Financial instruments may be used by financial and non-financial entities of all sizes for a variety of purposes. Some entities have large holdings and transaction volumes while other entities may only engage in a few financial instrument transactions. Some entities may take positions in financial instruments to assume and benefit from risk while other entities may use financial instruments to reduce certain risks by hedging or managing exposures. This Guidance Statement is relevant to all of these situations.
The following Australian Auditing Standards are particularly relevant to audits of financial instruments:
- ASA 540 deals with the auditor’s responsibilities relating to auditing accounting estimates, including accounting estimates related to financial instruments measured at fair value;
- ASA 315 and ASA 330 deal with identifying and assessing risks of material misstatement and responding to those risks; and
- ASA 500 explains what constitutes audit evidence and deals with the auditor’s responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.
This Guidance Statement is relevant to entities of all sizes, as all entities may be subject to risks of material misstatement when using financial instruments.
The guidance on valuation in this Guidance Statement is likely to be more relevant for financial instruments measured or disclosed at fair value, while the guidance on areas other than valuation applies equally to financial instruments either measured at fair value or amortised cost. This Guidance Statement is also applicable to both financial assets and financial liabilities. This Guidance Statement does not deal with instruments such as:
- The simplest financial instruments such as cash, simple loans, trade accounts receivable and trade accounts payable;
- Investments in unlisted equity instruments; or
- Insurance contracts.
Also, this Guidance Statement does not deal with specific accounting issues relevant to financial instruments, such as hedge accounting, profit or loss on inception (often known as “Day 1” profit or loss), offsetting, risk transfers or impairment, including loan loss provisioning. Although these subject matters can relate to an entity’s accounting for financial instruments, a discussion of the auditor’s consideration regarding how to address specific accounting requirements is beyond the scope of this Guidance Statement.
An audit in accordance with Australian Auditing Standards is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged certain responsibilities. Such responsibilities subsume making fair value measurements. This Guidance Statement does not impose responsibilities on management or those charged with governance nor override laws and regulation that govern their responsibilities.
This Guidance Statement has been written in the context of general purpose fair presentation financial reporting frameworks, but may also be useful, as appropriate in the circumstance, in other financial reporting frameworks such as special purpose financial reporting frameworks.
Australian Accounting Standards on financial instruments include AASB 7 Financial Instruments: Disclosures, AASB 132 Financial Instruments: Presentation, AASB 139 Financial Instruments: Recognition and Measurement, AASB 9 Financial Instruments and AASB 13 Fair Value Measurement.
This Guidance Statement focuses on the assertions of valuation, and presentation and disclosure, but also covers, in less detail, completeness, accuracy, existence, and rights and obligations.
Financial instruments are susceptible to estimation uncertainty, which is defined in ASA 540 as “the susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.” Estimation uncertainty is affected by the complexity of financial instruments, among other factors. The nature and reliability of information available to support the measurement of financial instruments varies widely, which affects the estimation uncertainty associated with their measurement. This Guidance Statement uses the term “measurement uncertainty” to refer to the estimation uncertainty associated with fair value measurements.
See ASA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.
See ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
In this Guidance Statement, the terms “valuation” and “measurement” are used interchangeably.