Preparing for the audit of a Tier 1 NSW association, we naturally came across Class order 11/01[i]. Without this Order, issued by the Director-General of Office of Fair Trading in May 2011[ii]an association with revenue greater than $250 000 would be required to prepare financial statements ‘in accordance with the Australian Accounting Standards’[iii]. Instead they can, if they have revenue less than $2 million, choose to follow the less onerous requirements in Schedule B of the Order.
Before accepting an audit engagement an auditor is required by the Australian Auditing Standards[iv] to ‘establish whether the preconditions for an audit are present’[v]. This includes determining ‘whether the financial reporting framework to be applied in the preparation of the financial report is acceptable’[vi].
If it is acceptable then it becomes the ‘applicable financial reporting framework’, the framework
adopted by management and, where appropriate, those charged with governance in the preparation of the financial report that is acceptable in view of the nature of the entity and the objective of the financial report, or that is required by law or regulation[vii].
Since ‘law or regulation’ is involved, we naturally thought that the requirements of Schedule B formed an acceptable reporting framework. However, after reading Fair Trading’s Regulatory Guide A1[viii], we found that Schedule B is not in fact required but is optional[ix].
Synonyms for ‘required’ are ‘obligatory’, ‘compulsory’, and ‘mandatory’[x], so it is clear that the standard-setters meant that only a legally required reporting framework takes precedence over one chosen to suit ‘the nature of the entity and the objective of the financial report’.
Therefore, since reporting according to Schedule B is not compulsory, the auditor of an association that has followed Schedule B must then assess the acceptability of that framework before they can accept the engagement.
ASA 210 gives an example of ‘the objective of the financial report’ criterion above:
whether it is prepared to meet the common financial needs of a wide range of users or the financial information needs of specific users[xi].
Schedule B doesn’t change the audience for the statements, just what has to be produced and what has to be included. The section headed ‘Why have Class order 11/01?’ makes it clear that the statements are for a ‘wide range of users’. For instance, the Class order
aims to ensure an appropriate level of transparency and accountability for incorporated associations, taking into account likely needs of persons who may wish to utilise the services of an incorporated association or make charitable donations to these entities[xii].
This makes the statements general purpose statements:
Financial reports prepared in accordance with a financial reporting framework designed to meet the common financial needs of a wide range of users are referred to as general purpose reports[xiii].
Is Schedule B an acceptable general purpose framework? Not according to ASA 210. It makes it clear that in Australia only the reporting standards established by the Australian Accounting Standards Board (AASB) are acceptable[xiv].
So isn’t the conclusion that we must reach this: either the association ignores the Class Order and follows all the Australian Accounting Standards, or the auditor has to decline the engagement[xv]?
[i] Financial reporting requirements for a class of Tier 1 associations, 27 May 2011, www.fairtrading.nsw.gov.au.
[ii] Under Section 53(1) of the Associations Incorporation Act 2009, www.legislation.nsw.gov.au
[iii] Section 43(2)
[iv] And there is no question that we have to follow the Australian Auditing Standards: Section 43(3) of the Act mandates that
[v] Auditing Standard ASA 210 Agreeing the Terms of Audit Engagements, paragraph 3, June 2011, www.aasb.gov.au
[vi] ASA 210, paragraph 6
[vii] AuAASB Glossary, www.auasb.gov.au
[viii] Associations Incorporations Act 2009, Regulatory Guide A1, May 2011, Financial Reporting Requirements for a Class of Tier 1 Associations, Registry of Co-operatives & Associations, NSW Fair Trading, NSW Department of Finance & Services, www.fairtrading.nsw.gov.au
[ix] Regulatory Guide A1, page 7
[x] Thesaurus function in Word 2013
[xi] ASA 210, paragraph A4
[xii] Regulatory Guide A1, page 5
[xiii] ASA 210, paragraph A5
[xiv] ASA 210, paragraph A8
[xv] ASA 210, paragraph 8