This GS comprises two parts:

Introductory guidance material

The purpose of the introductory guidance material is to explain the purpose, status and authority of this GS and how the topic specific guidance material included in this GS is to be understood and applied to public sector engagements.

The introductory guidance material also provides the necessary context for the topic specific guidance material and outlines the unique challenges faced by public sector auditors and assurance practitioners in complying with AUASB Standards.

Topic specific guidance material

Topic specific guidance material is developed and issued when a need for specific supplementary guidance relating to public sector engagements is identified in practice, and will be incrementally added to the GS in response to emerging issues.

Whilst the AUASB generally does not set industry or sector specific standards, the AUASB may from time to time produce industry or sector specific guidance materials in the form of authoritative AUASB GSs and/or other nonauthoritative materials. The AUASB’s Due Process Framework for Developing, Issuing and Maintaining AUASB Pronouncements and Other Publications (AUASB Due Process Framework) outlines the circumstances that may lead to the AUASB issuing guidance materials and identifies factors the AUASB will consider in determining the form of guidance that will be appropriate in the circumstances.

AUASB GSs are authoritative AUASB pronouncements that are formally approved and issued by the AUASB. GSs are developed, issued and maintained in accordance with the AUASB’s Due Process Framework. Refer to the Foreword to AUASB Pronouncements for further information on the purpose, authority and legal status of GSs.

The topic specific guidance included in this GS aims to support public sector auditors and assurance practitioners in implementing and applying the AUASB Standards in practice by providing supplementary guidance in relation to the definitions, objectives, requirements and application and explanatory material contained in the standards.

The main objective is to provide additional guidance to support public sector auditors and assurance practitioners to either comply with the requirements in AUASB Standards or identify appropriate alternative procedures which will enable the auditor/assurance practitioner to achieve the objective of a standard.

This GS covers only selected issues identified as presenting challenges in applying AUASB Standards to public sector engagements. It includes application and explanatory material on specific matters for the purposes of understanding and complying with the relevant requirements in AUASB Standards. In particular, guidance may:

explain more precisely what a requirement means or is intended to cover;

provide background information on matters addressed in an AUASB Standard, for example, to explain circumstances that may need further consideration in the public sector;

include examples that illustrate how the requirements might be applied and/or provide examples of procedures that may be appropriate in the circumstances; and

include illustrative examples of auditor reports or other documents.

Law or regulation governing public sector engagements generally mandate the appointment of a public sector auditor/assurance practitioner and commonly set out the public sector auditor’s/assurance practitioner’s responsibilities, functions and powers. Law or regulation may also prescribe other aspects of the terms of the engagement, including the objective and scope of the engagement and the responsibilities of management. There may be instances where the mandate or authority to perform an engagement and the public sector auditor’s/assurance practitioner’s powers reside in different pieces of legislation. AUASB Standards do not override law or regulation in such matters.

Where a public sector engagement is mandated by legislation, the public sector auditor/assurance practitioner cannot avoid such an obligation and, consequently, may not be in a position to not accept (that is, to decline) or not continue (that is, to withdraw from) the engagement. A public sector auditor/assurance practitioner may be required to perform these types of engagements whether or not the preconditions for the engagement exist and whether or not management’s agreement on the terms of the engagement has been obtained. Consequently, the acceptance and continuance requirements of AUASB Standards may not be applicable to the public sector for legislatively mandated engagements.

In addition to legislatively mandated audits and assurance engagements in the public sector, the appointment of a public sector auditor/assurance practitioner may also be included as a requirement of an agreement, such as a Commonwealth agreement for the provision and acquittal of funding by the States and Territories or grant agreements from governments to Non-Government Organisations (NGO) service providers.

In Australia, Commonwealth, State or Territory AuditorsGeneral are responsible for undertaking the majority of public sector engagements. Engagements at local government level are the responsibility of State or Territory AuditorsGeneral in some jurisdictions, while in others, local government engagements are conducted by private sector auditors or audit firms, with or without the AuditorGeneral having an oversight role. Statutory bodies may be audited by private sector auditors or audit firms but this will depend on the specific legislation under which these entities operate.

AuditorsGeneral exercise their public sector audit function within their specific jurisdictional legislative mandate, which governs the independence of their role and power of discretion in performing certain duties.

The responsibility to form an opinion or conclusion and to report outcomes is usually the domain of the respective Auditor-General. Depending on the legislative mandate in each jurisdiction, an Auditor-General may in some cases:

engage a private sector auditor or audit firm under contract to assist and/or undertake certain functions of the Auditor-General; and/or

delegate to a person employed in the Auditor-General’s Office, or to a private sector auditor or audit firm, the power to express an opinion or conclusion, or to make a report.

In addition to legislatively mandated engagements, legislation may enable an Auditor-General to undertake audits or audit-related services by arrangement - that is, a public sector entity, a minister or the Legislature may request audits or audit-related services under an agreement with the Auditor-General. These engagements may be requested as a once-off arrangement or as an annually recurring service. These types of engagements are often referred to as “by-arrangement” or “by-request” audits or reviews. An Auditor-General may only undertake these types of engagement where it falls within the Auditor-General’s legislative powers.

AuditorsGeneral in Australia may be mandated to perform different types of assurance engagements on any subject of relevance to the responsibilities of management and those charged with governance of a public sector entity and the application of public resources. The extent or form of these engagements and the reporting thereon will vary according to the legislated mandate of the AuditorGeneral concerned and any legislation applicable to the entity which is the subject of the audit.

Depending on the legislative mandate in each jurisdiction, Auditors-General may be required to:

conduct public sector engagements in accordance with applicable AUASB Standards;

have regard to recognised professional standards; or

set their own standards. Standards established by an Auditor-General may incorporate AUASB Standards.

In the Australian public sector, the scope and nature of financial audits conducted by public sector auditors are governed by relevant enabling legislation in each different jurisdiction.

For the purpose of this GS, the term “financial audit” means an audit that focuses on determining whether an entity’s financial information is presented in accordance with the applicable financial reporting and regulatory framework. This is accomplished by obtaining sufficient and appropriate audit evidence to enable the auditor to express an opinion as to whether the financial information is free from material misstatement due to fraud or error.

For financial audits conducted under AUASB Standards, the public sector auditor applies the Australian Auditing Standards (ASAs) relevant to the engagement. As described in the Preamble to AUASB Standards, AUASB Standards are:

neutral with respect to the audited or reviewed entity’s sector and size; and

intended to be applied, as appropriate, to all audit, review, assurance and related service engagements conducted by an auditor or audit firm in both the public and private sectors.

The application and explanatory material in ASAs may contain considerations specific to public sector entities.

The public sector auditor’s responsibilities may be affected by the audit mandate, or by obligations on public sector entities arising from law, regulation or other authority (such as ministerial directives, government policy requirements, or resolutions of the Legislature), which may encompass a broader scope than an audit of a financial report in accordance with the ASAs. Given the ASAs are sector neutral, these additional responsibilities are not dealt with in the standards. They may be dealt with in standards or guidance issued by government audit agencies.

The scope of an annual audit in the public sector may include, in addition to the audit of the financial report of a public sector entity, an audit of service performance (for example, an audit of annual performance information or performance statements) and/or elements of a compliance engagement (for example, reporting on compliance with key legislation). A public sector auditor may also perform other discretionary assurance engagements such as performance audits, reviews or assurance engagements on controls (refer to paragraph 29 below).

Specific requirements may exist within the legislation governing the audit mandate, for example, the public sector auditor may be required to report directly to a minister, the Legislature or the public if the entity attempts to limit the scope of the audit. Furthermore, law or regulation may establish additional reporting requirements for the auditors of public sector entities, for example, to prepare a separate report on instances of non-compliance with law or regulation to the Legislature or other governing body, or communicating such instances in the auditor’s report on the financial report.

In the public sector, there are many users of financial information including, but not limited to, the audited entity, ratings agencies, analysts, lending institutions, service providers and recipients, parliament, ministers and the public. In order to meet the information requirements of a broad range of users, a public sector auditor’s mandate may require, or allow for, reporting on non-compliance with laws or regulations and unacceptable conduct (such as lack of probity) in the public sector. AuditorsGeneral may elect or may be required to address probity and public interest considerations in their annual financial audits. This may necessitate a further broadening of the scope of an audit beyond the scope envisaged by the ASAs under which the audit is performed. The broadening of scope may present a challenge for the auditor in determining how to effectively report on the outcome of any additional work the auditor may decide to undertake within the structure of the opinion normally required by the relevant ASAs.

The objectives of a financial audit in the public sector therefore may be broader than expressing an opinion on whether the financial report has been prepared, in all material respects, in accordance with an applicable financial reporting framework. The ASAs and ASAEs provide minimum requirements and application material; however, as they are written to be sector neutral, additional guidance may be required to support the broader scope of engagements undertaken in the public sector to promote consistency.

For other public sector assurance and assurance related engagements required to be conducted under AUASB Standards, the public sector assurance practitioner applies the relevant requirements of the applicable AUASB Standard relevant to the engagement. For example:

Reviews of financial reports or historical financial information (limited assurance engagements) — refer to the applicable Standards on Review Engagements.

Assurance engagements on subject matters other than historical financial information — refer to Standard on Assurance Engagement ASAE 3000.

Compliance engagements — refer to Standard on Assurance Engagement ASAE 3100.

Assurance Engagements on Controls — refer to Standard on Assurance Engagement ASAE 3150.

Performance engagements — refer to Standard on Assurance Engagement ASAE 3500.

As noted in paragraph 23, AUASB Standards are designed to be neutral with respect to the sector and the size of the entity subject to the engagement, and are intended to be applied, as appropriate, to engagements in both the public and private sectors.

Where appropriate, additional considerations specific to the public sector are included within the application and other explanatory material of AUASB Standards. These additional considerations assist in the application of the requirements of the standards in such engagements. However, these considerations and associated guidance are not extensive and, as a result, the standards focus largely on engagements undertaken in the private sector where the objective is to form a conclusion in respect of compliance with a reporting framework.

Due to the differences between engagements undertaken in the public and private sectors, public sector auditors and assurance practitioners may face challenges in applying the AUASB Standards in the public sector. For example, practitioners may need to apply professional judgement in:

interpreting terminology used in AUASB Standards that is not usually found in the public sector, for example, terms such as “client”, “listed entity”, “firm”, “partner”, “engagement partner” and “lead assurance practitioner”.

applying AUASB Standards in delivering audit mandates established within legislation.

distinguishing a compliance engagement from a financial audit with elements of compliance with law or regulation.

determining materiality levels for public sector engagements where, for example, application of private sector benchmarks may not be appropriate and where the impact of qualitative considerations may be more prevalent.

identifying and communicating matters required to be reported by law or regulation within the structure of the opinion promulgated by the relevant AUASB Standards.

complying with AUASB Standards in circumstances where it may be against the public interest to disclose certain sensitive information in publicly released reports.

Topic specific guidance included in this GS is structured as follows:

Application

This section clarifies how the topic specific guidance is to be used and for what purpose it has been developed, and identifies:

the relevant AUASB Standard the guidance applies to; and

the type of engagement (or combination thereof) and, where relevant, the subject matter it addresses.

It includes a clear statement that the GS:

provides supplementary guidance in relation to the AUASB Standard it applies to and that it does not contain any further requirements for the conduct of the public sector engagement; and

is to be read and applied together with the relevant AUASB Standard.

Introduction (where applicable)

Topic specific guidance may include further introductory material to provide context relevant to a proper understanding of the topic specific supplementary guidance. Introductory material may include, as necessary, such matters as explanation of the:

purpose and scope of the supplementary guidance, including how the guidance relates to other segments of the GS; and

topic specific subject matter.

Scope

This section identifies the specific paragraphs or sections of the AUASB Standard the supplementary guidance relates to.

Definitions

Definitions necessary to understand guidance provided in this GS are included with the topic specific guidance it relates to.

Guidance

This section sets out supplementary application and other explanatory material to assist the auditor/assurance practitioner to achieve the objectives of the relevant AUASB Standards.

The following drafting conventions apply to guidance material included in this GS:

Words such as “should”, “shall” or “must”, or any other term that denotes something as a mandatory requirement, are not to be used, except when repeating or referring to the requirements from relevant AUASB Standards.

Guidance supports the general requirements and application and explanatory material contained in AUASB Standards, and:

does not extend the requirements of the public sector auditor/assurance practitioner as stated in the AUASB Standards;

refers to the requirements in the AUASB Standards to which the guidance is supplementary; and

is consistent with the relevant AUASB Standards the guidance relates to.

The present tense of verbs is used when it is the best form of expression. Use of the present tense does not create or imply mandatory requirements.

The word “including” means a list of items or examples is provided but the list does not purport to contain all relevant items or examples and intentionally is not exhaustive.

ASA 210 deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance. This includes:

establishing that certain preconditions for an audit are present before accepting the engagement; and

confirming that there is a common understanding between the auditor and the entity of the terms of the audit engagement.

The preconditions for an audit are defined in ASA 210, paragraph 4, to mean the use by management of an acceptable financial reporting framework in the preparation of the financial report and the agreement of management to the premise on which an audit is conducted.

In the public sector, law or regulation governing the operations of public sector audits generally mandate the appointment of a public sector auditor and commonly set out the public sector auditor’s responsibilities, functions and powers, including the power to access an entity’s records and other information. Law or regulation may also prescribe other aspects of the terms of the audit engagement, including the objective and scope of the audit and the responsibilities of management. ASAs do not override law or regulation in such matters.

Where the public sector financial audit is mandated by legislation, the public sector auditor cannot avoid such an obligation and, consequently, may not be in a position to not accept (that is, to decline) or not continue (that is, to withdraw from) the engagement. The public sector auditor may be required to perform these types of audits whether or not the ASA 210 preconditions for the audit exist and whether or not management’s agreement on the terms of the engagement has been obtained.

Consequently, the use of engagement letters may not be a widespread practice in the public sector for audits mandated by legislation. Nevertheless, there may be benefit in communicating a common understanding of the terms of the audit engagement between the auditor who is carrying out the audit and those charged with governance of the public sector entity, to avoid misunderstandings with respect to the engagement and to provide for an efficient and quality audit to be carried out.

Use of ASA 210 terminology such as to “accept” or “continue” an audit engagement, or to “agree” the terms of an engagement with management may be problematic in the public sector context for audits mandated by law or regulation.

This section of the GS provides additional guidance to reflect the public sector perspective on ‘agreeing’ the terms of financial audit engagements undertaken in the public sector.

This section of the GS provides supplementary guidance for public sector auditors related to the following requirements of ASA 210:

Preconditions for an Audit – Obtain agreement of management that it acknowledges and understands its responsibility (ASA 210, paragraph 6(b)).

Agreement on Audit Engagement Terms (ASA 210, paragraphs 9-13).

Financial reporting frameworks applicable in Australia generally require the adoption of the going concern basis of accounting in financial reports, except in circumstances where management of an entity intends to liquidate the entity or to cease trading or has no realistic alternative in doing so. This concept applies even when there are uncertainties about events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in the future. However, these reporting frameworks require such uncertainties to be disclosed in the financial report when they are material.

Under the going concern basis of accounting, the financial report is prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. Assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business.

ASA 570 clarifies that management’s use of the going concern basis of accounting is also relevant to public sector entities. However, as the concept of going concern as described in AASB 101/ASA 570 is generally more relevant to for-profit commercial entities (whether operating in the private sector or public sector), it may need to be interpreted and applied differently for public sector entities responsible for providing significant government functions on a non-commercial basis.

Cash flow projections and other financial metrics-based criteria traditionally used in making going concern assessments are often less relevant in the public sector for those entities that are funded by government through annual appropriations and grants, where the focus is more on whether an entity is sufficiently supported by the government and to what extent the continuation of its functions is protected. Cessation of a public sector entity is most likely to result from a government policy (political) decision to discontinue an entity in its entirety, merge or amalgamate one or more public sector entities, privatise the entity, or privatise all or part of the functions delivered by the entity. Therefore, the events or conditions which may cast significant doubt on a public sector entity’s ability to continue as a going concern may be different to the factors faced in the private sector.

To effectively plan and implement audit procedures that appropriately respond to going concern related risks, public sector auditors require a clear understanding of how the concept of going concern is applied to the public sector entity they are auditing. A lack of understanding of how the going concern concept applies in the context of public sector reporting may lead to public sector auditors applying unnecessary or inappropriate audit procedures.

Public sector auditors may need to obtain a detailed understanding of what, if any, going concern risks apply to the public sector entity and on what basis the going-concern assumption is appropriate. For example, whilst some public sector entities may face funding shortfalls or liquidity concerns, management’s use of the going concern assumption may still be appropriate based on the assumption that the functions provided by the public sector entity will continue within government, even if not within that entity if it is abolished. As a consequence, the nature and source of evidence public sector auditors obtain may be different when compared to the private sector.

Whilst the public sector auditor must determine that the use of the going concern basis of accounting is appropriate for each public sector entity in accordance with the requirements of ASA 570, there also may be other forms of public reporting (such as periodic reports to parliament covering the whole of government or specific public sector segments) where the public sector auditor may highlight significant financial sustainability issues relating to an individual or group of public sector agencies. Though reporting on these financial sustainability issues may be deemed in the public interest, it is not a substitute for any reporting requirements in ASA 570 and falls outside the scope of this GS.

This section of the GS provides supplementary guidance to reflect the public sector perspective on going concern related to:

The concept of going concern in the public sector (ASA 570, paragraphs 2 and A2).

Risk assessment procedures and related activities (ASA 570, paragraphs 10-11 and A3-A4, A7).

Evaluating management’s assessment (ASA 570, paragraph 12 and A8-A1).

Additional audit procedures when events or conditions are identified (ASA 570, paragraphs 16 and A16-A19).

Auditor conclusions and reporting (ASA 570, paragraphs 17-24 and A21-A35)

The term Engagement Partner is defined in ASA 220 and ASQM 1 as “the partner or other individual, appointed by the firm, who is responsible for the audit engagement and its performance, and for the auditor’s report [emphasis added] that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.” In accordance with these Standards, ‘engagement partner’, ‘partner’ and ‘firm’ is to be read as referring to their public sector equivalents where relevant.

In the public sector, an Auditor-General, or other suitably qualified individual appointed on behalf of the Auditor-General, may act in a role equivalent to that of the Engagement Partner with overall responsibility for a public sector audit.

Challenges may arise in relation to some aspects of ASA 220 in the public sector when the individual assigned responsibility for the audit engagement and its performance in practice, is not also the individual responsible for signing and issuing the auditor’s report. ASA 220 does not specify that the Engagement Partner has to sign the auditor’s report; nor does ASA 700 require this. Furthermore, ASA 700 does not include specific requirements as to the role and responsibilities of the individual responsible for signing and issuing the auditor’s report.

This section of the GS provides supplementary guidance on:

the concept of Engagement Partner in the public sector (ASA 220, paragraph 12(a)); and

the allocation of responsibilities under ASA 220 when the individual who is assigned responsibility for the audit engagement and its performance in practice, is not also the individual responsible for signing and issuing the auditor’s report.

Different scenarios may apply in the different jurisdictions in Australia depending on the applicable legislative mandate and chosen audit delivery model (for example, whether external Audit Service Providers form part of the engagement team or not). Each Audit Office will work within any delegation or authorisation clauses provided within their legislation to establish policies or procedures to ensure the objectives of ASA 220 are achieved.

Depending on the legislative mandate in each jurisdiction, an Auditor-General may not be required to perform the audit of a public sector entity. Instead, the public sector entity may engage a private sector auditor or firm to perform the audit. In these circumstances, the engaged auditor or firm has overall responsibility for the audit engagement and its performance, and will sign and issue the auditor’s report. These types of engagements fall outside the scope of this section, as ASA 220 is fit for purpose in these circumstances.