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«Bulletin: Auditing Small and Medium Sized Entities (SMEs) Issued by the Auditing and Assurance Standards Board September 2007 Disclaimer: AUASB ...»


Auditing Small and Medium

Sized Entities (SMEs)

Issued by the Auditing and Assurance Standards Board

September 2007


AUASB Bulletins are issued to raise a general awareness of matters that are

of interest to auditors and assurance practitioners. They do not provide

authoritative guidance and do not amend existing Auditing Standards and

Guidance Statements. No responsibility is taken for the results of actions or omissions to act on the basis of any information contained in this AUASB Bulletin, or any errors or omissions in the document.

This Bulletin is available on the AUASB website: www.auasb.gov.au.

Auditing and Assurance Standards Board Phone: (03) 8080 7400 PO Box 204 Fax: (03) 8080 7450 Collins Street West E-mail: enquiries@auasb.gov.au Melbourne Victoria 8007 AUSTRALIA COPYRIGHT © AUASB 2007. The text, graphics and layout of this Bulletin are protected by Australian copyright law and the comparable law of other countries.

Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Principal Executive, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne Victoria 8007.

Otherwise, no part of the Bulletin may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.

ISSN 1834- 4879

-2Auditing Small and Medium Sized Entities

1. Objective

The purpose of this Bulletin is to inform stakeholders of:

• The AUASB’s response to issues identified by constituents in the AUASB Discussion Paper on Auditing Small and Medium Sized Entities released for public comment in March 2007.

• Constituent comments received on the statements of principle and specific questions posed by the above.

2. AUASB Action on identified issues The AUASB received nine responses to its discussion paper which were considered at its meeting on 14 May 2007 when it resolved to

continue to:

(i) Actively monitor developments proposed at the international level, in particular, by the International Auditing and Assurance Standards Board (IAASB) and the Small and Medium Practices (SMP) Committee of The International Federal of Accountants (IFAC) which are considering the introduction of global guidance on the audit of Small and Medium Sized Entities (SMEs).

(ii) Promote awareness of assurance providers and other

–  –  –

Details of the responses received are noted under item three Constituent Comments, later in this Bulletin.

2.1 Developments impacting on SME Auditing Harmonisation and convergence with international standards by accounting and auditing standard setters around the world has tended to create complex accounting and auditing standards. Many argue this complexity has created an “understanding gap” for SMPs and SMEs which generally operate outside the capital markets.

Standard setters have refocussed their attention recently on

-3AUASB Bulletin – September 2007 facilitating the implementation of these accounting and auditing standards by SMPs and SMEs. As detailed below, this is an area to which Australian regulators and accounting and auditing standard setters are continuing to devote substantial resources.

Regulatory reforms As part of the overall government objective to reduce the regulatory burden in the corporate and financial services sectors, legislation, the Corporations Legislation Amendment (Simpler Regulatory System) 2007, came into effect in June 2007. This legislation revised the size tests for a proprietary company with regard to financial reporting and annual audit requirements. The thresholds

were increased as follows:

• consolidated revenue increased from $10 million to $25 million per annum; and

–  –  –

The employee test threshold remained constant at 50 and the requirement for a proprietary company to meet two of the three size tests remains unchanged.

Accounting standard setters In February 2007, the International Accounting Standards Board (IASB) published for public comment the Exposure Draft of its International Financial Reporting Standard for Small and MediumSized Entities (IFRS for SMEs). In May 2007, the Australian Accounting Standards Board published the Exposure Draft on Proposed Revised Differential Reporting Regime for Australia and IASB Exposure Draft of A Proposed IFRS for Small and MediumSized Entities. These proposed standards are aimed at establishing differential financial reporting requirements for SMEs.

Auditing standard setters The IFAC Small and Medium Practices (SMP) Committee has

developed a Draft ISA Guide Fact Sheet that:

• Provides a rationale as to why such guidance needs to be developed centrally by IFAC’s SMP Committee.

–  –  –

The Accounting Practices Board (APB) in the United Kingdom issued two consultation papers in January 2007 on The Need for Guidance to Aid the Implementation of Auditing Standards on Smaller Entity Audits and Draft Guidance on Smaller Entity Audit Documentation. It is our understanding that whilst the APB will have input into the IFAC SMP Committee’s ISA Guide, it is likely that it will issue guidance separately in the UK.

In May 2007, the Canadian Institute of Chartered Accountants (CICA) completed its project on the audit of SMEs and provided tools (Audit of a Small Entity, the Professional Engagement Manual (PEM) and related materials) to assist practitioners to understand, comply with and apply ISAs in SME audits. This was publicised in CICAs May 2007 Risk Alert. It is understood that the ISA Guide will be a variant of CICA’s PEM.

The AUASB plans to actively monitor developments on SME auditing by IFAC’s SMP Committee and examine the Proposed ISA Guide. The AUASB will use the ISA Guide, together with guides issued by the APB and CICA, to formulate guidance on the application of Auditing Standards.

2.2 Guidance on levels of assurance The AUASB has been proactive in providing guidance on the levels of assurance obtained from the conduct of audits (reasonable assurance) or reviews (limited assurance) of financial information.

In April 2006, the AUASB released Auditing Standard ASRE 2410 Review of an Interim Financial Report Performed by the Independent Auditor of the Entity which includes specific mandatory requirements and explanatory guidance on the level of assurance provided by reviews as against that provided by an audit. ASRE

-5AUASB Bulletin – September 2007 2410 Appendix 2 includes detailed illustrative review procedures that may be performed in an engagement to review an interim financial report. In July 2007, the AUASB issued the Framework for Assurance Engagements and Standard on Assurance Engagements ASAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Information which provides further explanatory guidance on the levels of assurance.

The AUASB is currently in the process of developing another proposed standard on review engagements, ASRE 2400 Review of Financial Reports and Other Historical Financial Information, which will provide assurance practitioners with further specific mandatory requirements and explanatory guidance on review engagements.

2.3 Liaison with Professional Accounting Bodies The AUASB intends to continue liaison with the Professional Accounting Bodies. Further, the AUASB intends to encourage training and self-help guides to be provided by the Professional Accounting Bodies to their constituents.

3. Constituent Comments In relation to the AUASB’s discussion paper on the issue of SME audits, the AUASB received responses to its statements of principle and specific questions from nine constituents (refer Appendix 1), which are included on its website, www.auasb.gov.au, and are

summarised as follows:

–  –  –

All responding constituents agreed with the following five of the six Statements of Principle espoused by the AUASB in its discussion


–  –  –



The AUASB received responses to the specific questions and comments on

the statements of principle from the following nine constituents:

(i) BDO Kendalls;

(ii) Grant Thornton;

(iii) Graeme Greene, CA;

(iv) John Oxley, CPA, CA;

(v) Professional Accounting Bodies – a combined response from CPA Australia, National Institute of Accountants and The Institute of Chartered Accountant in Australia;

(vi) PricewaterhouseCoopers;

(vii) RSM Bird Cameron;

(viii) The Institute of Internal Auditors Australia; and (ix) William Buck.

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