Applying the standards

Accounting Ahead | Original study resource | accountingahead.com.au

Applying the standards

MODULE 1 | 1.4 | STUDENT COMPANION

The auditing standards are grouped by number and all follow one pattern, and an auditor must comply with

every relevant standard. The same standards apply to every entity, with the work scaled to its size and

complexity. The law, not the standards, decides who needs an audit or a review. Auditors-General

apply the standards in the public sector, and the review, assurance and related services standards

complete the family, with some Australian additions.

How the auditing standards are organised

200s

General principles

and responsibilities,

starting with the

auditor's overall

objectives

300s and 400s

Assessing and

responding to risk

500s

Audit evidence

600s

Using the work of

others: component

auditors, internal

auditors, experts

700s

Conclusions and

reporting

800s

Specialised areas,

e.g. special

purpose

frameworks, single

statements

Through the audit: 200s to 700s. Specialised engagements: 800s

Inside every standard

Introduction Objective Definitions Requirements Application and other

explanatory material

Requirements are the sentences containing 'shall'; the application material explains how to carry them out

Where the authority comes from

Comply with all of them. The standard on overall objectives requires the auditor to comply with every

standard relevant to the audit; claiming compliance with the standards means complying with all the relevant

ones.

Use the objectives. Each standard's objective helps the auditor judge whether more work is needed to

achieve the overall aim of the audit.

Departures are rare. Only in exceptional circumstances may an auditor depart from a relevant requirement,

and then only by doing alternative procedures that achieve its aim, with the reasons documented.

Law comes first. No standard overrides local law. In Australia, auditing standards made under the

Corporations Act are themselves legally enforceable for audits and reviews under that Act.

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Same standards, scaled work

What stays the same

The objective: reasonable assurance and an opinion

Understanding the entity and assessing the risks

Sufficient appropriate evidence

The ethical requirements, including independence

What scales with size and complexity

The amount and form of the work: simpler transactions, fewer

controls and fewer people

Less time to understand the entity, a simpler plan and briefer

documentation

Specific guidance for smaller entities in many standards

Some standards may not apply: no internal audit function, or

only one entity, not a group

The owner-manager

Often the strongest control, because nothing happens without them, and the biggest risk, because nobody else can stop them overriding the

controls

Proportionality in practice. A small entity's audit still aims for reasonable assurance, but the auditor may rely

more on substantive testing than on controls, and some standards simply won't be relevant, such as the

standard on using internal auditors when there is no internal audit function. The owner-manager's dominance

calls for particular attention to the risk of management override.

Who must be audited or reviewed in Australia

These are the thresholds this lesson uses. The charity thresholds apply from 1 July 2022.

Entity Size test Requirement

Large proprietary company Meets at least two of: consolidated revenue of $50

million or more; consolidated gross assets of $25

million or more; 100 or more employees

Audit of the financial report

Small proprietary company Meets fewer than two of those tests Generally none, unless, for

example, shareholders with

enough shares request one or

ASIC directs it

Company limited by

guarantee

Tiered by revenue Smallest: neither; middle band:

review instead of audit allowed;

largest: audit

Incorporated association Tiers under state and territory laws Differs from place to place

Registered charity: small Annual revenue under $500,000 No review or audit

Registered charity: medium Annual revenue from $500,000 to under $3 million Review or audit

Registered charity: large Annual revenue of $3 million or more Audit

Lighter reporting too. The Australian standard on simplified disclosures lets entities in the second tier of

financial reporting prepare general purpose financial statements with far fewer disclosures.

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Case note: raising the charity thresholds

Charities registered with the Australian Charities and Not-for-profits Commission are classified by annual

revenue, and their size decides what they must report and what assurance they need. From 1 July 2022 the

thresholds were raised: a small charity now has revenue under $500,000; a medium charity, from $500,000 up to

$3 million; and a large charity, $3 million or more. Before the change the cut-offs were $250,000 and $1 million,

so many charities moved into a lighter tier at once. The aim was to cut red tape for smaller charities while

keeping full audits where the most money is at stake: proportionality decided by lawmakers, then applied by

auditors.

Source: Australian Charities and Not-for-profits Commission Act 2012, as amended in 2022; ACNC guidance on charity size.

Three tiers for registered charities

Small

Annual revenue under $500,000

No review or audit needed

Before 1 July 2022: under $250,000

Medium

Annual revenue from $500,000 to

under $3 million

Financial report reviewed or audited

Before 1 July 2022: $250,000 to under $1

million

Large

Annual revenue of $3 million or

more

Financial report audited

Before 1 July 2022: $1 million or more

Registered charities, from 1 July 2022. The thresholds were raised to cut red tape for smaller charities while keeping full audits where the

most money is at stake.

The public sector

Governments must control public spending, so audit offices check that public money is spent as Parliament

authorised and that public entities report reliably. The Commonwealth Auditor-General is independent of the

government of the day and answers to Parliament, supported by the Australian National Audit Office; the office

audits Commonwealth entities' financial statements and conducts performance audits of how well programs are

run. Each state and territory has its own Auditor-General. Public sector auditors usually have legal powers that

private sector auditors lack, such as the right to access information held by government agencies.

The rest of the family

Family International standards Australian notes

Reviews ISRE 2400 (Revised): by a practitioner who isn't

the auditor. ISRE 2410: interim information

reviewed by the entity's own auditor, e.g. a

half-year review

ASRE 2400 and ASRE 2410, plus ASRE

2415, designed for companies limited by

guarantee and registered charities

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Family International standards Australian notes

Other assurance ISAE 3000 (Revised), the umbrella standard for

everything else, with ISAE 3400 (prospective

information), 3402 (service organisation controls)

and 3420 (pro forma information in a prospectus)

ASAE equivalents, plus Australian-only

standards such as those on compliance,

controls and performance engagements

Sustainability

assurance

ISSA 5000 (sustainability information, including

greenhouse gas emissions) replaces ISAE 3410

for periods beginning on or after 15 December

2026

ASSA 5000; ASSA 5010 sets the timeline for

Corporations Act sustainability reports

Related services

(no assurance)

ISRS 4400 (Revised): agreed-upon procedures.

ISRS 4410 (Revised): compilations

The professional standard for compilations is

issued by the APESB, not the AUASB

Preamble

standard

None ASA 101 (which absorbed ASA 100) says

which AUASB standards are made under the

Corporations Act and which are for other

purposes, which matters for enforcement

Practice questions

MODULE 1 | 1.4 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Which group of standards?

Place each topic in the group of auditing standards that deals with it.

Topic Group (200s, 300s and 400s, 500s, 600s,

700s or 800s)

(a) Using a valuer engaged by the auditor to value land and buildings

(b) Setting materiality when planning the audit

(c) Including key audit matters in the auditor's report

(d) The auditor's responsibilities relating to fraud

(e) Sending confirmation requests to a client's customers

(f) Auditing financial statements prepared for a lender under a special

purpose framework

(g) Evaluating the misstatements identified during the audit

(h) Communicating with those charged with governance

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Question 2 - Audit, review or neither?

Using the thresholds in this lesson, decide whether each entity needs an audit, a review, or neither.

Entity (all imagined) Audit, review or neither? Why?

(a) Marramba Freight Pty Ltd: consolidated revenue $38

million, consolidated gross assets $31 million, 112

employees

(b) Dunmore Electrical Pty Ltd: consolidated revenue $57

million, consolidated gross assets $12 million, 64

employees; no shareholder has asked for an audit and

ASIC hasn't directed one

(c) Riverlight Youth Mentoring, a registered charity with

annual revenue of $500,000

(d) Hopewell Animal Rescue, a registered charity with

annual revenue of $3.2 million

Question 3 - Explaining proportionality to an owner-manager

Saddleworth Signs Pty Ltd (imagined) makes shop signs. It has 30 employees and one bank account, and its

owner approves every payment. Its bank now requires an audit, and the owner asks: 'Will my audit be the same

as a listed company's?' Explain how the audit of the business differs from the audit of a listed company, and

what stays exactly the same.

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Worked answers

MODULE 1 | 1.4 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Groups of standards

Topic Group Standard

(a) Valuer engaged by the auditor 600s: using the work of others ISA 620

(b) Materiality in planning 300s and 400s: risk ISA 320

(c) Key audit matters 700s: conclusions and reporting ISA 701

(d) Fraud 200s: general principles and responsibilities ISA 240

(e) Confirmation requests 500s: audit evidence ISA 505

(f) Special purpose framework 800s: specialised areas ISA 800

(g) Evaluating misstatements 300s and 400s: risk ISA 450

(h) Those charged with governance 200s: general principles and responsibilities ISA 260

Question 2 - Who needs what

Entity Answer Reason

(a) Marramba Freight Audit Large: it meets two tests (assets of $25 million or more and 100 or more

employees), even though revenue is under $50 million

(b) Dunmore

Electrical

Generally neither Small: it meets only the revenue test. An audit would be needed if enough

shareholders asked or ASIC directed one

(c) Riverlight Review or audit Medium: $500,000 is the bottom of the medium band, not the top of the

small one

(d) Hopewell Audit Large: revenue of $3 million or more

Question 3 - Saddleworth Signs (sample answer)

Exactly the same: the objective (reasonable assurance and an opinion), the requirement to follow every relevant

auditing standard, the ethical rules including independence, understanding the business and assessing risks,

materiality, and the need for sufficient appropriate evidence, documented.

Less of it, and simpler: with one bank account and few types of transaction, understanding the business takes

less time, the plan is simpler and the documentation briefer.

Different mix of evidence: with few formal controls, the auditor will rely mainly on substantive testing, such as

confirming the bank balance and testing payments and sales directly.

Some standards won't apply: for example those on using internal auditors (there is no internal audit function)

and on group audits (there is only one company). Key audit matters, required for listed companies, won't appear in

the report.

The owner is both strength and risk: approving every payment is a strong control, but nobody can stop the

owner overriding it, so the auditor plans procedures for management override.

ADVANCED AUDIT AND ASSURANCE | M1 | 1.4 | WORKED ANSWERS

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