the entity has satisfactory title to its assets and whether the entity is obligated to pay the liabilities.

Testing an account requires auditors to identify the specific assertions related to the account and design appropriate procedures to test each assertion. Once the auditor has obtained sufficient evidence to support each assertion, then the auditor has reasonable assurance that the account balance is fairly presented

Client requirements schedule

Given the volume of supporting documentation needed by auditors, it is advisable to provide the client with a list of audit requirements prior to the commencement of the audit. This can be in a separate list or incorporated in the engagement letter and can stipulate the timing of such requirements. This schedule can be a useful project management tool and to monitor over-runs/delays.

Designing the audit approach

Once the risks of material misstatement are identified and the planned control reliance is determined, an auditor must refer to ASA 330 which sets mandatory requirements and guidance in designing and performing audit procedures.

Overall responses might include:

• determination of the general audit approach (i.e. substantive only versus a combination of substantive and controls testing);


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• use of experts for complex areas; and

• timing of audit procedures (i.e. year-end versus interim).

The auditor must use professional judgement in determining the nature and extent of the work, but must document fully the linkage between the assessed risks and the audit program to support the audit opinion.

If the Auditor’s understanding of the key systems highlights that controls are weak and we are unable to rely upon any of them, then the fully substantive approach should be planned for that area and an management letter raised which highlights all significant control weaknesses noted.

Most audits combine substantive and control testing strategies. For example, the same entity that has weak internal controls for cash payments may have very effective internal controls for cash receipts, such as separation of duties. This means that the approach could be substantive testing for cash disbursements and control testing for cash receipts.

When designing transaction tests the nature and extent of balance sheet verification procedures should be considered so as to avoid excessive testing. For instance, if at year end a high percentage of debtors are confirmed, the Auditor may decide that limited transaction testing be conducted that are designed to identify an overstatement of sales.

Specific responses will relate to the audit procedures performed and in particular:

• nature — refers to purpose (i.e. test of controls or substantive) and type (i.e. inspection, observation, inquiry, confirmation, recalculation) of the audit procedure;

• timing — when procedures are performed;

• extent — quantity of audit procedures (e.g. sample size).

Changes in conditions or unexpected results of audit procedures may cause revisions of the overall planned audit approach.

The audit plan and audit programs would normally be completed at the end of this phase of the audit, however updates should be made, if necessary during the course of the audit.

Performing the audit

During this phase of the audit, the auditor needs to:

• determine whether systems and controls that are to be relied upon are operating as designed thus confirming the control risk assessment to justify the planned level of substantive testing;

• obtain audit evidence as to whether the financial statement assertions addressed by the audit procedures may include a significant misstatement by completing the planned substantive testing;

• collate any audit differences and management letter points;

• ensure workpapers have been independently reviewed.

The specific audit procedures to be performed are documented in the audit programs which were completed during the planning phase.


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In this phase, we complete the relevant tests during the final audit. The tests to be performed will be either:

• tests of control (if we have identified any controls we wish to place reliance on);

• substantive tests – these are tests to corroborate the balances/transactions and are either:

+ tests of details – agreeing balances to supporting documentation;

+ substantive analytical procedures – using the auditors understanding of the business to predict a balance and comparing the actual figure to the expectation.

Further information on each type of test has been provided below.

Tests of control

If an entity is small and has limited segregation of duties, it is unlikely that an auditor would plan to rely on controls and test them as an audit procedure. However, the auditor may be required to consider and in some circumstances test the effectiveness of controls when:

• the risk assessment includes an expectation of the operating effectiveness of controls;

• substantive procedures alone do not provide appropriate `audit evidence at the assertion level; or

• a significant risk has been identified which requires documentation of the auditors understanding of the controls.

If a control relevant to the audit is identified as being in place then testing must be performed to confirm that the control is operating effectively. This is tested through documentation of the control and suitable audit testing, e.g. observation and enquiry, walkthrough, reperformance. Enquiry alone is not sufficient and must be supported by another testing method.

The extent of controls testing depends upon the type of control, i.e. manual v automated and the frequency of the control. For controls which occur more frequently, the number tested will be higher than for those which are performed on a monthly basis. Automated controls may only need to be tested once depending on the information systems assessment.

The table below provides some guidance about sample sizes for controls testing.

Type Baseline

Periodic or recurring manual control

Where a manual control is performed periodically or is recurring the following guidelines are utilised:

Frequency of control activity Minimum sample size

Monthly 2

Weekly 5

Daily 25

More than daily 25

Example:

Monthly bank reconciliations, we would normally test an interim and year end reconciliation.

IT control In situations where an IT control exists and is applied to every transaction, then the systems query may be the most appropriate technique. In this technique, one query as a test is appropriate for an IT system that would be expected to operate consistently in a well-controlled environment (specific configuration, interfaces and system access are appropriately designed and subject to appropriate change control procedures).

Reliance on controls work from prior period

In some cases it may be possible for the auditor to use controls testing performed in a previous audit as part of the evidence for the current year audit.


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Prior to using this testing, the auditor will need to confirm information as documented below.

Work to be relied upon from prior year

Evidence needed in current year

Audit evidence about the operating effectiveness of controls

Have changes in the controls occurred subsequent to prior audit?

Evidence to be obtained via enquiry and observation/inspection.

Confirmation of the continuing relevance of the audit evidence obtained in prior year.

If controls have changed since they were last tested, the operating effectiveness of the controls should be tested in the current audit.

Controls testing, where controls have not changed since they were last tested.

Operating effectiveness of controls to be tested at least once in every third audit.

Where there are a number of controls then the operating effectiveness of some controls should be tested in each audit.

Substantive procedures

Substantive procedures should be performed if tests of control determine that:

• the controls are not operating effectively;

• they do not exist; or

• the auditor has determined that a substantive approach is more effective or efficient.

Substantive procedures comprise substantive analytical procedures or tests of details.

They enable the auditor to assess whether the transactions are bona fide and have been properly classified and recorded in the general ledger.

In most audits, it is not possible to undertake testing for every transaction and therefore the auditor has to select transactions to test. This selection process is discussed further in the sampling section below.

Analytical procedures

Analytical procedures are used in a number of stages of the audit, in accordance with ASA 520 Analytical procedures. During this phase of the audit, we use analytical procedures as a substantive test to assist in corroborating balances.

‘Analytical procedures’ means the investigation and analysis of fluctuations and relationships to determine whether there are inconsistencies with other relevant information or deviations from predicted amounts. Through an understanding of the business, the auditor should form an expectation of the balance to compare with the actual balance.

Since analytical procedures are generally at a higher level than tests of details, ASA 520 states that the extent of reliance on results from substantive analytical review procedures depends on the following:

• Source of the information available. For example, information is ordinarily more reliable when it is obtained from independent sources outside the entity.

• Comparability of the information available. For example, broad industry data may need to be supplemented to be comparable to that of an entity that produces and sells specialised products.

• Nature and relevance of the information available. For example, whether budgets have been established as results to be expected rather than as goals to be achieved.

• Controls over the preparation of the information. For example, controls over the preparation, review and maintenance of budgets.

These factors should be considered by the auditor in determining the extent of other testing (refer to ASA 520 for requirements and guidance).

There are a number of steps required to perform substantive analytical procedures in accordance with the Australian Auditing Standards which are shown below:

1. Identify relevant data and relationships (i.e. superannuation as % of payroll);

2. Determine an expectation;


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3. Comparison with recorded amounts;

4. Substantiate explanations;

5. Investigation of unusual or unexpected results;

6. Conclude that the amounts are within our expectation or satisfactorily explained by audit procedures or if material an audit adjustment made.

For analytical procedures to be effective, the auditor should perform the steps above in the right order.

Computing the difference between the prior-period balance and the current-year recorded but unaudited balance (step 3) before developing an expectation (step 2) or before determining the relationship (step 1), can inappropriately influence or bias the auditor’s judgement towards accepting the balance as fairly stated, even when it is misstated.

The auditor needs to document the following for each analytical procedure performed:

• The basis for the expectation, including information sources used to produce the expectation;

• The expected figures;

• The threshold for investigation of differences;

• Actual figures from the client;

• The difference between the Auditor’s expectation and actual figures;

• Explanations for the differences.

Some of the common audit areas where substantive analytical procedures are used are:

• Payroll;

• Depreciation;

• Superannuation charge;

• Cost of sales;

• Administration expenses.

Tests of detail

Tests of detail involve verification of an items’ source documentation. Generally the approach for planning and performing tests of details is as follows:

Define the population The population from which the Auditor selects the items for testing must be consistent with the period to be covered.

Consider subdividing or stratifying the population to increase the effectiveness of procedures.

Define what constitutes a difference

Differences may result from differences in the:

• timing of recording of transactions (incorrect period);

• description (error in classification) ;or

• amounts for data captured or processed.

Choose the method for selecting items

Select the entire population, specific items or a representative sample?

• Specific items testing is more appropriate when the population contains a small number of individually significant or risky items or is primarily made-up of non-routine transactions.

• Representative sampling is more appropriate when the population contains a large number of individually insignificant items and is primarily made-up of routine transactions.

There are further details on selecting items to test below.

Select the items for testing

If the auditor has chosen to perform specific items testing, the items are generally selected based on qualitative factors. When supplementing this with quantitative factors, items that are individually larger than the materiality threshold.


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Reconcile the population

Perform procedures to ensure that the population from which the Auditor select items reconciles to the financial statements.

Test items Perform planned procedures.

Evaluate and interpret results

If audit differences are identified:

• Investigate the nature and cause of the difference.

• Consider whether it is indicates a significant misstatement.

• Consider the effects on the entity’s business, the functioning of controls, management bias, competence of personnel, etc.

• Consider whether extrapolation of the difference is appropriate.

Amend procedures, if necessary

Based on the results obtained, the auditor may be satisfied that they have obtained sufficient audit evidence or may determine that additional procedures are necessary.

Documents the results of audit test work

Audit documentation included a description of the nature, timing and extent of the procedures performed, a description of the differences identified (including their nature and cause), how these differences were resolved and a summary of our conclusions.

When choosing items for tests of detail, there are three permitted options for selecting items to test:

• selecting all items (100% examination);

• selecting specific key items; and

• audit sampling.

Where an entity has a limited number of transactions, 100% of transactions may be selected for testing, however this approach is time-consuming and expensive where an entity has more than a few transactions during a period.

If there are a large number of transactions, the auditor should select and test items to obtain sufficient appropriate audit evidence in an efficient and effective manner using selective items testing, sampling or a combination of both. The selection process involves the application of audit procedures to a population less than a full defined population with the objective of obtaining evidence which is representative of the entire population.

• Selecting specific key items involves testing, for example, all items greater than a threshold, or unusual items.

• Audit sampling involves using judgement or statistics to determine a sample size and then each item in the population has an equal chance of being selected.

Specific items testing

Selecting specific items is likely to be more effective when one of the following is true:

• The risk of misstatement is assessed as low and audit evidence has been obtained from other substantive procedures for the population;

• The population contains a small number of individually significant items;

• The population mainly contains non-routine transactions or accounting estimates.

When the auditors select specific items from an account balance or class of transactions, the results of procedures cannot be extrapolated to the remaining population. The auditor needs to consider the need to obtain appropriate audit evidence regarding the remainder of the population when the remainder is significant.

Specific items testing does not represent sampling procedures. For instance, selecting all items over a stipulated value does not qualify as sampling given that it is not intended to be representative of the total population. It is important that such procedures not be mistaken as sampling, as to do so may result in an incorrect audit conclusion.

When choosing the specific items, the auditor can choose:

• high-value testing – the items of high monetary value are selected since errors therein are more likely to be larger and are therefore more likely to cause a material error;

• key item tests, the items identified as being inherently risky or being subject to weak controls are selected because their frequency of errors is likely to be higher and therefore more likely to cause a material error.


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Both the assessment of the threshold for the selection of high-value items and the determination of risk for the selection of key items is subject to the exercise of professional judgement and should be documented.

High-value tests and key item tests are not by themselves sufficient appropriate audit evidence unless the portion of the population not tested using these tests is significantly below materiality. If the portion of the population not tested is near or over materiality, then sampling should be employed on this portion of the population.

Audit sampling

The purpose of sampling is to gain evidence by examining characteristics of selected items within an account balance or class of transactions. The results obtained from the sample characteristics can be assumed to be representative and thus provide a reflection on the entire population.

There will be certain circumstances where sampling may not be appropriate. Conditions to be considered in deciding whether sampling is appropriate include:

a) are the intended audit procedures effective when applied on a test basis, e.g. if internal controls are completely absent sampling may not be suitable;

b) cost benefit relationship in that other audit procedures may provide a higher degree of evidence at a lower cost;

c) potential for material misstatement – normally financial statement items which the Auditor does not believe would contain a potential for material error are able to be more effectively audited via other procedures such as analytical review.

When designing an audit sample, the auditor shall consider the objectives of the audit procedures and the attributes of the population from which the sample will be drawn.

The population from which the sample is intended to be drawn should be appropriate to satisfy the audit objective(s) e.g. if the objective were to test for overstatement of sales it would be appropriate to define the population as being the debtors ledger, however if the objective were understatement of sales the appropriate population would be delivery dockets.

Sampling procedures may be either statistical or non-statistical:

• Statistical audit sampling.

+ Statistical sampling requires a calculation for the determination of the sample size. The calculation uses factors to reduce sampling risk to an acceptably low level. Statistical sampling is a sampling approach which has either of the following characteristics – random sample selections or the use of probability theory to evaluate sample results including measurement of sampling risk.

This method requires professional judgment in order to select items for the sample. The auditor therefore needs to ensure the sample is representative of the entire population and avoids bias.

• Non-statistical audit sampling:

+ The most common methods of non-statistical sample selections are systematic selections (i.e. every 10th items) and haphazard selection (i.e. there is no structure, and care is taken to ensure that all items have equal chance of being selected.).

Further guidance and information on sampling can be found in ASA 530 Audit Sampling.

Errors in sampling

Where a monetary error is noted, it shall be projected across the sample, and the effect of this on other areas of the audit shall be considered. This applies only to tests of detail and random sample selections.

For example from total inventory of $1,000 a selection of 3 items (5% of total inventory) for NRV testing is made. Only one of the items returns a variance of $10. The extrapolated variance would therefore be $200.

External confirmations

To obtain sufficient appropriate audit evidence, the auditor may be required to communicate with a number of external third parties, typically banks and solicitors. The timing of this communication should be coordinated so that all information can be assessed before forming an audit opinion on the financial statements.

The process for external confirmations should be controlled by the auditor to improve the reliability of the evidence, i.e. the auditor prepares the letter, mails the letter and receives the responses.

If the auditor is required to speak to the bank, solicitor or other external parties as part of the audit procedures then documentation of the salient points of the conversation should be made and retained on the audit file.


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Further information on external confirmations as audit evidence can be found in ASA 505 External confirmations.

Bank confirmations

Bank confirmations are a source of external evidence over cash/loan balances as well as providing information such as guarantees in place or security held.

GS 16 Bank Confirmation Requests provides further guidance on the process for obtaining banks confirmations as well as example confirmation letters which should be used for all engagements.

The client’s authority letter should be attached to the audit request to allow the bank to communicate directly with the auditor since without this authority the banks will not confirm any information.

Solicitor representation letters

The auditor should seek solicitors’ representation of legal matters in accordance with ASA 502 Audit evidence – specific considerations for litigation and claims.

The request should include details of known matters or a statement that there are no known matters, or they may not be completed.

An example request letter is included in Appendix 1 of ASA 502.

Review of audit working papers

All workpapers on the audit file should be reviewed by someone independent of the preparer. The reviewer should be suitably experienced and qualified to form an opinion on the work performed.

In the case of a sole practitioner or where a Partner in a firm prepares most of the working papers, then the documents may not be subject to review, however the papers should include documentation on how the quality and integrity of the workpapers has been maintained.

Changes to the audit approach

During the performing stage, the auditor obtains sufficient, appropriate audit evidence on which to base their opinion.

Sufficiency is the measure of the quantity of evidence, which is affected by the risk of misstatement, the higher the risk the more evidence is likely to be required.

Appropriateness is the measure of the quality of evidence, that is, its relevance and its reliability, the higher the quality the less evidence may be required. The auditor considers the relationship between the cost of obtained evidence and the usefulness of the information obtained.

The auditor uses professional judgement and exercises professional scepticism in evaluating the quantity and quality of evidence, and thus its sufficiency and appropriateness, to support the audit opinion.

When the auditor forms a conclusion that the audit procedures have not provided sufficient appropriate audit evidence regarding an assertion, additional audit procedures need to be performed to obtain sufficient appropriate audit evidence.

Evaluate, report and wrap-up

The objectives of this phase are to:

• Evaluate audit findings.

• Form our audit opinion.


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• Ensure that the audit file appropriately reflects the audit work performed and the basis for the audit opinion – prepare the final audit file.

• Provide deliverables which match those described in the engagement letter or which would be expected from an audit engagement (for example communication with those charged with governance).

Evaluation of audit findings

The auditor needs to confirm that the audit documentation provides sufficient, appropriate audit evidence to form their opinion that the risk of a material misstatement has been reduced to an acceptably low level.

If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement assertion, they will attempt to obtain such further evidence.

If they are still unable to obtain sufficient appropriate audit evidence, a qualified opinion or a disclaimer of opinion is to be given.

Completion

The auditor may consider it helpful to prepare and retain as part of the audit documentation a completion memorandum that describes the significant matters identified during the audit and how they were addressed, or that includes cross-references to other relevant supporting audit documentation that provides such information. Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation. The preparation of such a summary may assist the auditor’s consideration of the significant matters.

A completion memorandum should provide documentary evidence of final analytical reviews, evaluation of audit evidence and final sign-offs regarding independence etc. An example of a completion memorandum is included in Appendix 1E of this chapter.

Judging the significance of a matter and whether it should be included in the completion memo requires an objective analysis of the facts and circumstances of the situation. Significant matters include:

• Matters that give rise to significant risks (as defined in ASA 315).

• Results of audit procedures indicating that the financial information could be materially misstated; or a need to revise the auditor’s previous assessment of the risks of material misstatement and the auditor’s responses to those risks.

• Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.

• Findings that could result in a modification to the auditor’s report.

This document can be used to form the basis of any communication with those charged with governance.

Management representation letter

The auditor should obtain a representation letter from the client as part of the audit evidence in accordance with the mandatory requirements and guidance given in ASA 580 Written representations.

Generally, a representation by an entity will not be a substitute for other audit evidence which would ordinarily be expected to be found, however the auditor may wish to obtain representations where there is no alternative evidence available.

In addition, there are specific areas where the Auditing Standards require an auditor to obtain a representation, for example in relation to fraud, litigation.

The example representation letters included in Chapters 2, 3 and 4 may be used as guidance.

If a representation by management is contradicted by other audit evidence, the auditor investigates the circumstances and, when necessary, reconsiders the reliability of other representations made by management.

If management refuses to provide a representation that the auditor considers necessary or which is required by the auditing standards then this constitutes a scope limitation and the audit report will include a qualified opinion or a disclaimer of opinion.

Independence declaration

s307C of the Corporations Act 2001 requires an auditor to issue an independence declaration to their clients for inclusion in the financial statements. The only entities covered by this guide for which this is required are Companies Limited by Guarantee – see Chapter 4.


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Communication with those charged with governance

ASA 260 Communication with those charged with governance deals with the Auditor’s responsibility to communicate with those charged with governance in the audit of financial statements. We will cover the items relating to this phase of the audit in this section.

Each the end of each audit, the auditor shall communicate regarding the following points to those charged with governance:

a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial report disclosures. When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity;

b) Significant difficulties, if any, encountered during the audit;

c) Unless all of those charged with governance are involved in managing the entity:

i. Significant matters, if any, arising from the audit that were discussed, or subject to correspondence with management; and

ii. Written representations the auditor is requesting; and

d) Other matters, if any, arising from the audit that, in the auditor’s professional judgement, are significant to the oversight of the financial reporting process.

The communication should be in writing if the auditor does not believe that oral communication would be sufficient. Note if the information is provided orally to the client then the auditor needs to document the discussions that have taken place.

The auditor is also required under ASA 260 to inform those charged with governance of those uncorrected misstatements, other than clearly trivial amounts, aggregated by the auditor during the audit that were determined to be immaterial, both individually and in the aggregate, to the financial report taken as a whole.

ASA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management also requires the auditor to communicate appropriately to those charged with governance and management, deficiencies in internal control that the auditor has identified during the audit and that, in the auditor’s professional judgement, are of sufficient importance to merit their respective attentions.

This is generally done in the form of a management letter which is issued by the auditor as soon as practical, to ensure that those charged with governance and management are aware of material weaknesses in the design and implementation of internal controls to prevent and detect fraud. The management letter should follow up on points raised in prior year audits.

The management letter should include the following:

a) A description of the deficiencies and an explanation of their potential effects; and

b) Sufficient information to enable those charged with governance and management to understand the context of the communication. In particular, the auditor shall explain that:

i. The purpose of the audit was for the auditor to express an opinion on the financial report;

ii. The audit included consideration of internal control relevant to the preparation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control; or

iii. The matters being reported are limited to those deficiencies that the auditor has identified during the audit and that the auditor has concluded are of sufficient importance to merit being reported to those charged with governance.

The communication would normally document the observation, the risk and a recommendation for the client and generally the client’s response would be noted.

Audit differences

With respect to audit differences, the auditor:

• identifies and document audit differences;

• evaluates audit differences and determine their significance;

• considers the impact of audit differences.


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Generally the audit differences are collated on a summary schedule to allow the auditor and client to easily determine the potential effect on the financial statements. This schedule should be annotated based on discussions with the client in respect of which differences have been adjusted.

In assessing the materiality of individual misstatements, the audit team assess:

• Significance of the misstatement;

• Pervasiveness of the misstatement; and

• Effect of misstatement on the financial report as a whole.

Accounting estimates

The auditor makes a final assessment of the reasonableness of the client’s accounting estimates based on the understanding of the client and its environment and whether the estimates are consistent with other audit evidence obtained during the audit.

Any significant estimates made during the preparation of the financial statements are generally included in the completion memo and disclosed in the financial statements.

Audit report

The auditor assesses the financial report and evidence obtained to evaluate whether it is reasonable and consistent with the knowledge of the business, and then determines an appropriate audit opinion.

The audit report is the key deliverable provided by the Auditor to the client and is often one of the first documents reviewed by users of the financial statements.

The audit report date is the date that the auditor signs the opinion which is no earlier than the last date on which the auditor obtained sufficient appropriate audit evidence to form their opinion.

The audit report is not to be signed before the directors’ declaration.

There are a number of Auditing Standards which assist the Auditor in determining the most appropriate opinion to be issued, which have been discussed below:

ASA 700 Forming an Opinion and Reporting on a Financial Report is the over-arching standard which deals with aspects to consider in forming the opinion and the appropriate form and content of the report.

If the financial statements are special purpose then the auditor should refer to ASA 800 Special Considerations—Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks for detailed requirements relating to the audit report, including the inclusion of an emphasis of matter for all special purpose financial statements. This emphasis of matter alerts the users of the auditor’s report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose.

Where the auditor is considering any amendment to the audit report (i.e. modification/qualification) or emphasis of matter, then appropriate guidance can be found in ASA 705 Modifications to the Opinion in the Independent Auditor’s Report or ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.


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Final audit file

The assembly of the audit file is to be completed within a timely basis (60 days) after the date of the audit report and once this assembly has been completed then no audit documentation can be removed or discarded before the end of its retention period (7 years).

Only administrative changes may be made to the documentation after the date of the audit report. They may include:

• Deleting or discarding superseded documentation;

• Sorting, collating and cross-referencing working papers;

• Signing off on completion checklists relating to the file assembly process; and

• Documenting audit evidence that was obtained, discussed and agreed with the auditor before the date of the audit report.

When the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor is required, regardless of the nature of the modifications or additions, to document:

a) When and by whom they were made (where applicable) revised;

b) The specific reasons for making them; and

c) Their effect, if any, on the auditor’s conclusion.

Review engagementsReviews, rather than audits will be available for certain Victorian Incorporated Associations, from the commencement date of the amended Victorian Incorporated Associations Act, being 26 November 2012 (refer to Appendix 3A of Chapter 3) and certain Companies Limited by Guarantee (refer to Chapter 4).

At the time of writing, there are no other entities covered by this guide which are (or are proposed to be) permitted to have a review.

The term ‘reviewer’ has been used in this section to refer to the Auditor/Assurance practitioner undertaking the review of the financial statements.

Objective of a review

The objective and scope of a review of financial statements differs significantly from that of an audit conducted in accordance with ASAs. A review, is designed to provide limited assurance, rather than reasonable assurance that the financial report is free from material misstatement (i.e. the reviewer forms a conclusion as to whether anything has come to the attention of the reviewer that causes them to believe the financial report is not presented fairly.)

A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review may bring significant matters affecting the financial report to the practitioner’s attention, but it does not provide all of the evidence that would be required in an audit.

Relevant pronouncements

The relevant standard for performing a review of the entities included in this guide depends on whether the reviewer has performed an audit of the immediately previous financial statements.

For the first year of the review, the diagram below illustrates the relevant standard:


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Note – if the auditor did not perform all relevant risk assessment and control procedures as part of the audit work then ASRE 2400 should be used.

ASRE 2400 will be the relevant standard for each subsequent year where a review is performed.

Auditors who perform a review on Companies Limited by Guarantee should also refer to the transitional standard on review engagements, ASRE 2415 Review of a Financial Report – Company Limited by Guarantee which provides requirements and guidance regarding a review these entities as well as the form and content of the auditors report – refer to Chapter 4.

Over-arching principlesThe over-arching principles of:

• Auditor independence and ethical principles;

• Professional judgment and scepticism;

• Documentation; and

• Quality control

discussed earlier in this chapter are relevant to reviews performed under ASRE 2410 or ASRE 2400 and this review methodology should be read in conjunction with that guidance.

Acceptance and continuance

Client evaluation

An evaluation process shall take place on first time acceptance of a client and on an ongoing basis to ensure that the auditor or other assurance practitioner is not performing a review that:

• he or she is not sufficiently experienced or resourced to perform;

• has an unacceptably high risk level; or

• would cause a breach of independence requirements.

This process is required to be documented.

See the guidance on acceptance and continuance of engagements in the audit section of this chapter.

Engagement letter

The terms of the review are agreed in writing between the reviewer and the client to confirm the understanding of the difference between an audit and a review and the scope of the engagement.

ASAE 2400 includes an example engagement letter which has been reproduced in Appendix 3G of Chapter 3 and tailored to a Victorian Incorporated Association. Appendix 1 of ASRE 2410 also contains an example engagement letter which may be used in the first year of a review where the reviewer performed an audit on the prior year financial statements in accordance with Australian Auditing Standards.

Planning

Understanding the entity and its environment, including internal control

The reviewer obtains an understanding of the entity and its environment, including its internal control, as it relates to the preparation of the financial report, sufficient to plan and conduct the engagement so as to be able to:

• identify the types of potential material misstatements and consider the likelihood of their occurrence; and

• select the enquiries, analytical and other review procedures that will provide the reviewer with a basis for reporting whether anything has come to the reviewer’s attention that causes them to believe that the financial report is not prepared, in all material respects, in accordance with the applicable financial reporting framework.

The reviewer also needs to obtain a sufficient understanding of internal control as it relates to the preparation of the financial report subject to review, as it may differ from internal control as it relates to the preparation of a financial report subject to audit.

A reviewer who has audited the entity’s immediately preceding financial statements will have obtained an understanding of the entity and its environment, including its internal control, as it relates to the preparation of the financial report, that was sufficient to conduct the audit. In planning a review of a financial report, the reviewer needs to update this understanding.


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If the reviewer has not performed the audit of the immediately preceding financial statements, the reviewer needs to obtain and/or update this understanding as per ASRE 2400.

The reviewer uses the understanding of the entity and its environment, including its internal control, to determine the enquiries to be made and the analytical and other review procedures to be applied, and to identify the particular events, transactions or assertions to which enquiries may be directed or analytical or other review procedures applied.

The procedures performed by the reviewer to update the understanding of the entity and its environment, including its internal control, may include:

• reading the documentation, to the extent necessary, of the preceding year’s audit, or review to enable the auditor to identify matters that may affect the current-period financial report;

• considering any significant risks, including the risk of management override of controls;

• reading the most recent financial report;

• considering materiality with reference to the applicable financial reporting framework as it relates to the financial report, to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements;

• considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial report;

• considering significant financial accounting and reporting matters that may be of continuing significance, such as material weaknesses in internal control;

• enquiring of management about the results of management’s assessment of the risk that the financial report may be materially misstated as a result of fraud;

• enquiring of management about the effect of changes in the entity’s business activities;

• enquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of the financial report; and

• enquiring of management of the process by which the financial report has been prepared and the reliability of the underlying accounting records to which the financial report is agreed or reconciled.

Materiality

The reviewer is required to consider materiality, using professional judgement, when: determining the nature, timing and extent of review procedures; and evaluating the effect of misstatements.

Refer to the guidance in the audit section of this chapter for assistance in determining materiality.

Planning memorandum

The reviewer shall plan a review and set out how it will be conducted, this should be documented in a planning memorandum.

The plan should be based on the reviewer’s knowledge of the business, including a thorough knowledge of all legislative, accounting and review requirements.

The reviewer should also understand the process for the preparation of financial information and deadlines. ASA 315 emphasises the importance of such knowledge in identifying where the risks of material misstatement are likely to occur.

The reviewer’s understanding of the entity and its environment, including its internal control, the results of the risk assessments, and the consideration of materiality as it relates to the financial report, affects the nature and extent of the enquiries made, and analytical and other review procedures applied.

Appendix 1C includes a plan which can be tailored for each review engagement.

Performing

Enquiries, analytical and other review procedures

The procedures performed in a review engagement are primarily:

• enquiries of persons responsible for financial and accounting matters; and

• analytical and other review procedures.


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These procedures are performed to form a conclusion as to whether, on the basis of the procedures performed, anything has come to the reviewer’s attention that would indicate the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

It is important to note that a review ordinarily does not require tests of the accounting records through inspection, observation or confirmation.

Specific procedures

As well as the analytical procedures and enquiries, the following areas need to be considered as part of the review.

Litigation and claims A review of a financial report ordinarily does not require corroborating the enquiries about litigation or claims. It is, therefore, ordinarily not necessary to send an enquiry letter to the entity’s lawyer.

Direct communication with the entity’s lawyer with respect to litigation or claims, or alternative procedures, may, however, be appropriate if a matter comes to the reviewers attention that causes them to question whether the financial report is in accordance with the applicable financial reporting framework.

Underlying financial records

Obtain evidence that the financial report agrees or reconciles with the underlying accounting records.

For example by tracing the financial report to:

• the accounting records, such as the general ledger, or a consolidating schedule that agrees or reconciles with the accounting records; and

• other supporting data in the entity’s records as necessary.

Subsequent events Enquire whether management has identified all events up to the date of the review report that may require adjustment to, or disclosure in, the financial report.

Going concern Enquire whether those charged with governance have changed their assessment of the entity’s ability to continue as a going concern.

When, as the result of this enquiry or other review procedures, the reviewer becomes aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, the reviewer shall:

a) enquire of those charged with governance as to their plans for future actions based on their going concern assessment, the feasibility of these plans, and whether they believe that the outcome of these plans will improve the situation; and

b) consider the adequacy of the disclosure about such matters in the financial report.

Potential material adjustment

When a matter comes to the reviewer’s attention that leads the assurance practitioner to question whether a material adjustment should be made for the financial report to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the reviewer makes additional enquiries or perform other procedures to enable a conclusion in the review report to be expressed.

Documentation

The reviewer is required to prepare review documentation that is sufficient and appropriate evidence to provide a basis for the conclusion, and to provide evidence that the review was performed in accordance with ASRE 2415 or ASRE 2400 as appropriate and applicable legal and regulatory requirements.

Evaluation, report and wrap-up

Completion

A completion memorandum should provide documentary evidence of evaluation of evidence and final sign-offs regarding independence etc. An example of a completion memorandum is included in Appendix 1E of this chapter.


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Review report

Example review reports are included in Appendix 4 to ASRE 2410 and Appendix 5 of ASRE 2400, Appendix 3I in Chapter 3 provides guidance on choosing the most appropriate review report.

Written representation by client management

ASRE 2415 or ASRE 2400 as applicable require that the reviewer should obtain a representation letter from the client as part of the review evidence.

Generally, a representation by an entity will not be a substitute for other review evidence which would ordinarily be expected to be found, however, the reviewer may wish to obtain representations where there is no alternative evidence available.

In addition, there are specific areas where ASRE 2400 requires representations to be obtained.

See Appendix 3D for an example management representation letter.

Evaluation of misstatements

The reviewer evaluates, individually and in the aggregate, whether uncorrected misstatements that have come to the attention of the reviewer are material to the financial report.

Whilst a review provides limited assurance only, misstatements which come to the reviewer’s attention, including inadequate disclosures, need to be evaluated individually and in the aggregate, to determine whether a material adjustment is required to be made to the financial report, for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework.

Communication

When, as a result of performing the review of a financial report, a matter comes to the reviewers attention that causes them to believe that it is necessary to make a material adjustment to the financial report for it to be prepared, in all material respects, in accordance with the applicable financial reporting framework, the reviewer communicates this matter as soon as practicable to the appropriate level of management.

When, in the reviewer’s judgement, management does not respond appropriately within a reasonable period of time, the reviewer informs those charged with governance.


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AppendicesThe following appendices have been included to assist with performing an audit or review of financial statements.

Appendix 1A – Ethical clearance letter.

Appendix 1B – Example consent to act letter.

Appendix 1C – Planning memorandum.

Appendix 1D – Fraud workpaper.

Appendix 1E – Completion memorandum.

Appendix 1F – Summary of auditing standards.


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Appendix 1A – Ethical clearance letterThis letter should be used by a potential auditor to send to an outgoing auditor prior to acceptance of the audit engagement.

[DD Month YYYY]

[Previous Accountant’s Name]

[Audit Company Name]

[Address]

[Suburb]

[State Post Code]

Dear [Previous Accountant’s Name]

Re: [name of client]

We have been requested to act as auditor for [name of client] for the financial year ended [year end date].

Please advise if there are any professional or ethical reasons why we should not accept this appointment.

Thank you for your attention to this matter at your earliest convenience.

Yours faithfully

_____________________________

[Name and Title]


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Appendix 1B – Example consent to act letter

[Date]

[Name and address of auditor]

Dear [client contact name],

CONSENT TO ACT LETTER

[Pursuant to [legislation or authority,]] we [name of audit firm/individual auditor] hereby consent to appointment as [auditor/reviewer] of [entity name], ABN xxxxx.

Yours sincerely

_____________________________ ________________________

[Partner] [Audit firm] (if applicable)

Partner — Registered Company Auditor [delete if not applicable]

ABN XX XXX XXX XXX


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Appendix 1C – Planning memorandumPLANNING MEMORANDUM

a. Client overview

Year end:

Client:

Client code/reference:

Address:

Phone no:

Fax no:

Contact name:

Email:

Details of those charged with governance (i.e. Management Committee) and contact name:

Type of entity (i.e. Incorporated Association):

Where the financial statements are special purpose, describe the basis of accounting used and the compliance with Australian Accounting Standards.

b. Audit administration

Engagement team: Name Position

Partner

Manager

Staff

Audit/review engagement project management: (i.e. who will review workpapers and who will manage the client):

Budget: Name #Hours Rate Cost

TOTAL

Budgeted fee:

Anticipated recovery rate (%): (i.e. budgeted fee/budgeted cost)


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c. Key dates

Audit/review timings: Work flow Date

Planning meeting

Interim audit/planning visit

Stocktake (if applicable)

Final audit visit

Audit clearance

Reporting deadlines:

Expected date for signing financial report:

AGM:

d. Planning discussion

Date:

Attendees:

The audit team are required to hold planning discussions during the planning phase of an audit, a summary of the discussions from the planning meeting should be recorded here.

As a minimum, the following items should be discussed:

• Changes in operations for the entity.

• Nature, timing and extent of direction and supervision of engagement team members.

• Workpaper review process.

• Susceptibility of the entity to material misstatement.

• Potential for Fraud and error at the client as well as any fraud risk factors.

• Laws and regulations.

• Potential litigation and claims.


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e. Understanding the business

Client overview (provide details of the industry, competitors, revenue sources, significant assets, number of employees, significant regulations etc.).

Provide details of the objectives, strategies, values and vision of the client.

Briefly explain the key factors that have affected the client’s results for the year. If any revenue or expense items have changed materially from the prior year, provide explanation for the change.

Provide details of the objectives, strategies, values and vision of the client.

If the client holds any items at fair value, provide details regarding the process and controls for determining fair value measurements and disclosures.

Obtain a copy of the latest trial balance/management accounts and perform a high level analytical review to identify unusual balances/significant movements.


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f. Risk assessment and control environment

Does the organisation have a risk assessment document and/or process in place for considering risk faced?

If yes, then a copy should be obtained and reviewed.

If no, then consider whether a management letter point should be raised.

Risk table

Business risks/significant audit areas

Financial statement assertions

Audit testing

Are there adequate authorisation procedures and segregation of duties in place?

Where division of duties is not possible due to the size of the organisation, are there compensating controls?

Have prior year management letter points been acted upon?


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Are there any other factors which should be considered when evaluating the overall control environment or comments to support answers above? (e.g. change of finance staff during the year)

Assessment of overall control environment: (Strong/average/weak)

g. Systems and controls

The auditing standards require the auditor to obtain an understanding of systems and high level controls in place within these systems.

Key systems: Documentation of controls in place (W/P ref)

Will the audit approach rely on controls in the system?

Sales and cash receipts

Purchases and cash payments

Payroll

Other systems as applicable …

h. Materiality

Materiality (include details of the basis of the calculation and rationale for the ratio used).

i. Audit or review approach

This should be based on the risks identified above and your understanding of the business.

Overall audit approach (for example: controls reliance on payroll; however, all other areas to be audited using substantive analytical procedures supported by some tests of detail).

Overall review approach For a review, only inquiries and analytical procedures are involved.


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Key audit (or review) focus areas and audit/review approach (the focus areas should be driven by the business risks identified and the other areas of high inherent risk in the client)

Audit/review focus area Audit/review approach

Sign-off

Based on the knowledge of the client and the planning process, the audit approach proposed will reduced the level of audit risk to an acceptably low level.

_________________________ ___________________ ____________

[Engagement Partner – Name] [Signature] [Date]

_________________________ ___________________ ____________

[Engagement Manager – Name] [Signature] [Date]


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Appendix 1D – Fraud testing workpaperThe following workpaper may be used to assist auditors in documenting their compliance with the requirements of ASA 240 for audit engagements.

Done by and date

W/P reference/notes

Planning phase

Obtain an understanding of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud, and the accounting and internal control systems in place to address such risk and prevent and detect fraud and error.

Document the results of audit team discussions and enquiries with management concerning fraud and error.

Document the results of discussions with management and those charged with governance.

Document the fraud risk factors identified that indicate the possibility of either fraudulent financial reporting or misappropriation of assets, and the audit response.

Document circumstances that have been encountered that may indicate that there is a material misstatement in the financial statements resulting from fraud or error and the audit procedure performed to determine whether the financial statements are materially misstated.

Specific testing to be performed

Journals

Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial report.

i. Make enquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments;

ii. Select journal entries and other adjustments made at the end of a reporting period; and

iii. Consider the need to test journal entries and other adjustments throughout the period.

Estimates and judgements

i. Review accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement due to fraud.

ii. Evaluate whether the judgements and decisions made by management in making the accounting estimates included in the financial report, even if they are individually reasonable, indicate a possible bias on the part of the entity’s management that may represent a risk of material misstatement due to fraud. If so, the auditor shall re-evaluate the accounting estimates taken as a whole; and

iii. Perform a retrospective review of management judgements and assumptions related to significant accounting estimates reflected in the financial report of the prior year.


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Done by and date

W/P reference/notes

Unusual transactions outside the course of business

For significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual:

• Obtain an understanding of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud, and the accounting and internal control systems in place to address such risk and prevent and detect fraud and error;

• Document the results of audit team discussions and enquiries with management concerning fraud and error.


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Appendix 1E – Completion memorandumCOMPLETION MEMORANDUM

Reporting period end:

Client:

Client code:

Done by and date

Work paper reference

(if applicable)

Has a final trial balance been cross-referenced to the audit/review file?

Have lead sheets, which agree to the final financial report, been completed for all sections?

Does each lead sheet conclude appropriately on the findings of the section?

Have all work papers been signed and dated by the preparer and reviewer?

Did we attend stock takes at all material stock locations?

If the answer to the above question was ‘No’, have the circumstances that caused this been clearly documented in the work papers?

Have we reviewed minutes of all shareholders’, directors’ and other important meetings held during the year and considered the audit implications of key decisions?

Have we considered the following during the course of the audit?

• Laws and regulations.

• Litigation and claims.

• Fraud and error.

• Related parties.

• Subsequent events.

• Going concern.

Have we conducted analytical procedures as part of our overall review of the final financial report in an audit or as part of review engagement procedures?

Summary of audit/review differences:

Have all errors noted during the audit/review been documented?

Do the proposed adjustments on the summary of audit/review differences schedule distinguish between those which have been adjusted for and those which have not, including reasons for the latter?

Have we ensured that all the agreed adjustments have been properly recorded?

Significant audit, accounting and control issues:

Have all significant audit/review and accounting issues noted during the audit/review been documented and discussed with the client?

Have all significant control issues been included in the communication with management or those charged with governance?


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Done by and date

Work paper reference

(if applicable)

Have all outstanding matters/review points been cleared?

Have we provided the written management representation letter template to the client?

Has all email correspondence been appropriately filed?

Have we prepared a concluding memorandum that outlines all significant issues and decisions made during the course of the audit or review?

Does the concluding memorandum clearly link assessed risk to work performed to reduce the risk and to the conclusions drawn?

Fees

Have the actual costs of the job been compared against budget to determine the reasons for any cost overruns?

Have any factors that allow us to charge additional fees been communicated to and agreed with the client?

Has the final invoice for the engagement been arranged?

Staffing

Have staff appraisals been completed for this engagement?

Sign-offs

We confirm that:

Considerations

The audit/review procedures were performed in accordance with the planned approach as documented in the audit/review plan. Deviations from the original plan have been documented.

The audit/review files establish a clear link between the assessed risk at the financial report level and individual balances, the procedures performed and the conclusions drawn.

The engagement team has performed its work in accordance with Australian auditing or review standards as appropriate and applicable legal requirements. The working papers demonstrate this compliance. Any departures have been documented and approved.

Mandatory working papers, as determined by the auditor have been completed appropriately.

The financial statement disclosures and presentation conform to our understanding of the business as well as the appropriate statutory and regulatory requirements.

The framework used to prepare the financial statements is appropriate.

The engagement team has obtained sufficient and appropriate audit/review evidence in order to form an opinion for an audit or conclude for a review engagement.

Audit/review differences

The unadjusted audit/review differences as documented do not cause the financial report to be materially misstated either individually or in aggregate.


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Working papers

The engagement quality control reviewer role, if applicable, has been completed and all comments and issues raised by the reviewer have been addressed and satisfactorily resolved.

Review of workpapers:

• Working papers related to high risk areas have been reviewed by the engagement quality control reviewer.

• All other working papers that do not relate to high risk areas have been reviewed by someone other than the preparer.

• All review points have been cleared, working papers amended to reflect follow-up work performed and review notes discarded.

Communications committing the firm, including those sent by electronic media, have been appropriately authorised and retained on file.

Minutes of important discussions and meetings with client personnel and management have been retained on file including details of parties involved, date and time.

A signed written representation letter has been obtained.

Consultation

Consultations undertaken on difficult or contentious matters have been documented including the conclusions reached and how the resolutions have been implemented, e.g. review by tax expert, technical experts, second partner for other than unqualified opinions/review conclusions and other consultations undertaken in accordance with the auditor’s policy.

Ethics and independence

All legal, regulatory and professional requirements as they relate to ethical issues (including independence) have been complied with during the course of this engagement. The working papers demonstrate this compliance.

Communication with those charged with governance and management

All significant issues have been communicated to those charged with governance and management.

We have communicated all audit/review differences, adjusted and unadjusted to those charged with governance and management.

We have discussed subsequent events that could impact on the operation of the client with those charged with governance.

Auditor’s opinion/review conclusion

Sufficient audit/review evidence has been obtained to reduce the risk of material misstatement to an acceptably low level.

The auditor’s report drafted conforms to Australian auditing or review standards.

Modifications (if any) to the auditor’s report have been discussed with the client.

The Auditor’s report to be issued is appropriate.


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Sign-off

_______________________________ ____________________________ ____________

[Engagement Manager – Name] [Engagement Manager – Signature] [Date]

_______________________________ ____________________________ ____________

[Engagement Partner – Name] [Engagement Partner – Signature] [Date]

____________________________ ___________________________ _____________

[Engagement Quality Control Reviewer [EQCR – Signature] [Date] (if applicable) — name]


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Appendix 1F – Auditing standards relevant to the conduct of a financial reportThe key auditing standards which are relevant to the conduct of the audit of a financial report include, but are not limited to:

Auditing standard Requirements

ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements

Compliance with relevant ethical requirements, including those pertaining to independence.

ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards

• Compliance with the relevant ethical requirements, including those pertaining to independence, relating to financial report audit engagements;

• Compliance with all Australian Auditing Standards relevant to the audit;

• Plan and perform an audit of a financial report by exercising professional judgement;

• Plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial report to be materially misstated; and

• Obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.

ASA 210 Agreeing the Terms of Audit Engagements

The terms of the audit engagement to be agreed with management or those charged with governance, in an audit engagement letter or other suitable form of written agreement.

On recurring audits, the auditor assesses whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.

The auditor obtains the acknowledgement of those charged with governance that their responsibilities include:

• the preparation of financial statements and records;

• establishing and maintaining internal controls, particularly those preventing and detecting fraud and error; and

• providing the auditors with any information, explanations and assistance required for the audit.

ASA 220 Quality Control for an Audit of a Financial Report and Other Financial Information

The engagement partner is to:

i. remain alert, through observation and making enquiries as necessary, for evidence of non-compliance with relevant ethical requirements by members of the engagement team, throughout the audit engagement;

ii. form a conclusion on compliance with the independence requirements that apply to the audit engagement;

iii. be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed, and determine that conclusions reached in this regard are appropriate;


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iv. be satisfied that the engagement team, and any auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and capability to perform the audit engagement;

v. take responsibility for the direction, supervision and performance of the audit engagement; and

vi. take responsibility for the auditor’s report being appropriate in the circumstances.

ASA 230 Audit Documentation Preparation of documentation:

i. that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of the audit procedures performed to comply with the Australian Auditing Standards and applicable legal and regulatory requirements;

ii. that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the results of the audit procedures performed, the audit evidence obtained, significant matters arising during the audit, the audit conclusion reached thereon and significant professional judgements made in reaching those conclusions; and

iii. which is assembled in an audit file on a timely basis (ordinarily not more than 60 days) after the date of the auditor’s report.

ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report

Consider the risks of material misstatements in the financial report due to fraud.

ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report

Obtain a general understanding of:

• the legal and regulatory framework applicable to the entity;

• how the entity is complying with that framework.

Perform further audit procedures to help identify instances of non-compliance with those laws and regulations that may have a material effect on the financial report and obtain sufficient appropriate audit evidence regarding compliance with those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial report.

ASA 260 Communication with Those Charged with Governance

Determine the appropriate person(s) within the entity’s governance structure with whom to communicate, (generally Board of Directors or Committee of Management), and communicate with them the responsibilities of the auditor in relation to the financial report audit, an overview of the planned scope and timing of the audit, significant findings from the audit, and auditor independence on a timely basis.

ASA 265 Communication Deficiencies in Internal Control to Those Charged with Governance and Management

Communicate appropriately to those charged with governance and management, deficiencies in internal control that the auditor has identified during the audit and that, in the auditor’s professional judgement, are of sufficient importance to merit their respective attentions.


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ASA 300 Planning an Audit of a Financial Report

Perform preliminary engagement activities, including evaluation of their own compliance with relevant ethical requirements including independence, to establish and document an overall audit strategy that sets the scope, timing and direction of the audit, that guides the development of the audit plan and plan the nature, timing and extent of direction and supervision of the engagement team members and review of their work.

ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

Obtain an understanding of the entity and its environment, including its internal controls to provide a basis for the identification and assessment of risks of material misstatement at the financial report and assertion level.

ASA 320 Materiality in Planning and Performing an Audit

Determine materiality:

• for the financial report as a whole when determining the overall audit strategy; and

• for performance materiality for purposes of assessing the risks of material misstatement; and

• to determine the nature, timing and extent of further audit procedures.

ASA 330 The Auditor’s Responses to Assessed Risks

Design and implement overall responses to address the assessed risks of material misstatement at the financial report level and design and perform further audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement at the assertion level.

Further audit procedures may comprise only substantive procedures or, when reliance is placed on the operating effectiveness of controls to reduce substantive testing, include tests of controls.

ASA 402 Audit Considerations Relating to an Entity Using a Service Organisation

Determine whether the service organisation’s activities are of significance to the entity and relevant to the audit and, if so, the auditor is required to obtain a sufficient understanding of the entity and its environment to identify and assess the risks of material misstatement and design further audit procedures in response to the assessed risk.

The auditor may need to obtain evidence of the operating effectiveness of the service organisation’s controls and may use a report of a service organisation auditor to provide that evidence.

In using the service auditor’s report, the auditor considers the professional competence of the service auditor, the nature and content of the report, the scope of the work performed and whether the nature, timing and extent of the tests of controls and results that are relevant, provide sufficient appropriate audit evidence about the operating effectiveness of those controls to support the assessed risks of material misstatement.

ASA 450 Evaluation of Misstatements Identified during the Audit

Determine whether the overall audit strategy and audit plan needs to be revised if the nature of identified misstatements and the circumstances of their occurrence indicate that other misstatements may exist that, when aggregated with misstatements accumulated during the audit, could be material or approaches materiality determined in accordance with ASA 320.


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ASA 500 Audit Evidence Design and perform audit procedures that are appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. It requires the auditor to consider the relevance and reliability of the information to be used as audit evidence.

ASA 501 Audit Evidence – Specific Considerations for Inventory and Segment Information

Design and perform audit procedures to obtain sufficient, appropriate audit evidence regarding:

• existence and condition of inventory;

• presentation and disclosure of segment information in accordance with the applicable financial reporting framework.

ASA 502 Audit Evidence – Specific Considerations for Litigation and Claims

Design and perform audit procedures to identify litigation and claims which may give rise to a risk of material misstatement, and accounted for and disclosed in accordance with the applicable financial reporting framework.

ASA 505 External Confirmations Request external confirmations where they are necessary to obtain sufficient appropriate audit evidence.

ASA 510 Initial Audit Engagements – Opening Balances

Obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial report, whether the prior period closing balances have been correctly brought forward and that appropriate accounting policies are applied consistently.

ASA 520 Analytical Procedures Design and perform analytical procedures to address the assessed risks of material misstatement near the end of the audit that assist the auditor when forming an overall conclusion as to whether the financial report is consistent with the auditor’s understanding of the entity.

ASA 530 Audit Sampling When the auditor has decided to use audit sampling in performing audit procedures, requires design and performance of audit procedures to obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

ASA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures

Obtain sufficient appropriate audit evidence that accounting estimates, including fair value accounting estimates and disclosures are reasonable and are in accordance with the applicable financial reporting framework.

ASA 550 Related Parties Expands on how ASA 315, ASA 330 and ASA 240 are to be applied in relation to risks of material misstatement associated with related party transactions and relationships.

ASA 560 Subsequent Events Perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor’s report have been identified, and if material, are properly disclosed and accounted for.

ASA 570 Going Concern Consider the appropriateness of use of the going concern assumption in the preparation of the financial report.

ASA 580 Written Representations Request written representations from management that they are responsible for the preparation of the financial report in accordance with the applicable reporting framework, they have provided the auditor with all relevant information and access, and that all transactions have been recorded and reflected in the financial report.


ASA 620 Using the Work of an Auditor’s Expert

When using the work of an auditor’s expert, obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit and to evaluate the competence, capabilities and objectives of the auditor’s expert.

ASA 700 Forming an Opinion and Reporting on a Financial Report

Form an opinion on whether the financial report is prepared, in all material respects, in accordance with the applicable financial framework, and to express the auditor’s report in writing.

ASA 705 Modifications to the Opinion in the Independent Auditor’s Report

Modify the auditor’s report when it is not possible to issue an unmodified audit opinion. The circumstances may dictate that, due to a conflict, a significant uncertainty, a limitation of scope or a lack of sufficient appropriate audit evidence, that it is not possible to issue an unqualified audit opinion. In these circumstances, ASA 705 requires the auditor to issue either a qualified audit opinion, a disclaimer of opinion or an adverse opinion.

ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Contains the requirements of how the emphasis matter of paragraph is to be shown in the auditor’s report.

ASA 710 Comparative Information – Corresponding Figures and Comparative Financial Reports

Determine whether the financial report includes the comparative information required by the applicable financial reporting framework and whether such information is appropriately classified.

ASA 800 Special Considerations – Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks

Specifies the form of the auditor’s report on special purpose financial reports. An emphasis of matter paragraph in special purpose financial reports draws attention to the note of the financial report which describes the basis of accounting.

2. The audit of a self managed superannuation fund2. The audit of a self managed superannuation fund 2:2

Introduction to this chapter 2:2

ASIC SMSF auditor registration 2:2

Overview of the audit of an SMSF 2:2

SMSF specific methodology 2:3


Financial report audit 2:5

Planning 2:5

Reporting 2:6

Compliance audit 2:6

Reporting obligations for the financial statement and compliance audits 2:7

Management letter 2:7

Appendices 2:8

Appendix 2A – Example audit engagement letter for the audit of a Self-Managed Superannuation Fund 2:9

Appendix 2B – Example SMSF audit plan 2:12

Appendix 2C – Example trustee representation letter to the auditor 2:16

Appendix 2D – Example management letter template 2:19

Appendix 2E – ATO regulated superannuation funds 2:21

Appendix 2F – Example audit programs 2:22

Compliance audit 2:39


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2. The audit of a self managed superannuation fund

Introduction to this chapterThis chapter deals with the financial statement audit and compliance audit for self-managed superannuation funds (SMSF) and should be read in conjunction with Chapter 1 – Overview of audits and reviews for the financial statement audit and Chapter 5 – Overview of a compliance audit.

SMSFs are generally non-reporting entities that produce special purpose financial reports and are regulated by the Australian Taxation Office (ATO). This chapter is not applicable for the audits of APRA regulated superannuation funds.

ASIC SMSF auditor registrationASIC’s register of SMSF auditors is effective from 1 July 2013 and is part of the Australian Government’s ‘Stronger Super’ reforms to improve integrity and community confidence in the sector.

ASIC has responsibility for registering ‘approved SMSF auditors’, setting competency standards and, where appropriate, cancelling, suspending or disqualifying auditors.

Approved SMSF auditors will have ongoing obligations under section 128F of the Superannuation Industry (Supervisory) Act 1993 to comply with the competency standards set by ASIC. Auditors are also required by the legislation to comply with the auditing standards issued by the Auditing and Assurance Standards Board.

Any auditor who wishes to sign off SMSF audit reports from 1 July 2013 must register with ASIC, applications should be made by 30 April 2013. A detailed timeframe is available on the ASIC website. In order to be registered, SMSF auditors must meet minimum education, experience and competency requirements as well as maintaining professional indemnity insurance.

Existing approved SMSF auditors are able to apply for registration under transitional arrangements between 31 January 2013 and 30 June 2013, which may exempt them from some registration requirements.

ASIC has published Regulatory Guide 243 Registration of self-managed superannuation fund auditors and Class Order (CO 12/1687) which provide more information on the requirements for an SMSF auditor.

Guidance Statement (GS 009) – Auditing self managed superannuation funds was issued by the AUASB in August 2011 (refer CPA Australia Members’ Handbook and AUASB website), this chapter has been written with regard to the recommendations and guidance of GS 009 and other professional statements and standards current at the time of writing.

Overview of the audit of an SMSFSuperannuation funds are governed by the requirements of the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Section 35C of the SIS Act requires all superannuation funds, regardless of size or type, to be audited on an annual basis. The audit has two components:

• the audit of the financial report – to enable the auditor to form an opinion as to the fair presentation of the financial report in accordance with stated accounting policies. This component of the audit is conducted in accordance with Australian Auditing Standards.

• the compliance audit – to enable the auditor to form an opinion as to the trustees’ compliance with specified requirements of the SISA and the SISR. This compliance audit is conducted in accordance with the Australian Standards on Assurance Engagements.

The auditor is required to provide an audit report using the ATO approved form which covers both the financial statement and compliance components of the audit. The auditor’s obligation to consider compliance with the SIS Act and SIS Regulations is restricted to those sections and regulations specified in the approved form of the audit report (see Appendix 2E).

An SMSF audit report is not required to be lodged with the SMSF Annual Return. However, details of qualified audit reports or compliance breaches must be provided. In addition auditors of self managed superannuation funds have additional reporting requirements, directly to the ATO.


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Definition of an SMSF

Section 17A of the SISA sets out the definition of an SMSF which generally has the following characteristics:

a) it has fewer than five members;

b) each individual trustee or director of the corporate trustee is a member of the fund, unless it is a single member fund, in which case the sole member is either:

i. a director of the corporate trustee or one of two directors who are related; or

ii. one of two individual trustees of whom the additional trustee may be anyone apart from an employee of the member, unless the employee is related;

c) each member of the fund is a trustee or a director of the corporate trustee;

d) no member is an employee of another member, unless they are relatives; and

e) no trustee, or director of a corporate trustee, receives remuneration for any duties or services performed by the trustee or director in relation to the fund.

SMSF specific methodologyChapter 1 and Chapter 5 of this guide provide details of the generic methodology for the audits, any SMSF specific requirements have been documented in the relevant phase below.


Who can audit an SMSF?

Prior to 1 July 2013

An SMSF audit must be performed by an approved audit, who is an individual who is currently:

• a registered company auditor, or

• a member of CPA Australia, or

• a member of the Institute of Chartered Accountants in Australia, or

• a member of the Institute of Public Accountants, or

• a fellow or member of the Association of Taxation and Management Accountants, or

• a fellow of the National Tax and Accountants Association Ltd, or

• a SMSF specialist auditor for the SMSF Professionals Association of Australia Ltd, or

• the Auditor-General of the Commonwealth, or a state or territory.

After 1 July 2013

A SMSF audit must be performed by an ASIC registered auditor, known as an approved SMSF auditor, see information above.

Competency requirements

In view of market growth in the area of SMSFs and consultation with the regulator, CPA Australia in a joint initiative with the other professional accounting bodies, developed a set of competency requirements for auditors of SMSFs.

Members who are auditing SMSFs must meet the following professional standards requirements:

• hold a practicing certificate issued by the professional accounting body of which they are a member (CPA Australia, the Institute of Chartered Accountants in Australia or the Institute of Public Accountants);

• have continuing professional indemnity cover;

• meet the ongoing continuing professional development requirements;

• ensure that those who undertake work on their behalf have appropriate knowledge and experience, and are properly supervised in the conduct of the audit.

In addition to having one of the above qualifications, the auditor must demonstrate competencies in each of the following areas:

• acceptance and retention of clients;

• planning the engagement;


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• evaluating controls and testing these controls;

• substantive procedures;

• forming an audit opinion.

The SMSF competency requirements are available on the CPA Australia website and will continue to apply to members over and above the ASIC auditor registration requirements that apply from 1 July 2013.

ASIC has also introduced competency standards for approved SMSF Auditors (ASIC Class Order 12/1687), which are substantially based on the CPA Australia requirements. ASIC will be monitoring compliance with these standards from 1 July 2013.

Auditor independence

As part of the new SMSF auditor registration regime, the SIS Regulations now prescribe the requirements of APES110, the code of ethic for professional accountants, to apply to all approved SMSF auditors. Auditors will also be required to declare on the SMSF independent auditors report that they have met these requirements.

The Accounting Professional and Ethical Standards Board has been tasked with providing guidance on how the requirements of APES 110 apply to SMSF audit engagements and the Joint Accounting Bodies have released a revised edition of the Independence Guide: <cpaaustralia.com.au/cps/rde/xbcr/cpa-site/independence-guide.pdf>, with a much greater focus on SMSF audits.

The Auditing and Assurance Standards Board has also provided guidance through Appendix 6 of Guidance Statement, GS 009, which covers threats to independence in a SMSF.

The Appendix sets out various scenarios and safe guards that may be available to the Auditor in a given situation. Safeguards within the SMSF may be limited, as by its very nature, a SMSF is a small entity with limited scope for segregation of duties.

Assisting an audit client in the preparation of accounting records or financial reports may create a self-review threat when those records and reports are subsequently audited by the same firm. If the firm’s staff also make management decisions for the SMSF, which may occur if the firm is providing administrative services to the SMSF, there are no safeguards available to reduce the self-review threat to an acceptably low level, other than withdrawal from either the administration or the audit engagement.

If, however, the accounting services provided are of a routine or mechanical nature, such as posting transactions and entries approved by the SMSF or preparing the financial report based on a trial balance provided by the SMSF, the self-review threat may be reduced to an acceptably low level by applying safeguards, including:

• Making arrangements so accounting services are not performed by a member of the audit team.

• Implementing policies and procedures to prohibit the individual providing such services from making any managerial decisions on behalf of the SMSF.

• Requiring the source data for the accounting entries to be originated by the SMSF.

• Requiring the underlying assumptions to be originated and approved by the SMSF.

• Obtaining the SMSF’s approval for any proposed journal entries or other changes affecting the financial report.

• Obtaining the SMSF’s acknowledgement of their responsibility for the accounting work performed by the firm.

• Disclosing to the trustees the firm’s involvement in both engagements.

Provision of taxation services to a SMSF which is also an audit client would not generally create a threat to independence.

Timing of auditor appointment

The trustees are required to appoint the auditor at least 30 days prior to the date that the auditor’s report is due.

Engagement letter

The audit engagement letter should set out clearly the auditor’s reporting responsibilities for both components of the audit; an example audit engagement letter can be found in Appendix 2A to this chapter.


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Financial report audit

Planning

Understanding the business

In conducting a SMSF audit, the auditor obtains a preliminary understanding of the SMSF, including the:

• trust structure;

• nature of its investments and administration;

• parties involved in the management and trusteeship of the SMSF; and

• related parties of the trustees and members.

In gaining this preliminary understanding of the SMSF, the auditor reviews the current trust deed to verify whether:

a) The trust deed was properly executed.

b) The SMSF has current and appropriately empowered trustees.

c) The SMSF was established with either a corporate trustee, individual trustees or to pay a pension.

d) The trust deed complies with or has a mechanism to comply with the SISA and SISR and changes thereto.

e) The powers to accept contributions and pay benefits, in the form permitted by the SISA and SISR, are included.

A comprehensive list of considerations for examining the SMSF’s trust deed is included in Appendix 4 of GS009.

SMSFs are often small entities, with a close and related membership where control is vested in a few individuals. There may be little or no opportunity for implementing proper segregation of duties in these circumstances. Consequently, the auditor may assess the SMSF’s control environment and compliance framework as ineffective, in which case the auditor will be unable to rely on the effectiveness of the internal controls to reduce substantive testing.

As a result, the auditor may design and perform further audit procedures which are primarily or entirely substantive procedures.

Under ASA 250, the auditor is required to consider whether the SMSF has breached the SISA or SISR previously and whether there is any outstanding correspondence or unresolved issues with the ATO. Any such matters identified will impact on the risk assessment and the auditor’s assessment of the compliance framework.

SMSFs may use service organisations to provide services such as investment management services including:

• Custody.

• Asset management (including Hedge fund management and Private Equity).

• Property management.

• Superannuation member administration.

• Investment administration, including fund accounting and/or fund administration.

• Registry.

Where this is the case, this will have an impact on the response to the risks identified – see Chapter 1 and the auditor should look at the controls prevailing at the administrator.

Identification of risk

The major risk areas to consider when auditing SMSFs are:

• investments (ensuring their existence, ownership, correct valuation, representation and timing);

• contributions (ensuring they are calculated correctly, have the appropriate preservation status, are properly allocated to members in the appropriate period and treated correctly for tax purposes);

• benefits (ensuring the correct calculation of amounts paid in accordance with the trust deed and ensuring no unrecorded benefits are payable);

• revenue (ensuring that revenue is being accounted for in accordance with the stated accounting policies).


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Communication with third parties

In order to understand the business and obtain sufficient appropriate audit evidence, the auditor may be required to communicate with a number of third parties, including actuaries, fund administrators and investment managers. It is important to coordinate the timing of this communication so that all background information can be assessed before determining the nature, timing and extent of audit procedures.

Other information such as confirmation of investments will be required at year end.

Planning memorandum

In addition to the information included in chapter 1, the following specific SMSF details should be documented in the audit plan.

The response to the risks identified (i.e. the procedures to be performed), the nature, timing and extent of which depends on factors such as:

• The size and complexity of the SMSF.

• Whether the SMSF was a complying fund in prior years.

• Whether the SMSF is a defined benefit or accumulation fund.

• The level of trustee involvement and knowledge of the operations of the SMSF.

• Whether the SMSF is self-administered or administered by a third party service organisation.

• The nature and range of investments held and whether they are internally or externally managed.

• The availability of service auditor’s reports for services provided by service organisations.

• Whether the employer-sponsor is also a client of the firm preparing the accounts or the auditor.

• The potential and any known previous compliance issues.

• The due date for lodgement of the SMSF’s Annual Return to the ATO.

Annual review of the audit plan is necessary to ensure that it is updated to reflect the current circumstances of the SMSF and any changes in legislation that may affect the SMSF.

A sample audit plan is provided in Appendix 2B to this Chapter.

Reporting

Financial information to be prepared and basis for preparation

Most SMSFs will be required to prepare a statement of financial position and an operating statement.

The inclusion of a statement by the trustee is recommended, although it is not mandatory.

Minimum mandatory financial statement disclosure requirements are as follows (APES 205):

• a statement that the financial statements are special purpose financial statements;

• a statement of specific purpose for which the financial statements have been prepared;

• a statement of the significant accounting policies adopted in preparing and presenting the financial statements.

The measurement of assets at net market value may be required under the trust deed. It is the opinion of the ATO that SMSF assets should be valued at their current market value (refer NAT 11375-01.2010).

Compliance audit

Objective

The relevant auditing standards for the SMSF compliance audit are:

• ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information;

• ASAE 3100 Compliance Engagements.

Guidance on the application of these standards is provided in Chapter 4 of this guide.

The objective of the compliance audit is to form an opinion on the following five main areas:

• The fund meets the definition of an SMSF and has elected to be a regulated fund (SISA s17A).

• The fund is maintained for the sole purpose of providing benefits to fund members upon their retirement, or to their dependents in the case of the member’s death before retirement (SISA s62).


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• The trustees have an investment strategy and complies with the investment restrictions (SISR. 4.09).

• The trustees adhere to contribution and benefit payment standards, and (SISR 6.17 and 7.04).

• The trustees carry out their administrative obligations (SISR s103).

There is the risk in the compliance audit that there has been a breach of the SIS Act requirements which is not detected by the auditor. It is important that the audit procedures are planned so they cover the entire financial period and test compliance with the relevant SIS legislation requirements.

The Appendix to the Audit Report (Appendix 2E) provides a summary of the sections of the SISA and SISR reported on in the Auditors Report.

The sections and regulations of the SIS legislation listed in the audit report represent the minimum audit requirements for compliance. The auditor can expand the scope of the audit as he or she deems appropriate, based on audit risk and other factors. The scope of the audit (financial and compliance) should be agreed with the trustees of the SMSF before the audit.

Reporting obligations for the financial statement and compliance auditsThe auditor is required under the SISA to:

a) provide an auditor’s report on the SMSF’s operations for the year to the trustees in the approved form (see Appendix 2E);

b) report in writing to a trustee, if the auditor forms the opinion in the course of or in connection with the performance of the audit of the SMSF, that:

i. any contraventions of the SISA or SISR, may have occurred, may be occurring or may occur in relation to the SMSF (section 129 of the SISA); or

ii. the financial position of the SMSF may be, or may be about to become, unsatisfactory (section 130 of the SISA); and

c) report in writing to the ATO using the approved form Auditor/actuary contravention report (ACR) and instructions (ACR instructions), if the auditor forms the opinion in the course of or in connection with the performance of the audit of a SMSF, that:

i. it is likely that a contravention, may have occurred, may be occurring or may occur, of the requirements of the SISA or SISR, specified by the ATO in the ACR, which meet the tests specified in the ACR instructions (section 129 of the SISA); or

ii. the financial position of the SMSF may be, or may be about to become, unsatisfactory (section 130 of the SISA).

An audit contravention report (NAT 11299-06.2012) has been developed by the ATO and is located on the ATO website.

An auditor checklist to assist in reporting obligations can be found in the document Approved auditors and self-managed super funds – Role and responsibilities as an approved auditor (NAT 11375-01.2013). This ATO guide outlines the responsibilities of approved auditors of SMSFs under the SIS Act and the SIS Regulations, and explains what the ATO expects of auditors in conducting audits.

If a fund is established on or after 1 July 2008 and has a reportable contravention in its first 15 months of operation, the auditor is required to report this to the ATO, regardless of the amount involved. This helps to ensure new trustees are made aware of their obligations and responsibilities at an early stage.

Management letterTrustees should be provided with a management letter detailing the findings and implications of the audit.

This letter should include details of all contraventions of the SIS Act and SIS Regulations and appropriate recommendations for courses of action to be taken by the trustees.

It should also document identified weaknesses in internal controls that are not necessarily breaches of the SIS Act or SIS Regulations but would provide the trustees with improvements to their administrative procedures or systems.


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AppendicesThe following appendices contain example documents for use in the financial statement and compliance audits of a Self-Managed Superannuation Fund (SMSF).

Appendix 2A – Example audit engagement letter.

Appendix 2B – Example SMSF audit plan.

Appendix 2C – Example trustee representation letter.

Appendix 2D – Example management letter template.

Appendix 2E – ATO regulated audit report.

Appendix 2F – Example audit programs.


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Appendix 2A – Example audit engagement letter for the audit of a Self-Managed Superannuation FundThe following example audit engagement letter from Appendix 1 of GS009 is for use as a guide only and may need to be modified according to the individual requirements and circumstances of each engagement.

The section references under the objective of the auditor should be confirmed to the latest ATO Audit Report.

The ATO is of the opinion that these letters should be provided annually.

[Date]

[The Trustees/Directors of the Corporate Trustee]

[SMSF name]

[Address]

To [the Trustees/Directors of the Corporate Trustee] of [SMSF name]

The objective and scope of the audit

You have requested that we audit the [SMSF name]’s (the Fund):

1. financial report, which comprises the [statement of financial position/statement of net assets] as at [date] and the [operating statement/statement of changes in net assets] for the [period] then ended and the notes to the financial statements; and

2. compliance during the same period with the requirements of the Superannuation Industry (Supervision) Act 1993 (SISA) and SIS Regulations (SISR) specified in the approved form auditor’s report as issued by the ATO, which are sections 17A, 35A, 35B, 35C(2), 52(2)(d), 52(2)(e), 62, 65, 66, 67, 67A, 67B, 69-71E, 73-75, 80-85, 103, 104A, 109 and 126K of the SISA and regulations 1.06(9A), 4.09, 4.09A, 5.03, 5.08, 6.17, 7.04, 13.12, 13.13, 13.14, and 13.18AA of the SISR.

We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be conducted pursuant to the SISA with the objective of our expressing an opinion on the financial report and the fund’s compliance with the specified requirements of the SISA and SISR.

The responsibilities of the auditor

We will conduct our financial audit in accordance with Australian Auditing Standards and our compliance engagement in accordance with applicable Standards on Assurance Engagements, issued by the Auditing and Assurance Standards Board (AUASB). These standards require that we comply with relevant ethical requirements relating to audit and assurance engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement and that you have complied, in all material respects, with the specified requirements of the SISA and SISR.

The annual audit of the financial reports and records of the Fund must be carried out during and after the end of each year of income. In accordance with section 35 of the SISA, we are required to provide to the trustees of the Fund an auditor’s report in the approved form within the prescribed time as set out in the SISR, being a day before the latest date stipulated by the ATO for lodgement of the fund’s Annual Return.

Financial audit

A financial audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. A financial audit also includes evaluating the appropriateness of the financial reporting framework, accounting policies used and the reasonableness of accounting estimates made by the trustees, as well as evaluating the overall presentation of the financial report. Due to the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.

In making our risk assessments, we consider internal controls relevant to the fund’s preparation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the fund’s internal controls. However, we expect to provide you with a separate letter concerning any significant deficiencies in the fund’s system of accounting and internal controls that come to our attention during the audit of the financial report. This will be in the form of a trustee letter.


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Compliance engagement

A compliance engagement involves performing audit procedures to obtain audit evidence about the fund’s compliance with the provisions of the SISA and SISR specified in the ATO’s approved form auditor’s report.

Our compliance engagement with respect to investments includes determining whether the investments are made for the sole purpose of funding members’ retirement, death or disability benefits and whether you have an investment strategy for the fund, which gives due consideration to risk, return, liquidity and diversification. Our procedures will include testing whether the investments are made for the allowable purposes in accordance with the investment strategy, but not for the purpose of assessing the appropriateness of those investments to the members.

The responsibilities of the trustees

We take this opportunity to remind you that it is the responsibility of the trustees to ensure that the fund, at all times, complies with the SISA and SISR as well as any other legislation relevant to the fund. The trustees are also responsible for the preparation and fair presentation of the financial report.

Our auditor’s report will explain that the trustees are responsible for the preparation and the fair presentation of the financial report and for determining that the accounting policies used are consistent with the financial reporting requirements of the SMSF’s governing rules, comply with the requirements of SISA and SISR and are appropriate to meet the needs of the members. This responsibility includes:

• Establishing and maintaining controls relevant to the preparation of a financial report that is free from misstatement, whether due to fraud or error. The system of accounting and internal control should be adequate in ensuring that all transactions are recorded and that the recorded transactions are valid, accurate, authorised, properly classified and promptly recorded, so as to facilitate the preparation of reliable financial information. This responsibility to maintain adequate internal controls also extends to the Fund’s compliance with SIS including any Circulars and Guidelines issued by a relevant regulator to the extent applicable. The internal controls should be sufficient to prevent and/or detect material non-compliance with such legislative requirements.

• Selecting and applying appropriate accounting policies.

• Making accounting estimates that are reasonable in the circumstances.

• Making available to us all the books of the Funds, including any registers and general documents, minutes and other relevant papers of all Trustee meetings and giving us any information, explanations and assistance we require for the purposes of our audit. Section 35C(2) of SIS requires that Trustees must give to the auditor any document that the auditor requests in writing within 14 days of the request.

As part of our audit process, we will request from the trustees written confirmation concerning representations made to us in connection with the audit.

Our audit report is prepared for the members of the Fund and we disclaim any assumption of responsibility for any reliance on our report, or on the financial report to which it relates, to any person other than the members of the fund, or for any purpose other than that for which it was prepared.

Independence

We confirm that, to the best of our knowledge and belief, the engagement team meets the current independence requirements of the Code of Ethics for Professional Accountants, as issued by the Accounting Professional & Ethical Standards Board in relation to the audit of the fund. In conducting our financial audit and compliance engagement, should we become aware that we have contravened the independence requirements, we shall notify you on a timely basis.

Report on matters identified

Under section 129 of the SISA, we are required to report to you in writing, if during the course of, or in connection with, our audit, we become aware of any contravention of the SISA or SISR which we believe has occurred, is occurring or may occur. Furthermore, you should be aware that we are also required to notify the Australian Taxation Office (ATO) of certain contraventions of the SISA and SISR that we become aware of during the audit, which meet the tests stipulated by the ATO, irrespective of materiality of the contravention or action taken by the trustees to rectify the matter. Finally, under section 130, we are required to report to you and the ATO if we believe the financial position of the Fund may be, or may be about to become unsatisfactory.

You should not assume that any matters reported to you, or that a report that there are no matters to be communicated, indicates that there are no additional matters, or matters that you should be aware of in meeting


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your responsibilities. The completed audit report may be provided to you as a signed hard copy or a signed electronic version

Compliance program

The conduct of our engagement in accordance with Australian Auditing Standards and applicable Standards on Assurance Engagements means that information acquired by us in the course of our engagement is subject to strict confidentiality requirements. Information will not be disclosed by us to other parties except as required or allowed for by law or professional standards, or with your express consent. Our audit files may, however, be subject to review as part of the compliance program of a professional accounting body or the ATO. We advise you that by signing this letter you acknowledge that, if requested, our audit files relating to this audit will be made available under these programs. Should this occur, we will advise you. The same strict confidentiality requirements apply under these programs as apply to us as your auditor.

Limitation of liability

As a practitioner/firm participating in a scheme approved under Professional Services Legislation, our liability may be limited under the scheme.

Fees

We look forward to full co-operation with [you/your administrator] and we trust that you will make available to us whatever records, documentation and other information are requested in connection with our audit.

[Insert additional information here regarding fee arrangements and billings, as appropriate.]

Other

This letter will be effective for future years unless we advise you of its amendment or replacement, or the engagement is terminated.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our financial audit and compliance engagement of the [SMSF name].

[Insert here or attach any additional matters specific to the engagement, such as business terms and conditions, as appropriate.]

Yours faithfully,

_____________________________________ _____________

[Name and Title] [Date]

Acknowledged on behalf of the trustees of [SMSF name] by (signed).

_____________________________________ _____________

[Name and Title] [Date]


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Appendix 2B – Example SMSF audit plan

Audit strategy and plan

Client: Balance date:

Prepared by: Reviewed by:

Preparation date: Review date:

Fund name:

1. Audit team

Partner: Staff:

Manager:

Include information about the supervision of staff/review of work and other information about responsibilities:

2. Fund information

ABN/TFN if corporate trustee:

Trustee/s:

Primary contact:

Address:

Phone: Email:

Fund member 1: Fund member 2:

Fund member 3: Fund member 4:

3. Fund details

Trust Deed commencement date: ❏ Original ❏ Amended

Where the deed has been amended, note the changes from the prior version:

Type of fund: ❏ Accumulation ❏ Defined

Investment strategy of the fund:

Major assets/investments held:

Other pertinent facts about the fund: (e.g. the level of involvement of the trustees)

Outsourcing of any operations?

Are service audit reports available for these outsourced functions?


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4. Prior period issues or changes

Identify any prior period issues or changes:

5. Audit scope

Services to be provided:

Audit completion due date: Fund lodgement due date:

Signed engagement letter?

Other requirements:

6. Legislative and regulatory change

Identify any legislative or regulatory changes (SIS, tax, other):

7. Independence Yes No

Consider and identify any independence or ethical issues in accepting this appointment

7.1 Does the firm prepare the financial statements of the fund?

If yes, identify the person responsible for preparation

7.2 Are the Trustees related to the fund Auditor?

7.3 Is the Trustee a significant client of the firm?

7.4 Does the firm provide investment advice to the Trustee?

7.5 Is there any evidence that the Trustee has significant influence on the auditor of firm?

7.6 Comments and conclusion (for any ‘yes’ answers)


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8. Risk assessment L M H

Document business risks and determine whether the likelihood/significance of the risk is low, medium or high

8.1 Fraud risk (in particularly consider revenue recognition)

Provide an explanation for the assessment:

8.2 Investments held by the fund (in particular consider existence, ownership and valuation)


8.3 Contributions (ensuring they are calculated correctly, have the appropriate preservation status, are properly allocated to members in the appropriate period and treated correctly for tax purposes)


8.4 Benefits (ensuring the correct calculation of amounts paid in accordance with the trust deed and ensuring no unrecorded benefits are payable)


8.5 Revenue (ensuring that revenue is being accounted for in accordance with the stated accounting policies)


8.6 Risk that a breach of the SIS Act requirements has occurred


9. Control assessment – document the Auditor’s understand of the control environment and the controls in place at the fund


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10. Materiality

Materiality levels for audit: $

Rationale:

11. Audit approach – response to identified risks (provide approach about any controls/systems reliance and the approach for the risks identified) – consider nature, extent, timing and resources

12. Sign-off

I confirm the audit plan and proposed approach is appropriate for the audit, based on the risks identified, understanding of the fund and systems and controls assessment.

___________________________________

[Audit partner]

_______________________________________

[Signed]

________________

[Date]


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Appendix 2C – Example trustee representation letter to the auditorThis illustrative letter from Appendix 2 of GS009 is provided as an example only and may need to be modified according to the individual requirements and circumstances of each engagement. Representations by the trustees will vary between SMSFs and from one period to the next.

This letter assumes that the Fund is non-reporting and therefore is preparing special purpose financial statements.

The SISA and SISR section numbers included in this letter should be agreed to the latest ATO audit report prior to use of this letter.

[SMSF letterhead]

[Date]

[Addressee – Auditor]

Dear [Sir/Madam],

Trustee Representation Letter

This representation letter is provided in connection with your audit of the financial report of the [name of SMSF] (the Fund) and the Fund’s compliance with the Superannuation Industry (Supervision) Act 1993 (SISA) and SIS Regulations (SISR), for the [period] ended [date], for the purpose of you expressing an opinion as to whether the financial report is, in all material respects, presented fairly in accordance with the accounting policies adopted by the Fund and the Fund complied, in all material respects, with the relevant requirements of SISA and SISR.

The trustees have determined that the Fund is not a reporting entity for the [period] ended [date] and that the requirement to apply Australian Accounting Standards and other mandatory reporting requirements do not apply to the Fund. Accordingly, the financial report prepared is a special purpose financial report which is for distribution to members of the Fund and to satisfy the requirements of the SISA and SISR. We acknowledge our responsibility for ensuring that the financial report is in accordance with the accounting policies as selected by ourselves and requirements of SISA and SISR, and confirm that the financial report is free of material misstatements, including omissions.

We confirm, to the best of our knowledge and belief, the following representations made to you during your audit.

1. Sole purpose test

The Fund is maintained for the sole purpose of providing benefits for each member on their retirement, death, termination of employment or ill-health.

2. Trustees are not disqualified

No disqualified person acts as a director of the trustee company or as an individual trustee.

3. Trust deed, trustees’ responsibilities and fund conduct

The Fund meets the definition of a self-managed superannuation fund under SISA, including that no member is an employee of another member, unless they are relatives and no trustee [or director of the corporate trustee] receives any remuneration for any duties or services performed by the trustee [or director] in relation to the fund.

The Fund has been conducted in accordance with its constituent trust deed at all times during the year and there were no amendments to the trust deed during the year, except as notified to you.

The trustees have complied with all aspects of the trustee requirements of the SISA and SISR.

The trustees are not subject to any contract or obligation which would prevent or hinder the trustees in properly executing their functions and powers.

The Fund has been conducted in accordance with SISA, SISR and the governing rules of the Fund.

The Fund has complied with the requirements of the SISA and SISR specified in the approved form auditor’s report as issued by the ATO, which are sections 17A, 35A, 35B, 35C(2), 52(2)(d), 52(2)(e), 62, 65, 66, 67, 67A, 67B, 69-71E, 73-75, 80-85, 103, 104A, 109 and 126K of the SISA and regulations 1.06(9A), 4.09, 4.09A, 5.03, 5.08, 6.17, 7.04, 13.12, 13.13, 13.14 and 13.18AA of the SISR.

All contributions accepted and benefits paid have been in accordance with the governing rules of the Fund and relevant provisions of the SISA and SISR.

There have been no communications from regulatory agencies concerning non-compliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial report.


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4. Investment strategy

The investment strategy has been determined with due regard to risk, return, liquidity and diversity, and the assets of the Fund are in line with this strategy.

5. Accounting policies

All the significant accounting policies of the Fund are adequately described in the financial report and the notes attached thereto. These policies are consistent with the policies adopted last year.

6. Fund books and records

We have made available to you all financial records and related data, other information, explanations and assistance necessary for the conduct of the audit; and minutes of all meetings of the trustees.

We acknowledge our responsibility for the design and implementation of internal control to prevent and detect error. We have established and maintained an adequate internal control structure to facilitate the preparation of reliable financial reports, and adequate financial records have been maintained. There are no material transactions that have not been properly recorded in the accounting records underlying the financial report.

All accounting records and financial reports have been kept for 5 years, minutes and records of trustees’ [or directors of the corporate trustee] meetings [or for sole trustee: decisions] have been kept for 10 years and trustee declarations in the approved form have been signed and kept for each trustee appointed after 30 June 2007

7. Fraud, error and non-compliance

There have been no:

a) Frauds, error or non-compliance with laws and regulations involving management or employees who have a significant role in the internal control structure that could have a material effect on the financial report.

b) Communications from regulatory agencies concerning non-compliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial report.

c) Violations or possible violations of laws or regulations whose effects should have been considered for disclosure in the financial report or as a basis for recording an expense.

8. Asset form and valuation

The assets of the Fund are being held in a form suitable for the benefit of the members of the Fund, and are in accordance with our investment strategy.

Investments are carried in the books at [insert valuation method: e.g. market value]. Such amounts are considered reasonable in light of present circumstances.

We have no plans or intentions that may materially affect the carrying values, or classification, of assets and liabilities.

There are no commitments, fixed or contingent, for the purchase or sale of long term investments.

9. Uncorrected misstatements

We believe the effects of those uncorrected financial report misstatements aggregated by the auditor during the audit are immaterial, both individually and in aggregate, to the financial report taken as a whole. A summary of such items is attached.

10. Ownership and pledging of assets

The Fund has satisfactory title to all assets appearing in the statement of [financial position/net assets]. All investments are registered in the name of the Fund, where possible, and are in the custody of the respective manager/trustee.

There are no liens or encumbrances on any assets or benefits and no assets, benefits or interests in the Fund have been pledged or assigned to secure liabilities of others.

All assets of the Fund are held separately from the assets of the members, employers and the trustees. All assets are acquired, maintained and disposed of on an arm’s length basis and appropriate action is taken to protect the assets of the Fund.


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11. Related parties

Related party transactions and related amounts receivable have been properly recorded or disclosed in the financial report. Acquisitions from, loans to, leasing of assets to and investments in related parties have not exceeded the in-house asset restrictions in the SISA at the time of the investment, acquisition or at year end.

The Fund has not made any loans or provided financial assistance to members of the Fund or their relatives.

12. Borrowings

The Fund has not borrowed money or maintained any borrowings during the period, with the exception of borrowings which were allowable under SISA.

13. Subsequent events

No events or transactions have occurred since the date of the financial report, or are pending, which would have a significant adverse effect on the Fund’s financial position at that date, or which are of such significance in relation to the Fund as to require mention in the notes to the financial statements in order to ensure they are not misleading as to the financial position of the Fund or its operations.

14. Outstanding legal action

The trustees confirm that there is no outstanding legal action or claims against the Fund.

There have been no communications from the ATO concerning a contravention of SISA or SISR which has occurred, is occurring, or is about to occur.

15. Additional matters

[Include any additional matters relevant to the particular circumstances of the audit, for example:

• the work of an expert has been used; or

• justification for a change in accounting policy.]

We understand that your examination was made in accordance with Australian Auditing Standards and applicable Standards on Assurance Engagements and was, therefore, designed primarily for the purpose of expressing an opinion on the financial report of the Fund taken as a whole, and on the compliance of the Fund with specified requirements of SISA and SISR, and that your tests of the financial and compliance records and other auditing procedures were limited to those which you considered necessary for that purpose.

Yours faithfully,

______________________________________

[Name of director/trustee]

______________________________________

[Name of director/trustee]

_______________

[Date]


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Appendix 2D – Example management letter template

[Date]

[The Trustees/Directors of the Corporate Trustee]

[SMSF NAME]

[address]

Dear [Trustee(s) name]

[SMSF Name] SUPERANNUATION FUND

We have completed the audit of the [SMSF name] superannuation fund (the fund) for the financial year ended 30 June [year].

We wish to report to you the following matters arising from our audit:

1. Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) breaches

No contraventions of the SIS Act were identified during our Audit

or

The following breaches of the SIS Act were identified in the conduct of our Audit:

Breach Event Breach detected Relevant SIS legislation

Has breach been rectified

Reportable contravention

1. Details of event Details of breach detected

Relevant section breached

Rectified as at or

Not rectified

No

Yes

2. Material audit adjustments

No material audit adjustments were identified/carried out during our Audit;

or

The following material audit adjustments were identified/carried out during our Audit.

3. Matters for Trustee attention

In the course of our audit, we did not detect any instances of Non Compliance;

or

In the course of our audit, we identified the following instances of Non Compliance:

Breach Suggested actions

1. Set out the suggested action required by the trustees.

4. Further matters for your review

We did not identify any significant administration issues in the conduct of our Audit;

or

The following administration issues were identified in the conduct of our Audit and recommend as follows:

Issue Matter Recommendation

1. Identify matters for review

Set out recommended action/changes to be recommended.


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This report is prepared on the basis of the limitations set out below.

The matters raised in this report are only those that came to our attention during the course of our audit and are not necessarily a comprehensive statement of all the weaknesses that exist or improvements that might be made.

We cannot, in practice, examine every activity and procedure, nor can we be a substitute for management’s responsibility to maintain adequate controls over all levels of operations and their responsibility to prevent and detect irregularities, including fraud.

Accordingly, management should not rely on our report to identify all weaknesses that may exist in the systems and procedures reviewed, or potential instances of fraud that may exist. Our comments should be read in the context of the scope of our work. Findings within this report may have been prepared on the basis of management representations.

This report has been prepared solely for your use as management of [SMSF name] and should not be quoted in whole or in part without our prior written consent. No responsibility to any third party is accepted as the report has not been prepared, and is not intended, for any other purpose.

Should you have any questions in relation to the above matters, please do not hesitate to contact [name of auditor] on telephone number [telephone number].

Yours sincerely

______________________________________

[Name of auditor]

Audit Partner


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Appendix 2E – ATO regulated superannuation funds

Self managed superannuation fund independent auditor’s report

It is the responsibility of the auditor to ensure they are using the most recent audit report format required by the ATO: <www.ato.gov.au>. The most current version of this report at the time of writing is ATO NAT11466.07.2012 effective from 1 July 2012 – this report is updated annually and therefore you should check the ATO website for the latest version.


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Appendix 2F – Example audit programsThese suggested procedures should be reviewed and adapted for the specific circumstances and audit risks associated with each superannuation fund audit engagement. It should also be noted that changes will be necessary when reliance is placed on internal controls. No allowance has been made for materiality or extent of testing.

The procedures are segregated into the two audit components:

• Audit of the financial report – these programs assume that the fund is not a defined benefit fund.

• Compliance audit.

Audit of the financial report

Ref Test Performed by W/P

A Engagement acceptance and continuance

1. Confirm that the appropriate procedures relating to new and ongoing engagements have been completed prior to commencing the audit, including:

• Clearance from the previous auditor on new engagements;

• Confirmation of independence of the engagement partner, audit firm and each audit team member.

2. Has a current engagement letter been issued and returned?

B Planning

1. Obtain the most up-to-date:

• trust deed and amendments;

• fund summary (where available)

2. Has the trust deed been amended since our last audit?

If so, perform the following:

• ensure the deed amendment has been properly executed;

• consider obtaining confirmation of deed compliance with relevant SIS and CA regulations from solicitor or other party involved in the amendment;

• ensure you are familiar with the provisions of the new deed (using Appendix 4 of GS009).

3. Obtain copies of minutes of trustees’ meetings and any committees. Document any matters that may impact our audit:

• of the financial statements;

• of SIS Act and SIS Regulations compliance.

4. Determine whether:

• there are any outstanding requests from regulatory bodies;

• there are any issues which are currently being considered by regulatory bodies, e.g. the ATO;

• a notice of non-compliance has been issued by any regulatory bodies.


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5. Complete a risk assessment and determine preliminary materiality levels, covering:

• Risk assessment

+ Current period events.

+ Fraud risks.

+ Control environment.

+ Computer/IT environment.

+ Compliance environment.

• Materiality

+ Financial audit.

+ Compliance engagement.

The results of this should be documented in the audit plan.

6. Understand the control environment

Gain an understanding and assess the effectiveness of the client’s control environment particularly in the following areas:

• control over the use of authorised cheque signatories;

• authorisation of benefit requests;

• authorisation of redemption of investments;

• reconciliation of investments;

• processing and allocation of contributions.

7. Fraud

Consider the potential of fraud

Two types of fraud are relevant to financial statement audits:

1. fraudulent financial reporting;

2. misappropriation of assets.

Document the fraud risk factors in place at the entity.

Review journals for unusual/large amounts:

• Consider whether business conditions and the client’s key executives’/trustees’ motivations create an environment that is conducive to fraud.

• Consider incentives/pressures and opportunities for management or employees.

• Consider management or employee attitudes towards the internal control environment.

This should be done at fund level and at individual application/process level.


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8. Audit plan

Prepare an audit plan (which incorporates the audit strategy) for this engagement addressing, as a minimum, the following matters:

• Client profile, audit and reporting arrangements.

• Audit approach:

+ Nature:

– Controls testing, including use of service organisations’ controls reports;

– Substantive testing – inspection, observation, enquiry, confirmation, recalculation, reperformance and analytical review.

+ Timing.

+ Extent – fully substantive, sampling, analytical review or representations.

+ Resources, including extent of direction and supervision.

Consider interviewing the trustees and/or their advisors, reviewing the draft financial report and the minutes prior to and during the development of the audit plan.

Statement of financial position/Balance sheet – assets

Ref Test Done by and date

W/P ref/ notes

C Cash

1. Confirm ownership of the bank accounts from the bank statement to the SMSF for each bank account held.

2. Determine whether reconciliations have been performed throughout the year, following up large, unusual or recurring reconciling items.

3. Review bank statements for the year. Has the fund had a debit balance at any time during the period?

4. Test large and unusual cash payments and receipts to ensure these are bona fide and correctly recorded and authorised.

5. Trace a selection of payments and receipts to bank statements and agree to the source documents.

6. Obtain the bank reconciliation at year end:

• investigate any large or unusual reconciling items;

• follow up uncleared deposits and unpresented cheques ensuring correct cut off.

Note that if bank reconciliations are being relied upon as a control, then an interim reconciliation should also be tested.


2:25


W/P ref/ notes

7. Where banking activities are material to the audit and you are unable to gain sufficient, appropriate audit evidence, confirm the bank balance by way of a bank audit certificate.

Does the bank audit certificate show any evidence of the following:*

• debit account balances;

• other liabilities to the bank and security for these;

• unused limits or facilities;

• charges held over account(s).

* If you have answered yes to these questions, consider whether borrowings have been made or there are liens ver assets which may contravene SIS.

D Contributions receivable

1. Confirm the contributions receivables at the year end to the contributions income.

2. Where contributions have subsequently been received, trace the amount accrued to the remittance advice, and bank or other transaction statement.

3. Where contributions have not subsequently been received* perform alternative procedures, such as:

• confirm amount outstanding with employer-sponsor or member;

• assess for reasonableness of accrual based on the pattern of contributions in other months.

* If member contributions have not subsequently been received consider whether this contravenes the time period for remittance under SIS.

E Receivables, accrued income and other assets

1. If the SMSF uses accrual accounting, review each investment class and determine if the SMSF was entitled to receive income for the year and if this had been received or accrued at reporting date.

2. Obtain details of other receivables and other assets (e.g. prepayments) and ensure that they are correctly accounted for.

3. Verify that the receivable is current and has been received by the SMSF subsequent to period end or that it will be received by the SMSF.

4. If the amount is receivable from a related party, check that the disclosures are appropriate.

F Investments

All investments of the superannuation fund should be in accordance with the investment strategy developed under SIS, and should satisfy the provisions of the trust deed and the sole purpose test.

Where the name of the investment holder does not stipulate that the investment is held by XX (trustee) in trust for YY (superannuation fund), sight declaration of trust or other documentation to ensure ownership lies with the fund.


2:26


W/P ref/ notes

1. Obtain direct third party confirmation of the balance held on deposit at year end and ensure income from investment is correctly deposited into the funds account.

2. Check to ensure that all investments are recorded in Australian dollars and that if foreign currency transactions occur they are converted at the appropriate currency rates and accounting for correctly.

3. Does the fund offer member choice of investment strategies? If yes:

• document the procedures used by the trustee/administrator to control member choice. In particular:

+ recording that a member has made a choice;

+ how often a member may change their investment choice;

+ controls in place to ensure that the change is recorded accurately and promptly; and

+ procedures to monitor cash balances for each investment choice category and the redemption of investments for the payment of benefits.

• review the reconciliation of total member balances classified by choice category to investments similarly classified to ensure that investments held reflect member choice;

• determine if the method of allocating investment earnings to members’ balances reflects the earnings of the investment selected by the members and is equitable;

• ensure that a default strategy has been established.

4. Does the fund have a master custodian? If yes:

• obtain valuation reports at reporting date and compare to fund accounts;

• review valuation of unlisted investments and consider confirming these separately;

• obtain comfort letters from the custodian’s auditor in accordance with GS 007.

5. For investments in listed shares:

Review the number of listed securities including shares, units, instalment receipts, options, warrants and futures held by the SMSF at the end of the period. If the SMSF has units in unit trusts, obtain a listing of these and identify any unit trusts that are listed on the Australian Stock Exchange, those that are widely held trusts and those that are closely held trusts.

• Agree the number of securities held at period end to the CHESS statement issued at period year, the share or unit registry or other appropriate sources.

• Check that each listed security is owned by the trustee and is correctly and appropriately recorded as an investment of the SMSF.

• Confirm the closing market price of the securities at the period end against an independent source.


2:27


W/P ref/ notes

• Confirm that the method used to value the investments is consistent with that disclosed in the accounting policy notes.

• If the SMSF invested or redeemed listed securities during the period, trace transactions to and/or from the SMSF to confirm that they have been dealt with in an appropriate and timely manner.

6. For units in a PST:

• Obtain direct third party confirmation of unit balance and value of units (at redemption price) at year end.

• Confirm that the investment is in the correct name.

• Confirm the number of units and carrying value at period end, for investments at market value ensure that the unit price is the redemption price.

• Confirm that the method used to value the investments is consistent with that disclosed in the accounting policy notes.

7. For unit trusts:

Widely held trusts

These are usually arm’s length and professionally managed trusts that provide regular reports on unit holdings, distributions and unit prices.

• Sight the original unit certificates, a confirmation from the unit trust or similar documentation and agree:

+ The number of securities held at period end.

+ That each investment is owned by the trustee and is correctly and appropriately recorded as an investment of the SMSF.

+ The closing price of the units at the period end.

+ The method used to value the investments is consistent with that disclosed in the accounting policy notes.

+ Check if the units are valued cum or ex-distribution and that this is correctly and consistently calculated and reported.

• If the SMSF invested or redeemed units during the period, trace transactions to and/or from the SMSF to confirm that they have been dealt with in an appropriate and timely manner.

• If acquired during the year, ensure not acquired from related parties to avoid breach of section 66.

Closely held trusts

These are usually related trusts that require additional audit procedures to confirm ownership and value.

• Sight the original unit certificates, a confirmation from the unit trust or similar documentation and agree the following:

+ The number of units held at period end.

+ That each investment is owned by the trustee and is correctly and appropriately recorded as an investment of the SMSF.


2:28


W/P ref/ notes

• Identify the valuation method used and test the value by:

+ Assessing whether the method and valuation process were reasonable and the valuation is current.

+ Obtaining documentary evidence to support the valuation.

+ Verifying that the method used to value the investments is consistent with that disclosed in the accounting policy notes.

• Review the assets and liabilities of the unit trust and test for existence and valuation and allocation:

+ in the case of listed shares, by obtaining a current share certificate and a third party valuation).

+ in the case of a property, by obtaining a current title search and a third party valuation.

• If the SMSF invested or redeemed units during the period, trace transactions to and/or from the SMSF to confirm that they have been dealt with in an appropriate and timely manner.

8. For life insurance products:

• sight the life insurance policy and statement from the life office at period end;

• obtain direct third party confirmation of market value of product and obtain an actuarial valuation of insurance policy at period end;

• assess the reasonableness of the market value by reference to the assumptions used, e.g. if the policy is likely to be subject to early termination then penalties may be imposed which would affect the value of the policy;

• agree transactions on the statement to premiums paid, bonuses or benefits received in the SMSF’s records;

• ensure policy is held on life of a member and in the correct name;

• ensure policy is owned by the <<trustee>> of the SMSF.

9. For fixed interest securities:

• sight certificate for evidence of existence and ownership , date of issue and date of maturity;

• where securities are traded electronically, obtain confirmation from Austraclear/clearing house as to securities held;

• agree value of securities held at period end with quoted market prices;

• confirm that the investments are in the name of the trustee and that the documentation clearly identifies that the investment is an asset of the Fund;

• confirm that the method used to value the investment is consistent with that disclosed in the accounting policy notes.


2:29


W/P ref/ notes

10. For funds invested in an external manager’s portfolio:

• obtain an understanding as to the terms of the agreement between the trustee and the external manager, including the extent to which responsibility is delegated to the manager;

• obtain confirmation of investments held at year end from the external manager;

• where separate records are maintained by the trustee, reconcile these to the reports produced by the investment manager to determine accuracy of contributions and benefits, and particularly to establish correct cut-off;

• where access is not available to the systems of internal control, obtain a letter of comfort from the investment manager’s auditor in respect of control over investments, allocation of income and accuracy of tax balances;

• where access is not available to the external manager’s records, obtain a report from the investment manager’s auditor in relation to specific financial statement assertions, as set out in GS 007;

• review the carrying amount of the invested funds at period end;

• confirm that the valuation method is in accordance with the funds stated accounting policy.

11. For all other investments perform the following:

• ensure the investment is in accordance with the investment strategy;

• establish ownership of the investment by reference to supporting documentation;

• review the fund’s portfolio for unusual exposure, to a particular company, class of assets, country etc.

• consider the security of the asset or investment and whether it is adequately insured.

If the asset is a type that does not have any form of title obtain evidence to confirm existence and ownership including:

• Minutes or resolution relating to the acquisition of the asset, and its use/storage in the relevant financial year.

• Invoice and evidence of payment from the SMSF for the purchase of the asset.

• Sighting asset.

• Insurance policy or premium payment for insurance of the asset.

• Lease documents, if leased to another party.

If the trustee has relied on an independent valuation, obtain a copy of this and confirm that:

• The valuation or appraisal refers to the correct SMSF.

• The valuation refers to the correct period.

• If the asset has been subsequently sold, that the sale price does not differ significantly from the valuation or appraisal.


2:30


W/P ref/ notes

• If sold to a related party, that it was sold at market value.

• That the method used to value the property is reasonable and consistent with that disclosed in the accounting policy notes.

• The assumptions on which the valuation is based are reasonable and the valuation is current.

G Property

1. Where the fund holds property investments:

• Perform a title search and if applicable sight the title deed to ensure the title is in the name of the trustee on behalf of the fund and there are no encumbrances over this title.

• Ensure that the property is valued at net market value, at either trustee or independent valuation as stated in the accounting policies.

• If the trustees have relied on an independent market appraisal or valuation, obtain a copy of this and confirm that:

+ The value is correctly reflected in the financial report.

+ The valuation/appraisal refers to the correct property.

+ The valuation was based on reasonable assumptions and is current.

+ The valuation takes into account redemption costs.

+ The value takes into account GST (if applicable).

+ If the property has been subsequently sold, that the sale price does not differ significantly from the valuation/appraisal.

+ That the method used to value the property is consistent with that disclosed in the accounting policy notes.

• Where the property includes ‘buildings and other fixtures’ verify existence of adequate insurance and, where these are being depreciated, ensure that the depreciation adjustments are correctly and appropriately reflected in the market value and accounting policies.

• if Trustee(s) have utilised s67(4)(A) borrowings ensure that asset is held on trust for SMSF, that the asset is such an asset allowed to be held by the trustees and that the trustees have right to obtain the legal ownership of the asset by way of one, or a series of payments.


2:31

Statement of financial position/Balance sheet – liabilities


W/P ref/ notes

H Accounts payable

1. For sundry accounts payable:

• vouch significant amounts to invoices or other supporting documentation;

• search for unrecorded liabilities through testing of subsequent payments, review of minutes etc.

2. For benefits payable, determine accuracy of recorded amounts and search for unrecorded benefits payable through testing of subsequent payments.

I Taxation

1. Is the fund a complying fund for tax purposes?

If so:

• ensure tax is provided at 15% on taxable income other than certain non-arm’s length income and private company dividends and discounted capital gains.

If not:

• ensure tax is provided at the top marginal rate for the year of income.

2. Obtain the tax work papers including the reconciliation of prima facie tax to the tax provision (including all temporary differences) if applicable, and proof of deferred tax balances, and reference all amounts back to the audit work papers.

3. Ensure assessable income is correctly calculated and includes the following, where applicable:

• employer contributions, including salary sacrifice;

• specified roll-over amounts from previously untaxed sources (post-June 1983);

• shortfall components under the Superannuation Guarantee (Administration) Act;

• member contributions, where the member has given a section 290-170 notice to the trustee (i.e. substantially self-employed persons who will claim a tax deduction for their contributions);

• capital gains on investments – where the fund can use the CGT discount method, the fund should pay tax at 10% on those gains.

Ensure the following have been properly excluded from assessable income:

• income derived from, and capital gains realised in, investments in pooled superannuation trusts;

• cash bonuses received on life insurance policies;

• in the case of funds which are liable to pay current pensions, exempt current pension income;

• pre 1 July 1988 funding credits.


2:32


W/P ref/ notes

4. Ensure correct treatment of the following where applicable:

• imputation credits;

• foreign tax credits;

• TFN credits.

5. Ensure deductions are correctly calculated and include the following, where applicable:

• cost of death or disability benefits;

• actuarial costs;

• fees paid to auditors and advisers;

• investment management costs;

• other amounts meeting the specific superannuation and general section 8-1 conditions for deductibility.

6. Has the fund transferred its liability for tax on taxable contributions?

If so:

• obtain section 275 notice and ensure notice has been signed prior to lodgement of the tax return.

Statement of comprehensive income/Income statement – income


W/P ref/ notes

J Income

NON–CONTRIBUTIONS INCOME

1. • Calculate the SMSF’s investment return as a percentage based on the net income as a proportion of average assets held by the SMSF over the period.

• Compare this to the prior year as well as average market performance (for example, superratings) for the period of the audit and confirm that the return is reasonable and not under or overstated.

2. Vouch major items of income. For example:

• agree dividends on listed shares to dividend yield or dividend payable quoted in the Australian Financial Review or ASX report;

• confirm the accounting treatment of franking credits (either on a net or gross basis) and ascertain accounting treatment is consistent with the details disclosed in the accounting policy notes;

• trust distributions are treated correctly and have been agreed to distribution advice;

• agree interest rates to rates quoted by major banks or the rates quoted in the Australian Financial Review;

• movements in net market values of investments.


2:33


W/P ref/ notes

CONTRIBUTIONS

1. Reconcile member and employer contributions between general ledger and transaction listings produced by the fund administrator and to employer confirmation, paying particular attention to amounts remitted at the start or end of the year to determine whether there has been correct cut off.

(Cut off may also be tested through subsequent receipts after year end.)

2. Test accuracy of contribution rates and compliance with the trust deed as follows:

• for member contributions agree to total of payroll deductions;

• for member contributions on a sample basis test amounts remitted for employees by reference to payroll records indicating members’ salaries and contribution rates;

• for employer contributions test to sponsoring employer cash payments or obtain employer confirmation;

• for employer contributions on a sample basis test for compliance with SGC, award obligations and trust deed requirements;

• for employer contributions to defined benefit funds ensure funding is in accordance with the rates recommended by the actuary;

• ensure the funding note in the financial statements accurately reflects actual contribution rates.

3. Where co-contributions have been received test that they have been allocated to the member for whom they were remitted. Ensure that the Trust Deed allows contributions from Government.

4. Test for completeness of contributions by performing the following:

• compare member contributions to previous year and assess for reasonableness in light of movements in salaries and other factors, such as changes in members;

• compare employer contributions to previous year and assess for reasonableness in terms of movements in salaries, and any changes in employer obligations arising from SGC or award legislation or actuarial recommendations;

• test movements in employee numbers by testing listing of fund members to previous year and, on a sample basis, investigate additions or omissions.

5. Where contributions have been received for members:

• ensure that their Tax File number has been recorded;

• if over 65, ensure that member has satisfied the Work Test (40 hours work over a 30 consecutive day period);

• ensure compliance with contribution cap restrictions, and age based restrictions.


2:34


W/P ref/ notes

(Where we are also auditors of the employer sponsor consider placing reliance on the system of internal controls, particularly where compliance testing has been performed during the course of the employer sponsor’s audit. Where we are not the auditor of the employer sponsor consider whether any representation is required from the employer’s auditor as to the payroll and cash payments systems affecting contributions to the superannuation fund. Obtain direct confirmation of contributions paid and agree to remittance advices received by the fund administrator or investment manager.)

Statement of comprehensive income/Income statement – expenses


W/P ref/ notes

K Expenses

1. Perform an analytical review of expenses generally and assess for reasonableness based on our expectation, taking into account the prior year’s expenditure and strategies adopted during the year.

2. Vouch major items of expenditure to invoices or other supporting documentation. For example:

• agree administration fees to the agreement with the administrator;

• agree management fees to the agreement with the investment manager;

• movements in net market values to the change in value of investments.

3. Superannuation contribution surcharge review

Assess the trustee’s procedures for ensuring the contribution surcharge tax has been deducted from the appropriate member balances and for providing the ATO with the required information for members who have a liability but who have since left the fund.

Has the superannuation contribution surcharge been appropriately disclosed in the financial statements, where appropriate?

L Benefits

1. Lump sums

• Obtain a listing of all benefits paid and reconcile benefits paid between general ledger and bank statement.

• For each benefit paid, review documentation including correspondence to the members and rollover institutions and ensure that the benefit was duly authorised.

• Confirm that each benefit was paid in accordance with the terms of the trust deed.


2:35


W/P ref/ notes

• Where resignation or other benefits are based on an accumulation of contributions and earnings, test reasonableness of the benefit based on the number of years of membership, contribution amounts for the member, any earnings-related contributions by the associated employer, concessional and non-concessional contributions and your knowledge of the SMSF’s earning rates and reasonableness of interim earning rate calculations. Agree member information to trust minutes and records.

• For retirement or other defined benefits check calculation is in accordance with the trust deed and agree member’s age, final average or highest average salary and years of service to payroll, personnel records or trust records.

• Ensure payment is made to authorised beneficiaries.

• Obtain minutes supporting the final payment decision.

• For death benefits, sight death certificate and confirm if the benefit was paid in accordance with the trust deed and, if applicable, a binding death benefit nomination.

• For a total and permanent disability benefit, sight the medical certification regarding the inability of the member to work again.

• For a total and temporary permanent disability benefit, sight the medical certification regarding the temporary inability of the member to work.

• For each benefit paid ensure that the PAYG obligations have been correctly calculated and remitted by the SMSF.

2. Pension payments

• Sight documentation (member request and trustee minutes confirming member’s request for pension) and trustee acknowledgement and agreement to pay pension.

• Ensure that pensions paid are within the minimum and maximum thresholds and that pensions are paid at least once annually.

• Investigate liabilities at year end to ensure that pensions have been paid, and not just accrued.

• Review the terms of the pensions to ensure that the pensions have been calculated and paid in accordance with these terms.

• Trace pension payments to bank statements.


2:36

Other considerations


W/P ref/ notes

M Reserves

1. Does the fund maintain reserves? If so:

• ensure all movements during the period are in accordance with the fund’s reserve strategy;

• ensure trust deed allows the maintenance of reserves.

N Taxation

1. Review tax work papers to ensure that the income tax is correctly calculated and disclosed in accordance with the accounting policies, including:

• Member contributions have been treated correctly as non-assessable unless the SMSF received a notice in accordance with section 290-170 of the ITAA 1997 stating that the member contribution is assessable.

• Capital gains from the disposal of PSTs and insurance policies have been excluded from taxable income.

• Fee rebates and other income from PSTs have been excluded from taxable income.

• Income from assets used to pay current pensions is identified as not assessable and an actuarial certificate has been obtained to apportion the income, if required.

• The non-assessable pension income proportion has been correctly applied to income but not contributions.

O Completion

1. Financial statements

• Does the financial report includes an operating statement and statement of financial position.

• Do the table of contents or index agrees to the financial report, including the page numbers and content.

• Do the footnotes refer to the notes to the financial statements and do not mention compilation reports or ‘unaudited’ information.

• Is the audit report is situated appropriately in the financial report so as not to suggest that the member’s statements or other information have been audited.

• Have the assets and liabilities been presented in the broad order of the liquidity?

• Do comparatives agree to prior year audited financial statements?

• Do the financial statements add up correctly, including notes?

• Has cross referencing of notes and page numbering been checked?

• Have notes to the financial statements been audited and appropriate disclosures made?

• Have disclosures within the notes to the financial statements been prepared in accordance with accounting standards as applied by the fund?


2:37


W/P ref/ notes

2. Opening balances – new engagements

• Review the opening balances for reasonableness.

• Check that the bank account balance from the prior year financial report agrees with the bank statement at the beginning of the audit period.

• To verify the liabilities for accrued benefits in the prior year, confirm the member’s balances have increased by the expected amounts for the current period.

3. Obtain a copy of the SMSF’s trial balance and general ledger and agree the trial balance to the financial report and note any discrepancies.

4. Review the general ledger and identify material journal entries and other adjustments and review these to ensure that they are reasonable and consistent with the financial report.

5. Accounting policies

• If the SMSF is not a reporting entity, check that the accounting policy notes reflect this, obtain an understanding of the relevant accounting policies the trustee has used to prepare the financial report and check that the accounting policy notes adequately explain the policies adopted.

• Determine if there are any changes in the accounting policies applied in prior periods, and if so, check that these been appropriately disclosed in the accounting policy notes.

6. Going concern

Review all circumstances, investments, transactions and other matters from the audit to assess if the SMSF is a going concern.

7. Subsequent events

• Identify any subsequent events which would affect the financial report of the current or future periods.

• Test receipts and payments after reporting date to ensure correct cut off of contributions, benefits, income and expenses.

• Check for significant fluctuations in investment valuations after period end.

8. Related parties

If there have been any transactions with related parties, ensure that these matters have been appropriately addressed and reported in accordance with the accounting policies adopted by the SMSF.

9. Are material commitments and contingencies properly disclosed? Review the following where applicable:

• trustee minutes;

• solicitors’ representations;

• trustees’ representations;

• contracts with investment managers.

Note: superannuation contribution surcharge has been covered in section I3.


2:38


W/P ref/ notes

10. Has a letter of representation been obtained from the trustee documenting significant representations made to us during the audit?

See Appendix 2C for an example representation letter.

11. Have all matters of governance interest, if any, arising from the audit are communicated to the trustees on a timely basis, including:

• Uncorrected misstatements aggregated by the auditor during the audit that were determined by the trustees to be immaterial, both individually and in the aggregate, to the financial report taken as a whole.

See Appendix 2D for an example management letter template.


2:39

Compliance audit

SIS checklist for ATO regulated funds

The following compliance checklist specifies those items relating to an SMSF that the auditor is required to report on in the approved form of audit report. This checklist is for the year ended 30 June 2012 which is the latest version available at the time of publication of this guide.

This checklist must not be used for non-self managed superannuation funds.

Electronic Superannuation Audit Tool (eSAT)

The ATO allows auditors to complete the form using the Electronic Superannuation Audit Tool (eSAT) which allows for easy completion of the Auditor Report via a series of questions. This is available on the ATO website or using the following link <http://www.ato.gov.au/superfunds/content.aspx?menuid=49580&doc=/content/00157275.htm&page=8>. The use of this tool will also allow auditors to ensure that they are using the most up-to-date version of the checklist.


2:40

Appendix 1 – Explanation of listed sections and regulations in compliance report

Section or Regulation

Explanation

S17A The fund must meet the definition of an SMSF

S35A The trustees must keep and maintain accounting records for a minimum of five years

S35B The trustees must prepare and maintain proper accounting records

S35C(2) The trustees must provide the auditor with the necessary documents to complete the audit in a timely and professional manner; and within 14 days of a written request from the auditor

S52(2)(d) or Reg 4.09A

The assets of the SMSF must be held separately from any assets held by the trustee personally or by a standard employer sponsor or an associate of the standard employer

S52 (2)(e) The trustee must not enter into a contract that would prevent / hinder them from exercising the powers of a trustee

S62 The fund must be maintained for the sole purpose of providing benefits to fund members upon their retirement, or upon reaching a prescribed age, or to the dependents in the case of a member’s death before retirement

S65 The trustees must not loan monies or provide financial assistance to any member or relative at any time during the financial year

S66 The trustees must not acquire any assets (not listed as an exemption) from any member or related party of the fund

S67 The trustees of the fund must not borrow any money or maintain an existing borrowing (not listed as an exemption)

S67A-67B Limited recourse borrowing arrangements

S69-71E Outline of the in-house asset rules that trustees must follow. (These relate to transactions of any kind with a related party of the fund)

S73-75 Outline of the manner in which in-house assets must be valued by trustees (arms length market value)

S80-85 The trustees must comply with the in-house asset rules

S103 The trustees must keep minutes of all meetings and retain the minutes for a minimum of 10 years

S104A Trustees who became a trustee on or after 1 July 2007 must sign and retain a trustee declaration

S109 All investment transactions must be made and maintained at arms length - ie purchase, sale price and income from an asset reflects a true market value/rate of return

S126K A disqualified person cannot be a trustee, investment manager or custodian of a superannuation fund

Sub Reg 1.06 (9A)

Pension payments must be made at least annually and must be at least the amount calculated under clause 2 of Schedule 7

Reg 4.09 Trustees must have an investment strategy for the fund

Reg 5.03 Investment returns must be allocated to members in a manner that is fair and reasonable

Reg 5.08 Member benefits must be maintained in the fund until transferred or cashed out in a permitted fashion

Reg 6.17 Payments must be made in accordance with Part 6 of the regulations and be permitted by the trust deed

Reg 7.04 Contributions must be accepted in accordance with the applicable rules for the year being audited


2:41

Section or Regulation

Explanation

Reg 13.12 Trustees must not recognise an assignment of a super interest of a member or beneficiary

Reg 13.13 Trustees must not recognise a charge over or in relation to a member’s benefits

Reg 13.14 Trustees must not give a charge over, or in relation to, an asset of the fund

Reg 13.18AA Investments in collectables and personal use assets must be maintained in accordance with prescribed rules.

3. The audit or review of an association

3. The audit or review of an association 3:2

Audit or review of an incorporated association: Overview 3:2

Key definitions 3:2




Business understanding, associated risks and financial statement assertions 3:4

Reporting 3:6

Annual reporting requirements 3:6

Audit and review reports 3:7

Appendices 3:8

Appendix 3A – Summary requirements of each Incorporated Associations legislation 3:9

Audit appendices: 3:21

Appendix 3B – Example engagement letter – audit of an association 3:21

Appendix 3C – Example audit programs 3:24

Appendix 3D – Example committee written representation 3:36

Appendix 3E – Example unmodified auditor’s reports 3:39

Appendix 3F – Sample audit qualification or emphasis of matter 3:43

Review appendices: 3:44

Appendix 3G – Review engagement letter 3:44

Appendix 3H – Example review programs 3:46

Appendix 3I – Example review reports 3:57

Appendix 3J – Sample qualification or emphasis of matter for a review report 3:60


3:2


Audit or review of an incorporated association: OverviewThis chapter details the specific auditing and review requirements applicable to associations and should be read in conjunction with Chapter 1 – Overview of audit and review engagements.

Associations may be incorporated or unincorporated (for example, professional association, sports association, trade association, association incorporated under the relevant state Incorporated Associations Act).

The Victorian Incorporated Associations Act was amended from 26 November 2012 and now allows certain associations to elect for a review rather than an audit and therefore this chapter includes information on reviews for these entities. Assurance providers should confirm the association is eligible for a review prior to using the review guidance.

Specific guidance on the requirements of each state legislation in relation to Incorporated Association can be found in Appendix 3A and in the CPA Australia guide Incorporated Associations: Reporting and auditing obligations (December 2012).

Key definitions

Association An association, society, club, institution or body formed or carried on for any lawful purpose, which has no fewer than five members.

Incorporated association

An association that is incorporated under state and territory associations’ incorporation legislation, which is not administered by ASIC, but by the various state authorities.

Incorporated associations are separate legal entities, separate from the individual members.

Incorporated Associations are regulated by different authorities under state legislation but generally they:

• have a committee, responsible for managing the association;

• have a public officer and notify the relevant authority in each state of any changes in that position;

• have a registered office in their state of incorporation;

• act in accordance with their objects and rules;

• hold an annual general meeting once every calendar year;

• lodge an annual statement every year;

• keep proper accounting records and (in some states) prepare, have audited (or reviewed) and lodge financial statements;

• keep minutes of all committee and general meetings;

• keep registers of members and all committee members;

• have a common seal;

• are capable of being sued or suing;

• have the power to acquire or hold property.

Appendix 3A to this guide provides more detailed information on the requirements of specific state legislation.

Unincorporated association

A number of people grouped together by a common purpose with club-like characteristics, for example, a sporting club, social club or trade union. They have the following characteristics:

• there are members of the association;

• the members will normally be free to join or leave the association;


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• the association will normally continue in existence independently of any change to the composition of the association;

• as a matter of history, there will have been a moment in time when a number of persons combined to form the association;

• there is a contract (which can fall short of a legally enforceable contract) binding the members among themselves; and

• there is a constitutional arrangement for meetings of members and for appointing officers.

Audit or review approachThe methodology documented in Chapter 1 should be followed for the audit or review of an Association, however specific information relating to Associations to assist with the engagement has been described below.


Unincorporated associations

Any requirement for an audit or review of the association’s financial report will be contained in the association’s constitution or ‘special rules’, the Auditor should review these rules to confirm:

• their eligibility to act as auditor;

• that the scope/reporting requirements are appropriate; and

• that the rules will allow the engagement to be performed in accordance with Auditing Standards.

Incorporated associations

Each state legislation contains specific guidance on who is eligible to act as auditor for an Incorporated Association. Potential auditors should review the legislation prior to consenting to act as an auditor.

Scope of audit

In some cases, there may be no legal requirement for an audit but an audit may be required by another party such as a bank or peak industry body. In these cases, auditors should clearly establish the scope of the audit.

Planning the audit or reviewUnderstanding the business

Areas to consider include reliance on donations, turnover of key personnel, and the voluntary nature of membership. A further key factor could be declining membership.

Regulatory background

An unincorporated association is usually governed by its constitution, although in some cases it may not have one. It has no separate legal status and consequently the members can be personally liable without limits.

Interface with government bodies

Incorporated associations are likely to have significant interaction and reporting obligations to government agencies with government bodies.

For example, a kindergarten may receive funds from local, state or federal governments. The grants may be recurrent or one-off. The auditor or other assurance practitioner should determine:

• whether any such funds are received;

• any conditions attached to the expenditure of the funds;

• whether the conditions have been met; and

• reporting obligations to the provider of the funds.

Risk factors

The existence of any of the following risk factors and control weaknesses should be considered and the implication for the audit documented. Where any of the control weaknesses are deemed to be significant then they should be communicated to those charged with governance.


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Some areas of high inherent risk where potential control deficiencies should be identified in an incorporated association include:

• adequate documents to support payments are not maintained;

• invoices etc, where maintained, are not cancelled when paid;

• payments are tabled at meetings but little or no enquiry is made by others;

• no receipts are issued and no control over donations is maintained;

• there is lack of segregation of duties;

• registers of members not maintained or updated; and

• there is little or no control over stock used in fundraising and takings.

The table below shows areas where the Auditor/Reviewer needs to have an understanding of the Association and the related risks and financial statement assertions.

The Auditor/Reviewer may use this table to tailor their questions to the client and based on the responses, determine the relevant risks and financial statements assertions to tailor the audit/review programs.

Business understanding, associated risks and financial statement assertionsThe table below includes the most common areas financial statement risks faced by Associations, it is not a complete list of all risks or balances relevant to these entities and Auditors should ensure that they have considered all transactions/balances relevant to their client.

Obtaining an understanding of the Association

Risks Financial statement assertions

Cash balances

• What types of bank accounts does the Association maintain?

• How often are the bank accounts changed?

• What is the bank reconciliation process?

• Who can withdraw funds?

• Some bank accounts are not accounted for.

• Cash transactions around year end are not included in the correct period.

• Liquidity problem are being disguised.

• Cash is being misappropriated.

• Completeness.

• Cutoff.

• Accuracy.

• Rights and obligations.

Tested as part of the cash program.

Revenue, receipts and receivables

• What revenue streams does the Association receive?

• What form are the revenue received in – i.e. cash/direct deposit/credit cards?

• What level of revenue is comprised of cash donations?

• Does the Association have to provide services over a specified period of time in return for the revenue?

• What is the ageing profile of the debtors?

• What is the collection process for receivables?

• Revenue is recorded in the wrong period.

• Cash donations are misplaced or lost through fraud or theft.

• Fictitious revenue is recorded.

• Revenue recognition policy is not appropriate – significant risk.

• Receivables are recoverable.

• Completeness.

• Occurrence.

• Accuracy of sales.

• Cut-off.

• Valuation of receivables.

Tested as part of the revenue, receivables and cash programs.


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Grant income

• What grants are received by the Association?

• What are the terms and conditions of the grant?

• Has there been any breach of any terms/conditions during the year?

• Funds provided under the terms of the grant have not been properly accounted for.

• Money has not been spent appropriately and therefore may need to be returned.

• Terms or conditions of the grant have been breached.

• The grant revenue has not been accounted for in accordance with Accounting Standards/the Association’s accounting policy.

• Existence.

• Accuracy.

• Cut-off.

Tested in the grant funds program.

Purchases, payments and creditors

• Which goods/services does the Association purchase?

• What is the approval and payment process for purchases?

• Are there any preferred suppliers?

• How are creditors normally paid – cheque, direct deposit?

• Goods have been received but not invoiced.

• Payments are made in respect of fictitious goods or services.

• Purchases are not recorded or are duplicated.

• Purchases/payments are recorded in the wrong period.

• Recorded creditors do not represent all amounts owed for goods and services by the Association.

• Completeness.

• Existence.

• Cut-off.

• Accuracy.

Non-current assets (i.e. property, plant and equipment)

• What non-current assets are held by the Association?

• Have there been any significant acquisitions/disposals during the year?

• Have any valuations been performed during the year?

• Have there been any impairment indicators during the year which may indicate that the assets are carried at too high a value?

• Fixed assets that have been mislaid, misappropriated or discarded are still recorded in the accounting records.

• Valuation of non-current assets is mis-stated.

• Depreciation policies are unreasonable and depreciation charges are mis-stated.

• Expenses have been incorrectly capitalized.

• Impairment losses have not been identified.

• Existence.

• Valuation.


Tested in the property, plant and equipment program.


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Payroll

• How many staff are on the payroll?

• What is the system for:

+ Adding new employees

+ Removing employees

+ Changing details of employees

+ Processing the payroll

+ Calculating leave entitlements.

• Fictitious employees are paid.

• Improper or unauthorized amounts are paid.

• On-costs are not appropriately recorded.

• Accuracy.

• Existence.

These are tested through the payroll audit program.

Investments

• Why does the Association hold its investments:

+ Annual income?

+ Long term capital growth?

+ Invest short-term funds?

• What investments are held?

• Who manages the investments?

• Has there been any sales/purchases of investments during the reporting period?

• Valuation of the investments is not up to date.

• All investments which are owned by the Association are recorded.

• Profit/loss on sale have not been recorded correctly.

• Changes in market value have not been accounted for correctly.

• Valuation.

• Completeness.


Tested in the investments program.

Inventory

• What inventory is held by the Association?

• What is the inventory used for – i.e. given away or sold?

• How is the inventory valued?

• How does the Association identify inventory that should be written down?

• Inventory is over-valued.

• There is no provision for slow moving/unsaleable stock.

• Inventory is sold/given-away and has not been recorded as such.

• Valuation.

• Existence.

Reporting

Annual reporting requirementsThe reporting requirements of an unincorporated association will be detailed in the association’s individual constitution and will vary from one association to another. Typically, the following information will be required to be submitted to the members at the annual general meeting:

• a statement of receipts and payments or a statement of income and expenditure during the financial year;

• a statement of assets and liabilities at the end of the financial year; and

• a president’s report and a treasurer’s report for the financial year.

Examples of the reporting requirements for each state and territory under the respective associations incorporation Acts are included in Appendix 3A.


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Audit and review reportsExample audit and review reports are provided in the Appendices.

The form and content of the audit report will vary, depending on the legislative requirements of each State or Territory and whether the entity is a reporting or non-reporting entity. For example, legislation in some States requires that the financial report give a ‘true and fair view’ while others require the report to ‘present fairly’. These factors affect the form and content of the audit report. This issue is also addressed in the section ‘Annual reporting requirements’ above.

Where cash transactions such as donations, fundraising or kiosk takings are material to the activities of the association, a lack of controls may mean the auditor cannot gain sufficient evidence of completeness. The auditor or other assurance provider should issue an appropriate audit opinion or review conclusion (qualified) and management letter, if applicable. Where the auditor is able to obtain sufficient appropriate audit evidence, but it is considered fundamental to the users’ understanding of the financial report, an emphasis of matter paragraph should be used to draw the reader’s attention to the applicable note on revenue recognition in the financial statements. Guidance Statement GS 019 Auditing Fundraising Revenue of Not-for-Profit Entities, issued by the AUASB, covers planning, internal control and reporting considerations in this situation. Refer to Chapter 4 for more information on the requirements of GS 019.


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AppendicesThe appendices for Chapter 3 are:

Appendix 3A – Summary requirements of each Incorporated Associations legislation.

Audit appendices:

• Appendix 3B – Audit engagement letter.

• Appendix 3C – Example audit programs.

• Appendix 3D – Example management representation letter (may also be used for a review).

• Appendix 3E – Example audit reports.

• Appendix 3F – Sample qualification/emphasis of matter.

Review appendices:

• Appendix 3G – Review engagement letter.

• Appendix 3H – Example review programs.

• Appendix 3I – Example review reports.

• Appendix 3J – Sample qualification/emphasis of matter.


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Appendix 3A – Summary requirements of each Incorporated Associations legislationThis appendix summarises the significant financial reporting and auditing requirements from the relevant Incorporated Association legislation throughout Australia.

The details below are not exhaustive, and audit and assurance providers should ensure a thorough understanding of the legal framework that they are reporting on and the format of their report.

Whenever reference is made to reports such as ‘income and expenditure statement’ or ‘assets and liabilities statement’, these are generic terms for the statement of comprehensive income and statement of financial position, depending on whether the appropriate legislation requires adherence to the standards or specifies these terms for reporting.

Further, the actual format and content of the audit or review report may be specified in the appropriate legislation.

Note: Audit and assurance providers should confirm that there have been no changes to these requirements.

This information is a summary only and is not a substitute for reading the appropriate legislation.

Australian Capital Territory (ACT)

Relevant legislation • Associations Incorporation Act 1991.

• Associations Incorporation Regulations 1991.

<www.legislation.act.gov.au>.

Financial report format and contents

• Financial statements that give a true and fair view of:

+ Income and expenditure

+ Assets and liabilities

• Description of any mortgages, charges and other securities affecting any property

• The information above for any trusts of which the association is a trustee.

Report of the committee including:

• names of committee members throughout the year and reporting date (if different)

• principal activities and significant changes in activities in the year and

• net profit/loss for the year.

Mandatory audit Audit required if:

• Gross receipts > $150,000 OR

• Gross assets > $150,000 OR

• Prescribed association:

+ number of members > 1,000 OR

+ holding of liquor licence.

Auditor Audit can be conducted by:

• CPA Australia member

• Chartered Accountant

• Member of the Institute of Public Accountants

• Registered Company Auditor.

Note: If the association is prescribed then it must be audited by a Registered Company Auditor.


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Audit opinion An auditor must for a prescribed association, in a report under this section, state:

a) whether the accounts are in the auditor’s opinion properly drawn up:

i. so as to give a true and fair view of matters required by section 72 (2) to be dealt with in the accounts; and

ii. in accordance with the provisions of this Act; and

iii. in accordance with proper accounting standards.

Timing of AGM Within 5 months after financial year end.

First AGM must be within 18 months of the date of incorporation.

Annual return lodgement timing

Within 6 months after financial year end.

Lodge with certificate signed by two committee members certifying that the provisions of the Act in relation to the annual report and audit have been complied with.

New South Wales (NSW)

Legislation • Associations Incorporation Act 2009 No 7.

• Associations Incorporation Regulation 2010.

Information available on:

<http://www.fairtrading.nsw.gov.au/Cooperatives_and_associations/Associations.html>

<http://www.fairtrading.nsw.gov.au/pdfs/Cooperatives_and_associations/associations/Regulatory_guide_A1.pdf>.

Tiers of Associations Tier 1 Association

• Gross annual receipts > $250,000 or

• Current assets (assets other than real property or assets capable of depreciation) > $500,000.

Tier 2 Association

NSW Incorporated Association which is not a Tier 1 association.


Tier 1: Financial statements prepared in accordance with Accounting Standards:

• Income statement

• Statement of comprehensive income

• Statement of financial position

• Statement of changes in equity

• Cash flow statement.

Details of any mortgages, charges and other securities affecting any property owned by the association.

Accounts disclosing the above for any trusts of which the association is a trustee.

Reduced disclosures for Tier 1 associations with revenue < $2m

Tier 1 associations are only required to disclose the following:

• A statement of income and expenditure and a balance sheet setting out appropriately classified and detailed sources of income and applications of expenditure and assets and liabilities

• Statements of movements in equity

• A statement of accounting policies.


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The recognition, measurement and classification of transactions are to be in accordance with AASB 1048 Interpretation of Standards, while changes in accounting policies, estimates or errors must be reported in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.

In addition, where the association has a trust, they must:

• Prepare the financial statements for a trust for which it acts as trustee in accordance with the requirements above

• Prepares a consolidated statement of income and expenditure and balance sheet which consolidates its investments in subsidiaries (excepts for trusts).

Financial statements for Tier 2 associations

The financial statements prepared by a Tier 2 association include the following:

• an income and expenditure statement and

• a balance sheet

that sets out the appropriately classified individual sources of income and individual expenses incurred in the operation of the association and the assets and liabilities of the association,

• details of any mortgages, charges and other securities affecting any property owned by the association

• a separate income and expenditure statement and balance sheet for each trust for which the association is the trustee.

Mandatory audit Contingent on size.

Mandatory audit for ‘Tier 1’ associations, i.e. with:

• gross annual receipts > $250,000

• current assets (assets other than real property and capable of depreciation) > $500,000.

Auditor If audited must be by a Registered Company Auditor or public practice certificate holder of:

• CPA

• CA

• IPA.

For an audit carried out by a non-registered company auditor, the auditor’s report must record whether the auditor is a member of The ICAA, CPA Australia or the NIA and holds a public practice certificate issued by one of those bodies.

Unless approved by Director-General, audit may not be carried out by person who, within the last 2 years, is or has been:

• member of the association

• employee or provider of professional services to association, committee member or public officer. S52(2).

An auditor of a Tier 1 association is exempt from the independence requirements of section 52(2) of the Associations Incorporation Act 2009 provided that:

• the audit of the association is carried out in accordance with the code of conduct relating to independence in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethics Standards Board, and


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• the auditor’s report for the financial statements for the association includes an auditor’s independence declaration as follows:

+ as auditor for the audit of … (name of association) for the financial year ended … (date), I declare that, to the best of my knowledge and belief, there have been no contraventions of the code of conduct relating to independence in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board.

Audit opinion For Tier 1 entities: The auditor’s report:

a) must be prepared in accordance with the Australian Auditing Standards, and

b) must state whether the association has kept such financial records as are necessary to enable financial statements to be prepared in accordance with the Australian Accounting Standards.


First AGM must be within 18 months of the date of incorporation and within 6 months after the first financial year end.

Northern Territory (NT)

Legislation • Northern Territory Incorporated Associations Act 2008.

• Northern Territory Associations Regulations 2010.

<http://www.nt.gov.au/justice/licenreg/baal/club_assoc.shtml>.

Tiers Tier 1 criteria: not Tier 2 or Tier 3

Tier 2 criteria:

• gross receipts >$25,000 or

• gross assets > $50,000 or

• licence under Gaming Machine Act, or

• prescribed incorporated association or a member of a class of prescribed incorporated associations.

Tier 3 criteria:

• gross receipts > $250,000 or

• gross assets > $500,000 or

• declaration under section 101 made.


The statement of accounts must not be misleading and must give a true and fair account of:

• income and expenditure

• assets and liabilities

• mortgages, charges or other securities of any description affecting property of the association

• the information above for each trust of which the association was the trustee.

Report of the committee including:

• names of committee members throughout the year and at reporting date, if different

• principal activities and any significant changes in activities in the year and

• net profit/loss for the year.

Mandatory audit Mandatory audit for Tiers 1, 2 and 3.


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Auditor Auditor depends on Tier of incorporated association:

For Tier 1 associations, audit can be conducted by a person who is not:

• a member of the association

• the spouse or de facto partner or a business partner, employer or employee of a member of the association or

• the spouse or de facto partner or a business partner of an employee of a member of the association.

For Tier 2 associations, audit can be conducted by person who is a:

• member of one of the professional bodies:

+ CPA

+ ICAA

+ IPA

• Holder of qualifications in a prescribed class of qualifications or

• Approved by the Commissioner.

For Tier 3 associations, audit can be conducted by person who:

• Holds a public practice certificate issued by:

+ CPA

+ ICAA or

+ IPA

• Is approved by the Commissioner.

For Tier 3 associations which have a section 101 declaration, audit must be conducted by RCA.

Audit opinion The form of the opinion depends on the tier of the association:

For Tier 3 associations

a) whether the accounts are in the auditor’s opinion properly drawn up:

i. so as to give a true and fair view of matters required by section 42(2) to be dealt with in the accounts

ii. in accordance with this Act and

iii. in accordance with applicable Australian accounting standards

b) if, in the auditor’s opinion, the accounts have not been drawn up in accordance with the applicable accounting standards:

i. whether, in the auditor’s opinion, the accounts would, if drawn up in accordance with the applicable accounting standards, have given a true and fair view of the matters required by section 42(2) to be dealt with in the accounts

ii. if, in the auditor’s opinion, the accounts would not, if so drawn up, have given a true and fair view of those matters – the auditor’s reasons for being of that opinion and

iii. if subparagraph (ii) does not apply – particulars of the quantified financial effect on the accounts of the failure to so draw up the accounts

c) if, in the auditor’s opinion, there are reasonable grounds to believe the association will be able to pay its debts when they fall due

d) the defects or irregularities in the accounts identified during the audit


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e) the matters that, because they are not set out in the accounts, prevent a true and fair view of the accounts being obtained and

f) if the auditor is not so satisfied about a matter referred to in paragraphs (a) to (c), the auditor’s reasons for not being so satisfied.


First AGM must be within 18 months of date of incorporation.

Queensland

Legislation • Queensland: Associations Incorporation Act 1981.


<http://www.legislation.qld.gov.au/Acts_SLs/Acts_SL.htm>.

Tiers Level 1 Association:

• Current assets (i.e. total assets less property and other assets capable of depreciation) > $100,000 or

• Revenue > $100,000.

Level 2 Association:

• Not a level 1 or level 3 association.

Level 3 Association:

• Current assets < $20,000 OR

• Revenue < $20,000.


A set of financial statements for an incorporated association in Queensland, means a statement that presents fairly the following particulars:

a) the association’s income and expenditure during the financial year to which the statement relates

b) the association’s assets and liabilities as at the end date of the financial year to which the statement relates

c) the mortgages, charges and securities affecting the association’s property as at the end date of the financial year to which the statement relates.

Mandatory audit Audits mandatory for all associations, except for Level 3 association’s not covered by the Collections Act 1966, Gaming Machine Act 1991 or other law.

Auditor Tier 1 associations and Level 2 or 3 associations who are required to have an audit under the Collections Act 1966, Gaming Machine Act 1991 or other law are required to be audited by an Auditor or Accountant, i.e. one of the following:

• CPA Australia member

• Chartered Accountant

• Member of the Institute of Public Accountants

• Registered Company Auditor

• A person who the chief executive considers has appropriate qualifications.

A Tier 2 association not subject to one of the laws covered above can be audited by an auditor/accountant or an approved person.

A person must not audit a financial statement for an incorporated association if the person is:

a) the secretary, or a member of the management committee, of the incorporated association or

b) an employee of the incorporated association or


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c) a partner, employer, or employee of the secretary, or a partner, employer or employee of a member of the management committee, of the incorporated association; or

d) a spouse of a person mentioned in paragraph (a), (b) or (c); or wholly or partly dependent on a person mentioned in paragraph (a), (b) or (c).

Audit opinion For Level 1 associations and Level 2 or 3 associations required to have an audit under the Collections Act 1966, Gaming Machine Act 1991 or another law, the opinion states:

The form of the Auditor’s opinion is not specified.

Other Level 2 associations not covered by one of the acts above

A statement signed by an auditor, an accountant, or an approved person, that:

a) the person has sighted the association’s financial records and

b) the association’s financial records show that the association has bookkeeping processes in place to adequately record the association’s income and expenditure and dealings with its assets and liabilities.



South Australia

Legislation • Associations Incorporation Act 1985.


<http://www.ocba.sa.gov.au/associations/>.

Prescribed association

An association who has gross receipts > $500,000 (which is the amount prescribed by the Regulations).


A prescribed association is required to prepare accounts that present fairly:

• Either:

+ Statement of receipts and payments based on the cash method of accounting and a statement of assets and liabilities

or

+ Statement of income and expenditure based on the accrual method of accounting and balance sheet

• A statement made in accordance with a resolution of the committee of the association and signed by two or more members of the committee:

i. stating whether or not:

A. the accounts present fairly the results of the operations of the association for the financial year and the state of affairs of the association as at the end of the financial year; and

B. the committee has reasonable grounds to believe that the association will be able to pay its debts as and when they fall due; and

ii. giving particulars:

A. of any body corporate that is a subsidiary of the association within the meaning of section 46 of the Corporations Act 2001 of the Commonwealth; and

B. of any trust of which the association is a trustee.


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• The committee of a prescribed association must cause a report of the committee to be made in accordance with a resolution of the committee and signed by two or more members of the committee, stating in relation to each officer of the association:

a) whether or not, during the financial year to which the accounts relate:

i. the officer; or

ii. a firm of which the officer is a member; or

iii. a body corporate in which the officer has substantial financial interest,

has received or become entitled to receive a benefit as a result of a contract between the officer, firm or body corporate and the association, and if so the general nature of the benefit;

b) whether or not, during the financial year to which the accounts relate, the officer has received directly or indirectly from the association any payment or other benefit of a pecuniary value, and if so the general nature and extent of that benefit.

Mandatory audit Only for prescribed associations.

Auditor • CPA

• CA

• RCA

• Other person approved by the Commission.

Auditors opinion In respect of accounts consisting of an account of income and expenditure and a balance sheet, whether or not the auditor is satisfied that these accounts are drawn up so as to present fairly:

i. the results of the association’s activities for the association’s financial year and

ii. the financial state of the association at the end of the association’s financial year or

In respect of accounts consisting of an account of receipts and payments and a statement of assets and liabilities, whether or not the auditor is satisfied that these accounts present fairly:

i. the results of the association’s activities for the association’s financial year and

ii. the financial state of the association at the end of the association’s financial year

notwithstanding that the accounts may not have been prepared on the accrual method of accounting and

Whether the auditor has examined the accounts and auditors’ reports of:

i. each body corporate that is a subsidiary of the association within the meaning of section 46 of the Corporations Act 2001 of the Commonwealth and

ii. each trust of which the association is a trustee

and the conclusions drawn from the examination, and

Whether the auditor has obtained all of the information and explanations that he or she required from the association.




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Tasmania



<http://www.consumer.tas.gov.au/business_affairs/incorporated_associations>.


Preparation of true and fair accounts of the association.

Mandatory audit Yes, although an association can seek an exemption from the audit requirement if:

• the association has total revenue in any financial year of $40,000 or less

• total assets of $40,000 or less not including real property such as land and real estate

• a three quarter majority of members have voted in favour of not having the associations accounts audited

• the association has provision in their rules for a minimum number of members to requisition a special general meeting. Section 12(2) of the model rules reads: The committee, on the requisition in writing of at least 10 members of the Association, is to convene a special general meeting of the Association.

Auditor • Registered Company Auditor or

• A person, such as the Commissioner, having regard to the complexity of the financial affairs of the association, may approve.

Audit opinion A report by the auditor on the accounts of the Association stating:

• whether the association has, in the opinion of the auditor, kept proper accounting records and other books during the period covered by those accounts

• such statements as in the opinion of the auditor are adequate to explain its financial transactions for that financial year and its financial position at the end of that financial year.

Timing of AGM Within 6 months of the end of the reporting period (or 3 months if not otherwise stated in the Association’s constitution).

Victoria: Periods ending before 30 June 2013



<http://www.consumer.vic.gov.au/CA256EB5000644CE/page/Incorporated +associations?OpenDocument&1=85Incorporated+associations~&2=~&3=~>.

Prescribed association

Prescribed association, an association:

a) that has gross receipts in that association’s previous financial year in excess of $200 000 or such other amount as is prescribed by regulation or

b) that has gross assets in excess of $500 000 or such other amount as is prescribed by regulation; or

c) that is prescribed or of a class prescribed by regulation.


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Financial statements in accordance with relevant accounting standards, including:

• Income and expenditure statement

• Assets and liabilities statement

• Description of any mortgages, charges and other securities affecting the assets

• Accounts disclosing the above for any trusts of which the association is a trustee

• Details of any trust, held on behalf of the association by a third party, in which funds or assets of the association are placed

• Committee members’ direct or indirect pecuniary interest in a contract.

Mandatory audit For prescribed associations only.

Auditor Auditor of a prescribed association must be:

• RCA

• CA

• CPA

• Person approved by the Registrar.



Victoria: Periods ending on or after 30 June 2013

Legislation Associations Incorporation Reform Act 2012.

Associations Incorporation Reform Regulations 2012.

<http://www.consumer.vic.gov.au/resources-and-education/legislation/legislation-we-administer#a>.

Tiers of Association Tier 1: revenue < $250k.

Tier 2: revenue between $250k and $1m.

Tier 3: revenue > $1m.

Revenue is calculated based on total income for all activities during the last financial year, before any expenses are deducted.

Financial reporting and contents

All associations must prepare financial statements which contain:

• income and expenditure for your association’s financial year

• the balance sheet (assets and liabilities) at the end of its financial year

• any mortgages, charges and securities affecting any property of the association at the end of its financial year

• for each trust your association was a trustee of during any part of its financial year:

– income and expenditure of the trust during that period

– assets and liabilities of the trust during that period

– any mortgages, charges and securities affecting any property of the trust at the end of that period

– details of any trust holding association funds or assets, held on its behalf by another person or body.

Once the committee is satisfied with the financial statements, two committee members must certify that the financial statements give a ‘true and fair’ view of the association’s financial position and performance.


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Mandatory audit Tier 1 associations have a review if at a general meeting, a majority of the members vote to do so or directed to do so by the Registrar.

Tier 2 associations are required to have a review (unless their rules state an audit must be performed).

Tier 3 associations are required to have an audit by an independent auditor.

Auditor Your association’s financial audit must be done by:

• a registered company auditor or firm

• a member of CPA Australia or the Institute of Chartered Accountants in Australia, or

• someone approved by the Registrar of Incorporated Associations for this purpose; for example, a member of the Institute of Public Accountants who holds Professional National Accountant status.

The auditor must not be:

• a member of the association’s committee

• an employer or an employee of a member of the committee

• a member of the same partnership as a member of the committee

• an employee of the association.

Audit opinion Review/Audit report to:

• be prepared in accordance with Auditing Standards (on Review Engagements); and

• state whether the financial records kept by the association are such as to enable financial statements to be prepared in accordance with Australian Accounting Standards.

Timing of AGM Within 5 months after the end of the financial year.

Western Australia

Note: The WA Associations Incorporation Act 1987 is under review. A draft Associations Incorporation Bill 2006 had not yet been enacted at the time of publication. Please check for updates prior to using this information.



<http://www.commerce.wa.gov.au/ConsumerProtection/Content/Business/Associations/>.


No requirement to lodge accounts and financial statements on a regular basis.

Requirements are to:

• keep true and accurate accounting records that explain the financial transactions and the financial position of the association in a manner that can be conveniently and properly audited; and

• submit accounts at each AGM showing either:

• statement of receipts and payments

• statement of the assets and liabilities

or

• statement of income and expenditure

• balance sheet.

Mandatory audit No – if audit is performed then opinion to be attached.


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Auditor N/A.

Timing of AGM Within 4 months after end of financial year.

First AGM within 18 months of becoming incorporated.


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Audit appendices:

Appendix 3B – Example engagement letter – audit of an association If this is used for an unincorporated association then reference to relevant legislation should be removed, otherwise the specific state legislation name should be inserted for Incorporated Associations.

[Date]

[Contact name]1

[Position]

[name of Association]

[Address]

Dear [contact name]

ENGAGEMENT AS AUDITORS [UNDER STATE RELEVANT LEGISLATION, IF APPLICABLE]

You have requested that we audit the financial statements of [name of Association] for the year ended [date] which comprises the [insert name of primary statements and any notes presented which are subject to audit – for example statement of financial position as at [year end date] statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information, and the directors declaration.] We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter.

Our audit will be conducted with the objective of expressing an opinion on the financial statements.


We will conduct our audit in accordance with Australian Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with Australian Auditing Standards.

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit.

Our audit is not designed to be a complete examination of all aspects of your accounting system. Accordingly any matters that are reported to you verbally or in writing should not be regarded as all-inclusive.

Responsibilities of those charged with governance

Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance] acknowledge and understand that they have responsibility:

a) For the preparation of the financial statements that present fairly the results of the Association for the reporting period and the financial position of the Association as at the end of the reporting period.

b) To provide us with:

i. Access to all information of which the directors and management are aware that is relevant to the preparation of the financial report such as records, documentation and other matters;

1 The contact should be the appropriate representative of management or those charged with governance.


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ii. Additional information that we may request from the directors and management for the purpose of the audit; and

iii. Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence.

c) To advise us of any material and/or contentious issues relating to the preparation of the financial statements and any known or suspected frauds which have occurred within the Association.

d) To maintain adequate accounting records, to ensure that proper internal controls are in place, to ensure the accuracy of all financial records, and to maintain and safeguard the entity’s assets to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error.

Such internal controls reduce but do not eliminate the risk of misstatements in the financial statements from fraud or error. Those charged with governance assume responsibility for such risk. While the conduct of an audit may act as a deterrent against fraud or error we cannot be held responsible for preventing them.

Those charged with governance are responsible for adjusting the financial statements to correct identified material misstatements. At the conclusion of each financial reporting engagement we provide those charged with governance with a summary of any uncorrected misstatements we identify and request to confirm in writing that the effects of any uncorrected misstatements are immaterial, both individually and in aggregate, to the financial statements taken as a whole.

Representations from those charged with governance

As part of our audit process, we will request from those charged with governance written confirmation concerning oral representations made to us by [name of Association] in connection with the audit and that [name of Association] acknowledges that such representations would be relied upon by us during the audit.

Reporting

We anticipate the issues of an unqualified audit report in accordance with Australian Auditing Standards, however the form and content of our report may need to be amended in the light of our audit findings.

Independence

We have established policies and procedures designed to ensure our independence, including policies on the provision of non-audit work.

Fees

Our fee for the audit of the financial report of [name of Association] for the year ending [year end], is $xxx, exclusive of GST and out-of-pocket expenses, as agreed.

This fee assumes that all accounting transactions will have been processed and we will be presented with a final trial balance/set of financial statements at commencement of the audit.

If we incur additional costs as a result of factors such as:

• information not being provided to us within agreed time limits

• significant errors in the information that is provided

• the scale of the business significantly changing

• a material issue arising which was not reasonably contemplated at the time of the fee quote

then this additional time will also be billed.

Our fees will be billed as the work progresses.

Health and safety

We are required to comply with Occupational Health and Safety legislation by taking all practical steps to ensure the health and safety of our people. Our firm’s policy expects mutual responsibility for our people to ensure their own safety and that no harm is caused to others in the workplace, but the Act places responsibility for their safety on your Association when they are visitors to your site.

Other services

We are pleased to provide any additional services that may be required from time to time, provided such services do not impair our independence. We note that this engagement letter applies only to the work described in this letter. Should further work be required over and above such work, separate terms of engagement will need to be agreed. In particular, this letter does not deal with accounting advice or assistance with accounts preparation.


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Presentation of Auditing Financial Statements on the internet

If [name of Association] presents the audited financial statements and auditors’ report electronically on a web site, the security and controls over information on the web site should be addressed by the Association to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial information on the Association web site is beyond the scope of the audit of the financial statements. Responsibility for the electronic presentation of the financial statements on the Associations web site is that of the governing body of the entity.

Other financial information in reports

We read the financial information contained in the documents or statements that are issued with any of the financial statements, including the Committee reports, to identify material inconsistencies with the financial reports. However, we will not verify such other information.

General matters

The terms of this letter apply to all work carried out by us in connection with this engagement prior to the date of signing this letter.

This letter will be effective for future years unless we advise you of its amendment or replacement or the engagement is terminated.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements, including our respective responsibilities.

Yours sincerely

_____________________________________

[Audit firm]

_____________________________________

[partner name] Partner

Acknowledgement

We hereby acknowledge that the engagement letter dated [date of engagement letter] is in accordance with our understanding of the arrangements for the audit of [name of Association]’s financial statements.

Signed for and on behalf of the members by:

_____________________________________

[Signature]

_____________________________________

[Name]

_____________________________________

[Title]

_____________________________________

[Date]


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Appendix 3C – Example audit programsThe sample audit programs below provide guidance to auditors on the audit tests which may be performed on the audit of an association.

It is intended that this sample audit program be adapted as required for the circumstances of each engagement, taking into account factors such as the following:

• internal controls as a whole and whether these are adequate to ensure that all transactions are properly recorded;

• complexity of the accounting system and associated records;

• volume of transactions and scale of operations;

• risk associated with the entity;

• auditor’s knowledge of the business.

Please note that the following procedures will ordinarily be required to be performed. If internal controls are assessed as reliable, then the extent of substantive testing including the sample sizes selected for testing may be reduced, as considered appropriate by the auditor.

Note that these are minimum procedures based on the most common account balances and risks for small incorporated associations. Additional procedures will be required where there are additional risks or account balances.

Refer to ASA 330 The auditor’s responses to assessed risks for guidance on designing audit procedures to reduce audit risk to an acceptably low level and ASA 500 Audit evidence for guidance on the quantity and quality of audit evidence that an auditor is required to obtain.

Choose the tests to best cover the financial statements assertions identified during the risk assessment phase.

Income (excluding grant income) and cash receipts Performed by WP reference

1. Document the Auditors understanding of the process involved in recording revenue and receiving payment for all significant revenue streams.

Perform a walkthrough of the system.

Note any weaknesses and report to client, together with recommendations. Consider audit implications.

2. Select a sample of receipts from the cash receipts book and test as follows:

i. agree details to supporting documentation

ii. ensure the receipt is classified correctly and is in accordance with the association’s special rules, i.e. it is for bona fide purposes only

iii. agree amounts to stamped bank deposit slips and trace through to bank statements.

3. Agree other income, e.g. donations, interest received to supporting documentation.

4. Assess reasonableness of subscription income by reference to membership numbers and annual subscriptions.

5. Review all minutes of meetings in respect of financial matters and document matters of audit significance in relation to donations and pledges, whether in cash or kind, and ensure they are appropriately recognised in the financial report.

6. Additional procedures deemed necessary to obtain sufficient, appropriate audit evidence.


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Conclusion

Audit programs completed?

Matters for the completion memo?

Management letter points raised?

Audit differences raised?

Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Purchases and cash payments Performed by WP reference

1. Document the system for:

• Initiating purchases

• Confirming receipts of goods/services

• Paying creditors.


2. Select a sample of payments made from the cash payments book and test as follows:

i. agree to supporting documentation, i.e. invoice, supplier statement etc.

ii. trace evidence of delivery/receipts of goods

iii. ensure the payment is authorised by the committee and is in accordance with the association’s constitution, i.e. it is for bona fide purposes only

iv. trace amounts through to bank statements

v. consider appropriateness of account classification

vi. trace cash payments book to financial records.

3. Review the cash payments book for any large and unusual items and assess overall reasonableness of the payment.

Inspect supporting documentation.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Cash/bank/deposits Performed by WP reference

1. Review the bank reconciliation at reporting date as follows:

i. check the additions

ii. ensure there are no large and unusual reconciling items

iii. obtain a listing of unpresented cheques and trace to cash book prior to reporting date and to bank statements subsequent to year end to ensure they are presented in a timely manner

iv. review subsequent bank statements for unusual payments or receipts and inspect supporting documentation

v. ensure reconciliations are signed by a senior officer as being authorised.

2. Where the Auditor will place reliance on an internal control procedures such as the bank reconcilation, perform tests of controls to ensure that key controls identified in the system documentation are operating effectively and as recorded (i.e. test an interim bank reconciliation).

3. Agree balances on the bank confirmation/other confirmation to the bank reconciliation or other supporting documentation.

Ensure any encumbrances over assets detailed in the bank audit certificate are reflected in the financial statements.

4. If reliance has not been placed on any internal controls over cash, then a selection of cash transactions during the period should be traced to supporting documentation.

5. Where petty cash balances are material, verify the balance at the end of the reporting period.

6. Additional procedures needed as determined by the auditor to obtain sufficient, appropriate audit evidence.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Grant monies Performed by WP reference

1. Discuss with management, details of funds received from government and obtain and review a copy of the funding agreements.

2. Discuss with management and review appropriate supporting documentation to determine whether conditions associated with the grant have been met.

3. Review the accounting policy for grant accounting:

• Confirm this is in accordance with the appropriate accounting standard

• Confirm that the policy is being followed.


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4. For a selection of receipts:

i. agree to official receipt or third party advice

ii. trace amounts to bank statements and financial records.

5. For a sample of expenses:

i. ensure expenditure falls within conditions set by funding authority

ii. agree to supporting documentation

iii. trace amounts to bank statements and financial records.

6. Agree any grant receivable/payable to supporting documentation.

7. Determine whether there are any audit requirements in relation to any reporting obligations in the grant agreement (i.e. an auditor sign-off on an acquittal statement).


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Additional procedures needed as determined by the auditor to obtain sufficient, appropriate audit evidence.

Conclusion

Tests completed?



Reviewed by: <<name>>

YES / NO

YES / NO

YES / NO

Receivables/prepayments Performed by WP reference

1. Obtain a list of receivables and prepayments at year end and agree balances to general ledger.

2. Select a sample of receivables at year end and vouch to subsequent receipts as follows:

Trace amounts received to:

i. cash receipts book

ii. bank statements

iii. remittance advice or external correspondence.

If monies are not received subsequent to year end, obtain direct confirmation or prove existence of amount owing to proof of service being performed.


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3. Select a sample of prepayments and perform the following:

i. check calculations

ii. agree to supporting documentation, i.e. invoices, contracts, agreements, insurance policies etc

iii. agree amount paid to bank statement/other supporting documentation.

4. Ensure receivables/prepayments have been recorded in the correct period.

5. Review credit notes raised after year end and make any adjustments where necessary if the credit relates to transactions prior to reporting date.

6. Review receivable balances for any long-outstanding items and discuss recoverability with the client, i.e. sight evidence to ensure receivables are bona fide and confirm outstanding memberships.

7. Review the adequacy of the provision for doubtful debts in light of the testing performed in step 6 above.

8. Review:

i. classification and description of amounts

ii. accounting principles for appropriateness and consistency.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Investments Performed by WP reference

1. Confirm whether the investments have been classified appropriately as either fair value through profit or loss or available for sale.

Confirm that the accounting treatment reflects the classification.

2. Determine whether investments are being carried at costs or fair value.

If cost, then confirm this is in accordance with Accounting Standards.

If fair value, then ensure the recorded value reflects fair value at the end of the reporting period.

3. Obtain a list of investments and agree balances to the general ledger.

4. Obtain confirmation of the investments held from third parties.

5. Ensure any profit/loss on disposal of investments has been correctly treated and any cumulative amounts recorded in equity have been recycled into the profit and loss account.


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6. Confirm the income earned from the investments to supporting documentation.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Inventory Performed by WP reference


• Purchasing inventory

• Receiving inventory

• Counting inventory

• Valuing inventory

• Using/selling inventory.

Note any weakness and report to client, together with recommendations.

2. If inventory is material:

• Attend the stocktake

• Perform test counts and agree with client counts

• Inspect stock for slow-moving and obsolete items.

3. Obtain final stock listing and check additions and extensions and tie in to test counts performed during the stocktake.

Agree balances to the general ledger.

4. Review stock level for reasonableness and consistency (compared to prior year) and knowledge of the business.

5. Select a sample of stock lines from the final inventory listing and agree back to original invoices vouching prices and quantities (for reasonableness).

6. Enquire of management as to the existence of obsolete and/or slow moving stock items.

7. Select the first five delivery notes/goods received notes for the new financial year and the last five delivery notes from the previous financial year to ensure items have been recorded in the correct period.

8. Select a sample of stock items and compare unit cost, per year end stock listing, to selling price achieved post year end to ensure stock is valued at the lower of cost or net realisable value.



3:30


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Property, plant and equipment Performed by WP reference

1. Obtain supporting schedules from the fixed asset register (summarised by fixed asset classification including cost, additions, disposals, accumulated depreciation and depreciation expense) and agree balances to general ledger and trial balance.

2. Vouch additions and disposals for significant items to original invoice and bank statements and title deeds, if applicable.

Ensure additions have been appropriately authorized and relate to capital items.

3. Ensure profits and losses on disposal of assets have been calculated correctly.

4. Ensure depreciation rates used are appropriate and, on a test basis, check that the depreciation calculation is correct and consistent with previous financial years.

5. Perform a proof in total analytical review over depreciation.

6. Physically inspect a sample of fixed assets as follows:

i. trace back to accounting records

ii. select assets from records and inspect.

7. Review adequacy of insurance coverage and confirm maintenance of insurance register.

8. Discuss the existence of impairment indicators with management and review any recoverable amount calculations.

9. Review appropriateness of asset valuations (e.g. land and buildings) and ensure they comply with the applicable accounting standards.

10. Review:




Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Payables Performed by WP reference

1. Obtain a list of trade creditors and agree balance to general ledger and trial balance.

2. Select a sample of outstanding trade creditors at year end and vouch to supporting documentation, i.e. supplier statements, invoices etc., ensuring that any reconciling items are appropriate.

3. Investigate large, irregular, old, disputed and debit balances.

4. Vouch significant other creditor balances to supporting documentation.

5. Check and review the calculations of significant year end accruals.

6. Perform an unrecorded liabilities testing as follows:

i. review payments subsequent to year end

ii. review unpaid invoices on hand.

7. Review:




Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Payroll Performed by WP reference

1. Document the system for processing payroll-related payments and salaries.

Note any weaknesses and report them to the client, together with recommendations. Consider audit implications.

2. Perform substantive analytical procedures on:

• Superannuation

• Payroll tax

• Workcover

• Other on-costs

by calculating the expected value with reference to the wages and salaries expenses.

3. Ensure that appropriate provisions exist for employee entitlements such as annual leave and long service leave and that on-costs have been included.

Agree the total expense to the income statement.


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4. Obtain the calculations for leave entitlements, i.e. annual leave and long service leave.

For a selection of employees:

• Test check the calculation

• Agree leave taken to supporting documentation

• Review the assumptions used for reasonableness.

5. Calculate average salary per employee and compare to our expectations.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Profit and loss review Performed by WP reference

1. Perform analytical review procedures, as appropriate, based on our expectations for any balances not yet tested.

Corroborate management’s explanations where applicable.

2. Vouch to supporting documentation a sample of expense and revenue items as considered necessary.

3. Review items included in the repairs and maintenance expenses, ensuring that no items of a capital nature have been expensed.

4. Ensure that there are no amounts in the clearing/suspense accounts at reporting date. If there are, ask the client to reconcile the account and transfer the items to the correct accounts.

5. Cross-reference profit and loss items where applicable to other audit work areas, e.g. payroll and depreciation.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Commitments and contingencies Performed by WP reference

1. Minutes of meetings

Review all minutes of meetings in respect of financial matters and document matters of audit significance in relation to commitments and contingencies.

2. Capital and lease commitments

i. Discuss with client the existence of any capital commitments or lease commitments existing at reporting date.

ii. Agree commitments to appropriate documentation.

iii. Agree disclosure of commitments to financial report, if applicable.

iv. Ensure finance leases have been appropriately capitalized.

3. Contingent liabilities

i. Send a standard letter to client’s solicitor(s) and review to identify any contingencies.

ii. If applicable, agree the disclosure to the financial report.

iii. From the review of minutes after reporting date, discussion with client and solicitor’s reply, ascertain whether any contingent liabilities existed at reporting date.

iv. Document findings and consider related evidence obtained from bank confirmations, analysis of legal fees and review of minutes.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Reserves Performed by WP reference

1. Document the nature and purpose of each reserve and confirm it is reasonable and appropriate.

2. Obtain and check for the year the schedules of movements in retained profits and each reserve account, and agree significant movements to supporting documentation.

3. Agree opening balances with prior year’s audited financial statements.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Subsequent events Performed by WP reference

1. Discuss with client and review minutes for the period from reporting date to auditor’s report date to determine whether any material events have occurred which would require an adjustment to the accounts or disclosure by way of a note to the accounts.

2. Review the cash payments, cash receipts book and general journals after year end for significant and unusual items which could require an adjustment to the accounts.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Going concern Performed by WP reference

1. Review latest management accounts or other financial information available relating to post year end that may indicate the existence of a going concern issue.

2. Review budgets available for the following year to identify any potential issues.

3. Review current (to date of signing audit report) banking arrangements to ensure there are no breaches of available facilities or existing covenants that may indicate the existence of a going concern issue and confirm whether there were breaches during the year.

4. Enquire of management as to any issues that may give rise to doubts that the entity will be able to meet all financial obligations when they become due.

5. Discuss with committee of management their rationale for using the going concern basis.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Audit conclusions and reporting Performed by WP reference

1. Prepare a summary of the findings of the audit and conclude on overall results in light of the materiality of the matters found.

2. Obtain written representation from those charged with governance.

3. Prepare an audit report in accordance with the findings.

4. Complete completion memo.

5. Confirm that the fraud workpaper has been completed.

6. Prepare and issue relevant communication to those charged with governance.

Conclusion

In respect of the objectives of the audit procedures:

i. the audit procedures were applied in accordance with professional requirements

ii. subject to any audit differences documented in the working papers, the recorded amounts are materially correct

iii. the accounting principles are appropriate and have been consistently applied.



3:36

Appendix 3D – Example committee written representation2

This letter may be used for audits and reviews.

This letter should be tailored to the specific circumstances of the Association and has been prepared using the following assumption:

• The requirements of ASA 570 and ASA 710 to obtain a written representation is not relevant.

Additional paragraphs should be included where the audit team cannot reasonably be expected to obtain sufficient audit evidence (for example, representation regarding provision balances/assumptions).

Where paragraphs refer to balances/transactions which are not applicable for the Association then they should be deleted.

[Date]

[Audit Partner name]

Certified Practising Accountant

[Address]

Dear [Audit Partner name]

This representation letter is provided in connection with your audit of the financial report of [name of Association] for the year ended [year end], for the purpose of expressing an opinion as to whether the financial report is presented fairly, in all material respects, in accordance with the relevant Australian accounting standards [and the Incorporated Associations Act in the relevant state, if applicable].

We confirm, to the best of our knowledge and belief, having made such enquiries as we considered necessary for the purpose of appropriately informing ourselves, the following representations made to you during your audit:

Financial report

• We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [date of engagement letter], for the preparation of the financial report in accordance with Australian Accounting Standards as per note [xx]; in particular the financial report is fairly presented in accordance therewith.

• We have disclosed to you the results of our assessment of the risk that the financial report may be materially misstated as a result of fraud.

• Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.

• We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.

• Any related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of Australian accounting standards.

• All events subsequent to the date of the financial report and for which Australian Accounting Standards require adjustment or disclosure have been adjusted or disclosed.

• The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial report as a whole. A list of the uncorrected misstatements is attached to the representation letter.

Information provided

• We have provided you with:

a) Access to all information of which we are aware that is relevant to the preparation of the financial report such as records, documentation and other matters.

b) All requested information, explanations and assistance for the purposes of the audit.

c) Unrestricted access to persons within the Association from whom you determined it necessary to obtain audit evidence.

2 The letter should be emailed to the client to enable it to be printed on client letterhead.


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• All transactions have been recorded in the accounting records and are reflected in the financial report.

• We have disclosed to you all known actual or possible litigation and claims whose effects should be considered when preparing the financial report; and accounted for and disclosed in accordance with the applicable financial reporting framework.

General

• We have no plans or intentions that may materially affect the carrying values or classification of assets and liabilities.

• The Association has satisfactory title to all assets, and there are no liens or encumbrances on such assets nor have any assets been pledged as collateral that have not been disclosed in the financial report.

• There have been no known instances of non-compliance or suspected non-compliance with laws and regulations or contractual agreements whose effects should be considered in preparing the financial report.

Fraud

• We acknowledge our responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud and confirm we have disclosed to you:

a) the results of our assessment of the risk that the financial report may be materially misstated as a result of fraud

b) all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves:

i. management

ii. employees who have significant roles in internal controls or

iii. others where the fraud could have a material effect in the financial report and

c) all information in relation to allegations of fraud, or suspected fraud, affecting the entity’s financial report communicated to us by employees, former employees, analysts, regulators or others.

Commitments

• There were no material commitments for goods or services at year end, other than those disclosed in the financial report.

Impairment of assets

• We have considered the requirements of AASB 136: Impairment of assets when assessing the carrying values of assets and in ensuring that no assets within the scope of AASB 136 are stated in excess of their recoverable amount.

Liabilities

• There are no financial guarantee contracts in place to third parties which could be called upon in the event of a default, other than those disclosed in the financial report.

Inventory

• We have no plans to abandon lines of product or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realisable value.

• Provision has been made for material losses arising from the fulfilment of, or an inability to fulfil, any sale commitments or as a result of purchase commitments for inventory quantities in excess of normal requirements or at prices in excess of prevailing market prices.

Property, plant and equipment

• Rates of depreciation, applied to reduce book values of individual assets to their estimated residual values, reflect the probable useful lives of those assets to the association.

• Allowances for depreciation have been adjusted for all significant items of property, plant and equipment that have been abandoned or are otherwise unusable.

• The association has no ‘make good’ obligations in respect of its property, plant and equipment for which it would be required to make a restorative provision under AASB 137 Provisions, contingent liabilities and contingent assets which have not been included in the financial report.


3:38

Taxation

• Adequate amounts have been accrued for all local and foreign taxes on income including amounts applicable to prior years not finally settled and paid.

• Deferred tax assets in relation to tax losses [have/have not] been brought to account as it [is/is not] probable that they will be realised.

Electronic presentation of financial report

• With respect to presentation of the financial report on our website, we acknowledge that:

a) we are responsible for the electronic presentation of the financial report

b) we will ensure that the electronic version of the audited financial report and the auditor’s report on the website will be identical to the final signed hard copy version

c) we will clearly differentiate between audited and unaudited information in the construction of the entity’s website as we understand the risk of potential misrepresentation

d) we have assessed the controls over the security and integrity of the data on the website and confirmed that adequate procedures are in place to ensure the integrity of the information presented and

e) we will not present the auditor’s report on the full financial report with extracts only of the full financial report.

Yours sincerely,

_____________________________________

[Committee of Management Representatives – Chair/Treasurer]3

3 The sign-offs included in this letter are examples only. The audit manager/partner should consider the most appropriate personnel to sign the representation letter.


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Appendix 3E – Example unmodified auditor’s reports

Reporting entity i.e. general purpose financial statements

Reference – ASA 700 – Illustration 1

Independent audit report

To the members of [name of association]

We have audited the accompanying financial report of [name of association], which comprises the statement of financial position as at [year end], and the statement of comprehensive income for the year then ended, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the [those charged with governance]4 assertion statement.

[Those charged with governance] responsibility for the financial report

[Those charged with governance] of [name of association] are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards and [Incorporated Associations legislations, where applicable] and for such internal control as [those charged with governance] determine is necessary to enable the preparation and fair presentation of a financial report that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report whether due to fraud or error. In making those assessment, the auditor considers internal control relevant to the Associations preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by [those charged with governance], as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit, we have complied with the independence requirements of the Australian professional accounting bodies.

Electronic publication of the audited financial report5

It is our understanding that the [name of association] intends to electronically present the audited financial report and auditor’s report on its internet website. Responsibility for the electronic presentation of the financial report on the [name of association] website is that of [those charged with governance]of the [name of association]. The security and controls over information on the website should be addressed by the [name of association] to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial report(s) on the [name of association] website is beyond the scope of the audit of the financial report.

4 Insert the relevant persons, e.g. committee, members.

5 This paragraph should be deleted if the audit report is not being included on the entity’s website.


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Opinion

In our opinion, the financial report of [name of association] presents fairly, in all material respects the [name of association] financial position as at [year end], and of its financial performance and its cash flows for the year then ended in accordance with Australian Accounting Standards [and Incorporated Association legislation].

_____________________________________ _____________________________________

[Signature] [partner name] Certified Practising Accountant Partner

___________________

[Date]

______________________________________

[Auditor’s address]


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Non-reporting entity i.e. special purpose financial statements

Reference ASA 800 – Illustration 5


To the members of [name of association]

We have audited the accompanying financial report, being a special purpose financial report, of [name of association], which comprises the statement of financial position as at [year end], the statement of comprehensive income for the year then ended, statement of changes in equity and cash flow statement for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the [those charged with governance]6 assertion statement7.

[Those charged with governance] responsibility for the financial report

[Those charged with governance] are responsible for the preparation and fair presentation of the financial report and have determined that the basis of preparation described in Note 1 is appropriate to meet [the requirements of the [relevant Incorporated Associations Act and]] the needs of the members. The [those charged with governance]’s responsibility also includes such internal control as [those charged with governance] determine is necessary to enable the preparation and fair presentation of a financial report that is free from material misstatement, whether due to fraud or error.


Our responsibility is to express an opinion on the financial report based on our audit. We have conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Association’s preparation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by [those charged with governance], as well as evaluating the overall presentation of the financial report.


Independence8



It is our understanding that the [name of association] intends to electronically present the audited financial report and auditor’s report on its internet website. Responsibility for the electronic presentation of the financial report on the [name of association] website is that of those charged with governance of the [name of association]. The security and controls over information on the website should be addressed by the [name of association] to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial report on the [name of association] website is beyond the scope of the audit of the financial report.

6 Insert the relevant persons, e.g. Committee, Members.

7 Or other appropriate term.

8 Insert if an independence declaration is to be provided.



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Opinion

In our opinion, the financial report presents fairly, in all material respects, the financial position of [name of association] as at [year end] and of its financial performance and its cash flows for the year then ended on that date and complies with Australian Accounting Standards to the extent described in Note 1.

Basis of accounting

Without modifying our opinion, we draw attention to Note 1 to the financial report, which describes the basis of accounting. The financial report has been prepared for the purpose of fulfilling [those charged with governance] reporting responsibilities. As a result, the financial report may not be suitable for another purpose.

_____________________________________ _____________________________________

[Signature] [partner name] Certified Practising Accountant Partner

___________________

[Date]

______________________________________



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Appendix 3F – Sample audit qualification or emphasis of matter The most common amendments to Audit Reports relate to controls over cash donations.

This appendix illustrates some example workings in relation to the matter.

Refer to GS019 for guidance in determining whether a modification or emphasis of matter is appropriate.

Audit Report qualification

Basis for qualified opinion

Receipts from cash donations and other cash fundraising activities are a significant source of revenue for the [name of association]. The [name of association] has determined that it is impracticable to establish control over the collection of donations and other fundraising activity revenue prior to entry in its financial records. Accordingly, as the evidence available to us about revenue from these sources was limited, our audit procedures for donations and other fundraising activity revenue had to be restricted to the amounts recorded in the financial records. We therefore are unable to express an opinion on whether cash donations and other cash fundraising activity revenue obtained by the [name of association] are complete.

Qualified opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial report [name of association] presents fairly in all material respects in accordance with the accounting policies described in Note 1 to the financial statements, the financial position of the [name of association] at [year end date] and its financial performance and its cash flows for the year then ended.

Emphasis of matter

We draw attention to Note [X] to the financial report which describes the revenue recognition policy of [name of Association] including the limitations that exist in relation to the recording of cash receipts from [name of source of fundraising revenue]. Revenue from this source represents a significant proportion of [name of Association’s] revenue. Our opinion is unmodified in respect of this matter.


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Review appendices:

Appendix 3G – Review engagement letter

[Date]

[Contact name (the chair or treasurer)]

[Position]

[Association name]

[Address]

Dear [contact name]

REVIEW OF [NAME OF ASSOCIATION]

Scope

You have requested that we review the financial report of [name of Association] for the year ended [year end], which comprises [insert statements and any notes thereto subject to audit]. We are pleased to confirm our acceptance and our understanding of the terms and objectives of our engagement by means of this letter.

Our review will be conducted in accordance with Standard on Review Engagements ASRE 2400 Reviews of Financial Reports Performed by an Assurance Practitioner Who is Not the Auditor of the Entity [or ASRE 2410 Reviews of Financial Reports Performed by an Assurance Practitioner Who is the Auditor of the Entity] issued by the Auditing and Assurance Standards Board, with the objective of providing us with a basis for reporting whether anything has come to our attention that causes us to believe that the financial report of [name of Association] is not prepared, in all material respects, in accordance with the applicable financial reporting framework [and name of Incorporated Association state legislation]. Such a review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures and does not, ordinarily, require corroboration of the information obtained. The scope of a review of a financial report is substantially less than the scope of an audit conducted in accordance with auditing standards the objective of which is the expression of an opinion regarding the financial report and accordingly, we shall express no such opinion. ASRE 2400 [ASRE 2410] requires us to also comply with ethical requirements.

We expect to provide an unmodified review report on the financial report as per ASRE 2400 [ASRE 2410], however, our report may be modified based on work performed.

Responsibility for the financial report, including adequate disclosure, is that of those charged with governance. This includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. As part of our review, we shall request written representations from management concerning assertions made in connection with the review. We shall also request that where any document containing the financial report indicates that the financial report has been reviewed, our report will also be included in the document.

A review of the financial report does not provide assurance that we shall become aware of all significant matters that might be identified in an audit. Further, our engagement cannot be relied upon to identify whether fraud or errors, or illegal acts exist. However, we shall inform you of any material matters that come to our attention.

Fees

Our fee for the review of the financial report of [name of Association] for the year ending [year end date] is $xxx, exclusive of GST and out-of-pocket expenses, as agreed. This fee assumes that all accounting transactions will have been processed and we will be presented with a final trial balance/set of financial statements at commencement of the review.






3:45




We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our review.

This letter will be effective for future years unless it is terminated, amended or superseded.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our review of the financial report.

Yours sincerely

_____________________________________

[Auditor name]

Partner


ABN XX XXX XXX XX

We hereby acknowledge that this letter is in accordance with our understanding of the arrangements for the review of [name of Association] financial report.


_____________________________________

[Signature]

_____________________________________

[Name]

_____________________________________

[Title]

______________

[Date]


3:46

Appendix 3H – Example review programsThis sample review engagement program is aimed at providing guidance to assurance practitioners on the steps involved in the review of an association. The review should be performed by persons who have adequate training, experience and competence in assurance provision.

It is intended that this sample review program be adapted as required for the circumstances of each engagement, taking into account factors such as the following:

• internal controls as a whole and whether these are adequate to ensure that all transactions are properly recorded;

• complexity of the accounting system and associated records;

• volume of transactions and scale of operations;

• risk associated with the entity;

• assurance practitioner’s knowledge of the business.

The enquiry, analytical and other procedures carried out in a review of a financial report are determined by the auditor exercising professional judgement in light of the auditor’s assessment of the risk of material misstatement.

The procedures listed below are for illustrative purposes only. It is not intended that all the procedures suggested apply to every review engagement.

General Performed by WP reference

Confirm that the engagement team complies with relevant independence and ethical requirements.

Prepare and send an engagement letter to the entity.

Discuss the terms and scope of the engagement with the engagement team.

Obtain or update knowledge and understanding of the business, the key internal and external changes (including laws and regulations), and their effect on the scope of the review, materiality and risk assessment. This can be performed through the following:

• Ascertaining whether there have been any significant changes to the nature and scope of operations.

• Considering the results and effects of previous audits and review engagements.

• Enquiring of persons responsible for financial reporting in respect of matters that impact on the reliability of the underlying accounting records. For example, considering fraud risk, material weaknesses in internal controls and any significant changes to internal control policies and procedures.

Considering whether additional procedures will be required on any significant accounts where internal controls relating to significant processes have been historically unreliable in detecting and preventing errors in the financial report.

Assess the relevance and impact of the results of the above procedures on the current period.

Determine materiality, exercising professional judgement, considering both qualitative and quantitative factors.


3:47


Enquire of persons responsible for financial reporting about the following:

• Accounting policies adopted and consider whether:

+ they comply with the applicable financial reporting framework;

+ they have been applied appropriately; and

+ they have been applied consistently and, if not, consider whether disclosure has been made of any changes in the accounting policies.

• Policies and procedures used to assess asset impairment and any consequential estimation of recoverable amount.

• The policies and procedures to determine the fair value of financial assets and financial liabilities.

• New, unusual or complex situations that may have affected the financial report such as a business combination or disposal of a segment of the business. Consider adequacy of additional note disclosures in the financial report.

• Plans to dispose of major assets or business segments.

• Material off-balance sheet transactions, special purpose entities and other equity investments and related accounting treatment and disclosure.

• Knowledge of any allegations of fraud, or suspected fraud.

• Knowledge of any actual or possible significant non-compliance with laws and regulations.

• Compliance with debt covenants.

• Material or unusual related party transactions.

• New or significant changes in commitments, contractual obligations.

Enquire whether all financial information is recorded:

• Completely;

• Promptly; and

• After the necessary authorisation.

Obtain and read the minutes of meetings of shareholders, those charged with governance and other appropriate committees to identify matters that may affect the financial report, and enquire about matters dealt with at meetings for which minutes are not yet available that may affect the financial report.

Enquire if actions taken at meetings of shareholders or those charged with governance that affect the financial report have been appropriately reflected therein.

Ensure the financial report is agreed to the trial balance and is fairly presented including additional disclosure notes. If applicable, enquire as to whether all intercompany balances have been eliminated.

Review other information included in the financial report and document findings. Discuss any material misstatements of fact with the entity’s management.


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Conclusion

Program completed?




Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Cash Performed by WP reference

Obtain the bank reconciliations. Enquire about any old or unusual reconciling items with client personnel to assess reasonableness.

Enquire about transfers between cash accounts for the period before and after the review date.

Enquire whether there are any restrictions on cash accounts.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Revenue and Receivables Performed by WP reference

Enquire about the accounting policies for recognising sales revenue and trade receivables and determine whether they have been consistently and appropriately applied.

Obtain a schedule of receivables and determine whether the total agrees with the trial balance.

Obtain and consider explanations of significant variations in account balances from previous periods or from those anticipated.

Obtain an aged analysis of the trade receivables. Enquire about the reason for unusually large accounts, credit balances on accounts or any other unusual balances and enquire about the collectibility of receivables.

Consider, with management, the classification of receivables, including non-current balances, net credit balances and amounts due from shareholders, those charged with governance and other related parties in the financial report.

Enquire about the method for identifying ‘slow payment’ accounts and setting allowances for doubtful accounts and consider it for reasonableness.

Enquire whether receivables have been pledged, factored or discounted and determine whether they have been properly accounted for.

Enquire about procedures applied to ensure that a proper cut-off of sales transactions and sales returns has been achieved.


3:49


Enquire whether accounts represent goods shipped on consignment and, if so, whether adjustments have been made to reverse these transactions and include the goods in inventory.

Enquire whether any large credits relating to recorded income have been issued after the balance sheet reporting date and whether provision has been made for such amounts. Consider the reasonableness of any provisions.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Inventories Performed by WP reference

Obtain the inventory list and determine whether:

• the total agrees with the balance in the trial balance; and

• the list is based on a physical count of inventory.

Enquire about the method for counting inventory.

Where a physical count was not carried out at the end of the reporting period, enquire whether:

• a perpetual inventory system is used and whether periodic comparisons are made with actual quantities on hand; and

• an integrated cost system is used and whether it has produced reliable information in the past.

Consider adjustments made resulting from the last physical inventory count.

Enquire about procedures applied to control cut-off and any inventory movements.

Enquire about the basis used in valuing each inventory classification and, in particular, regarding the elimination of inter-branch profits. Enquire whether inventory is valued at the lower of cost and net realisable value (or lower of cost and replacement cost for not-for-profit organisations).

Consider the consistency with which inventory valuation methods have been applied, including factors such as material, labour and overhead.

Compare amounts of major inventory categories with those of prior periods and with those anticipated for the current period. Enquire about major fluctuations and differences.

Compare inventory turnover with that in previous periods.

Enquire about the method used for identifying slow moving and obsolete inventory and whether such inventory has been accounted for at net realisable value.

Enquire whether any inventory has been consigned to the entity and, if so, whether adjustments have been made to exclude such goods from inventory.


3:50


Enquire whether any inventory is pledged, stored at other locations or on consignment to others and consider whether such transactions have been accounted for appropriately.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Obtain a schedule of the investments at the reporting date and determine whether it agrees with the trial balance.

Enquire whether the accounting policy applied to investments is consistent with prior periods.

Enquire from management about the carrying values of investments. Consider whether there are any realisation problems.

Enquire whether there are any new investments, including business combinations. Consider classification, measurement and disclosure in respect of material or significant acquisitions.

Consider whether gains and losses and investment income have been properly accounted for.

Enquire about the classification of long-term and short-term investments.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Property, plant and equipment and depreciation Performed by WP reference

Obtain a schedule of the property, plant and equipment indicating the cost and accumulated depreciation and determine whether it agrees with the trial balance.

Enquire about the accounting policy applied regarding residual values, provisions to allocate the cost of property, plant and equipment over their estimated useful lives using the expected pattern of consumption of the future economic benefits and distinguishing between capital and maintenance items. Consider whether there are any indicators of impairment and whether the property, plant and equipment have suffered a material, permanent impairment in value.

Discuss with management the additions and disposals to property, plant and equipment accounts and accounting for gains and losses on disposals or de-recognition. Enquire whether all such transactions have been properly accounted for.

Enquire about the consistency with which the depreciation method and rates have been applied and compare depreciation provisions with prior years.

Enquire whether there are any restrictions on the property, plant and equipment.

Enquire whether lease agreements have been properly reflected in the financial report in conformity with current accounting pronouncements.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Loans payable Performed by WP reference

Obtain from management a schedule of loans payable and determine whether the total agrees with the trial balance.

Enquire whether there are any loans where there has been a change to the terms and conditions or management has not complied with the provisions of the loan agreement, including any debt covenants. Assess whether loans have been appropriately classified as current or non-current in the financial report.

Where material, consider the reasonableness of interest expense in relation to loan balances.

Enquire whether loans payable are secured. Review loan and working capital facilities. Enquire if options to extend terms have been exercised or if any debt requires refinancing.


3:52


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Trade payables Performed by WP reference

Enquire about the accounting policies for initially recording trade payables and whether the entity is entitled to any allowances given on such transactions.


Obtain a schedule of trade payables and determine whether the total agrees with the trial balance.

Enquire whether balances are reconciled with the creditors’ statements and compare with prior period balances. Compare turnover with prior periods.

Consider whether there could be material unrecorded liabilities.

Enquire whether payables to shareholders, those charged with governance and other related parties are separately disclosed.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Other liabilities and contingent liabilities Performed by WP reference

Obtain a schedule of other liabilities and determine whether the total agrees with the trial balance.

Compare major balances of related expense accounts with similar accounts for prior periods.

Enquire about approvals for such other liabilities, terms of payment, compliance with terms, collateral and classification.

Enquire about other liabilities to assess whether the methodology and assumptions adopted are consistent with prior periods. Enquire whether there are any unusual trends and developments affecting accounting estimates.

Enquire as to the nature of amounts included in contingent liabilities and commitments.

Enquire whether any actual or contingent liabilities exist which have not been recognised in the accounts. If so, enquire with management and/or those charged with governance whether provisions need to be made in the accounts or whether disclosure should be made in the notes to the financial report.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Operations Performed by WP reference

Compare results with those of prior periods and those expected for the current period.

Discuss significant movements/variations with management.

Discuss whether the recognition of major revenue and expense items have taken place in the appropriate periods.

Enquire about the policies and procedures related to accrued revenue and/or expenses.

Consider and discuss with management the relationship between related items in the revenue accounts and assess the reasonableness thereof in the context of similar relationships for prior periods and other available information.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


3:54

Income and other taxes Performed by WP reference

Enquire from management as to the tax status of the entity. If there were any events, including disputes with taxation authorities, which could have a significant effect on the taxes payable by the entity. Examine correspondence in relation to any significant matters arising and assess whether events have been reflected appropriately in the financial report.

If the entity is not tax exempt, consider the tax expense in relation to the entity’s income for the period.

Enquire from management as to the adequacy of the recognised deferred and current tax assets and/or liabilities including provisions in respect of prior periods, if applicable.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Obtain from management the latest financial report and compare it with the financial report being reviewed or with those for comparable periods from the preceding year.

Enquire about events after the end of the reporting period that would have a material effect on the financial report under review and, in particular, enquire whether:

• any substantial commitments or uncertainties have arisen subsequent to the end of the reporting period;

• any significant changes in the share capital, long-term debt or working capital have occurred up to the date of enquiry; and

• any unusual adjustments have been made during the period between the balance sheet reporting date and the date of enquiry.

Consider the need for adjustments or disclosure in the financial report.

Obtain and read the minutes of meetings of shareholders, those charged with governance and appropriate committees subsequent to the balance sheet date and consider any impact of the financial report and disclosures.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


3:55

Litigation Performed by WP reference

Enquire from persons responsible for financial reporting, and where appropriate in-house litigation specialists, whether the entity is the subject of any legal actions – threatened, pending or in process. Consider the effect thereof on the financial report and any provision for loss.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Going concern assessment Performed by WP reference

Consider the going concern assumption. When events or conditions come to attention which cast significant doubt on the entity’s ability to continue as a going concern, perform additional procedures to assess the impact on the financial report and review report. Additional procedures may include:

• Discussion with those charged with governance to understand the events and circumstances that have contributed to the current situation to determine whether the risk arising can be mitigated.

• Plans for future actions, such as plans or intentions to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital.

• Feasibility of the plans and whether those charged with governance believe that the outcome of these plans will improve the situation.

Consider the adequacy of disclosure about such matters in the financial report.

Conclusion




Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO


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Evaluation of misstatements Performed by WP reference

Ensure significant unadjusted differences have been summarised and their effect evaluated.

Ensure material adjustments identified are notified to management/ those charged with governance (as appropriate).

Conclusion

Reviewed by: ___________________________

Written representations Performed by WP reference

Obtain written representation from the directors/management/those charged with governance (as appropriate) to confirm matters arising during the course of the review engagement.

Documentation Performed by WP reference

Ensure that review documentation is sufficient and appropriate to provide a basis for the conclusion and to provide evidence of compliance with ASRE 2410 or ASRE 2400.


3:57

Appendix 3I – Example review reportsIndependent review report – reporting association

To the members of [name of Association]

Report on the financial report

We have reviewed the accompanying annual financial report of [name of Association], which comprises the statement of financial position as at [year end date], the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the [those charged with governance]10 assertion statement.

[Those charged with governance]11 Responsibility for the financial report

[Those charged with governance] of the Association are responsible for the preparation of the annual financial report that gives a true and fair view in accordance with Australian Accounting Standards [and the Associations Incorporation Act (state), if applicable]. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Assurance practitioner’s responsibility

Our responsibility is to express a conclusion on the financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2400 Review of a Financial Report Performed by an Assurance Practitioner who is not the Auditor of the Entity, in order to state whether, on the basis of the procedures described, anything has come to our attention that causes us to believe that the financial report is not presented fairly, in all material respects, in accordance with the Australian Accounting Standards.

ASRE 2400 requires us to comply with the requirements of the applicable code of professional conduct of an accounting body.

A review of an annual financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence


Conclusion

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the annual financial report of [name of Association] does not present fairly, in all material respects, the [name of Association]’s financial position as at [year end date] and of its financial performance and its cash flows for the year ended on that date in accordance with the Australian Accounting Standards.

______________________________________ ______________________________________

[Signature] [Partner name] Certified Practising Accountant Partner

______________________________________

[Date]

______________________________________

[Address]

10 Or identify the individual component of the financial report when appropriate.



3:58

Independent assurance practitioner’s report – non-reporting association

To the members of [name of Association]


We have reviewed the accompanying annual financial report of [name of Association], which comprises the statement of financial position as at [year end date], the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the [those charged with governance]12 assertion statement.

[Those charged with governance]13 Responsibility for the financial report

[Those charged with governance] of the Association are responsible for the preparation of the annual financial report that gives a true and fair view in accordance with Australian Accounting Standards to the extent noted in Note [x][and the Associations Incorporation Act (state), if applicable]. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.


Our responsibility is to express a conclusion on the financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2400 Review of a Financial Report Performed by an Assurance Practitioner who is not the Auditor of the Entity, in order to state whether, on the basis of the procedures described, anything has come to our attention that causes us to believe that the financial report is not presented fairly, in all material respects, in accordance with the Australian Accounting Standards to the extent noted in Note [1].

ASRE 2400 requires us to comply with the requirements of the applicable code of professional conduct of an accounting body.

A review of an annual financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence


Conclusion

Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the annual financial report of [name of Association] does not present fairly, in all material respects, the [name of Association]’s financial position as at [year end date] and of its financial performance and its cash flows for the year ended on that date in accordance with the Australian Accounting Standards as noted in note [x].

12 Or identify the individual component of the financial report when appropriate.



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Basis of accounting

Without modifying our conclusion, we draw attention to Note 1 to the financial report, which describes the basis of accounting. The financial report has been prepared for the purpose of fulfilling [those charged with governance] reporting responsibilities. As a result, the financial report may not be suitable for another purpose.

______________________________________ ______________________________________


______________________________________

[Date]

______________________________________

[Address]

Appendix 3J – Sample qualification or emphasis of matter for a review reportThe most common amendments to Review Reports relate to controls over cash donations.



Review report qualification

Basis for qualified conclusion

Receipts from cash donations and other cash fundraising activities are a significant source of revenue for the [name of association]. The [name of association] has determined that it is impracticable to establish control over the collection of donations and other fundraising activity revenue prior to entry in its financial records. Accordingly, as the evidence available to us about revenue from these sources was limited, our review procedures for donations and other fundraising activity revenue had to be restricted to the amounts recorded in the financial records. We therefore are unable to express an opinion on whether cash donations and other cash fundraising activity revenue obtained by the [name of association] are complete.

Qualified conclusion

Except for the possible effects of the matter described in the Basis for Qualified Conclusion paragraph, based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the financial report of [name of Association] does not present fairly, the financial position of the [name of Association] at [year end date] and its financial performance and its cash flows for the year then ended in all material respects in accordance with the accounting policies described in Note 1 to the financial statements.

Emphasis of matter

We draw attention to Note [X] to the financial report which describes the revenue recognition policy of [name of Association] including the limitations that exist in relation to the recording of cash receipts from [name of source of fundraising revenue]. Revenue from this source represents a significant proportion of [name of Association’s] revenue. Our opinion is unmodified in respect of this matter.

4. Audit or review of a company limited by guarantee4. Audit or review of a company limited by guarantee 4:2

Audit or review of a company limited by guarantee: Overview 4:2




Reporting 4:6

Annual reporting requirements 4:6

Audit and review reports 4:6

Appendices 4:8

Audit appendices: 4:9

Appendix 4A – Example engagement letter – audit of a non-small Company Limited by Guarantee 4:9

Appendix 4B – Example audit programs 4:12

Appendix 4C – Example management representation letter 4:24

Appendix 4D – Example unmodified auditor’s reports 4:27

Appendix 4E – Sample audit qualification or emphasis of matter 4:31

Review appendices: 4:32

Appendix 4F – Review engagement letter 4:32

Appendix 4G – Example review programs 4:34

Appendix 4H – Example review reports 4:45

Appendix 4I – Sample qualification or emphasis of matter for a review report 4:48


4:2

4. Audit or review of a company limited by guarantee

Audit or review of a company limited by guarantee: OverviewThis chapter details the specific auditing and review requirements applicable to companies limited by guarantee should be read in conjunction with Chapter 1 – Overview of audit and review engagements.

The audit/review requirements for Companies Limited by Guarantee are included within section 285A of the Corporations Act 2001 and can be summarized below:

Financial reporting and auditing requirements for companies limited by guarantee

Annual financial reporting for companies limited by guarantee

Nature of company Obligations Relevant Corporations Act sections

Small company limited by guarantee, i.e. revenue < $250k and not a tax deductible gift recipient.

No obligation to do any of the following unless required to do so under a member direction or ASIC direction:

• prepare a financial report;

• prepare a directors’ report;

• have financial report audited;

• notify members of reports.

Sections 292, 301 and 316A.

Company limited by guarantee with annual revenue or, if part of a consolidated entity, annual consolidated revenue of less than $1 million.

Must prepare a financial report.

Must prepare a directors’ report, although less detailed than that required of other companies.

Need not have financial report audited unless a Commonwealth company, or a subsidiary of a Commonwealth company or Commonwealth authority.

If the company does not have financial report audited, it must have financial report reviewed.

Must give reports to any member who elects to receive them.

Sections 292, 298, 300B, 301, 316A.

Company limited by guarantee with annual revenue or, if part of a consolidated entity, annual consolidated revenue of $1 million or more.

Must prepare a financial report.

Must prepare a directors’ report, although less detailed than that required of other companies.

Must have financial report audited.

Must give reports to any member who elects to receive them.

Sections 292, 298, 300B, 301, 316A.

Audit or review approachThe methodology documented in Chapter 1 should be followed for the audit or review of a Company Limited by Guarantee, however specific information to assist with the engagement has been described below.

Acceptance and continuanceThe type of engagement being performed for the company will determine who is able to undertake the work.

Review engagement

A review engagement can be performed by a practitioner who is a member of and hold a practising certificate issued by one of:

• the Institute of Chartered Accountants in Australia

• CPA Australia Limited, or

• Institute of Public Accountants.


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There is no requirement to be a Registered Company Auditor in order to perform a review of a company limited by guarantee.

Audit engagement

An audit of a Company Limited by Guarantee must be conducted by a Registered Company Auditor.

Scope of audit

In some cases, there may be reporting requirements to a peak entity or government body who has provided grant or other funds to the company. The auditor/reviewer should clarify whether these requirements exist and the extent of reliance by these parties on the review/audit report.

Planning the audit or reviewUnderstanding the business

Areas to consider include reliance on grants, donations, turnover of key personnel, and the voluntary nature of membership. A further key factor could be declining membership.

Interface with government bodies

Companies limited by guarantee are likely to have significant interaction and reporting obligations to government agencies with government bodies.

For example, a sporting club or school may receive funds from local, state or federal governments. The grants may be recurrent or one-off. The auditor or other assurance practitioner should determine:

• whether any such funds are received

• any conditions attached to the expenditure of the funds

• whether the conditions have been met and

• reporting obligations to the provider of the funds.

Risk factors

The existence of any of the following risk factors and control weaknesses should be considered and the implication for the audit documented. Where any of the control weaknesses are deemed to be significant then they should be communicated to those charged with governance.

Some areas of high inherent risk where potential control deficiencies should be identified in company limited by guarantee include:

• adequate documents to support payments are not maintained

• invoices etc, where maintained, are not cancelled when paid

• payments are tabled at meetings but little or no enquiry is made by others

• no receipts are issued and no control over donations is maintained

• there is lack of segregation of duties

• registers of members not maintained or updated and

• there is little or no control over stock used in fundraising and takings

• lack of understanding of statutory directors responsibilities.

The table below shows some areas of focus for a Company Limited by Guarantee where the Auditor/Reviewer needs to have an understanding of the entity and the related risks and financial statement assertions.

The Auditor/Reviewer may use this table to tailor their questions to the client and based on the responses, determine the relevant risks and financial statements assertions to tailor the audit/review programs.


4:4

Business understanding, associated risks and financial statement assertions

The table below includes the most common areas financial statement risks faced by Companies Limited by Guarantee, it is not a complete list of all risks or balances relevant to these entities and Auditors should ensure that they have considered all transactions/balances relevant to their client.

Obtaining an understanding of the Company


Cash balances

• What types of bank accounts does the Company maintain?

• How often are the bank accounts changed?

• What is the bank reconciliation process?

• Who can withdraw funds?

• Some bank accounts are not accounted for

• Cash transactions around year end are not included in the correct period

• Liquidity problem are being disguised

• Cash is being misappropriated.

• Completeness

• Cutoff

• Accuracy


Tested as part of the cash program.

Revenue, receipts and receivables

• What revenue streams does the Company receive?

• What form are the revenue received in – i.e. cash/direct deposit/credit cards?

• Who has the ability to collect cash, e.g. sporting club registration days/school payment days?

• What level of revenue is comprised of cash donations?

• Does the Company have to provide services over a specified period of time in return for the revenue?

• What is the ageing profile of the debtors?

• What is the collection process for receivables?

• Revenue is recorded in the wrong period

• Cash donations are misplaced or lost through fraud or theft

• Fictitious revenue is recorded

• Revenue recognition policy is not appropriate – significant risk

• Receivables are recoverable.

• Completeness

• Occurrence

• Accuracy of sales

• Cut-off

• Valuation of receivables.

Tested as part of the revenue, receivables and cash programs.

Grant income

• What grants are received by the Company?

• What are the terms and conditions of the grant?

• Has there been any breach of any terms/conditions during the year?

• Funds provided under the terms of the grant have not been properly accounted for

• Money has not been spent appropriately and therefore may need to be returned

• Terms or conditions of the grant have been breached

• The grant revenue has not been accounted for in accordance with Accounting Standards/the Company’s accounting policy.

• Existence

• Accuracy

• Cut-off.

Tested in the grant funds program.


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Purchases, payments and creditors

• Which goods/services does the Company purchase?

• What is the approval and payment process for purchases?

• Are there any preferred suppliers?

• How are creditors normally paid – cheque, direct deposit?

• Goods have been received but not invoiced

• Payments are made in respect of fictitious goods or services

• Purchases are not recorded or are duplicated

• Purchases/payments are recorded in the wrong period

• Recorded creditors do not represent all amounts owed for goods and services by the Company.

• Completeness

• Existence

• Cut-off

• Accuracy.

Non-current assets (i.e. property, plant and equipment)

• What non-current assets are held by the Company?

• Have there been any significant acquisitions/disposals during the year?

• Have any valuations been performed during the year?

• Have there been any impairment indicators during the year which may indicate that the assets are carried at too high a value?

• What are the security measures in place over Company assets?

• Fixed assets that have been mislaid, misappropriated or discarded are still recorded in the accounting records.

• Valuation of non-current assets is mis-stated

• Depreciation policies are unreasonable and depreciation charges are mis-stated

• Expenses have been incorrectly capitalized

• Impairment losses have not been identified.

• Existence

• Valuation


Tested in the property, plant and equipment program.

Payroll and other expenses

• How many staff are on the payroll?

• What is the system for:

– Adding new employees?

– Removing employees?

– Changing details of employees?

– Processing the payroll?

– Calculating leave entitlements?

• What is the process for purchasing items/paying reimbursements to volunteers?

• Fictitious employees are paid

• Improper or unauthorized amounts are paid

• On-costs are not appropriately recorded.

• Accuracy

• Existence.

These are tested through the payroll and income and expenses audit program.


4:6



Investments

• Why does the Company hold its investments:

– Annual income?

– Long term capital growth?

– Invest short-term funds?

• What investments are held?

• Who manages the investments?

• Has there been any sales/purchases of investments during the reporting period?

• Valuation of the investments is not up to date

• All investments which are owned by the Company are recorded

• Profit/loss on sale have not been recorded correctly

• Changes in market value have not been accounted for correctly.

• Valuation

• Completeness


Tested in the investments program.

Inventory

• What inventory is held by the Company?

• What is the inventory used for – i.e. given away or sold?

• How is the inventory valued?

• How does the Company identify inventory that should be written down?

• Inventory is over-valued

• There is no provision for slow moving/unsaleable stock

• Inventory is sold/given-away and has not been recorded as such.

• Valuation

• Existence.

Reporting

Annual reporting requirementsA company limited by guarantee, which is not a small company, is required to lodge a copy of the financial reports, Directors report and Auditors report to both the Members (who elect to receive a copy) and to ASIC in accordance with the timeframes below.

Reporting to … Timeframe

Members Members can elect to receive either a hard copy or electronic copy of the financial reports, Directors report and Audit report.

The company must send the reports to members by the earlier of:

• 21 days before the Annual General Meeting or

• 4 months after the end of the financial year.

ASIC Audited financial reports to be lodged with ASIC within 4 months after the end of the financial year.

Audit and review reportsExample audit and review reports are provided in the Appendices to this Chapter.

Where cash transactions such as donations, fundraising or kiosk takings are material to the activities of the Company, a lack of controls may mean the auditor cannot gain sufficient evidence of completeness. The auditor or other assurance provider should issue an appropriate audit opinion or review conclusion (qualified) and management letter, if applicable. Where the auditor is able to obtain sufficient appropriate audit evidence, but it is considered fundamental to the users’ understanding of the financial report, an emphasis of matter paragraph should be used to draw the reader’s attention to the applicable note on revenue recognition in the financial statements. Guidance Statement GS 019 Auditing Fundraising Revenue of Not-for-Profit Entities, issued by the


4:7

AUASB, covers planning, internal control and reporting considerations in this situation. Refer to Chapter 1 for more information on the requirements of GS 019 and refer to Appendix 4E for an example of an audit modification and Appendix 4I for a review modification in accordance with GS 019.


4:8

AppendicesThe appendices for Chapter 4 are:

• Audit appendices:

– Appendix 4A – Audit engagement letter.

– Appendix 4B – Example audit programs.

– Appendix 4C – Example management representation letter (may also be used for a review).

– Appendix 4D – Example audit reports.

– Appendix 4E – Example qualification/emphasis of matter – GS019.

• Review appendices:

– Appendix 4F – Review engagement letter.

– Appendix 4G – Example review programs.

– Appendix 4H – Example review reports.

– Appendix 4I – Example qualification/emphasis of matter.


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Audit appendices:

Appendix 4A – Example engagement letter – audit of a non-small Company Limited by Guarantee

[Date]

[Contact name]1

[Position]

[name of Company]

[Address]

Dear [contact name]

ENGAGEMENT AS AUDITORS

You have requested that we audit the financial statements of [name of Company] for the year ended [date] which comprises the [insert name of primary statements and any notes presented which are subject to audit – for example statement of financial position as at [year end date] statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information, and the directors declaration.] We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter.

Our audit will be conducted with the objective of expressing an opinion on the financial statements.


We will conduct our audit in accordance with Australian Auditing Standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with Australian Auditing Standards.

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit.

Our audit is not designed to be a complete examination of all aspects of your accounting system. Accordingly any matters that are reported to you verbally or in writing should not be regarded as all-inclusive.

Responsibilities of those charged with governance

Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance] acknowledge and understand that they have responsibility:

a) For the preparation of the financial statements that present a true and fair view of the results of the Company for the reporting period and the financial position of the Company as at the end of the reporting period.

b) To provide us with:

i. Access to all information of which the directors and management are aware that is relevant to the preparation of the financial report such as records, documentation and other matters;

ii. Additional information that we may request from the directors and management for the purpose of the audit; and

1 The contact should be the appropriate representative of management or those charged with governance.


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iii. Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence.

c) To advise us of any material and/or contentious issues relating to the preparation of the financial statements and any known or suspected frauds which have occurred within the Company.

d) To maintain adequate accounting records, to ensure that proper internal controls are in place, to ensure the accuracy of all financial records, and to maintain and safeguard the entity’s assets to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error.

Such internal controls reduce but do not eliminate the risk of misstatements in the financial statements from fraud or error. Those charged with governance assume responsibility for such risk. While the conduct of an audit may act as a deterrent against fraud or error we cannot be held responsible for preventing them.

Those charged with governance are responsible for adjusting the financial statements to correct identified material misstatements. At the conclusion of each financial reporting engagement we provide those charged with governance with a summary of any uncorrected misstatements we identify and request to confirm in writing that the effects of any uncorrected misstatements are immaterial, both individually and in aggregate, to the financial statements taken as a whole.

Representations from those charged with governance

As part of our audit process, we will request from those charged with governance written confirmation concerning oral representations made to us by [name of Company] in connection with the audit and that [name of Company] acknowledges that such representations would be relied upon by us during the audit.

Reporting

We anticipate the issues of an unqualified audit report in accordance with Australian Auditing Standards, however the form and content of our report may need to be amended in the light of our audit findings.

Independence

We have established policies and procedures designed to ensure our independence, including policies on the provision of non-audit work.

Fees

Our fee for the audit of the financial report of [name of Company] for the year ending [year end], is $xxx, exclusive of GST and out-of-pocket expenses, as agreed.

This fee assumes that all accounting transactions will have been processed and we will be presented with a final trial balance/set of financial statements at commencement of the audit.








Health and safety

We are required to comply with Occupational Health and Safety legislation by taking all practical steps to ensure the health and safety of our people. Our firm’s policy expects mutual responsibility for our people to ensure their own safety and that no harm is caused to others in the workplace, but the Act places responsibility for their safety on your Company when they are visitors to your site.

Other services

We are pleased to provide any additional services that may be required from time to time, provided such services do not impair our independence. We note that this engagement letter applies only to the work described in this letter. Should further work be required over and above such work, separate terms of engagement will need to be agreed. In particular, this letter does not deal with accounting advice or assistance with accounts preparation.


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Presentation of Auditing Financial Statements on the internet

If [name of Company] presents the audited financial statements and auditors’ report electronically on a web site, the security and controls over information on the web site should be addressed by the Company to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial information on the Company web site is beyond the scope of the audit of the financial statements. Responsibility for the electronic presentation of the financial statements on the Company web site is that of the governing body of the entity.

Other financial information in reports

We read the financial information contained in the documents or statements that are issued with any of the financial statements, including the Committee reports, to identify material inconsistencies with the financial reports. However, we will not verify such other information.

General matters

The terms of this letter apply to all work carried out by us in connection with this engagement prior to the date of signing this letter.

This letter will be effective for future years unless we advise you of its amendment or replacement or the engagement is terminated.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements, including our respective responsibilities.

Yours sincerely

_____________________________________

[Audit firm]

_____________________________________

[partner name] Partner

Acknowledgement

We hereby acknowledge that the engagement letter dated [date of engagement letter] is in accordance with our understanding of the arrangements for the audit of [name of Company]’s financial statements.


_____________________________________

[Signature]

_____________________________________

[Name]

_____________________________________

[Title]

_____________________________________

[Date]


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Appendix 4B – Example audit programsThe sample audit programs below provide guidance to auditors on the audit tests which may be performed to obtain sufficient, appropriate audit evidence during the audit of a Company Limited by Guarantee.

It is intended that this sample audit program be adapted as required for the circumstances of each engagement, taking into account factors such as the following:

• internal controls as a whole and whether these are adequate to ensure that all transactions are properly recorded

• complexity of the accounting system and associated records

• volume of transactions and scale of operations

• risk associated with the entity

• auditor’s knowledge of the business.

Please note that the following procedures will ordinarily be required to be performed. If internal controls are assessed as reliable, then the extent of substantive testing including the sample sizes selected for testing may be reduced, as considered appropriate by the auditor.

Note that these are minimum procedures based on the most common account balances and risks for Companies Limited by Guarantee. Additional procedures will be required where there are additional risks or account balances.

Refer to ASA 330 The auditor’s responses to assessed risks for guidance on designing audit procedures to reduce audit risk to an acceptably low level and ASA 500 Audit evidence for guidance on the quantity and quality of audit evidence that an auditor is required to obtain.

Choose the tests to best cover the financial statements assertions identified during the risk assessment phase.


1. Document the Auditors understanding of the process involved in recording revenue and receiving payment for all significant revenue streams.

Perform a walkthrough of the system.


2. Select a sample of receipts from the cash receipts book and test as follows:

i. agree details to supporting documentation

ii. ensure the receipt is classified correctly and is in accordance with the Company’s special rules and constitution, i.e. it is for bona fide purposes only

iii. agree amounts to stamped bank deposit slips and trace through to bank statements.

3. Agree other income, e.g. donations, interest received to supporting documentation.

4. Assess reasonableness of subscription income by reference to membership numbers and annual subscriptions.

5. Review all minutes of meetings in respect of financial matters and document matters of audit significance in relation to donations and pledges, whether in cash or kind, and ensure they are appropriately recognised in the financial report.



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Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Purchases and cash payments Performed by WP reference


• Initiating purchases

• Confirming receipts of goods/services

• Paying creditors.


2. Select a sample of payments made from the cash payments book and test as follows:

i. agree to supporting documentation, i.e. invoice, supplier statement etc.

ii. trace evidence of delivery/receipts of goods

iii. ensure the payment is authorised by the committee and is in accordance with the Company’s constitution, i.e. it is for bona fide purposes only

iv. trace amounts through to bank statements

v. consider appropriateness of account classification

vi. trace cash payments book to financial records.

3. Review the cash payments book for any large and unusual items and assess overall reasonableness of the payment.

Inspect supporting documentation.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:14

Cash/bank/deposits Performed by WP reference

1. Review the bank reconciliation at reporting date as follows:

i. check the additions

ii. ensure there are no large and unusual reconciling items

iii. obtain a listing of unpresented cheques and trace to cash book prior to reporting date and to bank statements subsequent to year end to ensure they are presented in a timely manner

iv. review subsequent bank statements for unusual payments or receipts and inspect supporting documentation

v. ensure reconciliations are signed by a senior officer as being authorised.

2. Where the Auditor will place reliance on an internal control procedures such as the bank reconcilation, perform tests of controls to ensure that key controls identified in the system documentation are operating effectively and as recorded (i.e. test an interim bank reconciliation).

3. Agree balances on the bank confirmation/other confirmation to the bank reconciliation or other supporting documentation.

Ensure any encumbrances over assets detailed in the bank audit certificate are reflected in the financial statements.

4. If reliance has not been placed on any internal controls over cash, then a selection of cash transactions during the period should be traced to supporting documentation.

5. Where petty cash balances are material, verify the balance at the end of the reporting period.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


1. Discuss with management, details of funds received from government and obtain and review a copy of the funding agreements.

2. Discuss with management and review appropriate supporting documentation to determine whether conditions associated with the grant have been met.

3. Review the accounting policy for grant accounting:

• Confirm this is in accordance with the appropriate accounting standard

• Confirm that the policy is being followed.


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4. For a selection of receipts:

i. agree to official receipt or third party advice

ii. trace amounts to bank statements and financial records.

5. For a sample of expenses:

i. ensure expenditure falls within conditions set by funding authority

ii. agree to supporting documentation

iii. trace amounts to bank statements and financial records.

6. Agree any grant receivable/payable to supporting documentation.

7. Determine whether there are any audit requirements in relation to any reporting obligations in the grant agreement (i.e. an auditor sign-off on an acquittal statement).


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Additional procedures needed as determined by the auditor to obtain sufficient, appropriate audit evidence.

Conclusion

Tests completed?




YES / NO

YES / NO

YES / NO


1. Obtain a list of receivables and prepayments at year end and agree balances to general ledger.

2. Select a sample of receivables at year end and vouch to subsequent receipts as follows:

Trace amounts received to:

i. cash receipts book

ii. bank statements

iii. remittance advice or external correspondence.

If monies are not received subsequent to year end, obtain direct confirmation or prove existence of amount owing to proof of service being performed.


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3. Select a sample of prepayments and perform the following:

i. check calculations

ii. agree to supporting documentation, i.e. invoices, contracts, agreements, insurance policies etc

iii. agree amount paid to bank statement/other supporting documentation.

4. Ensure receivables/prepayments have been recorded in the correct period.

5. Review credit notes raised after year end and make any adjustments where necessary if the credit relates to transactions prior to reporting date.

6. Review receivable balances for any long-outstanding items and discuss recoverability with the client, i.e. sight evidence to ensure receivables are bona fide and confirm outstanding memberships.

7. Review the adequacy of the provision for doubtful debts in light of the testing performed in step 6 above.

8. Review:




Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


1. Confirm whether the investments have been classified appropriately as either fair value through profit or loss or available for sale.

Confirm that the accounting treatment reflects the classification.

2. Determine whether investments are being carried at costs or fair value.

If cost, then confirm this is in accordance with Accounting Standards.

If fair value, then ensure the recorded value reflects fair value at the end of the reporting period.

3. Obtain a list of investments and agree balances to the general ledger.

4. Obtain confirmation of the investments held from third parties.

5. Ensure any profit/loss on disposal of investments has been correctly treated and any cumulative amounts recorded in equity have been recycled into the profit and loss account.

6. Confirm the income earned from the investments to supporting documentation.


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Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO



• Purchasing inventory

• Receiving inventory

• Counting inventory

• Valuing inventory

• Using/selling inventory.

Note any weakness and report to client, together with recommendations.

2. If inventory is material:

• Attend the stocktake

• Perform test counts and agree with client counts

• Inspect stock for slow-moving and obsolete items.

3. Obtain final stock listing and check additions and extensions and tie in to test counts performed during the stocktake.

Agree balances to the general ledger.

4. Review stock level for reasonableness and consistency (compared to prior year) and knowledge of the business.

5. Select a sample of stock lines from the final inventory listing and agree back to original invoices vouching prices and quantities (for reasonableness).

6. Enquire of management as to the existence of obsolete and/or slow moving stock items.

7. Select the first five delivery notes/goods received notes for the new financial year and the last five delivery notes from the previous financial year to ensure items have been recorded in the correct period.

8. Select a sample of stock items and compare unit cost, per year end stock listing, to selling price achieved post year end to ensure stock is valued at the lower of cost or net realisable value.



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Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Property, plant and equipment Performed by WP reference

1. Obtain supporting schedules from the fixed asset register (summarised by fixed asset classification including cost, additions, disposals, accumulated depreciation and depreciation expense) and agree balances to general ledger and trial balance.

2. Vouch additions and disposals for significant items to original invoice and bank statements and title deeds, if applicable.

Ensure additions have been appropriately authorized and relate to capital items.

3. Ensure profits and losses on disposal of assets have been calculated correctly.

4. Ensure depreciation rates used are appropriate and, on a test basis, check that the depreciation calculation is correct and consistent with previous financial years.

5. Perform a proof in total analytical review over depreciation.

6. Physically inspect a sample of fixed assets as follows:

i. trace back to accounting records

ii. select assets from records and inspect.

7. Review adequacy of insurance coverage and confirm maintenance of insurance register.

8. Discuss the existence of impairment indicators with management and review any recoverable amount calculations.

9. Review appropriateness of asset valuations (e.g. land and buildings) and ensure they comply with the applicable accounting standards.

10. Review:




Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Payables Performed by WP reference

1. Obtain a list of trade creditors and agree balance to general ledger and trial balance.

2. Select a sample of outstanding trade creditors at year end and vouch to supporting documentation, i.e. supplier statements, invoices etc., ensuring that any reconciling items are appropriate.

3. Investigate large, irregular, old, disputed and debit balances.

4. Vouch significant other creditor balances to supporting documentation.

5. Check and review the calculations of significant year end accruals.

6. Perform an unrecorded liabilities testing as follows:

i. review payments subsequent to year end

ii. review unpaid invoices on hand.

7. Review:




Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


1. Document the system for processing payroll-related payments and salaries.

Note any weaknesses and report them to the client, together with recommendations. Consider audit implications.

2. Perform substantive analytical procedures on:

• Superannuation

• Payroll tax

• Workcover

• Other on-costs

by calculating the expected value with reference to the wages and salaries expenses.

3. Ensure that appropriate provisions exist for employee entitlements such as annual leave and long service leave and that on-costs have been included.

Agree the total expense to the income statement.


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4. Obtain the calculations for leave entitlements, i.e. annual leave and long service leave.

For a selection of employees:

• Test check the calculation

• Agree leave taken to supporting documentation

• Review the assumptions used for reasonableness.

5. Calculate average salary per employee and compare to our expectations.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Profit and loss review Performed by WP reference

1. Perform analytical review procedures, as appropriate, based on our expectations for any balances not yet tested.

Corroborate management’s explanations where applicable.

2. Vouch to supporting documentation a sample of expense and revenue items as considered necessary.

3. Review items included in the repairs and maintenance expenses, ensuring that no items of a capital nature have been expensed.

4. Ensure that there are no amounts in the clearing/suspense accounts at reporting date. If there are, ask the client to reconcile the account and transfer the items to the correct accounts.

5. Cross-reference profit and loss items where applicable to other audit work areas, e.g. payroll and depreciation.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Commitments and contingencies Performed by WP reference

1. Minutes of meetings

Review all minutes of meetings in respect of financial matters and document matters of audit significance in relation to commitments and contingencies.

2. Capital and lease commitments

i. Discuss with client the existence of any capital commitments or lease commitments existing at reporting date.

ii. Agree commitments to appropriate documentation.

iii. Agree disclosure of commitments to financial report, if applicable.

iv. Ensure finance leases have been appropriately capitalized.

3. Contingent liabilities

i. Send a standard letter to client’s solicitor(s) and review to identify any contingencies.

ii. If applicable, agree the disclosure to the financial report.

iii. From the review of minutes after reporting date, discussion with client and solicitor’s reply, ascertain whether any contingent liabilities existed at reporting date.

iv. Document findings and consider related evidence obtained from bank confirmations, analysis of legal fees and review of minutes.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Reserves Performed by WP reference

1. Document the nature and purpose of each reserve and confirm it is reasonable and appropriate.

2. Obtain and check for the year the schedules of movements in retained profits and each reserve account, and agree significant movements to supporting documentation.

3. Agree opening balances with prior year’s audited financial statements.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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1. Discuss with client and review minutes for the period from reporting date to auditor’s report date to determine whether any material events have occurred which would require an adjustment to the accounts or disclosure by way of a note to the accounts.

2. Review the cash payments, cash receipts book and general journals after year end for significant and unusual items which could require an adjustment to the accounts.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Going concern Performed by WP reference

1. Review latest management accounts or other financial information available relating to post year end that may indicate the existence of a going concern issue.

2. Review budgets available for the following year to identify any potential issues.

3. Review current (to date of signing audit report) banking arrangements to ensure there are no breaches of available facilities or existing covenants that may indicate the existence of a going concern issue and confirm whether there were breaches during the year.

4. Enquire of management as to any issues that may give rise to doubts that the entity will be able to meet all financial obligations when they become due.

5. Discuss with committee of management their rationale for using the going concern basis.


Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


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Audit conclusions and reporting Performed by WP reference

1. Prepare a summary of the findings of the audit and conclude on overall results in light of the materiality of the matters found.

2. Obtain written representation from those charged with governance.

3. Prepare an audit report in accordance with the findings.

4. Complete completion memo.

5. Confirm that the fraud workpaper has been completed.

6. Prepare and issue relevant communication to those charged with governance.

7. Review the Directors report to confirm it is in compliance with the Corporations Act and is not inconsistent with the financial statements.

Conclusion

In respect of the objectives of the audit procedures:

i. the audit procedures were applied in accordance with professional requirements

ii. subject to any audit differences documented in the working papers, the recorded amounts are materially correct

iii. the accounting principles are appropriate and have been consistently applied.



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Appendix 4C – Example management representation letter2

This letter may be used for audits and reviews.

This letter should be tailored to the specific circumstances of the Company and has been prepared using the following assumption:

• The representation required by ASA 570 and ASA 710 are not applicable.

Additional paragraphs should be included where the audit team cannot reasonably be expected to obtain sufficient audit evidence (for example, representation regarding provision balances/assumptions).

Where paragraphs refer to balances/transactions which are not applicable for the Company then they should be deleted.

[Date]

[Audit Partner name]


[Address]

Dear [Audit Partner name]

This representation letter is provided in connection with your audit of the financial report of [name of Company] for the year ended [year end], for the purpose of expressing an opinion as to whether the financial report is presented fairly, in all material respects, in accordance with the relevant Australian accounting and the Corporations Act 2001.

We confirm, to the best of our knowledge and belief, having made such enquiries as we considered necessary for the purpose of appropriately informing ourselves, the following representations made to you during your audit:

Financial report

• We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [date of engagement letter], for the preparation of the financial report in accordance with Australian Accounting Standards as per note [xx]; in particular the financial report presents a true and fair view in accordance therewith.

• We have disclosed to you the results of our assessment of the risk that the financial report may be materially misstated as a result of fraud.

• Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.

• We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.

• Any related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of Australian Accounting Standards.

• All events subsequent to the date of the financial report and for which Australian Accounting Standards require adjustment or disclosure have been adjusted or disclosed.

• The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial report as a whole. A list of the uncorrected misstatements is attached to the representation letter.

Information provided

• We have provided you with:

a) access to all information of which we are aware that is relevant to the preparation of the financial report such as records, documentation and other matters.

b) all requested information, explanations and assistance for the purposes of the audit.

c) unrestricted access to persons within the Company from whom you determined it necessary to obtain audit evidence.

2 The letter should be emailed to the client to enable it to be printed on client letterhead.


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• All transactions have been recorded in the accounting records and are reflected in the financial report.

• We have disclosed to you all known actual or possible litigation and claims whose effects should be considered when preparing the financial report; and accounted for and disclosed in accordance with the applicable financial reporting framework.

General

• We have no plans or intentions that may materially affect the carrying values or classification of assets and liabilities.

• The Company has satisfactory title to all assets, and there are no liens or encumbrances on such assets nor have any assets been pledged as collateral that have not been disclosed in the financial report.

• There have been no known instances of non-compliance or suspected non-compliance with laws and regulations or contractual agreements whose effects should be considered in preparing the financial report.

Fraud

• We acknowledge our responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud and confirm we have disclosed to you:

a) the results of our assessment of the risk that the financial report may be materially misstated as a result of fraud

b) all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves:

i. management

ii. employees who have significant roles in internal controls or

iii. others where the fraud could have a material effect in the financial report and

c) all information in relation to allegations of fraud, or suspected fraud, affecting the entity’s financial report communicated to us by employees, former employees, analysts, regulators or others.

Commitments

• There were no material commitments for goods or services at year end, other than those disclosed in the financial report.

Impairment of assets

• We have considered the requirements of AASB 136 Impairment of assets when assessing the carrying values of assets and in ensuring that no assets within the scope of AASB 136 are stated in excess of their recoverable amount.

Liabilities

• There are no financial guarantee contracts in place to third parties which could be called upon in the event of a default, other than those disclosed in the financial report.

Inventory

• We have no plans to abandon lines of product or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess of net realisable value.

• Provision has been made for material losses arising from the fulfilment of, or an inability to fulfil, any sale commitments or as a result of purchase commitments for inventory quantities in excess of normal requirements or at prices in excess of prevailing market prices.

Property, plant and equipment

• Rates of depreciation, applied to reduce book values of individual assets to their estimated residual values, reflect the probable useful lives of those assets to the Company.

• Allowances for depreciation have been adjusted for all significant items of property, plant and equipment that have been abandoned or are otherwise unusable.

• The Company has no ‘make good’ obligations in respect of its property, plant and equipment for which it would be required to make a restorative provision under AASB 137 Provisions, contingent liabilities and contingent assets which have not been included in the financial report.


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Taxation

• Adequate amounts have been accrued for all local and foreign taxes on income including amounts applicable to prior years not finally settled and paid.

• Deferred tax assets in relation to tax losses [have/have not] been brought to account as it [is/is not] probable that they will be realised.

Electronic presentation of financial report

• With respect to presentation of the financial report on our website, we acknowledge that:

a) we are responsible for the electronic presentation of the financial report

b) we will ensure that the electronic version of the audited financial report and the auditor’s report on the website will be identical to the final signed hard copy version

c) we will clearly differentiate between audited and unaudited information in the construction of the entity’s website as we understand the risk of potential misrepresentation

d) we have assessed the controls over the security and integrity of the data on the website and confirmed that adequate procedures are in place to ensure the integrity of the information presented and

e) we will not present the auditor’s report on the full financial report with extracts only of the full financial report.

_____________________________________

[Director]3

3 The sign-offs included in this letter are examples only. The audit manager/partner should consider the most appropriate personnel to sign the representation letter.


4:27

Appendix 4D – Example unmodified auditor’s reports

Reporting entity i.e. general purpose financial statements

Reference – ASA 700 – Illustration 1A


To the members of [name of Company]

Report on the Financial Report

We have audited the accompanying financial report of [name of Company], which comprises the statement of financial position as at [year end], and the statement of comprehensive income for the year then ended, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration.

Directors’ responsibility for the financial report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.


Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.


Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of [name of Company], would be in the same terms if given to the directors as at the time of this auditor’s report.


It is our understanding that the [name of Company] intends to electronically present the audited financial report and auditor’s report on its internet website. Responsibility for the electronic presentation of the financial report on the [name of Company] website is that of [those charged with governance] of the [name of Company]. The security and controls over information on the website should be addressed by the [name of Company] to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial report(s) on the [name of Company] website is beyond the scope of the audit of the financial report.



4:28

Opinion

In our opinion, the financial report of [name of Company] is in accordance with the Corporations Act 2001, including:

a) giving a true and fair view of the company’s financial position as at [year end date] and of its performance for the year ended on that date; and

b) complying with Australian Accounting Standards and the Corporations Regulations 2001.

_____________________________________ _____________________________________


___________________

[Date]

______________________________________



4:29

Non-reporting entity i.e. special purpose financial statements

Reference ASA 800 – Illustration 4

Independent audit report to the members of [name of Company]

We have audited the accompanying financial report, being a special purpose financial report, of [name of Company], which comprises the statement of financial position as at [year end], the statement of comprehensive income for the year then ended, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration.


The directors of the company are responsible for the preparation of the financial report that gives a true and fair view and have determined that the basis of preparation described in Note X to the financial report is appropriate to meet the requirements of the Corporations Act 2001 and is appropriate to meet the needs of the members. The directors’ responsibility also includes such internal control as the directors determine is necessary to enable the preparation of a financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.


Our responsibility is to express an opinion on the financial report based on our audit. We have conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.


Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of [name of Company], would be in the same terms if given to the directors as at the time of the auditor’s report.


It is our understanding that the [name of Company] intends to electronically present the audited financial report and auditor’s report on its internet website. Responsibility for the electronic presentation of the financial report on the [name of Company] website is that of those charged with governance of the [name of Company]. The security and controls over information on the website should be addressed by the [name of Company] to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial report on the [name of Company] website is beyond the scope of the audit of the financial report.



4:30

Opinion

In our opinion the financial report of [name of Company] is in accordance with the Corporations Act 2001, including:


b) complying with Australian Accounting Standards to the extent described in Note X, and the Corporations Regulations 2001.

Basis of accounting

Without modifying our opinion, we draw attention to Note X to the financial report, which describes the basis of accounting. The financial report has been prepared for the purpose of fulfilling the directors’ financial reporting responsibilities under the Corporations Act 2001. As a result, the financial report may not be suitable for another purpose.

_____________________________________ _____________________________________


___________________

[Date]

______________________________________



4:31

Appendix 4E – Sample audit qualification or emphasis of matter The most common amendments to Audit Reports relate to controls over cash donations.



Audit Report qualification

Basis for qualified opinion

Receipts from cash donations and other cash fundraising activities are a significant source of revenue for the [name of Company]. The [name of Company] has determined that it is impracticable to establish control over the collection of donations and other fundraising activity revenue prior to entry in its financial records. Accordingly, as the evidence available to us about revenue from these sources was limited, our audit procedures for donations and other fundraising activity revenue had to be restricted to the amounts recorded in the financial records. We therefore are unable to express an opinion on whether cash donations and other cash fundraising activity revenue obtained by the [name of Company] are complete.

Qualified opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial report [name of Company] provides a true and fair view in all material respects in accordance with the accounting policies described in Note 1 to the financial statements, the financial position of the [name of Company] at [year end date] and its financial performance and its cash flows for the year then ended.

Emphasis of matter

We draw attention to Note [X] to the financial report which describes the revenue recognition policy of [name of Company] including the limitations that exist in relation to the recording of cash receipts from [name of source of fundraising revenue]. Revenue from this source represents a significant proportion of [name of Company’s] revenue. Our opinion is unmodified in respect of this matter.


4:32

Review appendices:

Appendix 4F – Review engagement letter

[Date]

[Contact name (the chair or treasurer)]

[Position]

[Company name]

[Address]

Dear [contact name]

REVIEW OF [NAME OF COMPANY]

Scope

You have requested that we review the financial report of [name of Company] for the year ended [year end], which comprises [insert statements and any notes thereto subject to audit]. We are pleased to confirm our acceptance and our understanding of the terms and objectives of our engagement by means of this letter.

Our review will be conducted in accordance with Standard on Review Engagements ASRE 2400 Reviews of Financial Reports Performed by an Assurance Practitioner Who is Not the Auditor of the Entity [or ASRE 2410 Reviews of Financial Reports Performed by an Assurance Practitioner Who is the Auditor of the Entity] and ASRE 2415 Review of a Financial Report – Company Limited by Guarantee issued by the Auditing and Assurance Standards Board, with the objective of providing us with a basis for reporting whether anything has come to our attention that causes us to believe that the financial report of [name of Company] is not prepared, in all material respects, in accordance with the applicable financial reporting framework and the Corporations Act 2001. Such a review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures and does not, ordinarily, require corroboration of the information obtained. The scope of a review of a financial report is substantially less than the scope of an audit conducted in accordance with auditing standards the objective of which is the expression of an opinion regarding the financial report and accordingly, we shall express no such opinion. ASRE 2400 [ASRE 2410] requires us to also comply with ethical requirements.

We expect to provide an unmodified review report on the financial report as per ASRE 2400 [ASRE 2410], however, our report may be modified based on work performed.

Responsibility for the financial report, including adequate disclosure, is that of those charged with governance. This includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. As part of our review, we shall request written representations from management concerning assertions made in connection with the review. We shall also request that where any document containing the financial report indicates that the financial report has been reviewed, our report will also be included in the document.

A review of the financial report does not provide assurance that we shall become aware of all significant matters that might be identified in an audit. Further, our engagement cannot be relied upon to identify whether fraud or errors, or illegal acts exist. However, we shall inform you of any material matters that come to our attention.

Fees

Our fee for the review of the financial report of [name of Company] for the year ending [year end date] is $xxx, exclusive of GST and out-of-pocket expenses, as agreed. This fee assumes that all accounting transactions will have been processed and we will be presented with a final trial balance/set of financial statements at commencement of the review.





4:33





We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our review.

This letter will be effective for future years unless it is terminated, amended or superseded.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our review of the financial report.

Yours sincerely

_____________________________________

[Auditor name]

Partner


ABN XX XXX XXX XX

We hereby acknowledge that this letter is in accordance with our understanding of the arrangements for the review of [name of Company] financial report.


_____________________________________

[Signature]

_____________________________________

[Name]

_____________________________________

[Title]

______________

[Date]


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Appendix 4G – Example review programsThis sample review engagement program is aimed at providing guidance to assurance practitioners on the steps involved in the review of a Company Limited by Guarantee, where permitted by the Corporations Act 2001. The review should be performed by persons who have adequate training, experience and competence in assurance provision.

It is intended that this sample review program be adapted as required for the circumstances of each engagement, taking into account factors such as the following:

• internal controls as a whole and whether these are adequate to ensure that all transactions are properly recorded

• complexity of the accounting system and associated records

• volume of transactions and scale of operations

• risk associated with the entity

• assurance practitioner’s knowledge of the business.

The enquiry, analytical and other procedures carried out in a review of a financial report are determined by the auditor exercising professional judgement in light of the auditor’s assessment of the risk of material misstatement.

The procedures listed below are for illustrative purposes only. It is not intended that all the procedures suggested apply to every review engagement.


Confirm that the engagement team complies with relevant independence and ethical requirements.

Prepare and send an engagement letter to the entity.

Discuss the terms and scope of the engagement with the engagement team.

Obtain or update knowledge and understanding of the business, the key internal and external changes (including laws and regulations), and their effect on the scope of the review, materiality and risk assessment. This can be performed through the following:

• Ascertaining whether there have been any significant changes to the nature and scope of operations.

• Considering the results and effects of previous audits and review engagements.

• Enquiring of persons responsible for financial reporting in respect of matters that impact on the reliability of the underlying accounting records. For example, considering fraud risk, material weaknesses in internal controls and any significant changes to internal control policies and procedures.

Considering whether additional procedures will be required on any significant accounts where internal controls relating to significant processes have been historically unreliable in detecting and preventing errors in the financial report.

Assess the relevance and impact of the results of the above procedures on the current period.

Determine materiality, exercising professional judgement, considering both qualitative and quantitative factors.


4:35


Enquire of persons responsible for financial reporting about the following:

• Accounting policies adopted and consider whether:

+ they comply with the applicable financial reporting framework;

+ they have been applied appropriately; and

+ they have been applied consistently and, if not, consider whether disclosure has been made of any changes in the accounting policies.

• Policies and procedures used to assess asset impairment and any consequential estimation of recoverable amount.

• The policies and procedures to determine the fair value of financial assets and financial liabilities.

• New, unusual or complex situations that may have affected the financial report such as a business combination or disposal of a segment of the business. Consider adequacy of additional note disclosures in the financial report.

• Plans to dispose of major assets or business segments.

• Material off-balance sheet transactions, special purpose entities and other equity investments and related accounting treatment and disclosure.

• Knowledge of any allegations of fraud, or suspected fraud.

• Knowledge of any actual or possible significant non-compliance with laws and regulations.

• Compliance with debt covenants.

• Material or unusual related party transactions.

• New or significant changes in commitments, contractual obligations.

Enquire whether all financial information is recorded:

• Completely;

• Promptly; and

• After the necessary authorisation.

Obtain and read the minutes of meetings of Directors and other appropriate committees to identify matters that may affect the financial report, and enquire about matters dealt with at meetings for which minutes are not yet available that may affect the financial report.

Enquire if actions taken at meetings of Directors that affect the financial report have been appropriately reflected therein.

Ensure the financial report is agreed to the trial balance and is fairly presented including additional disclosure notes. If applicable, enquire as to whether all intercompany balances have been eliminated.

Review other information included in the financial report and document findings. Discuss any material misstatements of fact with the entity’s management.


4:36


Conclusion

Program completed?




Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Cash Performed by WP reference

Obtain the bank reconciliations. Enquire about any old or unusual reconciling items with client personnel to assess reasonableness.

Enquire about transfers between cash accounts for the period before and after the review date.

Enquire whether there are any restrictions on cash accounts.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Enquire about the accounting policies for recognising sales revenue and trade receivables and determine whether they have been consistently and appropriately applied.

Obtain a schedule of receivables and determine whether the total agrees with the trial balance.


Obtain an aged analysis of the trade receivables. Enquire about the reason for unusually large accounts, credit balances on accounts or any other unusual balances and enquire about the collectibility of receivables.

Consider, with management, the classification of receivables, including non-current balances, net credit balances and amounts due from shareholders, those charged with governance and other related parties in the financial report.

Enquire about the method for identifying ‘slow payment’ accounts and setting allowances for doubtful accounts and consider it for reasonableness.

Enquire whether receivables have been pledged, factored or discounted and determine whether they have been properly accounted for.

Enquire about procedures applied to ensure that a proper cut-off of sales transactions and sales returns has been achieved.


4:37


Enquire whether accounts represent goods shipped on consignment and, if so, whether adjustments have been made to reverse these transactions and include the goods in inventory.

Enquire whether any large credits relating to recorded income have been issued after the balance sheet reporting date and whether provision has been made for such amounts. Consider the reasonableness of any provisions.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Obtain the inventory list and determine whether:

• the total agrees with the balance in the trial balance; and

• the list is based on a physical count of inventory.

Enquire about the method for counting inventory.

Where a physical count was not carried out at the end of the reporting period, enquire whether:

• a perpetual inventory system is used and whether periodic comparisons are made with actual quantities on hand; and

• an integrated cost system is used and whether it has produced reliable information in the past.

Consider adjustments made resulting from the last physical inventory count.

Enquire about procedures applied to control cut-off and any inventory movements.

Enquire about the basis used in valuing each inventory classification and, in particular, regarding the elimination of inter-branch profits. Enquire whether inventory is valued at the lower of cost and net realisable value (or lower of cost and replacement cost for not-for-profit organisations).

Consider the consistency with which inventory valuation methods have been applied, including factors such as material, labour and overhead.

Compare amounts of major inventory categories with those of prior periods and with those anticipated for the current period. Enquire about major fluctuations and differences.

Compare inventory turnover with that in previous periods.

Enquire about the method used for identifying slow moving and obsolete inventory and whether such inventory has been accounted for at net realisable value.

Enquire whether any inventory has been consigned to the entity and, if so, whether adjustments have been made to exclude such goods from inventory.


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Enquire whether any inventory is pledged, stored at other locations or on consignment to others and consider whether such transactions have been accounted for appropriately.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Obtain a schedule of the investments at the reporting date and determine whether it agrees with the trial balance.

Enquire whether the accounting policy applied to investments is consistent with prior periods.

Enquire from management about the carrying values of investments. Consider whether there are any realisation problems.

Enquire whether there are any new investments, including business combinations. Consider classification, measurement and disclosure in respect of material or significant acquisitions.

Consider whether gains and losses and investment income have been properly accounted for.

Enquire about the classification of long-term and short-term investments.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:39

Property, plant and equipment and depreciation Performed by WP reference

Obtain a schedule of the property, plant and equipment indicating the cost and accumulated depreciation and determine whether it agrees with the trial balance.

Enquire about the accounting policy applied regarding residual values, provisions to allocate the cost of property, plant and equipment over their estimated useful lives using the expected pattern of consumption of the future economic benefits and distinguishing between capital and maintenance items. Consider whether there are any indicators of impairment and whether the property, plant and equipment have suffered a material, permanent impairment in value.

Discuss with management the additions and disposals to property, plant and equipment accounts and accounting for gains and losses on disposals or de-recognition. Enquire whether all such transactions have been properly accounted for.

Enquire about the consistency with which the depreciation method and rates have been applied and compare depreciation provisions with prior years.

Enquire whether there are any restrictions on the property, plant and equipment.

Enquire whether lease agreements have been properly reflected in the financial report in conformity with current accounting pronouncements.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Prepaid expenses and other assets Performed by WP reference

Obtain schedules identifying the nature of these accounts and determine whether they agree with the trial balance. Discuss recoverability thereof with management.

Compare balances of related expense accounts with those of prior periods and obtain explanations for significant variations with management.

Discuss the classification between current and non-current accounts with management.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:40


Obtain from management a schedule of loans payable and determine whether the total agrees with the trial balance.

Enquire whether there are any loans where there has been a change to the terms and conditions or management has not complied with the provisions of the loan agreement, including any debt covenants. Assess whether loans have been appropriately classified as current or non-current in the financial report.

Where material, consider the reasonableness of interest expense in relation to loan balances.

Enquire whether loans payable are secured. Review loan and working capital facilities. Enquire if options to extend terms have been exercised or if any debt requires refinancing.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Trade payables Performed by WP reference

Enquire about the accounting policies for initially recording trade payables and whether the entity is entitled to any allowances given on such transactions.


Obtain a schedule of trade payables and determine whether the total agrees with the trial balance.

Enquire whether balances are reconciled with the creditors’ statements and compare with prior period balances. Compare turnover with prior periods.

Consider whether there could be material unrecorded liabilities.

Enquire whether payables to shareholders, those charged with governance and other related parties are separately disclosed.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:41

Other liabilities and contingent liabilities Performed by WP reference

Obtain a schedule of other liabilities and determine whether the total agrees with the trial balance.

Compare major balances of related expense accounts with similar accounts for prior periods.

Enquire about approvals for such other liabilities, terms of payment, compliance with terms, collateral and classification.

Enquire about other liabilities to assess whether the methodology and assumptions adopted are consistent with prior periods. Enquire whether there are any unusual trends and developments affecting accounting estimates.

Enquire as to the nature of amounts included in contingent liabilities and commitments.

Enquire whether any actual or contingent liabilities exist which have not been recognised in the accounts. If so, enquire with management and/or those charged with governance whether provisions need to be made in the accounts or whether disclosure should be made in the notes to the financial report.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Operations Performed by WP reference

Compare results with those of prior periods and those expected for the current period.

Discuss significant movements/variations with management.

Discuss whether the recognition of major revenue and expense items have taken place in the appropriate periods.

Enquire about the policies and procedures related to accrued revenue and/or expenses.

Consider and discuss with management the relationship between related items in the revenue accounts and assess the reasonableness thereof in the context of similar relationships for prior periods and other available information.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:42

Income and other taxes Performed by WP reference

Enquire from management as to the tax status of the entity. If there were any events, including disputes with taxation authorities, which could have a significant effect on the taxes payable by the entity. Examine correspondence in relation to any significant matters arising and assess whether events have been reflected appropriately in the financial report.

If the entity is not tax exempt, consider the tax expense in relation to the entity’s income for the period.

Enquire from management as to the adequacy of the recognised deferred and current tax assets and/or liabilities including provisions in respect of prior periods, if applicable.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


Obtain from management the latest financial report and compare it with the financial report being reviewed or with those for comparable periods from the preceding year.

Enquire about events after the end of the reporting period that would have a material effect on the financial report under review and, in particular, enquire whether:

• any substantial commitments or uncertainties have arisen subsequent to the end of the reporting period;

• any significant changes in the share capital, long-term debt or working capital have occurred up to the date of enquiry; and

• any unusual adjustments have been made during the period between the balance sheet reporting date and the date of enquiry.

Consider the need for adjustments or disclosure in the financial report.

Obtain and read the minutes of meetings of shareholders, those charged with governance and appropriate committees subsequent to the balance sheet date and consider any impact of the financial report and disclosures.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO


4:43

Litigation Performed by WP reference

Enquire from persons responsible for financial reporting, and where appropriate in-house litigation specialists, whether the entity is the subject of any legal actions – threatened, pending or in process. Consider the effect thereof on the financial report and any provision for loss.

Conclusion





Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO

YES / NO

Going concern assessment Performed by WP reference

Consider the going concern assumption. When events or conditions come to attention which cast significant doubt on the entity’s ability to continue as a going concern, perform additional procedures to assess the impact on the financial report and review report. Additional procedures may include:

• Discussion with those charged with governance to understand the events and circumstances that have contributed to the current situation to determine whether the risk arising can be mitigated.

• Plans for future actions, such as plans or intentions to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital.

• Feasibility of the plans and whether those charged with governance believe that the outcome of these plans will improve the situation.

Consider the adequacy of disclosure about such matters in the financial report.

Conclusion




Reviewed by: ___________________________

Date: __________________________________

YES / NO

YES / NO

YES / NO


4:44

Evaluation of misstatements Performed by WP reference

Ensure significant unadjusted differences have been summarised and their effect evaluated.

Ensure material adjustments identified are notified to management/those charged with governance (as appropriate).

Conclusion

Reviewed by: ___________________________

Written representations Performed by WP reference

Obtain written representation from the directors/management/those charged with governance (as appropriate) to confirm matters arising during the course of the review engagement.

Documentation Performed by WP reference

Ensure that review documentation is sufficient and appropriate to provide a basis for the conclusion and to provide evidence of compliance with ASRE 2410 or ASRE 2400.


4:45

Appendix 4H – Example review reportsIndependent review report – reporting Company



We have reviewed the accompanying annual financial report of [name of Company], which comprises the statement of financial position as at [year end date], the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration.


The directors of the company are responsible for the preparation of the annual financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of a financial report that is free from material misstatement, whether due to fraud or error.


Our [my] responsibility is to express a conclusion on the financial report based on our [my] review. We [I] conducted our [my] review in accordance with Auditing Standard on Review Engagements ASRE 2415 Review of a Financial Report – Company Limited by Guarantee, in order to state whether, on the basis of the procedures described, we [I] have become aware of any matter that makes us [me] believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the company’s financial position as at [year end date] and its performance for the year ended on that date; and complying with the Australian Accounting Standards and Corporations Regulations 2001.

ASRE 2415 requires that we [I] comply with the ethical requirements relevant to the review of the financial report.

A review of a financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us [me] to obtain assurance that we [I] would become aware of all significant matters that might be identified in an audit. Accordingly, we [I] do not express an audit opinion.

Independence

In conducting our [my] review, we [I] have complied with the independence requirements of the Corporations Act 2001. We [I] confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of [name of company], would be in the same terms if given to the directors as at the time of this auditor’s report.

Conclusion

Based on our [my] review, which is not an audit, we [I] have not become aware of any matter that makes us [me] believe that the financial report of [name of company] is not in accordance with the Corporations Act 2001 including:


b) complying with Australian Accounting Standards and Corporations Regulations 2001.

______________________________________ ______________________________________


______________________________________

[Date]

______________________________________

[Address]


4:46

Independent assurance practitioner’s report – non-reporting company



We have reviewed the accompanying annual financial report of [name of Company], which comprises the statement of financial position as at [year end date], the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration.


The directors of the company are responsible for the preparation of the annual financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 to the extent noted in Note [X] and for such internal control as the directors determine is necessary to enable the preparation of a financial report that is free from material misstatement, whether due to fraud or error.


Our [my] responsibility is to express a conclusion on the financial report based on our [my] review. We [I] conducted our [my] review in accordance with Auditing Standard on Review Engagements ASRE 2415 Review of a Financial Report – Company Limited by Guarantee, in order to state whether, on the basis of the procedures described, we [I] have become aware of any matter that makes us [me] believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the company’s financial position as at [year end date] and its performance for the year ended on that date; and complying with the Australian Accounting Standards and Corporations Regulations 2001.

ASRE 2415 requires that we [I] comply with the ethical requirements relevant to the review of the financial report.

A review of a financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us [me] to obtain assurance that we [I] would become aware of all significant matters that might be identified in an audit. Accordingly, we [I] do not express an audit opinion.

Independence

In conducting our [my] review, we [I] have complied with the independence requirements of the Corporations Act 2001. We [I] confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of [name of company], would be in the same terms if given to the directors as at the time of this auditor’s report.

Conclusion

Based on our [my] review, which is not an audit, we [I] have not become aware of any matter that makes us [me] believe that the financial report of [name of company] is not in accordance with the Corporations Act 2001 including:


b) complying with Australian Accounting Standards to the extent noted in note [x] and Corporations Regulations 2001.

Basis of accounting

Without modifying our conclusion, we draw attention to Note [x] to the financial report, which describes the basis of accounting. The financial report has been prepared for the purpose of fulfilling the directors’ reporting responsibilities. As a result, the financial report may not be suitable for another purpose.


4:47

______________________________________ ______________________________________


______________________________________

[Date]

______________________________________

[Address]

Appendix 4I – Sample qualification or emphasis of matter for a review reportThe most common amendments to Review Reports relate to controls over cash donations.



Review Report qualification

Basis for qualified conclusion

Receipts from cash donations and other cash fundraising activities are a significant source of revenue for the [name of Company]. The [name of Company] has determined that it is impracticable to establish control over the collection of donations and other fundraising activity revenue prior to entry in its financial records. Accordingly, as the evidence available to us about revenue from these sources was limited, our review procedures for donations and other fundraising activity revenue had to be restricted to the amounts recorded in the financial records. We therefore are unable to express an opinion on whether cash donations and other cash fundraising activity revenue obtained by the [name of Company] are complete.

Qualified conclusion

Except for the possible effects of the matter described in the Basis for Qualified Conclusion paragraph, based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the financial report of [name of Company] does not present fairly, the financial position of the [name of Company] at [year end date] and its financial performance and its cash flows for the year then ended in all material respects in accordance with the accounting policies described in Note 1 to the financial statements.

Emphasis of matter

We draw attention to Note [X] to the financial report which describes the revenue recognition policy of [name of Company] including the limitations that exist in relation to the recording of cash receipts from [name of source of fundraising revenue]. Revenue from this source represents a significant proportion of [name of Company’s] revenue. Our opinion is unmodified in respect of this matter.

5. Overview of a compliance audit

5. Overview of a compliance audit 5:2

Standards on Assurance Engagements 5:2

What is a compliance audit? 5:2

Overview of ASAE 3100 5:2

Ethical requirements 5:3

Quality control 5:3

Professional scepticism 5:3


Overview of the audit approach under ASAE 3100 5:5

Planning 5:6

Performing 5:7



5:2

5. Overview of a compliance auditThis chapter provides guidance for Assurance Practitioners who are required to undertake a compliance engagement.

This chapter provides an overview of the methodology and details of the relevant standards and specific information relating to the entities covered by this guide are covered in the appropriate chapter:

• Compliance audit of an SMSF – Chapter 2;

• Audit of a real estate agent’s trust account – Chapter 6;

• Audit of client monies – Chapter 7;

• Audit of a solicitor’s trust account – Chapter 8.

Standards on Assurance EngagementsThe relevant standards are the Standards on Assurance Engagements (ASAEs) which are issued by the Auditing and Assurance Standards Board (AUASB) as discussed below:

• ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information is the over-arching standard which is for general application to assurance engagements other than audits or reviews of historical financial information covered by ASREs and ASAs.

• ASAE 3100 Compliance Engagements is the specific standard which is considered in conjunction with ASAE 3000 for the engagements covered by this guide.

Note: the term auditor has been used throughout this chapter and is interchangeable with the term ‘Assurance Practitioner’ used in the ASAEs.

What is a compliance audit?A compliance audit is different from an external audit since the auditor is not forming an opinion on the financial report but on the client’s compliance with specified criteria.

The objective of a compliance engagement is to enable the auditor to express a conclusion on whether an entity has complied in all material respects, with requirements as measured by the suitable criteria.

The responsibility for an entity’s compliance with requirements as measured by the suitable criteria rests with the responsible party. A compliance engagement performed by an auditor does not relieve the responsible party of its obligations to ensure compliance with requirements as measured by the suitable criteria.

Overview of ASAE 3100ASAE 3100 provides mandatory requirements and guidance for auditors engaged to provide assurance on an entity’s compliance with externally imposed requirements as measured by suitable criteria.

ASAE 3100 requires the auditor to:

• Comply with applicable ASAEs;

• Comply with the fundamental ethical principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour;

• Implement quality control procedures;

• Meet acceptance and continuance procedures;

• Agree the terms of the engagement in writing;

• Plan the compliance engagement so that it will be performed effectively;

• Consider materiality and compliance engagement risk when planning and performing the compliance engagement;


5:3

• Obtain sufficient appropriate evidence on which to base the conclusion and evaluate the impact on the conclusion of any compliance breaches noted;

• Consider the effect of events up to the date of the compliance report;

• Prepare, on a timely basis, documentation that is sufficient and appropriate to provide a basis for the auditor’s conclusion and evidence that the engagement was performed in accordance with ASAE 3000 and ASAE 3100;

• Express a conclusion about the subject matter information.

The auditor is required to document the key elements of the compliance framework, such as procedures for identifying, assessing and reporting compliance incidents and breaches.

Ethical requirementsThe auditor is required to comply with the fundamental ethical principles of:

• Integrity;

• Objectivity;

• Professional competence and due care;

• Confidentiality;

• Professional behaviour.

Additional guidance on these requirements can be found in Chapter 1 – Overview of Audits and Reviews.

Quality controlThe auditor is required to implement procedures to address the following elements of a quality control system that applies to the individual engagements:

• Leadership responsibilities for quality on the assurance engagement;

• Ethical requirements;

• Acceptance and continuance of client relationships and specific assurance engagements;

• Assignment of assurance engagement teams;

• Assurance engagement performance; and

• Monitoring.

Further information on the quality control requirements can be found in Chapter 1 – Overview of Audits and Reviews.

Professional scepticismA compliance audit should be planned and performed with an attitude of professional scepticism which is discussed in detail in Chapter 1.

Documentation

The auditor is required to prepare and maintain documentation on a timely basis that provides:

• A basis for their conclusion; and

• Evidence that the engagement was performed in accordance with ASAE 3000 and ASAE 3100.

Acceptance and continuanceTripartite relationship

When considering whether an engagement should be accepted or continued, the auditor needs to determine who is responsible for the subject matter. This responsibility should rest with a party other than the intended users or the auditor, otherwise the engagement should not be accepted.


5:4

Whilst the responsible party may be a user of the information, they should not be the only users, i.e. there must be at least three parties involved in an assurance engagement. This should be acknowledged in the engagement letter.

For example – in a solicitor trust audit – the solicitor is the responsible party and although they are a user, the Law Society is also a user.

Non-compliance with ethical principles

The auditor should only accept or continue with any engagement where nothing has come to their attention to indicate the fundamental ethical principles will not be satisfied.

This means considering whether:

• Relevant ethical requirements, such as independence and professional competence will be satisfied and

• The assurance engagement exhibits the following characteristics:

– the subject matter is appropriate;

– the criteria to be used are suitable and are available to the intended users;

– the auditor has access to sufficient appropriate evidence to support the assurance practitioner’s conclusion;

– the auditor’s conclusion, in the form appropriate to either a reasonable assurance engagement or a limited assurance engagement, is to be contained in a written report; and

– the auditor is satisfied that there is a rational purpose for the assurance engagement. If there is a significant limitation on the scope of the auditor’s work, it may be unlikely that the assurance engagement has a rational purpose. Also, an auditor may believe the engaging party intends to associate their name with the subject matter in an inappropriate manner.

Also, if the party engaging the auditor (the ‘engaging party’) is not the responsible party, the auditor ordinarily considers the effect of this on access to records, documentation and other information they may need to complete the assurance engagement.

Competence

The auditor considers where they or the team posses the necessary professional competencies to perform the engagement.

Engagement letter

The terms of the engagement are agreed in a letter prepared by the auditor and signed off by both parties, this letter should refer to applicable legislation, as necessary.

The letter includes:

• the objectives of the compliance engagement;

• the scope of the compliance engagement; and

• the suitable criteria against which compliance is measured.


5:5

Overview of the audit approach under ASAE 3100

In a compliance engagement sufficient appropriate evidence is obtained as part of an iterative, systematic engagement process involving:

a) obtaining an understanding of the entity’s business and its compliance environment which includes the key elements of the entity’s compliance framework;

b) obtaining an understanding of the requirements, the suitable criteria and other engagement circumstances which, depending on the subject matter, may include obtaining an understanding of internal controls and testing the effectiveness of these controls;

c) obtaining an understanding of the internal compliance function where appropriate and any relevant testing of compliance controls performed as part of that function during the period;

d) Evaluating the results of this testing and the level of reliance that can be placed on this work and the impact on further control and substantive procedures;

e) based on the understanding acquired under (a), (b) and (c), assessing the risks that the entity may be non compliant with requirements as measured by the suitable criteria; responding to assessed risks, including developing overall responses, and determining the nature, timing and extent of further procedures; and

f) performing further evidence-gathering procedures clearly linked to the identified compliance engagement risks, using a combination of inspection, observation, confirmation, recalculation, re-performance and enquiry. Such further evidence-gathering procedures may involve substantive procedures, including obtaining corroborating information from sources independent of the entity, and depending on the nature of the activity or subject matter, tests of the operating effectiveness of controls.


5:6

Planning A compliance audit needs to be planned so that it will be performed effectively.

The planning phase of a compliance audit involves:

• developing an overall strategy for the:

– scope;

– emphasis;

– timing; and

– conduct of the engagement.

• preparing an engagement plan consisting of a detailed approach for the nature, timing and extent of evidence-gathering procedures to be performed and the reasons for selecting them.

The following items should be included within the audit plan:

• The terms of the engagement.

• The characteristics of the subject matter/requirements and the identified criteria and the appropriateness and suitability of these.

• The engagement process and possible sources of evidence.

• The understanding of the entity and its environment and the compliance framework, including the risks that the entity may not be compliant with the requirements as measured by the suitable criteria.

• Identification of intended users and their needs, and consideration of materiality and the components of assurance engagement risk.

• Personnel and expertise requirements, including the nature and extent of experts’ involvement.

The audit plan is updated throughout the engagement, as necessary.

Business understanding

The auditor needs to obtain and document their understanding of the subject matter and other considerations in relation to the engagement to allow them to:

• Identify and assess risks of the entity’s non-compliance with the requirements as measured by the suitable criteria; and

• Sufficiently design and perform appropriate evidence-gathering procedures.

Professional judgement (discussed further in Chapter 1) is used to determine the extent of the understanding needed to allow them to sufficiently assess the compliance engagement risk.

Compliance engagement risk is defined as ‘the risk that the assurance practitioner expresses an inappropriate conclusion when the entity is materially non-compliant with the requirements as measured by the suitable criteria.

Elements of a compliance framework

In order for the auditor to be able to plan appropriate audit procedures, they need to obtain an understanding of the compliance environment and document the key elements of the compliance framework, this would include:

• Procedures for identifying and updating compliance obligations.

• Staff training and awareness programs.

• Procedures for assessing the impact of compliance obligations on the entity’s key business activities.

• Controls embedded within key business processes designed to ensure compliance with obligations.

• Processes to identify and monitor the implementation of further mitigating actions required to ensure that compliance obligations are met.

• A monitoring plan to test key compliance controls on a periodic basis and report exceptions.

• Procedures for identifying, assessing, rectifying and reporting compliance incidents and breaches.

• Periodic sign off by management and/or external third party outsourced service providers as to compliance with obligations.

• A compliance governance structure that establishes responsibility for the oversight of compliance control activities with those charged with governance, typically a Board Audit, Risk Management or Compliance Committee.


5:7

Once this understanding has been obtained then the audit can assess the appropriateness of the subject matter and the suitability of the criteria to evaluate or measure the subject matter.

Materiality

The auditor considers materiality when planning and performing the compliance engagement and in assessing any compliance breaches.

Materiality is applied to a compliance audit in a different way from the audit of a financial report. A compliance audit is concerned with compliance with set requirements (such as standards or laws), rather than the misstatement of the financial report. In assessing this compliance, the auditor is required to test transactions to ensure that they have been dealt with and recorded in a way that is consistent with legislation.

For example, if a transaction has been recorded incorrectly then that is a breach of the legislation and therefore the dollar value of the transaction does not matter.

ASAE 3100 defines materiality in the context of a compliance audit as:

i. in relation to potential (for risk assessment purposes) or detected (for evaluation purposes) breaches – instance(s) of non compliance that are significant, individually or collectively, in the context of the entity’s compliance with the requirements as measured by the suitable criteria, and that affect the auditor’s conclusion; and/or

ii. in relation to the compliance framework and controls – instance(s) of deficiency that are significant in the context of the entity’s control environment and that may raise the compliance engagement risk sufficiently to affect the auditor’s conclusion.

PerformingDuring this phase of the audit, the auditor performs evidence-gathering procedures that are clearly linked to the identified risks.

The procedures generally use a combination of inspection, observation, confirmation, recalculation, re-performance, analytical procedures and enquiry.

Such further evidence-gathering procedures involve substantive procedures, including obtaining corroborating information from sources independent of the entity, and depending on the nature of the subject matter, tests of the operating effectiveness of controls.

Where there are material deficiencies in the entity’s compliance framework, the auditor assesses the impact on the risk of non-compliance and therefore amends their procedures, as appropriate.

Evidence obtained

The audit assesses whether the audit evidence obtained is both sufficient (in respect of the quantity of the evidence) and appropriate (the quality of the evidence).

Use of an expert

Where the auditor deems that the use of an expert is necessary then the auditor and expert should have the combined necessary knowledge and skill to allow them to determine that sufficient, appropriate evidence has been obtained regarding the subject matter and criteria.

Written representations

The auditor should consider whether it is necessary, or required by legislation, to obtain representation on certain matters from management.

Evaluate, report and wrap-upDeficiencies and compliance breaches

When deficiencies or compliance breaches have been found during the course of the audit, the auditor needs to determine whether they are material based on the criteria.

In evaluating any deficiencies and compliance breaches the auditor generally considers materiality as specified in the terms of the engagement, any relevant legislative, regulatory or other requirement which may apply and the effect on the decisions on the intended users of the compliance report and the auditor’s conclusion.

Communication to the responsible party

The auditor should communicate any deficiencies or compliance breaches as soon as possible to the responsible party for the material as soon as practical.

Subsequent events

Where subsequent events have the potential to affect the entity’s compliance and the appropriateness of the auditor’s conclusion then they should be considered.

Audit report

Whilst many of the engagements covered in this guide may have specified content and format for the audit report on the compliance engagement, the auditor should ensure that the report is in accordance with the requirements of ASAE 3000 and ASAE 3100.

The audit report contains the following elements:

a) a title that clearly indicates the report is an independent assurance report;

b) an addressee;

c) an identification and description of the requirements;

d) period of compliance being reported on;

e) identification of the suitable criteria;

f) where appropriate, a description of any significant, inherent limitation associated with the evaluation of compliance with the requirements as measured by the criteria;

g) when the criteria used to evaluate the requirements are available only to specific intended users, or are relevant only to a specific purpose, a statement restricting the use of the compliance report to those intended users or that purpose;

h) a statement to identify the responsible party and to describe the responsible party’s and the auditor’s responsibilities;

i) a statement that the engagement was performed in accordance with ASAEs and the level of assurance provided;

j) a summary of the work performed;

k) the auditor’s conclusion:

i. in a reasonable assurance engagement, the conclusion shall be expressed in the positive form;

ii. in a limited assurance engagement, the conclusion shall be expressed in the negative form; and

iii. where the assurance practitioner expresses a conclusion that is other than unqualified, the assurance report shall contain a clear description of all the reasons;

l) the compliance report date; and

m) the name of the firm or the auditor, and a specific location, which ordinarily is the city where the auditor maintains the office that has responsibility for the engagement.

Appendix 1 of ASAE 3100 has an example compliance report which may be used where the legislation or other requirements do not require a specific format or content for the report.

6. Compliance audit of a real estate agent’s trust account

6. Compliance audit of a real estate agent’s trust account 6:2

Audit of a real estate agent’s trust account: Overview 6:2

Purpose 6:2

Legislation 6:2

Audit approach 6:2

Audit objective 6:2


Planning 6:3

Performing 6:3

Reporting 6:4

Appendices 6:5

Appendix 6A – Legislative requirements for the audit of real estate agent trust accounts 6:6

Appendix 6B – Example letter and reply for trust money circularisation 6:12

Appendix 6C – Example of an agent’s written representation to the auditor 6:13

Appendix 6D – Example audit programs 6:14


6:2


Audit of a real estate agent’s trust account: OverviewThis chapter details the specific auditing requirements applicable to the compliance audit of a real estate agent’s trust account and should be read in conjunction with Chapter 5 – Overview of a compliance audit.

PurposeThe purpose of a compliance audit of a real estate agent’s trust account is to report on whether:

• accounting and other records relating to trust monies have been properly kept;

• there is no loss or deficiency of trust monies or failure to pay or account for trust monies; and

• there has been no failure to comply with a provision of the relevant Act or Regulations.

LegislationThe rules governing the operation and audit of real estate agents’ trust accounts are in the relevant Acts and Regulations in each state/territory, therefore it is necessary for the auditor to have a good understanding of the requirements of the relevant state/territory’s Act.

Appendix 6A shows the current Acts and Regulations for each state/territory and an overview of the audit requirements.

General requirements relating to audit

Real Estate Agents must ensure that trust accounts are audited within the prescribed time frame each year. The cost of the audit is to be borne by the agent, and is to be paid from the agent’s general account and not from the trust account.

The auditor is to be allowed access to accounting records of the trust account, and also to the records and files of the agent’s practice. This access is essential in ensuring that all transactions involving trust account money have been recorded correctly.

The timing of the audit is determined by the provisions of the Act in each state and territory. The lodging of the audit report also differs between states and territories but is generally required two, three or four months after the year end.

Some legislation requires more than one audit visit each trust year, through unscheduled visits.

The audit of the trust account is to be performed in accordance with Australian standards on Assurance Engagements, in particular ASAE 3000 and ASAE 3100 as discussed in Chapter 5 since the auditor is required to form an opinion on the agent’s compliance or non-compliance with the relevant Act and Regulations.

Although other ASAs do not apply to assurance engagements, they may, nevertheless, provide guidance to practitioners.

Audit approachThe audit should be performed in conjunction with the methodology described in Chapter 5, however specific information related to the compliance audit for a real estate agent is included below.

Audit objectiveThe objective of the audit of a real estate agent’s trust account is to determine compliance with the relevant Acts and Regulations on real estate agent trust accounts in each particular state/territory.

To achieve this objective, the auditor needs to be satisfied that trust money belonging to clients of an agent is properly accounted for, and is only paid or applied as directed by the clients.

To be satisfied of this, the auditor must obtain sufficient audit evidence through the performance of appropriate tests of control and substantive procedures.


6:3

Acceptance and continuanceIn addition to considering the general acceptance and continuance requirements discussed in Chapter 5, prior to accepting the compliance audit engagement the auditor should confirm that they are eligible to act based on the requirements of the relevant Act (or Regulations) (see Appendix 6A).

PlanningThe auditor should plan the audit of a real estate agent’s trust account to consider risks and knowledge of the business. The focus of the audit of a real estate agent’s trust account is to test compliance with the rules governing trust money; therefore, the auditor should understand the legislative requirements for handling trust money.

The nature, timing and extent of audit procedures will vary, depending on the following factors:

• the services provided by the real estate agent and money received on trust as a result of these services;

• the nature of the real estate agent’s business, i.e. whether the real estate agent is a sole practitioner or an agent of a large practice;

• the volume of transactions affecting the trust account;

• the average size of transactions affecting the trust account; and

• the existence of segregation of duties.

The above factors should be taken into account in the auditor’s assessment of risk.

Assurance engagement risk

In the audit of an agent’s trust account, it is important that the audit procedures are planned so they cover the entire period and such procedures are designed to test compliance with all the requirements of the Act and Regulations to minimise the risk of non-detection of breaches including fraud.

Internal control structure

The auditor should document and assess internal controls and procedures to establish whether reliance can be placed on them. The systems documentation and assessment should include computer procedures whenever applicable.

The agent has the ultimate responsibility for compliance with the trust account at all times during the year. Therefore a prudent agent will have procedures in place to ensure that those requirements are being fulfilled. If no such procedures exist, the auditor should question the ability of the agent to state that all requirements have been complied with throughout the year, and issue a recommendation to the agent suggesting that such procedures be implemented.

The strengths of internal controls over the trust account will vary, depending on the size and nature of an agent’s practice.

Where an agent is also a sole practitioner, there will be limited scope for adequate segregation of duties, whereas a larger practice may only rely on such segregation in order to maintain effective controls over the trust account.

Ideally, the agent should have the following internal controls in place:

• segregation of authorisation of transactions, recording of transactions and custody over the client’s money;

• independent monthly reconciliation of trust account records to trust bank accounts;

• supervision by partner of the practices of the operations of the trust accounts; and

• adequate supporting documentation for all transactions relating to trust money (see ‘Documentation’ below).

Performing The results of the planning phase of the audit will have allowed the auditor to plan the appropriate procedures.

These procedures are completed in this phase and the evidence evaluated.

Supporting documentation

The following are examples of the supporting documentation that should be available for inspection by the auditor:

• cheque requisition forms for all withdrawals of trust money, detailing the client name, amount required, purpose of the payment, payee name, and requiring authorisation prior to processing;


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• cash receipts for all trust money received by the agent, detailing date received, amount, name of client, and purpose of the receipt;

• register of items other than trust money received, such as documents of title, detailing date received, particulars of documents and client name;

• trust transfer journals; and

• bank statements, bank deposit slips, cheque butts and any other relevant documentation.

Audit testing

Where an agent has relatively few clients for whom trust money is received and there are a limited number of transactions, it may be more efficient to perform testing on a 100 per cent basis. However, where there are a large number of clients, and numerous transactions, the auditor should select and test samples to obtain sufficient appropriate audit evidence in an efficient and effective manner.

The main risk area for the auditor is ensuring completeness, i.e. that all transactions that should have passed through the trust account have occurred and have been correctly recorded. This risk is taken into account when deciding sample selection, and also the source of sample selection, i.e. the population.

The population in this case is the files of all of the clients of the agent’s practice, as any of these clients may have had trust money transactions during the year. If the population was the trust account records, then there would be a zero probability of selecting and testing transactions dealing with trust money that has been erroneously or deliberately recorded elsewhere.

This will require access to the office records of the agent to ensure all client records are available.

It may be appropriate to design audit procedures that look at the methods of recording new clients and matters within the agent’s practice.

All transactions relating to client’s monies, whether they are trust money or not, should be recorded and the source documentation filed. Therefore, these client files are the source of the sample selection. (The method of filing may vary between agents; however, the ideal method is for source documents to be filed in separate ‘client monies files’, those files relating to both trust money and other client monies).

When there are receipts or other records of monies on file, and these are not designated as trust money, the auditor should plan procedures to consider the appropriateness of the classification.

Reporting Auditors may be required to report in a format specified by the legislation, however the auditor is required to confirm that the report is in compliance with ASAE 3100.

The audit report is different for each state and territory, so it is necessary to have a good understanding of the requirements of your state or territory legislation, an overview of the requirements is provided in Appendix 6A.

In addition, the auditor needs to determine the need to report separately to those charged with governance on any matters found.


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AppendicesThe following appendices are included in this chapter:

Appendix 6A – Summary of the legislative requirements relating to audit for each State/Territory.

Appendix 6B – Example letter and reply for trust money circularisation.

Appendix 6C – Example agent’s written representation letter to the auditor.

Appendix 6D – Example audit programs.


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Appendix 6A – Legislative requirements for the audit of real estate agent trust accountsThe information below is an overview of the relevant act/regulations, it is not a substitute for reading the Act/regulations. It is important to check for any amendments to these Acts and Regulations issued after the release of this document.

ACT

Relevant legislation and guidance

• Agents Act 2003.

• Agents Regulations 2003.

<http://www.ors.act.gov.au/business/agents/real_estate_business_and_stock_station_agents>.

Audit opinion The auditor reports on whether, in their opinion:

a) the agent has kept the accounting and other records relating to trust money in accordance with part 7 of the Act; and

b) the records were available for the auditor’s examination within a reasonable time after the auditor asked for them; and

c) the agent complied with the auditor’s requirements within a reasonable time; and

d) there is any discrepancy relating to a trust account; and

e) any records to which the audit relates are kept in a way that does not allow them to be properly audited or are missing; and

f) records that are necessary for the proper audit of other records are missing; and

g) there is anything else in relation to the records about which the commissioner for fair trading or the agent should be informed.

As soon as practicable after finishing the audit, the auditor must prepare a report of the result of the audit and give the report to the commissioner for fair trading and a copy to the licensed agent.

Due date for audit report

Within 3 months after the end of the audit period.

NSW

Relevant legislation and guidance

• Property, Stock and Business Agents Act 2002.

• Property, Stock and Business Agent Regulations 2003.

<http://www.fairtrading.nsw.gov.au/About_us/Legislation/List_of_legislation.html>

<http://www.fairtrading.nsw.gov.au/Property_agents_and_managers/Agency_responsibilities/Trust_accounts/Trust_account_audit_requirements.html>.

Who can be an auditor Must be:

• registered company auditor or

• qualified under s.115(1)(b) of the Property, Stock and Business Agents Act 2002.

Audit opinion In my opinion, subject to the qualifications as reported on Schedule 3, for the period covered by the report, having regard to the legislation applicable at the time that the money was held in the Trust Accounts, based on appropriate examinations and sampling techniques:

a) the books of account required to be kept under Sections 103 and 104 of the Property, Stock and Business Agents Act 2002 have been kept in accordance with the Act and its associated Regulation;

b) during the period the reconciled balance(s) of the trust account(s) were sufficient to meet all trust creditors of the licensee entity as disclosed by the books of accounts and records.




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Northern Territory

Relevant legislation • Agents Licensing Act.

• Agents Licensing Regulations.

<http://www.nt.gov.au/justice/licenreg/baal/property_agents.shtml>.

Who can be an auditor A licensed agent shall not engage as the agent’s auditor, or permit the audit of the agent’s accounting records relating to trust moneys to be made by, a person who:

a) is not a registered company auditor; or

b) is an employee of, or is a partner of, or is a relation of, the licensed agent; or

c) is an employee of any other licensed agent; or

d) is engaged in keeping and entering those records or has those records in the agent’s custody or control; or

e) is himself or herself a licensed agent; or

f) is a director, officer or employee of a company that is a licensed agent; or

g) is a person by whom a firm is constituted that is a licensed agent; or

h) is an employee of, or is a partner of, or is a relation of, a business manager of a company or firm that is a licensed agent.

Audit opinion Whether, in the auditor’s opinion:

a) the licensed agent had kept the accounting records relating to all trust moneys received and paid by the agent in accordance with this Act; and

b) whether those records were ready, within a reasonable time, for the auditor’s examination after the auditor had required their production; and

c) whether the agent had complied with the auditor’s other requirements and so complied within a reasonable time; and

d) anything in relation to those records of which the agent or the Board should, in the opinion of the auditor, be informed.


Within 3 months of the end of the audit period (30 June each year).

Queensland

Relevant legislation • Property Agents and Motor Dealers Act 2000

• Property Agents and Motor Dealers Regulations 2001.

<http://www.fairtrading.qld.gov.au/property-agents-managers.htm>.

Who can be an auditor An auditor is automatically approved if they are:

• registered as an auditor under the Corporations Act;

• a member of CPA Australia or the Institute of Chartered Accountants in Australia;

• a member of the National Institute of Accountants who has completed an auditing component of study in accountancy over at least three years.

If the auditor is unqualified, they must lodge an application for approval to audit a licensee´s trust account.


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Audit opinion The auditor must include the following in the report:

a) the audit period for which the report is made;

b) the name and number of each trust account audited;

c) the name of the financial institution, the office or branch of the institution where each trust account was kept and the identifying number of the office or branch;

d) the licensee’s name and:

i. if the licensee is a corporation—the name of each of its licensed directors during the audit period; and

ii. if the licensee carried on business under a registered business name—the business name andthe names of any persons with whom the licensee carried on the business;

e) each place where the licensee carried on business as a licensee;

f) a statement about whether each trust account has been satisfactorily kept under this Act;

g) a statement specifying the day and result of each unannounced examination for the audit period under section 403(1);

h) a statement about whether the auditor has audited the licensee’s general account;

i) a statement about whether any trust account has been overdrawn;

j) a statement about whether a trust creditor’s ledger account has been overdrawn;

k) a statement about whether, for each month during the audit period:

i. each trust account cash book was reconciled with the bank balance and trust ledger; and

ii. an analysis was made showing the name of each person for whom an amount was held and the amount held for each person;

l) the serial numbers of the trust receipts used during the audit period and the unused trust receipts produced to the auditor;

m) particulars of the amounts held in trust for more than 3 months by the licensee at the last day of the audit period;

n) a statement that each trust account cash book has been reconciled with the bank balance of the trust account at the last day of the audit period;

o) a copy of the reconciliation of the trust account cash book and the bank balance of the trust account at the last day of the audit period;

p) a statement about anything else about any trust account audited that the auditor considers should be reported to the chief executive.


The audit period is the 12-month period in each year ending on the last day of the audit month, the audit period depends on when the licence expires.

Month of licence expiry Audit period (dd/mm) Audit report due by end of

January 01/10–30/09 January

February 01/11–31/10 February

March 01/12–30/11 March

April 01/01–31/12 April

May 01/02–31/01 May

June 01/03–28/02 June

July 01/04–31/03 July

August 01/05–30/04 August

September 01/06–31/05 September

October 01/07–30/06 October

November 01/08–31/07 November

December 01/09–31/08 December


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South Australia

Relevant legislation • Land Agents Act 1994.

• Land Agents Regulations 2010.

<http://www.legislation.sa.gov.au/LZ/C/A/LAND%20AGENTS%20ACT%201994.aspx>.

Who can be an auditor A registered company auditor;

OR

A person who:

a) holds a degree in commerce, accounting, business studies or a related field from an Australian university or from another university approved by the Commissioner; and

b) is a member of

i. The Institute of Chartered Accountants in Australia; or

ii. CPA Australia; and

c) meets the requirements of a body referred to in paragraph (b) to practise as a public accountant; and

d) has been continuously engaged for at least 3 years in practice as a public accountant in this State (whether or not as an employee of a public accountant).

Audit opinion The auditor forms an opinion on:

a) whether the accounts and records appear to have been kept regularly and properly written up at all times;

b) whether the accounts and records have been ready for examination at the periods appointed by the auditor;

c) whether the agent has complied with the auditor’s requirements;

d) whether, at any time during the period of the audit, the agent’s trust account was overdrawn and, if so, the full explanation for that given by the agent;

e) whether the agent has, or has had, any debit balances in his or her trust account and the explanation or reason for such a debit given by the agent;

f) whether the auditor has received and examined the notice given to the auditor under regulation 23 and the result of that examination;

g) whether the agent has complied with section 13 of the Act;

h) if the agent uses a computer program to keep the agent’s accounts and records—whether the program allows for the accounts and records to be conveniently and properly audited.




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Tasmania

Relevant legislation • Property Agents and Land Transaction Act 2005.

• Property Agents and Land Transaction Regulations 2006.

<http://www.consumer.tas.gov.au/about_us/legislation>.

Audit opinion The audit report is to be in a form approved by the Board and is to state, in the opinion of the auditor, whether:

a) the trust account records being audited were properly drawn up and kept in accordance with the Act; and

b) there is any defect or irregularity in the trust account records; and

c) the amount in each trust account after being reconciled under regulation 21 and the amount of trust money invested under regulation 29 were sufficient to meet all the trust account liabilities at the end of the period being audited; and

d) the auditor obtained all the information, documents, explanations and assistance that he or she required to complete the audit; and

e) the requirements of the Act in respect of trust money and the keeping of trust accounts have been complied with.


Within 3 months of audit period (30 June).

Victoria

Relevant legislation • Estate Agents Act 1980.

• Estate Agents (General, Accounts and Audit) Regulations 2008.

<http://www.consumer.vic.gov.au/resources-and-education/legislation/legislation-we-administer#e>.

Who can be an auditor A person is not qualified to act as an auditor under section 64, 64A or 64B in respect of an estate agent

a) unless he or she is an approved auditor;

b) if he or she is, or at any time within 2 years before the last day of the period in respect of which the audit is to be made, has been, an employee or partner of the agent, or of any partner of the agent, whose accounts of trust money are to be audited.

A person shall not audit the accounts of an estate agent:

a) if he is an employee or partner of that estate agent;

b) if he is an employee of any other estate agent actually in practice;

c) if he is himself an estate agent carrying on business as such;

d) if he is in any way engaged in keeping or entering up the trust account records of an estate agent or has those records in his custody or control; or

e) in the case of an estate agent being a corporation, if he is a member, director, officer or employee of the corporation.

Audit opinion In my/our opinion, the above Licensed Estate Agent has, in all material respects, maintained the above named Trust Account(s) in compliance with sections 63 and 64 of the Act and the Regulations for the period(s) specified above.

Format should be as specified by Consumer Affairs Victoria.

<http://www.consumer.vic.gov.au/businesses/licensed-businesses/estate-agents/running-your-business/trust-accounts/auditing-trust-accounts>.


Within 3 months after 30 June.


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Western Australia

Relevant legislation • Real Estate and Business Agents Act 1978.

• Real Estate Agents (General) Regulations 1979.

<http://www.commerce.wa.gov.au/consumerProtection/Content/Licences/Real_Estate_Industry/Real_Estate_Industry.html>

<http://www.commerce.wa.gov.au/consumerProtection/PDF/Real_Estate_industry/For_Auditors/For_Auditors_PDFs/Guide_to_auditing_20.pdf>.

Who can be an auditor • Registered Company Auditor; or

• Other person approved by the Board.

Audit opinion The auditor to report in accordance with sections 70(2) and 79 of the Real Estate and Business Agents Act 1978 that in their opinion:

a) the trust accounts have been regularly kept and properly written up;

b) the trust accounts were ready for examination at the periods appointed by me;

c) the agent has complied with all my requirements as auditor;

d) the trust accounts are and have been in order during the year of the audit; and

e) there is no matter in relation to the trust accounts that should, in my opinion, be communicated to the Board.


Within 3 months of the end of each year.


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Appendix 6B – Example letter and reply for trust money circularisation

[Date]

[Auditors name and address]

Dear Sir/Madam

[Name of agent’s practice] statement

Enclosed is your statement of trust money held by our above-named client as at [year end date].

We are performing our regular audit of the trust records and wish to verify this account from an independent source.

Would you please sign and indicate on the form below whether or not this statement is correct.

If the statement is not correct, please note the differences on the form below.

A reply paid envelope is enclosed for your use. Your prompt attention to this request would be appreciated.

Yours faithfully

_____________________________________

[Name of Auditor]

* * *

To [Name of auditor]

Dear Sir/Madam

[Name of agent’s practice]

The balance of [$amount] on the above agent’s statement of trust account money held on my/our behalf is: (strike out whichever is not applicable)

a) correct; or

b) incorrect (complete section below).

The correct balance of the monies held by [name of member’s practice] on my/our behalf is $__________.

Yours faithfully

_____________________________________

[Name of client]


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Appendix 6C – Example of an agent’s written representation to the auditor

[Name of auditor]

[Address of auditor]

Dear Sir/Madam

In connection with your audit of the trust account records of [name of agent’s practice] for the year ending [year end date] we confirm, to the best of our knowledge and belief, the following representations made to you during your examination.

I/We have complied with the requirements of [name of the relevant state Act and Regulation].

I/We have made available to you all accounting records pertaining to the trust account, and other records and files pertaining to the practice and its clients.

_____________________________________

[Signed]

_____________________________________

[Name]

_____________________________________

[Title]

__________________

[Date]


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Appendix 6D – Example audit programsThe following audit programs are aimed at providing guidance to auditors on the steps involved in the audit of an agent’s trust account. It should be adapted to the circumstances of each engagement, and taking into account factors such as:

• requirements of specific state/territory real estate regulations and law;

• the adequacy of internal controls within the agent’s practice as a whole, and whether these are adequate to ensure that all trust money transactions are properly recorded within the trust account system;

• the adequacy of internal controls over trust account transactions, and the extent to which these should be tested;

• the extent to which reliance is to be placed on the internal control system and, as a result, the extent of substantive testing to be performed; and

• the complexity of the accounting system and associated records.

This in turn is affected by the volume and complexity of trust account transactions. For example, where there are few transactions, the records for a particular client may consist only of an engagement letter and a photocopy of the cheque.

When there are a large number and range of transactions, individual client trust ledger accounts may be used.

Note that the audit program assumes the use of ledgers and journals. Where these are not applicable, appropriate alternative procedures should be performed on the existing records.

It is important that auditors become familiar with the Act and Regulations pertaining to their state or territory and ensure that they have adapted the audit program so that they have tested the agent’s compliance with the appropriate state or territory legislation.

Planning Done by and date

W/P ref/ notes

1. Prepare an audit planning memorandum, summarising the scope and approach of the audit and our understanding of the business.

Administration Done by and date

W/P ref/ notes

1. Check that records are properly maintained and filed in an orderly manner.

Appointment to act Done by and date

W/P ref/ notes

1. Confirm that the agent has a valid appointment to act in writing signed by the person for whom the services are being provided.

2. Confirm that the appointment clearly identifies the property, for example address of property, title details.


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Internal control Done by and date

W/P ref/ notes

1. Document and assess the internal controls over the following:

i. trust receipts

ii. trust payments and

iii. receipt and safeguarding of client documents.

In all circumstances there is a need to pay some attention to the client’s internal controls, in particular:

• Who maintains the records?

• Is there adequate segregation of duties?( i.e. consideration should be given to who opens mail, banks money and signs cheques)

• Is there any service independent of those processing/authorising the transactions?

• Who authorises the opening of bank accounts?

• What controls are in place over cheques (i,e. Who can issue cheques and are they stored securely)?

• Does the person in bona fide control sign all cheques or are there other internal controls in place?

• How secure are the agent’s files from fire, theft etc?

• Are regular back-ups made and where are the back-ups kept?

Based on the results of the above controls testing, determine whether internal controls can be relied on.

2. Bank reconciliations

i. Review bank reconciliations ensuring the following:

• bank reconciliations were performed each month within the required number of days after month end

• large and unusual reconciling items have been followed up

• there are no recurring reconciling items

• there is evidence of independent review.

Fees and remuneration Done by and date

W/P ref/ notes

1. Confirm that the fees charged by the real estate agent are in accordance with the fees agreed between the principal and the agent.

2. Confirm that only actual costs only are recouped for postage and petty expenses.

3. Confirm that documentation is maintained on the client’s files for any fees charged.


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Cash receipts testing Done by and date

W/P ref/ notes

Select a sample of cash receipts (both trust account and other monies) from the client files and perform the following:

i. where the receipt has not been designated as trust account money, review the nature of the monies to determine whether this allocation is reasonable.

ii. where the receipt has been designated as trust account monies, perform the following procedures:

• ensure that the money has been banked promptly before the end of the next business day into the appropriate trust account by tracing to bank deposit slips and bank statements

• ensure that the trust receipt includes the name and address of the estate agent.

iii. ensure that the trust receipt includes:

• the date on which the trust money is received

• the name of the person on whose behalf the money was received

• a description of the transaction

• the amount and form the money was received in

• the name of the person paying the money

• ensure the receipt is signed by the issuer.

iv. confirm that the money is banked in the same form as received (for example, that cash is not substituted by a cheque).

v. check daily bankings to the bank statement.

vi. identify and report deposits from agent’s own funds/staff (for example cheques issued from the agent’s general account).

Cash payments testing Done by and date

W/P ref/ notes

Select a sample of payments made from trust accounts and perform the following:

i. ensure that before a payment is made from trust, the agent has:

• obtained the written authority to do so

• entered in trust records details of the transaction and particulars of any amount due from that person to the agent.

ii. ensure that the payment is not for an amount which exceeds the balance of the individual client’s trust money at the date of payment; and

iii. ensure that payments are for bona fide purposes only (i.e. consistent with the nature of the trust account).


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Cash payments testing Done by and date

W/P ref/ notes

iv. verify the payment to the cheque butt or other record which contains the following:

• the date of the payment

• the name of the person to whom the payment is made

• the account in the trust ledger to which the payment is debited

• a description of the transaction

• the purpose for which the payment is made

• if the payment is by cheque, its serial number

• the amount of the payment (Rule 29).

v. ensure the estate agent keeps a register of the trust cheque forms. The register should record the serial numbers and details of the issue and use of trust cheque forms given to, or held by the agent. (Note: if the trust cheque forms are part of a sequence, it is sufficient to record the first and last number of the trust cheque forms.

vi. Verify cheque details to the bank statement.

vii. Confirm the sequence of cheque numbers issued. Sight any cancelled cheques.

Receipt and handling of client documents Done by and date

W/P ref/ notes

Where trust money has been received in the form of documents of title, select a sample and perform the following:

i. ensure that the receipt is recorded in an appropriate register in accordance with the relevant requirements

ii. ensure that the document is securely kept to prevent unauthorised use.

Trust account operation Done by and date

W/P ref/ notes

1. For each trust in operation, ensure that the following conditions have been met:

i. the name of the bank account includes the words ‘trust account’

ii. confirm with the bank that it has been notified of the nature of the account and the terms and conditions in respect of the operation of the account

iii. confirm that there is no right of set off in relation to the trust accounts.

2. Obtain independent confirmation by way of a bank audit certificate of trust account and investment balances as at the end of the audit period (Refer GS 016 Bank Confirmations).

3. Request the bank to confirm that there are no trust or investment accounts operated by the agent other than those shown on the bank audit certificate.

4. Review trust accounts as at the end of the audit period for debit balances. Where a debit balance exists, refer to auditor’s requirements for reporting below.


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Trust account operation Done by and date

W/P ref/ notes

5. Check that the financial institution has not credited interest to the bank trust account.

6. Check that no bank or government charges have been debited to the bank trust account.

Substantive tests of maintenance of an agent’s trust account Done by and date

W/P ref/ notes

1. Select a sample of client files and perform the following:

i. obtain details of the movement in the client’s trust account as per the agent’s records, i.e. opening balances, receipts, payments and closing balance

ii. trace each item to supporting documentation, e.g. duplicate receipt or cheque requisition, ensuring that each supporting document has a corresponding entry in the records so as to obtain comfort as to the completeness of the records

iii. where there are supporting documents for which no accounting entry has been made, determine whether these have been recorded as being part of general trust money and, if so, whether such allocation is reasonable, given the nature of the receipt or payment

iv. with regard to the nature and purpose of the receipt, trace the monies through to the point of withdrawal and ensure the following:

• that the nature of the payment is consistent with that of the receipt

(For example, where the money is received from the client as a prepayment of fees, ensure that this has been applied to the agent’s debtors account (i.e. general account) or, where money is received by way of tax refund, this is returned to the client.)

• that the money has not been held for a lengthy period without the client being given the option to hold the money in an interest bearing account.

v. ensure the end balance of the client account is consistent with the sum of the opening balance plus the net amount of the transactions that have occurred during the year.

Ledger accounts Done by and date

W/P ref/ notes

1. Ensure the agent has a separate ledger account opened for each client.

2. Ensure that the total of the individual client accounts agrees with the balance of the trust control account.

3 Agree balances to general ledger and bank reconciliation.

4. Ensure that the real estate agent keeps a ledger consisting of separate accounts for:

• each person on behalf of whom the agent holds trust money and

• each transaction for which the estate agent holds trust money as a stakeholder or in trust.


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Ledger accounts Done by and date

W/P ref/ notes

5. Ensure that each account in the trust ledger, contains:

• the name and address of the agent’s principal

• the name of other parties to the transaction (if any)

• the date of each transaction

• the name of the person from whom the money was received, or to whom the money was paid

• the purpose of the receipt of payment, or the amount paid or reviewed and

• the balance after each entry.

6. Ensure that an account at all times shows a continuous running balance disclosing the amount of money held.

Review of journals Done by and date

W/P ref/ notes

1. Test postings of journals to the individual client accounts and the trust control account and ensure narratives are appropriate.

2. Ensure that transfers from one trust account to another are in accordance with the appropriate rules whereby the estate agent must record:

i. the date of the transfer

ii. the account of the trust ledger from which the money is transferred

iii. the account of the trust ledger to which the money is transferred

iv. a description of the transfer, indicating the purpose of the transfer

v. the amount of the money transferred.

3. Peruse journals for unusual entries, such as transfers between client accounts, and investigate, ensuring the transaction is appropriate and properly authorised and does not highlight a breach, i.e. that a deficiency in an individual trust account has occurred.

4. Ensure that the estate agent keeps and records journals, appropriate to enable adequate details of transactions to be posted into a trust account ledger. This extends to receipts, payments and transfers (Rule 25.)

Review of dormant trust accounts Done by and date

W/P ref/ notes

Procedures

1. Review the trust account ledger for all trust accounts that have remained dormant during the year.

2. Based on the discussion with the responsible staff member and a review of the client’s files, determine the reasonableness of the explanation obtained:

• purpose of the dormant balance

• the reason why the balance has not changed during the trust year.

(It is important to note that, if no one is reviewing dormant or inactive trust accounts, they constitute good candidates for fraudulent activity.)


W/P ref/ notes

3. Enquire about the existence of any unclaimed trust money held in the trust accounts and confirm the requirements of the relevant Unclaimed Money Act have been complied with.

Audit conclusions and reporting performed by objective achieved Done by and date

W/P ref/ notes

Procedures

1. Prepare a summary review memorandum summarising the findings of the audit.

2. Ensure the preparation of the agent’s statement is in accordance with the legislative requirements of each state.

3. Prepare an audit report in accordance with the requirements of the relevant Act.

7. The audit of client monies

7. The audit of client monies 7:2

Introduction 7:2

Key definitions 7:2

Annual audit requirement 7:3

Methodology 7:3

Audit objective and methodology 7:3

Performing an audit 7:3

Reporting 7:4

Appendices 7:5

Appendix 7A – Example letter to request approval for a new auditor 7:6

Appendix 7B – Example letter and reply for trust money circularisation 7:7

Appendix 7C – Example member representation letter 7:8

Appendix 7D – Example independent auditor’s report – as per Appendix 1 to APES 310 7:9

Appendix 7E – Example audit programs 7:11


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Introduction This chapter provides guidance for auditors of client monies held by members in professional practice in either client bank accounts or trust accounts and should be read in conjunction with Chapter 5 – Compliance Audits.

This chapter does not deal with the responsibilities of a member who is dealing with the client monies on a daily basis, other than the reference to these responsibilities in the audit procedures.

The audits of client monies are governed by the requirements of:

• APES 310 Dealing with Client Monies (issued by the Accounting Professional and Ethical Standards Board (APESB));

• ASAE 3100 Compliance Engagements; and

• its overriding standard, ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information.

APES 310 was issued in December 2010 with an effective date of 1 July 2011. APES 310 superseded APS 10 Trust Accounts and GN 3 Operation of Trust Accounts.

The scope of APES 310 and therefore the associated audit requirements are broader than the predecessor guidance since APES 310 covers situations not only where a member is handling client monies through a trust account, but also where a member has been appointed as a signatory to a client bank account,.

The annual audit of the member’s compliance with the requirements of APES 310 will therefore address both the member’s operation of their practice’s trust account and of client bank accounts.

Some relevant definitions from APES 310 are reproduced below to assist in determining whether your engagement is within the scope of this standard.

Key definitions

Monies Cash, foreign currency, any negotiable instrument and any security, the title to which is transferred by delivery (for example, bills of exchange and promissory notes), including delivery by electronic funds transfer.

Client monies Any monies (in whatever form) coming into the control of a Member in Public Practice or any of the Member’s Personnel which are the property of a Client and included Monies to which the Member or the Member’s Personnel have no present entitlement.

‘Control’ means where a Member or any of the Member’s Personnel, acting either solely or in conjunction with one or more people, can authorize the transacting of Client Monies.

Examples of Client Monies include:

• client tax refund cheques negotiated by the member with the client’s written authority;

• monies received that are associated with insolvency engagements;

• money advanced by the client for the costs associated with the incorporation of a company or in the preparation of a trust deed;

• rental revenue collected on behalf of the client;

• money received in advance from the client to meet future liabilities, e.g. to pay the client’s income tax assessment while the client is overseas; and

• prepayment of professional fees for the member’s services where no request for payment has been made to the client, e.g. audit fees.

Trust account An account opened by a Member in Public Practice or by another party on behalf of the Member with a Financial Institution which is kept for the sole purpose of Dealing with Client Monies. A Trust Account can be in the form of:

• One of more accounts Dealing with Monies of one Client; or

• One or more accounts Dealing with Monies of Multiple Clients.


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Auditor of client monies

A Member in Public Practice who:

• Has been engaged to perform an audit engagement of another Member in Public Practice’s compliance with APES 310; and

• Holds a certificate of public practice from one of the Professional Bodies (e.g. CPA Australia).

Deficiency A deficit or shortfall of client monies, as disclosed by records maintained by a member in public practice or in the records of a financial institution at which an account is held. However, it does not include any deficiency which the auditor of client monies is satisfied was caused solely by an error of a financial institution which has been subsequently rectified.

Annual audit requirementAn audit of the client monies is required each year within 3 months of the year end date, except in the following circumstances:

• where trust accounts are maintained and audited under federal or state legislation (for example, the Trust Accounts Act (Qld) 1973);

• where trust accounts are maintained by a member in their capacity as scheme manager, receiver/manager, liquidator or administrator under the Corporations Act 2001 or registered trustee in bankruptcy under the Bankruptcy Act 1966. Trust accounts in these circumstances are subject to regular inspection by the relevant authority.

The auditor is required to adhere to the principles contained in ASAE 3000 Assurance engagements other than audits or reviews of historical financial information and the specific requirements of ASAE 3100 Compliance Engagements.

Methodology

Audit objective and methodologyThe objective of the audit of client monies is to determine whether the member dealing with the monies has complied with APES 310.

To achieve this objective, the auditor needs to be satisfied that client monies are properly accounted for, and only paid or applied as directed by the clients.

The methodology for compliance audits is documented in Chapter 5 of this guide, however specific requirements relating to the audit of client monies have been provided below

Planning the audit

The auditor gains an understanding of the legislative requirements for handling client money and the requirements of APES 310.

The nature, timing and extent of audit procedures will vary, depending on the:

• services provided by the member and client monies received as a result of these services;

• nature of the member’s business, i.e. whether the member is a sole practitioner or a member of a large practice;

• volume of transactions affecting the client monies;

• average size of transactions affecting the client monies; and

• existence of segregation of duties.

The above factors should be taken into account in the auditor’s assessment of risk and documentation of the planning process.

Performing an audit

Sampling

Where a member has relatively few clients for who client monies are received, and there are a limited number of transactions, it may be more efficient to perform testing on a 100 per cent basis. However, where there are a large number of clients and numerous transactions, the auditor should select and test samples to obtain sufficient


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appropriate audit evidence in an efficient and effective manner in accordance with the guidance included in the sampling section of Chapter 5.

Reporting

Written representation by management

The auditor should also obtain a written representation from the client as part of the audit evidence. An example representation letter can be found in Appendix 7C of this chapter.

Timing

Client monies need to be audited annually within 3 months of the applicable year–end date.

Reporting to the Professional Body

The Auditor is required to report the following to the Members Professional Body:

• Any deficiency of client monies within 5 business days of becoming aware of the deficiency; or

• Within 10 business days of becoming aware of any material:

+ failure by a Member to comply with paragraphs 6.1 or 6.9 of APES 310 – relating to receipt or disbursement of funds within 3 days;

+ uncorrected errors reflected in a statement issued by a Financial Institution; or

+ circumstance where client monies have not been transacted or maintained in accordance with APES 310.

Modified opinion

If the auditor’s report contains a modified opinion, the Auditor of Client Monies is required to lodge the report with the applicable Professional Body (e.g. CPA Australia) within 15 business days of completion of the audit.

Example audit opinion

Appendix 1 of APES 310 contains an example of an audit report which should be put onto the Auditors letterhead which has been reproduced in Appendix 7D to this chapter.


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AppendicesThe Appendices include the following example documents:

Appendix 7A – Example letter to request approval for a new auditor.

Appendix 7B – Example letter and reply for trust money circularisation.

Appendix 7C – Example member representation letter.

Appendix 7D – Example audit report.

Appendix 7E – Example audit programs.


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Appendix 7A – Example letter to request approval for a new auditorPer paragraph 8.7 of APES 310, a member in public practice who proposes to change the existing auditor of client monies shall first obtain the approval of the applicable professional body (e.g. CPA Australia).

Public Practice Manager

CPA Australia

Level 20,

28 Freshwater Place Southbank

VIC 3006

[Date]

Dear Sir/Madam

Change of an auditor of client monies

I/We [name of member and membership number] request approval from CPA Australia to change the auditor of my/our clients monies from [existing auditor name] to [proposed auditor name, address] due to [insert reasons].

_____________________________________

[Signed]

_____________________________________

[Name and membership no.]


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Appendix 7B – Example letter and reply for trust money circularisation

[Date]

[Auditors name and address]

Dear Sir/Madam

[Name of member’s practice] statement

Enclosed is your statement showing monies held by our above-named client as at [period end date].

We are performing our regular audit of the client monies records and wish to verify this account from an independent source.

Would you please sign and indicate on the form below whether or not this statement is correct. If the statement is not correct, please note the differences on the form below.

A reply paid envelope is enclosed for your use. Your prompt attention to this request would be appreciated.

Yours faithfully

_____________________________________

[Name of Auditor]

* * *

To [Name of auditor]

Dear Sir/Madam

[Name of member’s practice]

The balance of [$amount] on the above statement of monies held on my/our behalf is: (strike out whichever is not applicable)

a) correct; or

b) incorrect (complete section below).

The correct balance of the monies held by [name of member’s practice] on my/our behalf is $__________.

Yours faithfully,

_____________________________________

[Name of client]


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Appendix 7C – Example member representation letter[Name and address of auditor]

Dear Sir/Madam

Representation letter

In connection with your audit of the client monies records of [name of member’s practice] for the year ending [date], we confirm, to the best of our knowledge and belief:

• I/We have complied with all requirements of APES 310 Dealing with Client Monies.

• I/We have made available to you all accounting records pertaining to the client monies, and other records and files pertaining to the practice and its clients.

[Add any other representations as applicable.]

_____________________________________

[Signed]

_____________________________________

[Name of member]

____________________

[Date]


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Appendix 7D – Example independent auditor’s report – as per Appendix 1 to APES 310This independent auditor’s report is based on the version of APES 310 effective as at January 2013, APES 310 should be reviewed to ensure this is the most up to date version.

Where the audit opinion is qualified or modified, it is to be sent to the CPA Australia Divisional Director in the state where the member practises.

To [the applicable professional body]

Report on the compliance of [name of member or firm etc.] with the requirements of APES 310

We have audited the compliance of [name of member or firm etc.] with the requirements of APES 310 Dealing with Client Monies (APES 310) for the [year ended …./…./….].

The responsibility of [member or firm] for compliance with APES 310

[name of member or firm etc.] is responsible for compliance with the requirements of APES 310. This responsibility includes establishing and maintaining internal controls relevant to compliance with the requirements of APES 310.


Our responsibility is to express a conclusion on [name of member or firm etc.]’s compliance with the requirements of APES 310. Our audit has been conducted in accordance with applicable Standards on Assurance Engagements including ASAE 3100 Compliance Engagements and with APES 310, in order to state whether, in all material respects, [name of member or firm etc.] has complied with the requirements of APES 310 for the [year ended …./…./….]. Our procedures included examination, on a test basis, of evidence supporting [Member or Firm]’s compliance with APES 310. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. ASAE 3100 also requires us to comply with the relevant ethical requirements, including independence requirements of APES 110 Code of Ethics for Professional Accountants.

Limitations on use

This audit report has been prepared for CPA Australia in accordance with APES 310. We disclaim any assumption of responsibility for any reliance on this report to any persons or users other than CPA Australia, or for any purpose other than that for which it is prepared.

Inherent limitations

Because of the inherent limitations of any audit, it is possible that fraud, error or non compliance may occur and not be detected. An audit is not designed to detect all instances of non compliance with the requirements of APES 310, as an audit is not performed continuously throughout the year and the audit procedures performed are undertaken on a test basis. The conclusion expressed in this report has been formed on the above basis.

Independence

In conducting our audit, we have complied with the independence requirements of APES 110 Code of Ethics for Professional Accountants.

Conclusion

A. Unqualified

In our opinion, <<name of member or firm etc.>> has complied, in all material respects, with the requirements of APES 310 for the [year ended …./…./….].

OR

B. Qualified

In our opinion, except for [provide details of exceptions], <<name of member or firm etc.>> has complied, in all material respects, with the requirements of APES 310 for the [year ended …./…./….].


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_____________________________________

[Auditor name]

_____________________________________

[Address]

_____________________________________

[Date]


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Appendix 7E – Example audit programsThe following audit programs provides guidance for auditors on the steps involved in the audit of client monies held by a member in professional practice.

The steps should be adapted to the circumstances of each engagement, taking into account factors such as:

• the adequacy of internal controls within the member’s practice as a whole, and whether these are adequate to ensure that all client money transactions are properly recorded within the trust account system;

• the adequacy of internal controls over transactions involving client monies, and the extent to which these should be tested;

• the extent to which reliance is to be placed on the internal control system, and the extent of substantive testing to be performed; and

• the complexity of the accounting system and associated records.

This in turn is affected by the volume and complexity of client money transactions. For example, where there are few transactions the records for a particular client may consist only of an engagement letter and a photocopy of the cheque. When there are a large number and range of transactions, individual client trust ledger accounts may be used.

The relevant paragraph from APES 310 have been shown after each test, where applicable.

Internal controls Done by and date

W/P ref/ notes

Document the internal controls and procedures in place in respect of the operation of a Trust Account and a Client Bank Account. (4.5)

Do the internal controls achieve the following objectives:

a) Client Monies are dealt with in accordance with the Client’s instructions and APES 310;

b) A Trust Account is properly safeguarded and accounted for; and

c) A Client Bank Account is properly safeguarded against unauthorised access or use.

For a sample of accounts, review the reconciliation of the Trust Account Records to the Trust Account.

Confirm that this reconciliation has been performed at least every 25 business days.

Review documentation to show the correct any differences or errors within 5 business days. (7.7)

Review bank reconciliations, ensuring the following:

• bank reconciliations are performed on a periodic basis (e.g. monthly);

• large and unusual reconciling items have been followed up;

• there are no recurring reconciling items;

• there is evidence of independent review.


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Administration of client monies Done by and date

W/P ref/ notes

Have all Client Monies been kept separate from all other Monies of the Member? (4.4)

Confirm that the Member has not obtained any benefit from Dealing with Client Monies, including benefits deriving from the deposit and/or investment of Client Monies, without prior written authority from the Client. (4.6)

Confirm that professional fees in respect of Dealing with Client Monies have only been charged in accordance with Section 240 Fees and Other Types of Remuneration of the Code. (4.7)

Review the Trust accounts to confirm there have been no Financial Institution, statutory or other government charges in respect of a Trust Account. (4.8)

These charges should be borne by the Member.

Where the Member has deposited their own funds to a Trust Account, confirm this was only:

a) to meet any charges made to the Trust Account where the Financial Institution has made such charges to the Trust Account in error, instead of to the Member’s general bank account; or

b) to meet a Financial Institution’s prescribed minimum requirements for an ongoing account balance. (4.9)

Determine the processes in place so that the Member in Public Practice does not:

a) receive or pay into a Trust Account or a Client Bank Account; or

b) disburse out of a Trust Account or a Client Bank Account

any Monies if the Member believes on reasonable grounds that they were obtained from, or are to be used for, illegal activities or that Dealing with the Monies is otherwise unlawful. (4.11)

Determine whether there were any such cases during the period.

Review procedures to confirm that the Member’s Trust account is operated only by either:

• the Member; or

• a person who has been delegated in writing the Members authority, being:

– another Member in Public Practice;

– a solicitor holding a current practising certificate;

– a suitably competent person employed by the Member; or

– a manager of a branch of a Financial Institution. (6.10 and 6.12)

For a sample of accounts, confirm that all interest earned on Trust Accounts has been credited to the relevant Client’s account. (7.2)


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Opening a trust account Done by and date

W/P ref/ notes

Confirm where funds have been received that the Member has open a Trust Account at a Financial Institution in the name of the Member or the Member’s Firm and include the term ‘Trust Account’ in its title, unless the Member has been authorised to operate a Client Bank Account. (5.1)

Review the processes documented by the Member to establish the identity of a Client and the source of Client Monies prior to Dealing with Client Monies. (5.3)

Where a client request was received, confirm that the Member opened and maintains a separate Trust Account. (5.4)

Confirm the terms and conditions relating to Trust accounts opened during the year requires that:

a) all Monies standing to the credit of that account are held by the Member as Client Monies and that the Financial Institution is not entitled to combine the account with any other account, or to exercise any right to set-off or counterclaim against Monies in that account in respect of any sum owed to the Financial Institution on any other account; and

b) any interest payable in respect of the account balance is credited to that account. (5.5)

Review a selection of files to confirm a copy of the terms and conditions of the Financial Institution relating to a Trust Account is included as part of the Member’s Records.

Review evidence to show that a copy to the Client within 10 business days of any request being made by the Client. (5.6)

For a sample of files, review the written correspondence to the client to show:

• no later than at the time of initial deposit into a Trust Account, the details of the Financial Institution at which the Client Monies are to be held; and

• if there is a change to the existing Financial Institution arrangements, the new details of the Trust account sent to the client within 10 business days. (5.7)

Holding and receiving client monies Done by and date

W/P ref/ notes

For a selection of files, confirm that the Member in Public Practice deposited Client Monies into a Financial Institution within 3 Business Days of receipt by tracing to bank deposit slips and bank statements. (6.1)

Confirm, for a selection of files that the Member only held Client Monies in a Trust Account for the period necessary to enable the purpose for which the Client Monies were received to be discharged. (6.2)

If the Member in Public Practice received Client Monies where the payee is no longer a Client, or the intended recipient is unknown to the Member, confirm that the Monies were returned within 10 business days to the drawer or sender as appropriate. (6.3)

If the Member was unable to disburse Client Monies to the Client, payee, drawer or sender, confirm that the Member complied with relevant legislation in respect of unclaimed Monies. (6.4)


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Holding and receiving client monies Done by and date

W/P ref/ notes

For a selection of amounts received, confirm that the following information was recorded (6.5):

a) the name of the person from whom Monies were received;

b) the amount of Monies;

c) the Client for whose benefit Monies are held;

d) the purpose for which Monies were received or other description of the Monies;

e) the date on which Monies were received;

f) the form in which Monies were received; and

g) in relation to Client Monies of a kind referred to in paragraph 6.7, the location where the Monies are held.

For a sample of monies received, confirm that an acknowledgement was issued to the Client within 21 business days or as otherwise agreed with the Client containing the details specified in paragraph 6.5 and stating that the Member has deposited the Client Monies into a Trust Account or a Client Bank Account. (6.6)

Where any funds were received that are not capable of being deposited into a Financial Institution, confirm that the Member:

• safeguarded the Monies against unauthorised use;

• recorded details in an appropriate register; and

• issued an acknowledgement to the Client within 21 business days containing the details specified in paragraph 6.5. (6.7)

Disbursement of client monies Done by and date

W/P ref/ notes

For a sample of disbursements, ensure that the client has given written authority for withdrawal from the trust account/client bank account and that the payment was made within 3 business days of receiving the instructions. (6.9)

Review the records to support transacting electronic funds transfers from a client bank account or trust account. (6.11).

For a selection of disbursements relating professional fees and/or expenses due from a Client to A Member in Public Practice, obtain the Client’s written approval prior to such disbursement. (6.13)

Confirm that no Trust account or Client Bank account is in a debit position at the year end and that no disbursements during the year caused any account to go into debit. (6.14)


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Confirmation of client monies balances Done by and date

W/P ref/ notes

Circularisation

i. Select a sample of individual client trust account balances as at applicable reporting year end, with the member’s approval, and perform a positive circularisation by way of a letter requesting that the client confirm the balance as per that of the annual statement issued by the member. This letter is to be enclosed with the statement – see Appendix 7B.

ii. Follow up non-replies to the circularisation by obtaining the client file, and investigate any major discrepancies.

Ledger accounts

i. Ensure the total of the individual client accounts agrees with the balance of the trust control account.

ii. Agree balances to general ledger and bank reconciliation.

Reporting to clients Done by and date

W/P ref/ notes

Confirm that the following statements (containing details of the Member’s application of Client Monies and any interest earned on Client Monies ) have been issued either to the Client or to such other person as directed by the Client. (7.8):

a) in respect of all transactions, at least annually;

b) upon completion of the matter requiring the maintenance of the Trust Account or Client Bank Account;

c) in respect of any transaction, upon written request from the Client; or

d) when a Trust Account or Client Bank Account is closed or if the Member’s authority to operate a Client Bank Account is revoked.

Were the statements described above issued within the relevant timeframes, being:

a) paragraph 7.8(a) within 30 Business Days of the Applicable Year-End Date;

b) paragraphs 7.8(b) and 7.8(d) within 25 Business Days;

c) paragraph 7.8(c) within 5 Business Days. (7.9)

Where a Client receives Client Bank Account statements directly from a Financial Institution, confirm that the Member has provided to the Client details of transactions undertaken by the Member within 25 business days of the end of each month or as otherwise agreed with the Client. (7.10)


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Documentation Done by and date

W/P ref/ notes

Discuss with the Member, the procedures in place to retain Records that:

a) enable transactions involving Client Monies to be audited;

b) disclose the financial position of Client Monies; and

c) clearly identify the transactions made on behalf of each Client.

Review a sample of client files and confirm that the records achieve the objectives.

Confirm the records in place show:

a) the details of all transactions involving Client Monies, including:

i. details of all Client Monies paid direct to the Client, or to a third party nominated by the Client;

ii. details of all cheques received and endorsed by the Member for disbursement to the Client, or to a third party nominated by the Client;

iii. details of all electronic funds transfers of Monies received, and of Monies transferred direct to the Client, or to a third party nominated by the Client; and

iv. details of any errors in transactions involving Client Monies;

b) the details and basis of calculation of all interest earned on Client Monies held in a Trust Account and that the interest has been applied by the Member in accordance with paragraph 5.5(b);

c) the financial position of a Member’s Trust Account and Client’s Bank Account and the Client Monies therein; and

d) the signatories for each Client Bank Account authorised by the Client.


W/P ref/ notes

Procedures

1. Review the trust account ledger for all trust accounts that have remained dormant during the year.

2. Based on the discussion with the responsible staff member and a review of the client’s files, determine the reasonableness of the explanation obtained:

• purpose of the dormant balance;

• the reason why the balance has not changed during the trust year.

(It is important to note that, if no one is reviewing dormant or inactive trust accounts, they are a good target for fraudulent activity.)


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Audit conclusions and reporting Done by and date

W/P ref/ notes

Prepare a summary review memorandum, summarising the findings of the audit.

Prepare a report to CPA Australia within the times noted below where any of the following have occurred

• within five business days any deficiency in trust money or in the trust bank account;

• within ten business days any failure to pay, deposit or account for trust money within three business days;

• within ten business days any error reflected in a statement issued by a financial institution;

• within ten business days any circumstances where client monies have not been transacted or maintained in accordance with APES 310;

• within 15 business days If the audit report contains a modified opinion.

Prepare an audit report in accordance with the example in APES 310 Appendix 1, as shown in Appendix 7D of this chapter. Unqualified and unmodified audit reports are retained by the member. This can be inspected as part of CPA Australia’s Quality Review Program.

Where the audit report is qualified or modified, forward a copy to CPA Australia within three months of the reporting date.

8. Audit of a solicitor’s trust account

8. Audit of a solicitor’s trust account 8:2

Audit of a solicitor’s trust account: Overview 8:2

Objective 8:2

Regulations 8:2

Annual audit requirements 8:2

Audit methodology 8:2


Planning 8:3

Performing 8:4

Reporting 8:4

Appendices 8:5

Appendix 8A – Relevant Act/legislation 8:6

Appendix 8B – Sample audit programs 8:7


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Audit of a solicitor’s trust account: OverviewThis chapter details the specific auditing requirements applicable to the compliance audit of a solicitor’s trust account and should be read in conjunction with Chapter 5 – Overview of a compliance audit.

The audit must be carried out in accordance with ASAE 3000 Assurance engagements other than audits or reviews of historical financial information and ASAE 3100 Compliance engagements.

ObjectiveIn a Solicitors’ trust account audit, the auditor must form an opinion on whether the law practice has, during the period of the examination, complied with the requirements of the relevant legislation, regulations and any legal profession rules relating to how law practice handles trust money.

This involves obtaining evidence to determine whether:

• accounting and other records relating to trust monies have been properly kept;

• there is no loss or deficiency of trust monies or failure to pay or account for trust monies; and

• there has been no failure to comply with a provision of the Act or Regulations.

The auditor must sign a report and certificate, in a form approved by the relevant state or territory, certifying the statement of trust money prepared by the law practice and submit this to the relevant authority by the specified deadline.

RegulationsThe regulations governing the operations of a solicitor’s trust account are driven by the Acts and Regulations in the relevant state/territory and therefore it is necessary to have a good understanding of the requirements of the relevant state/territory Act.

Appendix 8A provides an overview of the audit requirements in each state/territory legislation.

Annual audit requirementsSolicitors must ensure that trust accounts are audited within the prescribed time frame each year. The cost of the audit is to be borne by the solicitor, and is to be paid from the solicitor’s general account and not from the trust account.

The auditor is to be allowed access to accounting records of the trust account, and also to the records and files of the solicitor’s practice. This access is essential in ensuring that all transactions involving trust account money have been recorded correctly.

The timing of the audit is determined by the provisions of the Act in each state and territory.

Some legislation requires more than one audit visit each trust year. For example, Victoria requires an unscheduled visit during the audit year in addition to the year end visit.

Audit methodologyThe compliance audit methodology described in Chapter 5 should be followed – specific information relating to the audit of a solicitor’s trust account is included in the relevant phase below.


Auditor appointment and replacement

Each legislation contains relevant details of appropriately qualified persons able to act as auditors and prior to accepting any audit engagement, the auditor should confirm their eligibility.

Engagement letter

The audit scope should be outlined in the audit engagement letter.

The engagement letter should clearly delineate the responsibilities of the solicitor, including the requirements to maintain an adequate system of internal control, to maintain proper accounting records, and to ensure that the conditions of having a trust account are complied with throughout the year.


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The letter should outline general audit procedures to be performed, including a review of internal controls over the operation of the trust account and relevant accounting information. Other information should include fees and payment requirements.

PlanningThe auditor should plan the audit of a solicitor’s trust account to take into account risks and knowledge of the client.

Understanding the business

The focus of the audit of a solicitor’s trust account is to test compliance with the rules governing trust money; therefore, the auditor should understand the legislative requirements for handling trust money and the requirements of the relevant legislation.

Audit procedures

The nature, timing and extent of audit procedures will vary, depending on the following:

• the services provided by the solicitor and money received on trust as a result of these services the nature of the solicitor’s business, i.e. whether the solicitor is a sole practitioner or a solicitor of a large practice;

• the volume of transactions affecting the trust account;

• the average size of transactions affecting the trust account; and

• the existence of segregation of duties.

The above factors should be taken into account in the auditor’s assessment of risk and documentation of the planning process.

In the audit of a solicitor’s trust account, it is important that the audit procedures are planned so they cover the entire period. Such procedures are designed to test compliance with all the requirements of relevant legislation and minimise the risk of non-detection of breaches including fraud.

Internal control system

The auditor should document and assess internal controls and procedures to establish whether reliance can be placed on them. The systems documentation and assessment should include computer procedures, whenever applicable.

The solicitor has the ultimate responsibility for compliance with legislation at all times during the year. Therefore a prudent solicitor will have procedures in place to ensure that those requirements are being fulfilled. If no such procedures exist, the auditor should question the ability of the solicitor to state that all requirements have been complied with throughout the year, and issue a recommendation to the solicitor suggesting that such procedures be implemented.

The strengths of internal controls over the trust account will vary, depending on the size and nature of a solicitor’s practice.

Where a solicitor is also a sole practitioner, there will be limited scope for adequate segregation of duties, whereas a larger practice may only rely on such segregation in order to maintain effective controls over the trust account.

Ideally, the solicitor should have the following internal controls in place:

• segregation of authorisation of transactions, recording of transactions and custody over the client’s monies;

• independent monthly reconciliation of trust account records to trust bank accounts;

• supervision by partner of the practices of the operations of the trust accounts; and

• adequate supporting documentation for all transactions relating to trust money (see ‘Documentation’ below).

Materiality

Materiality is applied to the audit of a solicitor’s trust account in a different way from the audit of a financial report. The auditor of a solicitor’s trust account is concerned with compliance with a standard rather than purely the misstatement of the financial report. In assessing this compliance, the auditor is required to test transactions to ensure that they have been dealt with and recorded in a way that is consistent with legislation. For example, if a transaction has been recorded incorrectly then that is a breach of the legislation and therefore the dollar value of the transaction does not matter.


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Performing

Documentation

The following are examples of the supporting documentation which should be available for inspection by the auditor:

• cheque requisition forms for all withdrawals of trust money, detailing the client name, amount required, purpose of the payment, payee name, and requiring authorisation prior to processing;

• cash receipts for all trust money received by the member, detailing date received, amount, name of client, and purpose of the receipt;

• register of items other than trust money received, such as documents of title, detailing date received, particulars of documents and client name;

• trust transfer journals; and

• bank statements, bank deposit slips, cheque butts and any other relevant documentation.

Sampling

Where a solicitor has relatively few clients for whom trust money is received and there are a limited number of transactions, it may be more efficient to perform testing on a 100 per cent basis. However, where there are a large number of clients, and numerous transactions, the auditor should select and test samples to obtain sufficient appropriate audit evidence in an efficient and effective manner.

ASA 530 Audit sampling can be referred to for guidance, as it outlines the matters to be considered by the auditor in selecting sampling methods and sizes. These matters include the extent of reliance to be placed on internal controls, e.g. the lower the reliance, the greater the sample size in substantive testing. The auditor should also keep in mind the objective of the audit (i.e. compliance based).

The main risk area for the auditor is ensuring completeness, i.e. that all transactions which should have passed through the trust account have occurred and have been correctly recorded.

This risk is taken into account when deciding sample selection, and also the source of sample selection, i.e. the population.

The population in this case is the files of all of the clients of the solicitor’s practice, as any of these clients may have had trust money transactions during the year. If the population was the trust account records, then there would be a zero probability of selecting and testing transactions dealing with trust money which have been erroneously or deliberately recorded elsewhere.

This will require access to the office records of the solicitor to ensure all client records are available.

It may be appropriate to design audit procedures that look at the methods of recording new clients and matters in the solicitor’s practice.

All transactions relating to client’s monies, whether they are trust money or not, should be recorded and the source documentation filed. Therefore, these client files are the source of the sample selection. (The method of filing may vary between members; however, the ideal method is for source documents to be filed in separate ‘client monies files’, those files relating to both trust money and other client monies).

When there are receipts or other records of monies on file, and these are not designated as trust money, the auditor should plan procedures to consider the appropriateness of the classification.

ReportingThe lodging and format of the audit report differs between states and territories and the auditor should ensure that the report contains the most up-to-date and relevant opinion.


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AppendicesAppendix 8A – Relevant Acts for each State/Territory.

Appendix 8B – Sample audit programs.


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Appendix 8A – Relevant Act/legislation The table below shows the relevant Act/Regulations for each state in respect of the audit of the solicitor trust account. It is important to check for any amendments to these Acts and Regulations issued after the release of this document.

Australian Capital Territory

Relevant legislation and guidance The Legal Profession Act 2006

The Legal Professional Regulations 2007

<www.actlawsociety.asn.au>.

New South Wales



<www.lawsociety.com.au>.

Northern Territory


The Legal Professional Regulations

<http://lawsocietynt.asn.au/>.

Queensland



<www.qls.com.au>.

South Australia

Relevant legislation and guidance The Legal Practitioners’ Act 1981

The Legal Professional Regulations

<www.lawsocietysa.asn.au>.

Tasmania

Relevant legislation and guidance The Legal Professional Act 2007

The Legal Profession (Prescribed Authorities) Regulations 208

<www.taslawsociety.asn.au>.

Victoria


The Legal Profession Regulations 2005

<www.lsb.vic.gov.au>.

Western Australia

Relevant legislation and guidance Legal Profession Rules 2009

Legal Profession Regulations 2009

<www.lawsocietywa.asn.au>.


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Appendix 8B – Sample audit programsThe following audit programs are not specific to any state/territory in Australia and auditors should ensure that they choose the appropriate tests to meet their reporting requirements under the relevant legislation listed in Appendix 8A.

Surprise visit program – refer to legislation for frequency and timing of surprise visits

W/P Ref

Completion

By Date

1. At least once during the audit year, visit the solicitor’s office without previous notice to him and carry out a state of records check.

2. Enquire whether there have been any investigations by a Law Institute or any other regulatory bodies since the last audit.

If there have been any inspections, obtain a copy of the report of findings and consider the implication of any breaches identified.

3. Attend a mail opening at the surprise visit, listing cheques for subsequent tracing to the cash book, client ledger & bank statement.

4. Obtain a copy of the reconciliation of the trust ledger account to the cash book balance, bank reconciliation and trust ledger account control card.

• Agree unpresented cheques to both the cash book and to subsequent bank statements.

• Check all outstanding deposits to ensure that they represent money received on the last business day of the month and banked on the first business day of the following month – if this is not the case, check whether the delay in banking is the result of poor administrative procedures or fraud.

• Check that the bank reconciliation statement records the dates of issue of outstanding cheques, cheque numbers and amounts.

• Check that appropriate action has been taken in respect of:

a) any stale and long-outstanding cheques;

b) unclaimed monies.

• Check all other reconciling items and investigate any which are old or unusual.

5. Ensure that the trust account trial balance contains details of the name, identifying reference, balance and short description of each matter to which each balance relates.

6. Identify any large and/or unusual transactions and follow them up to ensure their compliance with trust accounting requirements.

7. Review the ADI records (bank statements) for the year and:

• ensure dishonoured cheques have not led to a debit balance;

• check unusual items where necessary.

Conclusion:

Issues to be reported:


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Type of practising certificate W/P Ref

Completion

By Date

1. Check that each principal (authorised to receive trust money) of the law practice holds a current practising certificate with authority to receive trust money.

If necessary, obtain confirmation from the Legal Services Board or the relevant Law Institute of the type of practising certificate held by each principal.

Conclusion:


General trust account administration W/P Ref

Completion

By Date

1. Check that the trust account is established and maintained with an approved Authorised Deposit-taking Institution.

2. Check that the law practice notifies the appropriate Legal Services Board (or equivalent) of the number of the account and the name and address of the branch of the ADI at which the general account is maintained within 14 days after establishing it.

3. Check if there are any subsequent changes to the information notified to the Board.

If so, did the law practice notify the Board within 14 days after becoming aware of the change?

4. Check whether there is any closure of a general trust account; if so, did the law practice notify the Board of the closure within 14 days after closing the trust account?

5. Check that the name of the general trust account includes the name of the law practice or the business name under which the law practice engages in legal practice, and the expression ’law practice trust account’ or ‘law practice trust a/c’.

6. Check that the account is of a kind that is, for the time being, approved by the Board.

If considered necessary, obtain confirmation from the Board.

7. Confirm with the law practice that the ’disclosed’ trust account/s is/are the only trust account/s maintained by the practice during the audit year.

8. Statutory deposits.

Check the details of the quarterly statements from the Board with the ADI records. Ensure there are no discrepancies.

Conclusion:



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Controlled money account W/P Ref

Completion

By Date

‘Controlled money’ means trust money received by a law practice with a written direction to deposit the money in an account (other than a general trust account) over which the practice has or will have exclusive control.

1. Check with the law practice whether there is any controlled money received by the law practice; if so, ensure that the money was deposited in a controlled money account exclusively for the person on whose behalf it was received.

2. Check that the account name of a controlled money account includes the following particulars:

a) the name of the law practice concerned;

b) the expression ‘controlled money account;

c) such particulars as are sufficient to identify the purpose of the account and to distinguish the account from any other account maintained by the law practice. (Regulation 3.3.22(1)).

3. Confirm all controlled money (100%) held at the end of the audit period to confirmations.

4. Confirm that a controlled money reconciliation has been prepared within the relevant number of days after each month. The reconciliation should contain a list of the practice’s controlled money accounts showing:

i. the name, number and balance of each account in the register; and

ii. the name of the person on whose behalf the controlled money in each account was held; and

iii. a short description of the matter to which each account relates; and

iv. the date the statement was prepared.

5. Written direction

i. For each deposit of controlled money and/or each controlled money account maintained, check that there is a written direction by the person on whose behalf the money was received.

ii. Check that the purpose of the account agrees with the written direction.

iii. Check that each written direction is kept for 7 years after finalisation of the matter to which the direction relates.

6. Confirm that a register of controlled money has been kept during the year and that the record of controlled money movements for a controlled money account records the following information:

a) the name of the person on whose behalf the controlled money is held;

b) the person’s address;

c) particulars sufficient to identify the matter;

d) any changes to the information referred to in paragraphs (a) to (c).


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Completion

By Date

7. Select a judgemental sample of controlled money balances received during the audit year and for these balances, inspect the controlled money receipt relating to each item.

Confirm that:

a) the solicitor deposited the money in the account specified in the written direction relating as soon as practicable after receiving controlled money;

b) the solicitor holds controlled money deposited in a controlled money account exclusively for the person on whose behalf it was received;

c) the amounts agree to the controlled money register;

d) the receipt has been made out in duplicate, where computer records are not used;

e) the receipt includes the following information:

• the date the receipt is made out and, if different, the date of receipt of the money;

• the amount of money received;

• the form in which the money was received;

• the name of the person from whom the money was received;

• details clearly identifying the name of the person on whose behalf the money was received and the matter description and matter reference;

• particulars sufficient to identify the purpose for which the money was received;

• the name of and other details clearly identifying the controlled money account to be credited, unless the account has not been established by the time the receipt is made out;

• the name of the law practice, or the business name under which the law practice engages in legal practice, and the expression ‘controlled money receipt;

• the name of the person who made out the receipt;

• the number of the receipt.

8. Select a judgemental sample of payments made from controlled money balances held during the audit year.

Confirm that:

a) The solicitor has only made payments after receiving written instructions from the client.

b) The amounts agree to the controlled money register.

c) The payments had been made under the appropriate authorisation, i.e:

i. an authorised principal of the law practice; or

ii. if a principal referred to in paragraph (a) is not available:

• an authorised legal practitioner associate; or

• an authorised Australian legal practitioner who holds an unrestricted practising certificate authorising the receipt of trust money; or

• 2 or more authorised associates jointly.


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Completion

By Date

d) The records of the controlled money payment include the following information:

i. the date and number of the transaction;

ii. the amount withdrawn;

iii. in the case of a transfer made by electronic funds transfer—the name and number of the account to which the amount was transferred and the relevant BSB number;

iv. the name of the person to whom payment is to be made or, in the case of a payment to an ADI, the name or BSB number of the ADI and the name of the person receiving the benefit of the payment;

v. details clearly identifying the name of the person on whose behalf the payment was made and the matter reference;

vi. particulars sufficient to identify the purpose for which the payment was made;

vii. the person or persons effecting, directing or authorising the withdrawal.

Conclusion:


Reconciliation of trust records W/P Ref

Completion

By Date

1. Check that the general trust account balance has been reconciled with the balance of the practice’s trust account cash books at the end of each month (bank reconciliation) within the timeframe specified in the relevant Act.

2. Obtain a copy of the reconciliation at the last day of the audit period:

• Confirm that the balance per bank has been reconciled to balance per cash book; and balance per cash book has been reconciled to balance per total client matters.

• Check the additions.

• Agree unpresented cheques to both the cashbook and subsequent bank statements.

• Perform standard unpresented cheque testing (bank statement back to unpresented cheque listing).

• Investigate any long outstanding cheques and ensure provisions in relation to unclaimed monies are complied with.

• Agree unallocated receipts to direct credits in bank statement on the testing date.

• Investigate any unusual reconciling items.


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Reconciliation of trust records W/P Ref

Completion

By Date

Conclusion:


Trust account balances W/P Ref

Completion

By Date

1. Check that the balance (total) of the trust ledger accounts agrees with the cash book balance at the end of each month.

2. Check that the listing of trust ledger accounts shows:

• the name

• the identifying reference

• the balance of each account and

• a short description of the matter to which each relates.

3. Ensure that overdrawn (negative) balances in any general trust account or trust ledger account are fully investigated.

4. Obtain standard bank confirmations from all banks where trust money is held.

5. Review the trust bank statements at the year and:

Identify any large and/or unusual transactions and follow them up to ensure their compliance with trust accounting requirements.

Conclusion:


Examination of matter files W/P Ref

Completion

By Date

1. Select a sample of matter files, based on matter file rotation and selection listing and:

• Review matter file for transactions which have occurred for that matter and determine whether these transactions should be processed through the trust account.

• Obtain trust statement for selected matter and ensure all transactions identified above have been processed through the trust account.

• Ensure all transactions have been recorded in the trust ledger in accordance with applicable rules (i.e. rules in relation to receipts, expenses, transit money and cost to office transfers).


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Examination of matter files W/P Ref

Completion

By Date

2. Obtain independent confirmation from solicitors clients in relation to transactions which have occurred during the financial year by performing the following:

• Obtain listing of all clients who had trust matter files opened during the year subject to audit.

• Select a random sample of 5 clients to send confirmation and obtain a trust matter statement for the period 1 Nov 2009 to 31 Oct 2010 (details all transactions processed for that client during year).

Follow up any exceptions from clients obtaining adequate explanation for disagreement.

3. Check if the matter files can be readily reconciled to the trust ledger accounts.

Conclusion:


Office bank account W/P Ref

Completion

By Date

1. Confirm the auditors understanding of the use of the office account in relation to receipting process, and confirm with client, whether money for bills is received in the trust account or the office account. If funds are received into the trust account and never into the office account then no further work in this area is required.

If controls in the solicitor’s computerised accounting software prevent bills from being receipted into the office account, confirm that this is so by re-performance of 1 sample each year.

2. If funds are received into the office account, select a sample of bills received into the office account during the year. Obtain copies of the relevant bills and confirm by inspection of the bill whether the bill contains any unpaid hard disbursements. If the bill did contain unpaid disbursements, check that one of the following two treatments is used:

a) the creditor is paid within 24 hours; or

b) the money for the disbursements is transferred to the trust account within 24 hours until the time when the creditor is paid.

3. Obtain a copy of the bank reconciliation of the office bank account (if prepared), review the long-outstanding cheques for disbursements and check if there are any irregularities (such as money paid from trust where the disbursements cheques have not been presented, resulting in a deficiency).

Conclusion:



8:14

Receipts of trust money W/P Ref

Completion

By Date

1. Follow up the cheques identified at the surprise visit by tracing selected cheques to:

• Trust funds receipt;

• Bank deposit slip;

• Bank statement;

• Cash book;

• Client ledger.

Ensure receipts have been banked ‘as soon as practicable’ into the trust bank account.

If a cheque was not banked in the trust account document the reason for this and confirm this is in accordance with the relevant Act.

2. Check that receipt forms, in duplicate, are used for the receipt of trust money, unless at the time the receipt is made out those particulars are recorded by computer program in the trust account receipts cash book.

3. Check that receipts are consecutively numbered and issued in consecutive sequence.

4. Check that if a receipt is cancelled or not delivered, the original receipt is retained.

5. Review all cash receipt journals for the year to identify large and/unusual transactions for audit testing.

All receipts from the solicitors general account should be investigated.

6. Select a sample of receipt numbers by means of a numeric sample (determine first and last receipt issued during period) and perform the following:

• Obtain the duplicate receipt and ensure that the receipt was made out as soon as practicable after the trust money is received; or if received by direct deposit, as soon as practicable after the law practice receives or can access notice or confirmation (in written or electronic form) of the deposit from the ADI concerned.

• Inspect the receipt and the trust ledger to confirm that the following information was recorded:

a) the date the receipt is made out and, if different, the date of receipt of the money;

b) the amount of money received;

c) the form in which the money was received;

d) the name of the person from whom the money was received;

e) details clearly identifying the name of the client in respect of whom the money was received and the matter description and matter reference;

f) particulars sufficient to identify the purpose for which the money was received;

g) the name of the law practice and the expression ‘trust account’ or ‘trust a/c’;

h) the name of the person who made out the receipt;

i) the number of the receipt.


8:15

Receipts of trust money W/P Ref

Completion

By Date

• Vouch to supporting documents in client file (or other documentation as considered necessary) and ensure date recorded on receipt corresponds to supporting documentation to ensure receipts have not been predated in the trust ledger to conceal a deficiency.

• Vouch to cashbook and ensure receipts around receipt selected (5 prior and 5 subsequent) are in sequence. Sight originals of any cancelled receipts

• Trace to bank deposit slip stamped by bank, ensuring the following details have been included:

a) the date of the deposit;

b) the amount of the deposit;

c) whether the deposit consists of cheques, notes or coins (and the amount of each);

d) for each cheque:

i. the name of the drawer of the cheque;

ii. the name and branch (or BSB number) of the ADI on which the cheque is drawn;

iii. the amount of the cheque.

Conclusion:


Payments – cheque W/P Ref

Completion

By Date

1. Select a random sample of [xx] cheques and confirm that the cheque is:

a) made payable to or to the order of a specified person or persons and not to bearer or cash; and

b) crossed ‘not negotiable’; and

c) in the case of a law practice, includes:

i. the name of the law practice or the business name under which the law practice engages in legal practice; and

ii. the expression ‘law practice trust account’ or ‘law practice trust a/c’;

d) In the case of a law practice, signed:

i. by an authorised principal of the law practice; or

ii. if a principal referred to in paragraph (a) is not available:

a) by an authorised legal practitioner associate; or

b) by an authorised Australian legal practitioner who holds an unrestricted practising certificate authorising the receipt of trust money; or

c) by 2 or more authorised associates jointly.


8:16

Payments – cheque W/P Ref

Completion

By Date

2. Perform the following for the cheques selected above:

a) Examine the trust account payments cash book to confirm the following information is included:

i. the date and number of the cheque;

ii. the amount ordered to be paid by the cheque;

iii. the name of the person to whom the payment is to be made or, in the case of a cheque made payable to an ADI, the name or BSB number of the ADI and the name of the person receiving the benefit of the payment;

iv. details clearly identifying the name of the person on whose behalf the payment was made and the matter reference;

v. details clearly identifying the ledger account to be debited;

vi. particulars sufficient to identify the purpose for which the payment was made.

b) Confirm that the sequence of posting of the information above is recorded in the order in which the payments were made.

c) Confirm that the information above was recorded within 5 working days of the day the payment was made.

d) Confirm there were sufficient funds in the trust account to cover the payment.

e) Vouch to subsequent debit in bank statement ensuring date presented is subsequent to date in cashbook, otherwise may conceal a deficiency.

f) Vouch to supporting documentation within the matter file (or else where if considered necessary) and ensure the details and dates recorded in the trust ledger and cashbook match the actual source documentation.

3. Review the sequence of cheques used for the year and sight all cancelled cheques.

4. Review all cash payments journals for the year to identify large and/unusual transactions and ensure transaction is in order and complies with trust account requirements.

Particular attention should be paid to amounts paid to solicitors or their related companies.

Conclusion:



8:17

Payment by electronic funds transfer W/P Ref

Completion

By Date

1. Check that a payment by electronic funds transfer is effected by, under the direction of or with the authority of:

a) an authorised principal of the law practice or

b) if the principal is unavailable:

i. an authorised legal practitioner associate; or

ii. an authorised Australian legal practitioner who holds an unrestricted practising certificate authorising the receipt of trust money; or

iii. 2 or more authorised associates jointly.

2. Check that a written record is maintained for each payments showing the ’required particulars’:

a) the date and number of the transaction;

b) the amount transferred;

c) the name and number of the account to which the amount was transferred and relevant BSB number;

d) the name of the person to whom the payment was made or, in the case of a payment made payable to an ADI, the name or BSB number of the ADI and the name of the person receiving the benefit of the payment;

e) details clearly identifying the name of the person on whose behalf the payment was made and the matter reference;

f) details clearly identifying the ledger account to be debited;

g) particulars sufficient to identify the purpose for which the payment was made.

Conclusion:



8:18

Journal transfers W/P Ref

Completion

By Date

1. Check that trust money is only transferred by journal entry from one trust ledger account to another trust ledger account if:

i. the law practice is entitled to withdraw the money and pay it to the other trust ledger account; and

ii. the transfer has been authorised in writing by the authorised signatory or signatories to the general trust account.

2. Select a sample of journal transfers from the trust ledger accounts:

a) Ensure the postings of the debit and credit to the trust ledger accounts are on the same date;

b) Ensure the entries have been correctly authorised;

i. by a person who is authorised to sign cheques drawn on the general trust account without a cosignatory; or

ii. by 2 or more persons who are authorised to sign cheques drawn on the general trust account jointly;

c) Confirm that the authorisations are retained.

3. Check that the following particulars are recorded in the trust account transfer journal for each of the journals selected:

a) the date of the transfer;

b) the trust ledger account from which the money is transferred (including its identifying reference);

c) the trust ledger account to which the money is transferred (including its identifying reference);

d) the amount transferred;

e) particulars sufficient to identify the purpose for which the transfer is made, the matter reference and a short description of the matter.

4. Check that the journal pages or entries are consecutively numbered.

5. Investigate any unusual journals and ensure transfers between accounts are reasonable and have been made with the knowledge and authority of the client (especially transactions involving partners or associated companies).

Conclusion:



8:19

Trust account statement W/P Ref

Completion

By Date

1. Document the law practice’s policies for the distribution of trust account statements, to ensure that the relevant rules are adhered to.

2. Check that a statement of account contains all the relevant information required by the Act/Regulations.

3. Check that a trust account statement is furnished in accordance with the timeframes specified in the relevant Act/Regulations.

Conclusion:


Register of investments W/P Ref

Completion

By Date

1. Check that any investment of trust money is recorded in a register of investments.

2. Check that the register of investments records the following information in relation to each investment:

a) the name in which the investment is held;

b) the name of the person on whose behalf the investment is made;

c) the person’s address;

d) particulars sufficient to identify the investment;

e) the amount invested;

f) the date the investment was made;

g) particulars sufficient to identify the source of the investment, including, for example

i. a reference to the trust ledger account; and

ii. a reference to the written authority to make the investment; and

iii. the number of the cheque for the amount to be invested;

h) details of any documents evidencing the investment;

i) details of any interest received from the investment or credited directly to the investment;

j) details of the repayment of the investment and any interest, on maturity or otherwise.

Conclusion:



8:20

Register of interests W/P Ref

Completion

By Date

1. Ensure a register of interests has been kept detailing the following:

a) The names of all companies, other than companies listed on the ASX or shelf companies which have not traded and are maintained for sale of which the legal practitioner or any member of the immediate family of the legal practitioner is a director, shareholder or in which the person has a beneficial interest; and

b) Sufficient details to enable identification of any partnerships, joint ventures, trusts or other business interests in which the legal practitioner or any member of the immediate family of the legal practitioner has a joint interest with a client of the legal practitioner.

Conclusion:


Trust money subject to special powers W/P Ref

Completion

By Date

1. Check that a law practice or an associate of the practice when given power to deal with trust money (whether alone or jointly with another person) keeps the following records:

a) a record of all dealings with the money to which the practice or associate is a party; and

b) all supporting information in relation to the dealings

in a manner that enables the dealings to be clearly understood.

2. If an approved clerk is given a power to deal with trust money (whether alone or jointly with another person), confirm that the clerk has kept as part of the practice’s or clerk’s trust records:

a) a record of all dealings with the money to which the clerk is a party; and

b) all supporting information in relation to the dealings in a manner that enables the dealings to be clearly understood.

Conclusion:



8:21

Register of powers and estates W/P Ref

Completion

By Date

1. Check that the register of powers and estates records:

a) the name and address of the donor and date of each power; and

b) the name and date of death of the deceased in respect of each estate of which

c) the law practice or associate is executor or administrator.

Conclusion:


Intermixing money W/P Ref

Completion

By Date

1. Procedure

Check that no trust money is mixed with other money, unless authorised by the Board, and in accordance with any conditions imposed by the Board in relation to the authorisation.

Conclusion:


Deeds W/P Ref

Completion

By Date

1. Check whether a deed register (if applicable) is appropriately maintained.

Conclusion:



8:22

Accounting records and computer system W/P Ref

Completion

By Date

1. Confirm that the law practice keeps in permanent form trust records in relation to trust money received by the practice or clerk. These records should be kept for a period of 7 years.

2. Confirm that the following documents have been printed within the relevant timeframe at the end of each month (choose a sample of months):

a) trust account cash books, unless a copy of the books as at the end of the month is retained in electronic form that is readable or reportable on demand;

b) trust account bank reconciliation statements;

c) trust ledger trial balances;

d) lists of controlled money accounts and their balances.

3. Check that when creating, amending or deleting information about the client’s name, address, matter reference and description, or the ledger account number, a record is maintained in chronological order.

4. Check that a debit balance is not created unless a contemporaneous record is made in a permanent form.

5. Ensure that the practice’s system is not capable of deleting a trust ledger account unless:

a) the balance of the account is zero and all outstanding cheques have been presented:

b) when the account is deleted, a copy of the account is retained in a permanent form.

6. Document the back up process used by the practice, checking compliance with each part of the Regulations listed below. Inspect evidence as appropriate to support the assertions made.

The law practice must ensure that:

a) a back-up copy of all records is made at least once each month; and

b) each back-up copy is retained by the law practice; and

c) a complete set of back-up copies is kept in a separate location so that any incident that may adversely affect the records would not also affect the back-up copy.

Conclusion:



8:23

Transit money W/P Ref

Completion

By Date

1. Select a random sample of [xx] transits during the financial period and perform the confirm the following information has been recorded into the trust ledger in respect of the transit money:

a) Date on which money was received;

b) Name of person from whom money received;

c) Amount received;

d) Identity of person to whom money was paid;

e) Name of drawer;

f) Brief particulars to identify the relevant transaction;

g) Date on which the money was paid;

h) Ensure that transit money has been paid or otherwise delivered as soon as practicable after it is received.

Conclusion:


Trust to firm transfers W/P Ref

Completion

By Date

1. Select a sample of [xx] trust to firm cost/fee transfers from the trust ledger and compare the date of the transfer and the actual amount transferred per the cash book to both the trust bank statement and the solicitors general bank statements.

2. For the sample selected, determine whether the transaction was in accordance with the relevant rules of the Act/Regulations.

3. If transfer relates to the reimbursement of costs paid by the legal practitioner on behalf of the relevant client sight supporting documentation to confirm legal practitioner had in fact incurred the expense prior to transferring the funds.

Conclusion:


Professional conduct and practice rules W/P Ref

Completion

By Date

1. Check whether the law practice has been unreasonably slow in completing a client’s work.

2. Check whether there is any evidence of any legal practitioner associates borrowing from clients.

3. Check whether there is any evidence of acting for both mortgagor and mortgagee where the mortgagor is a developer, builder or subdivider.

4. Check whether authorities are held by the law practice when acting for more than one party.

5. Check whether there is any evidence of acting for both parties without acknowledgement.

6. Check whether there is evidence of any other conflict of interest situation.

7. Check whether there is any evidence of the legal practitioner/s having settled a will, power of attorney or instrument where the legal practitioner or associates of the legal practitioner may receive a benefit in addition to reasonable costs (including conditional costs agreement).

Check whether there is any evidence of the law practice operating some form of unregulated managed mortgage practice.

Conclusion:
