Function

Approved work programme for 2006-07

Monitoring and assessing the nature and overall adequacy of the systems and processes used by Australian auditors to ensure compliance with auditor independence requirements.

Information concerning the performance of this function should continue to be provided by ASIC (under the terms of the MOU with the FRC) following its inspections of those accounting firms targeted for inspection in 2006-07.

However, there may be merit in the FRC expanding the scope of its involvement with the accounting firms. In addition to periodic meetings, it may be useful for the FRC to use its information gathering powers to obtain manuals and other documents from the firms to form its own assessment of the systems and processes adopted by the firms for the purpose of ensuring compliance with auditor independence requirements.

The assessment of the information gathered by the FRC could be undertaken by a consultant and, depending on a preliminary review of the material, might be targeted at firms of a particular size or operating in a particular geographical area. This assessment could result in further work to determine whether individual firms are complying with their systems and processes.

Monitoring and assessing the nature and overall adequacy of:

1. the systems and processes used by professional accounting bodies for planning and performing quality assurance reviews of audit work undertaken by Australian auditors to the extent that those reviews relate to auditor independence requirements
2. the action that Australian auditors who have been subject to such quality assurance reviews have taken in response to the reports prepared as a result of those reviews; and
3. the action taken by professional accounting bodies to ensure that Australian auditors who have been subject to such quality assurance reviews respond appropriately to the reports prepared as a result of those reviews.

The FRC’s work in respect of this function will flow from the report of the consultant and the recommendations contained in that report.

The FRC will be consulting with the professional accounting bodies and other stakeholders concerning the recommendations of the consultants.

There may be a need for further consultancies in 2006-07 or later years to consider issues that arise out of this consultative process.

Monitoring and assessing the nature and overall adequacy of the investigation and disciplinary procedures of professional accounting bodies as those procedures apply to Australian auditors.

The FRC’s work in respect of this function will flow from the report of the consultant and the recommendations contained in that report.

The FRC will be consulting with the professional accounting bodies and other stakeholders concerning the recommendations of the consultants.

There may be a need for further consultancies in 2006-07 or later years to consider issues that arise out of this consultative process.

Monitoring the overall compliance by companies, registered schemes and disclosing entities with the audit-related disclosure requirements of the Corporations Act and the accounting standards. The disclosure requirements include:

1. paragraph 298(1)(c) of the Corporations Act, which requires a company, registered managed investment scheme or disclosing entity to include in its directors report for each financial year a copy of the auditor’s independence declaration under section 307C in relation to the audit for the financial year;
2. section 300 of the Corporations Act, which provides that the following information is to be included in the directors’ report of a listed company:
   1. if a registered company auditor plays a significant role in the audit of a listed company for the financial year in reliance on a declaration made under section 324A, the report for the company must also include details of the declaration [s-sec.300(11A)];
   2. in relation to each auditor:
      1. details of the amounts paid or payable to the auditor for non-audit services provided, during the year, by the auditor (or by another person or firm on the auditor’s behalf);
      2. a statement whether the directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Act;
      3. a statement of the directors’ reasons for being satisfied that the provision of those non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) did not compromise the auditor independence requirements of the Act.
3. subsection 306(2) of the Corporations Act, which provides that the directors’ report of a disclosing entity must include a copy of the auditor’s independence declaration under section 307C in relation to the audit or review for the half-year; and
4. paragraphs Aus 126.1 and Aus 126.2 of accounting standard AASB 101 Presentation of Financial Statements, which require an entity or economic entity to disclose in its financial report the remuneration of:
   1. the auditor, showing separately amounts for audit and non-audit services (including, in the case of the latter, the nature and amount of each of the non-audit services provided by the auditor); and
   2. a practice related to the auditor’s firm for non-audit services provided in relation to the entity or economic entity (including the nature and amount of each category of non-audit service).

As part of its 2006-07 work programme, the FRC will review, and analyse, the level of compliance with audit related disclosure requirements by considering the information provided by the MOU bodies.

Giving the Minister reports and advice about the matters referred to above.

Monitor developments on an ongoing basis and provide reports and advice on an ‘as required’ basis.

Giving professional accounting bodies reports and advice about matters related to their quality assurance reviews and disciplinary procedures as detailed above.

Monitor developments on an ongoing basis and provide reports and advice on an ‘as required’ basis.

Monitoring international developments in auditor independence, assessing the adequacy of the Australian auditor independence requirements provided for in:

1. the Corporations Act; and
2. codes of professional conduct;

in the light of those developments and giving the Minister, and professional accounting bodies, reports and advice on any additional measures needed to enhance the independence of Australian auditors

In 2006-07, the FRC should continue to perform this function by:

1. monitoring media reports and information on relevant web-sites (this information is provided to all FRC members on a monthly basis); and
2. meeting with appropriate bodies in other jurisdictions as part of overseas visits by the FRC chairman.

Having regard to the Treasury’s work comparing Australian independence requirements with the requirements of other major jurisdictions, the FRC will consider areas in which some aspects of Australian auditor independence requirements differ from the requirements applicable in other jurisdictions with a view to submitting appropriate recommendations for consideration by the Government.

Promoting, and monitoring the adequacy of, the teaching of professional and business ethics by, or on behalf of, professional accounting bodies to the extent to which the teaching of those subjects relates to auditor independence.

The FRC’s work in respect of this function will flow from the report of the consultant and the recommendations contained in that report.

The FRC will be consulting with the professional accounting bodies and other stakeholders concerning the recommendations of the consultants.

There may be a need for further consultancies in 2006-07 or later years to consider issues that arise out of this consultative process.

Other matters.

1. Non-Corporations Act audits (in particular, self managed superannuation funds).

The 2006-07 work programme does not envisage any direct action in respect of this matter.

Nevertheless, given the terms of the Parliamentary Secretary to the Treasurer’s letter of 22 February 2006, the FRC should monitor/consider any independence issues that arise in respect of non-Corporations Act audits so that it is able to provide appropriate advice to the Minister at the expiration of the 12 month period.

The advice to the Minister could result in work in this area being programmed in 2007-08.