NSW Audit Office - Awareness - Issue 2004 07 - August 2004

NSW Audit Office - Awareness - Issue 2004 07 - August 2004

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AWARENESSAccounting and Auditing Developments Issue 7 AUGUST 2004AUDIT OFFICE UPDATEAUDIT OFFICE AUDITOR-GENERAL’S PERFORMANCE AUDIT TOPICS FOR 2004-05 UPDATE 1When Will the Reports be released?ACCOUNTING The program shows all audits we will be working on and is available for perusal atUPDATE 3www.audit.nsw.gov.auURGENT ISSUES 2003-04 Audits yet to be ReleasedGROUP UPDATE 7Realising Benefits from Shared Corporate Services (expected release September 2004)Fraud Control Strategies in Government Agencies (Follow-up of our 1998 AUDITING UPDATE 8Performance Audit) (expected release September 2004)INTERNATIONAL Managing Air Quality (expected release October 2004) UPDATE 13School Annual Reports (expected release late 2004)MISCELLANEOUSPUBLICATIONS 13Home Care Service Emergency Mental Health Services (expected release late 2004) LEGISLATIVE CHANGES UPDATE 142004-05 Program-The following audits have not yet commenced, and thedescriptions below are a guide onlyTREASURY UPDATE 16Environmental Impact Assessment of Major ProjectsPREMIER’S Maintenance of Public HousingDEPARTMENTUPDATE 17Bus Maintenance and Bus ContractsEnsuring the Supply of Water to Meet Sydney’s Demand AUDIT OFFICE BETTER PRACTICE Maintaining Public Infrastructure GUIDES 18In-year Monitoring of the State’s Budget PositionFare Evasion on Public TransportAgency Relocations to Non-Metropolitan AreasCoordination of Rescue ServicesEffectiveness of the Juvenile Justice SystemCityRail’s ...

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AWARENESS A c c o u n t i n g a n d A u d i t i n g D e v e l o p m e n t s I s s u e 7 A U G U S T 2 0 0 4
AUDIT OFFICE UPDATE AUDITOR-GENERAL’S PERFORMANCE AUDIT TOPICS FOR 2004-05 When Will the Reports be released? The program shows all audits we will be working on and is available for perusal at www.audit.nsw.gov.au 2003-04 Audits yet to be Released Realising Benefits from Shared Corporate Services (expected release September 2004) Fraud Control Strategies in Government Agencies (Follow-up of our 1998 Performance Audit) (expected release September 2004) Managing Air Quality (expected release October 2004) School Annual Reports (expected release late 2004) Home Care Service (expected release late 2004) Emergency Mental Health Services (expected release late 2004) 2004-05 Program-The following audits have not yet commenced, and the descriptions below are a guide only Environmental Impact Assessment of Major Projects Maintenance of Public Housing Bus Maintenance and Bus Contracts Ensuring the Supply of Water to Meet Sydney’s Demand Maintaining Public Infrastructure In-year Monitoring of the State’s Budget Position Fare Evasion on Public Transport Agency Relocations to Non-Metropolitan Areas Coordination of Rescue Services Effectiveness of the Juvenile Justice System CityRail’s Response to Unexpected Disruptions to Service Efficiency and Effectiveness of the DOCS Helpline in Providing Access to Services, Particularly in Relation to Child Protection Management of Intellectual Property Bus Transitways Collecting Outstanding Fines and Penalties.
AUDIT OFFICE UPDATE 1 ACCOUNTING UPDATE 3 URGENT ISSUES GROUP UPDATE 7 AUDITING UPDATE 8 INTERNATIONAL UPDATE 13 MISCELLANEOUS PUBLICATIONS 13 LEGISLATIVE CHANGES UPDATE 14 TREASURY UPDATE 16 PREMIER’S DEPARTMENT UPDATE 17 AUDIT OFFICE BETTER PRACTICE GUIDES 18
What are We Trying to Achieve, and How are the Topics Chosen? Our performance audit program comprises follow-up audits and new audits. Follow-up audits are designed to establish the extent to which action has been taken on issues raised in an earlier audit we carried out. Our forward program of new audits is developed using a strategic approach. Firstly, we have classified all government activity into one or more of seven "outcome areas", which our research indicates is how Parliament and the community look at the performance of government. These areas are as follows: ensuring the effectiveness of strategies to develop and maintain the State’s public infrastructure helping the State to assess the efficiency and effectiveness of its transport services identifying ways to improve State agencies’ ability to ensure law, order and public safety positively impacting the provision of health and welfare services identifying opportunities to better manage education and deliver more effective services identifying opportunities to improve the State’s strategies and programs for environmental protection and for sustainable management of land and water resources identifying ways to improve governance and public sector management. We look at a number of criteria in deciding which topics to pursue, for example: the level of expenditure on the activity to be reviewed the potential for our audit to improve service levels or value for money whether our findings may apply in other government agencies what other reviews have been done recently on the activity what resources we need to undertake the review. What are Performance Audits? Our financial audits look at the accuracy of agencies’ annual financial reporting. We carry out this role in every government agency each year. Performance audits build on our financial audit role by reviewing whether taxpayers’ money is being spent efficiently, effectively and in accordance with the law. Because of the resources involved in each performance audit, we are limited in the number we carry out each year. More Information? If you would like further information about the scope of a particular audit or its progress, or if you have any information you believe could be useful to us, contact Stephen Horne, Assistant Auditor-General (Performance Audit) on 9275 7278 or at stephen.horne@audit.nsw.gov.au
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ACCOUNTING UPDATE Year 2005 Directive The Australian Accounting Standards Board (AASB) implemented the Financial Reporting Council’s strategic directive regarding the adoption of International Accounting Standards Board Standards (for 2005.) The AASB made Australian equivalents to International Financial Reporting Standards and amended certain Australian Standards listed below to implement this directive. The Standards which are now law are applicable to interim and annual reporting periods beginning on or after 1 January 2005 are: AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards AASB 2 Share-based Payment AASB 3 Business Combinations AASB 4 Insurance Contracts AASB 5 Non-current Assets Held for Sale and Discontinued Operations AASB 101 Presentation of Financial Statements AASB 102 Inventories AASB 107 Cash Flow Statements AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors AASB 110 Events after the Balance Sheet Date AASB 111 Construction Contracts AASB 112 Income Taxes AASB 114 Segment Reporting AASB 116 Property, Plant and Equipment AASB 117 Leases AASB 118 Revenue AASB 119 Employee Benefits AASB 120 Accounting for Government Grants and Disclosure of Government Assistance AASB 121 The Effects of Changes in Foreign Exchange Rates AASB 123 Borrowing Costs AASB 124 Related Party Disclosures AASB 127 Consolidated and Separate Financial Statements AASB 128 Investments in Associates AASB 129 Financial Reporting in Hyperinflationary Economies AASB 130 Disclosures in the Financial Statements of Banks and Similar Financial Institutions AASB 131 Interests in Joint Ventures AASB 132 Financial Instruments: Disclosure and Presentation AASB 133 Earnings per Share AASB 134 Interim Financial Reporting AASB 136 Impairment of Assets AASB 137 Provisions, Contingent Liabilities and Contingent Assets AASB 138 Intangible Assets AASB 139 Financial Instruments: Recognition and Measurement AASB 140 Investment Property AASB 141 Agriculture AASB 1004 Contributions AASB 1023 General Insurance Contracts AASB 1031 Materiality AASB 1038 Life Insurance Contracts AASB 1048 Interpretation and Application of Standards. Source: AASB Action Alert July 2004.
The Audit Office of New South Wales 3
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Limited Amendments to IAS 39 Financial Instruments: Recognition and Measurement The International Accounting Standards Board (IASB) issued three short Exposure Drafts (ED’s) proposing limited amendments to IAS 39. The limited amendments do not relate to the IASB’s ongoing broad examination of the accounting for financial instruments and work on interest margin hedging. The IASB is committed to maintaining a ‘stable platform’ of unchanged Standards during the period to 2005. Accordingly, only one of the proposed amendments which is aimed at easing the implementation of IAS 39 on its first adoption-would apply for 2005; the other two amendments, though available for early adoption, would have effective dates of 1 January 2006. The ED Transition and Initial Recognition of Financial Assets and Financial Liabilities proposes an amendment that would apply when entities first adopt IAS 39. It would allow, but not require, entities to adopt an approach to transition that is easier to implement than that in the current version of IAS 39 and would enable entities to eliminate a difference between the IASB’s Standards and US requirements. The ED Cash Flow Hedge Accounting of Forecast Intragroup Transactions clarifies the treatment in consolidated financial statements of a foreign currency cash flow hedge of a highly probable forecast external transaction denominated in the functional currency of the group entity (eg a subsidiary) entering into the transaction. Thus, a group could designate that external transaction as the hedged item, provided that the transaction gives rise to an exposure that will have an effect on consolidated profit or loss (ie it is denominated in a currency other than the group’s presentation currency). The Exposure Draft Financial Guarantee Contracts and Credit Insurance proposes that the issuer of a financial guarantee contract should measure the contract initially at fair value. If the financial guarantee contract was issued in a stand-alone arm’s length transaction to an unrelated party, its fair value at inception is likely to equal the premium received. The Exposure Draft also addresses the subsequent measurement of those guarantees. The proposed requirements would apply even if the contract meets the definition of an insurance contract in IFRS 4 Insurance Contracts. Comments on the three ED’s are requested by 8 October 2004. Discussion Paper-Preliminary Views on Accounting Standards for Small and Medium-sized Entities (SMEs) This discussion paper published by the International Accounting Standards Board (IASB) includes preliminary views of the IASB that may be modified in the light of the comments received before being issued in the form of one or more proposed Standards for SMEs. Questions asked in the discussion paper include: should the IASB develop special financial reporting standards for SMEs? what should be the objectives of a set of financial reporting standards for SMEs? for which entities would IASB entities for SMEs be intended? The discussion paper is available at www.iasb.org. Comments on the issues and questions raised in the discussion paper are due by 24 September 2004.
The Audit Office of New South Wales
The interaction of "highest and best use" and "fair value" Some constituents have questioned AASB staff as to how the revaluation model in AASB 116 Property and Plant and Equipment is to apply, particularly in two situations that are illustrated below. Situation 1 in 1991, Entity A purchased land zoned industrial on which it constructed an industrial building, from which it continues to operate its business entity A applies the revaluation model at the 2003 year-end, and immediately prior to revaluation, the land's depreciable amount is 300, and the building's depreciable amount is 200. entity A engages a valuer to provide market-based evidence about the fair value of the land and buildings. the valuer's report notes that the highest and best alternative use of the land and building is as residential land without the building (the land can easily be rezoned as 'residential'), and the market value of the land as residential land is 550 (after deducting building demolition costs – rezoning costs and the proceeds from sale of the components of the building are not material). AASB staff view Underlying the defined term 'fair value' is the concept of market participants' 'highest and best use' of the asset that is, the most probable use of the land and building that is physically possible, legally permissible, financially feasible and which results in the highest value. The concept of 'highest and best use' is consistent with the economic rational behaviour that is articulated as fair value, the seller and most advantageous price reasonably obtainable by the buyer will trade i.e. the land and building at the best price reasonably obtainable. AASB staff concluded that: the fair value of the composite asset 'land and building' is 550 on allocation, the asset 'land' is attributed an amount of 550, and the asset 'building' is attributed an amount of zero Situation 2 In 1991, Entity B purchased land-zoned industrial on which it constructed an industrial building, from which it continues to operate its business. Entity B applies the revaluation model. At the 2003 year-end, and immediately prior to revaluation, the land's depreciable amount is 300, and the building's depreciable amount is 200. Entity B engages a valuer to provide market-based evidence about the fair value of the land and buildings. The valuer's report notes that: — the highest and best use of the land and building is in an industrial activity, and the market value for the land and building is 500 — the next highest and best (alternative) use of the land and building is as residential land without the building (the land can easily be rezoned as 'residential') — the market value of the land as residential land is 450 (after deducting building demolition costs. Rezoning costs and the proceeds from sale of the components of the building are not material).
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AASB staff view The highest and best use of the land and building is as industrial land and industrial building and the market value of that use are 500, i.e. the highest and best use of the land and building is its current use. The next highest and best (alternative) use of the land and building is as residential land with no building, and the market value of that use is 450. Possibility 1: The highest and best use of the land and building is its industrial use. The fair value of the composite asset 500 is allocated – land 450 (highest and best use as residential land) and building 50 (residual amount). AASB staff has considered whether this is the allocation method required by AASB 116. AASB staff thinks that allocating the fair value of the composite asset – land 450 and building 50 is not consistent with the concept of fair value. AASB staff considers that 'the market based evidence' is evidence (market buying price) that is consistent with the highest and best use of the land and building, i.e. an industrial use. Accordingly, in this situation, AASB staff rejects the use of the market-buying price of the land as residential land as the determinant of the land's fair value. Possibility 2: The highest and best use of the land and building is its industrial use. The fair value of the composite asset 500 is allocated in a way that is consistent with fair value of the land and the fair value of the building being measured with regard to the highest and best use of the composite asset, i.e. for industrial use. For example, the fair value of the composite asset 500 is allocated as follows: (i) the land is measured at the market buying price of industrial land (and that market buying price does not reflect any demand for the land for residential use), and the building is measured at the market buying price of the industrial building's remaining future economic benefits (as an industrial building) (ii) should the sum of the market buying prices of the two assets exceed 500, the directors reducing proportionately the market-buying price of the land, and the market-buying price of the building eliminate the excess. In performing this task the lands fair value is measured at an amount not less than the market-selling price of industrial land (and that market selling price does not reflect any demand for the land for residential use), and the market-selling price of the building (as an industrial building). AASB staff believes this approach is consistent with fair value being measured with regard to the highest and best use of the land and building (i.e. for industrial use). The views expressed in this article are those of AASB staff and do not necessarily reflect the views of the AASB. Source: CPA Australia-Information Centre March 2004.
The Audit Office of New South Wales
URGENT ISSUES GROUP UPDATE MEETING 22 JULY 2004 Revision of UIG Abstracts for 2005 The UIG is revising existing Abstracts that are proposed to be retained alongside the Australian equivalents to the International Standards and Interpretations. The revision is being carried out to ensure that the Abstracts are consistent with those pronouncements. For example, references in the Abstracts to AASB Standards are being updated to the revised Standards and requirements in the Abstracts that are now directly covered by those Standards are being deleted. Reissued Abstracts will be called Interpretations. Proposed Interpretations Agreed UIG members reached a consensus concerning each of the following Proposed Interpretations, based on the draft revised Interpretations: 1019 The Superannuation Contributions Surcharge 1030 Depreciation of Long-Lived Physical Assets: Condition-Based Depreciation and Related Methods. The AASB is expected to consider the Proposed Interpretations for approval as Interpretations at its next meeting, on 8-9 September 2004. Subject to the AASB’s approval, the Interpretations will apply for reporting periods beginning on or after 1 January 2005, in the context of applying Australian equivalents to International Standards and Interpretations. Proposed Interpretation 1019 will require a superannuation plan to recognise a liability and an expense and to make certain disclosures in respect of the superannuation contributions surcharge. The requirements are effectively the same as in the current Abstract 19. Proposed Interpretation 1030 identifies the characteristics of condition-based and related depreciation methods that would not satisfy the requirements of Accounting Standard AASB 116 Property, Plant and Equipment . The requirements are effectively the same as in the current Abstract 30, except that the previous transitional provisions have been removed as the retrospective transitional requirements in AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards will apply when the Interpretation is first applied. Abstracts to be Superseded Members decided that the following Abstracts should be superseded by the Australian equivalents to International Standards and withdrawn once the Standards are applicable: 14 Directors’ Remuneration 45 Subsidiary Becomes a Joint Venture Entity or an Associate 46 Initial Foreign Currency Translation for Redomiciled Entities. The next meeting is due in Melbourne on 26 August 2004. Source: UIG Action Alert 04-5 July 2004.
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Urgent Issues Group Interpretations The AASB approved the following Interpretations as part of implementing the Year 2005 directive: Interpretation 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities Interpretation 107 Introduction of the Euro Interpretation 110 Government Assistance – No Specific Relation to Operating Activities Interpretation 112 Consolidation – Special Purpose Entities Interpretation 113 Jointly Controlled Entities – Non-Monetary Contributions by Venturers Interpretation 115 Operating Leases – Incentives Interpretation 121 Income Taxes – Recovery of Revalued Non-Depreciable Assets Interpretation 125 Income Taxes – Changes in the Tax Status of an Entity or its Shareholders Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease Interpretation 129 Disclosure – Service Concession Arrangements Interpretation 131 Revenue – Barter Transactions Involving Advertising Services Interpretation 132 Intangible Assets – Web Site Costs Interpretation 1031 Accounting for the Goods and Services Tax (GST); and Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia. Source: AASB Action Alert July 2004. AUDITING UPDATE CLERP 9 and Audit Registration The passing of the CLERP 9 legislation at the end of June 2004 has introduced a "competency based regime" for the registration of auditors, in addition to the previous hours-based/ experience regime. The Australian Securities and Investments Commission (ASIC) has released a new Policy statement PS 180 "Auditor Registration" to support the new legislation which is available on its website http://www.asic.gov.au. Amongst other items it sets out ASIC's Policy on approving an Audit Competency Standard. The Institute of Chartered Accountants in Australia (Institute) jointly with CPA Australia has been involved in on-going discussions with ASIC on the draft Audit Competency Standards developed and issued by the Accounting Bodies in early 1999. It is expected that ASIC will shortly consider the Accounting Bodies Audit Competency Standard for its approval and application. The draft standards are available on the institute website http://www.icaa.org.au. Note that if you are already a registered company auditor, you do not have to reapply under the new legislation. Source: Accounting and Auditing Today No 27 July 2004.
The Audit Office of New South Wales
CLERP 9 Policies ASIC has issued two policy statements and two practice notes to explain the new requirements of CLERP 9. The policies issued are: Policy Statement 180: [PS 180] (Refer article above) Revised Practice Note 34: Auditors’ obligations: reporting to ASIC [PN 34] (refer article below) Revised Practice Note 66: Transaction-specific disclosure [PN 66] Revised Policy Statement 173: Disclosure for the on-sale of securities and other financial products [PS 173] ASIC has stressed the CLERP 9 policies are in "proof" form and are based on the CLERP 9 legislation as passed by Parliament on 25 June 2004. Before finalising the policies, ASIC will review them in light of the final form of the CLERP 9 legislation and regulations and any further industry comment. Source: ASIC media release, IR 04-29. Audit Notifications under CLERP 9 ASIC has announced details of its procedures for dealing with new audit notifications required as a result of CLERP 9. The new procedures have been put in place as part of the new notification requirements for registered company auditors, audit firms or audit companies, arising from the expansion of auditors' duties under CLERP 9. The new procedures take effect from 21 July 2004. Under amendments made to the Corporations Act 2001 (the Act) by CLERP 9, auditors must report certain matters to ASIC. These include matters where the auditor has reasonable grounds to suspect a significant contravention of the Act, or if someone has attempted to mislead or interfere in the proper conduct of the audit. See sec 311 of the Act and revised ASIC Practice Note 34 Auditors' obligations: reporting to ASIC issued on 1 July 2004. Auditors must also notify ASIC of certain conflicts of interest as soon as the auditor becomes aware of the relevant circumstances. These matters need to be resolved and ASIC needs to be notified within a prescribed time period or the auditor, audit firm or audit company will cease to be the auditor of the entity and be removed from the database as auditor of the entity by ASIC (sec 324). ASIC has developed a fast track process for dealing with these notifications and such notices can be either emailed to auditor.notification.team@asic.gov.au or mailed to the Auditor Notification Team, Corporate Finance Division, Australian Securities and Investments Commission, GPO Box 9827, Brisbane QLD 4001. This will enable ASIC to respond to these matters within the required timeframes. Source: ASIC Information Release IR 04-33, 20 July 2004.
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AUDITING UPDATE Revised ISA 300 Planning and Audit of Financial Statements The International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) has released a revised International Standard on Auditing (ISA) requiring auditors to be more rigorous in the planning of their audits. The revised ISA 300 builds on the new audit risk standards issued last year and requires the auditor to plan the audit so that the engagement will be performed in an effective manner. The standard emphasises that planning is a continual process throughout the engagement and that unexpected events, changes in conditions or other circumstances may lead the auditor to re-evaluate the planned audit procedures. The establishment of the overall audit strategy helps guide the development of the more detailed audit plan and ensures that risk assessment procedures and further detailed audit procedures are appropriately targeted. The standard, effective for audits of financial statements for periods beginning on or after December 15, 2004, requires the auditor to establish the overall strategy for the audit that sets the scope, timing and direction of the audit. Proposed Amendments to the Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services The International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) has issued the above exposure draft (ED) proposing certain enhancements to its due process and working procedures. The ED also proposes to expand the present description of IAASB's due process and working procedures to reflect more fully the practices that are being followed. To further strengthen its deliberative process and to enhance its responsiveness to comments made on proposed standards, the IAASB proposes that its due process and working procedures provide for: public forums or roundtables, or the issue of consultation papers, where wider or further input would be appropriate enhanced meeting agenda material and easier access to comment letters to assist in its deliberative process an expanded description of the process by which the IAASB considers the need to re-expose a draft IAASB international standard or practice statement the possibility of issuing a separate document explaining its basis for conclusions on final IAASB international standards or practice statements where necessary a process to address circumstances where issues over due process are raised with the IAASB. Comments on the ED are requested by October 15, 2004. New Assurance Engagements Framework and Standard issued by the AuASB The AuASB has released the revised Framework AUS 108 "Framework for Assurance Engagements" and the new Auditing and Assurance Standard AUS 110 "Assurance Engagements other than Audits or Reviews of Historical Financial Information". The Framework (AUS 108) provides a reference document for practitioners and others involved with assurance engagements, as the document defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which AUSs apply.
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The new AUS 110 establishes basic principles and essential procedures that are applicable to all assurance engagements other than audits or reviews of historical financial information covered by other AUSs. AUS 108 and AUS 110 are based on the corresponding "International Framework for Assurance Engagements" and the International Standard on Assurance Engagements ISAE 3000 "Assurance Engagements other than Audits or Reviews of Historical Financial Information" respectively. The revised AUS 108 will replace the existing AUS 108 "Assurance Engagements", which was previously issued in October 2001. The new AUS 110 is operative for assurance engagements where the assurance report is dated on or after 1 January 2005. This is in line with the operative date for ISAE 3000. The AuASB will also withdraw the existing AUS 106 "Explanatory Framework for Standards on Audit and Audit Related Services" at a later date. However, because the existing AUS 106 contains additional information on matters such as agreed-upon procedures, such additional information will be incorporated in the existing AUS 102 "Foreward to Australian Auditing Standards and Guidance Statements", when that document is next revised. AUS 206 Quality Control for Audits of Historical Financial Information Revised AUS 206 provides guidance on specific responsibilities of firm personnel regarding quality control procedures for audits of historical financial information, including audits of a financial report. The main elements of the revised AUS 206 are standards and guidance on: leadership responsibilities for quality on audits ethical requirements (including independence) acceptance and continuance of client relationships and specific audit engagements assignment of engagement teams engagement performance (including consultation, resolution of differences of opinion and engagement quality control review); and monitoring. The revised AUS 206 is based on the corresponding International Standard on Auditing ISA 220 "Quality Control for Audits of Historical Financial Information". The revised AUS 206 will replace the existing AUS 206 "Quality Control for Audit Work", which was previously issued in July 2002. The revised AUS 206 is operative for audits of historical financial information for periods commencing on or after 15 June 2005. This is in line with the operative date for ISA 220. AUS 210 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report The revised AUS 210 requires auditors to be more proactive in considering the risk of fraud during an audit of a financial report. The revised AUS 210 builds on the new audit risk standards, which were issued earlier this year, and requires auditors to focus on areas where there is a risk of material misstatement due to fraud, including management fraud.
The Audit Office of New South Wales
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