Application and Other Explanatory Material
The primary purpose of an assurance engagement is the conduct of assurance procedures to provide an assurance conclusion. However, the assurance practitioner is not precluded from providing recommendations for improvements to the compliance framework or compliance activities in conjunction with or as a result of conducting an assurance engagement to report on compliance.
In a direct engagement, the assurance practitioner evaluates the compliance activity conducted by the responsible party to meet the compliance requirement. In a attestation engagement, the responsible party evaluates the compliance activity against the compliance requirements and provides a statement on the compliance outcome.
The primary practical difference for the assurance practitioner between an attestation and a direct engagement is the additional work effort for a direct engagement when planning the engagement and understanding the compliance framework and other engagement circumstances e.g. criteria to be applied. In a direct engagement the assurance practitioner selects, or is required to use, the criteria which address the purpose or overall objective of the compliance engagement. This difference affects the assurance practitioner’s work effort in planning a direct engagement if the compliance requirements have not been identified or documented and in understanding the entity’s compliance framework where a description is not available.
In a three party relationship, which is an element of an assurance engagement, the responsible party may or may not be the engaging party, but is responsible for the compliance activities which are the underlying subject matter of the engagement and is a separate party from the intended users. The responsible party and the intended users may both be internal to the entity, for example if the responsible party is at an operational level of management and the intended users are at the level of those charged with governance, such as the Board or Audit Committee. See Appendix 1 for a discussion of how each of these roles relate to an assurance engagement on compliance.
The assurance practitioner, in order to comply with relevant ethical requirements gives consideration to whether the assurance practitioner has provided internal audit or consulting services with respect to the compliance framework or implementation of controls at the entity, as any such past or current engagements may impact on the assurance practitioner’s independence and are likely to preclude acceptance of the engagement.
Acceptance and Continuance
Competence and Capabilities to Perform the Engagement
Relevant competence and capabilities to perform the compliance engagement, as required by ASAE 3000 by persons who are to perform the engagement, include matters such as the following:
- Knowledge of the relevant industry, compliance frameworks, the nature of the overall compliance requirements (for example: emissions quantification or regulatory compliance).
- An understanding of controls, IT and systems.
- Experience in evaluating risks as they relate to the compliance requirements.
- Experience in the design and execution of tests of compliance and the evaluation of the results.
When considering the acceptance of a limited assurance engagement on compliance, ASAE 3000 requires the assurance practitioner to determine whether a meaningful level of assurance is expected to be able to be obtained, which may include whether a limited assurance engagement is likely to be meaningful to users. In making this assessment, consideration is given to the intended users of the assurance report and whether they are likely to understand the limitations of a limited assurance engagement, including the need to read the assurance report in detail to understand the assurance procedures performed and the assurance obtained.
An appropriate subject matter is:
- Identifiable, and capable of consistent evaluation against the identified criteria; and
- Able to be subjected to procedures for gathering sufficient appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate.
Examples of subject matters that may be appropriate for a compliance engagement include compliance with the following:
- General Insurers and Insurance Groups - Risk Management Strategy & Reinsurance Management Strategy (RMS/REMS).
- Treasurer’s Instructions.
- Managed Investment Schemes – Compliance Plan.
- Registered Superannuation Entity – SIS Act requirements (SPS 310).
- Financial Services Licensee – Corporations Act 2001 requirements.
In the context of a compliance engagement, examples of criteria include:
- Externally imposed criteria under law or directives, including:
- Other statutory requirements (e.g. ASIC Regulatory Guides and Practice Notes or APRA Prudential Standards).
- Ministerial directives.
- Industry or professional obligations (professional standards or guidance, codes of practice or conduct).
- Enforceable contractual obligations.
- Enforceable undertakings.
- Internally imposed criteria, as determined by management, including:
- Organisational policies and procedures.
- Frameworks, for example, compliance framework based on ISO 19600 – Compliance Management Systems.
Criteria need to be identified by the parties to the engagement and agreed by the engaging party and the assurance practitioner. The assurance practitioner may need to discuss the criteria to be used with those charged with governance, management and the intended users of the report. Criteria can be either established or specifically developed. The assurance practitioner normally concludes that established criteria embodied in laws or regulations or issued by professional bodies, associations or other recognised authorities that follow due process are suitable when the criteria are consistent with the objective. Other criteria may be agreed to by the intended users of the assurance practitioner’s report, or a party entitled to act on their behalf, and may also be specifically developed for the engagement.
In situations where the criteria have been specifically developed for the engagement, the assurance practitioner may obtain from the intended users or a party entitled to act on their behalf, acknowledgment that the specifically developed criteria are sufficient for the user’s purposes. (Ref: Para. 23)
When agreeing whether the engagement is to be conducted as an attestation or direct engagement, the assurance practitioner considers factors such as whether:
- there is a regulatory requirement or users need an evaluation of the compliance activity by the responsible party or evaluator (Ref: Para. 27); or
- the entity has the resources and expertise to prepare a suitable description or documentation of the compliance activity, compliance requirements and related controls and conduct a meaningful evaluation of the compliance outcome.
Where relevant, the terms of the engagement could also include a reference to, and description of, the auditor’s responsibility in accordance with:
- applicable law;
- regulation or relevant ethical requirements, and
- obligations to report identified or suspected non-compliance with laws and regulations to an appropriate authority outside the entity is required or appropriate in the circumstances.
When agreeing whether the report will be in long‑form, including matters such as evaluation of compliance procedures and detailed findings, both the needs of users and the risks of users misunderstanding the context of the procedures conducted or the findings reported are considered. Reporting evaluation of compliance procedures and findings may be appropriate where the users are knowledgeable with respect to assurance and the compliance requirements and, therefore, not likely to misinterpret those findings.
The nature and extent of planning activities will vary with the compliance engagement circumstances, for example the size and complexity of the compliance activity and requirements, the assurance practitioner’s previous experience with this area and the entity as a whole. Examples of the main matters to be considered when developing the engagement plan include:
- Matters affecting the industry in which the entity operates, for example economic conditions, laws and regulations, and technology;
- Risks to which the entity is exposed that are relevant to the compliance activity being examined;
- The quality of the control environment within the entity and the role of the governing body, audit committee and internal audit function;
- Knowledge of the entity’s internal control structure obtained during other engagements;
- The extent of recent changes if any, in the entity, its operations or its compliance framework;
- Methods adopted by management to evaluate the effectiveness of the compliance framework;
- Preliminary judgements about significant risk;
- The nature and extent of evidence likely to be available;
- The nature of control procedures relevant to the compliance activity and their relationship to the compliance framework taken as a whole;
- The assurance practitioner’s preliminary judgement about the effectiveness of the compliance framework taken as a whole and of the control procedures within the framework;
- The terms of the compliance engagement;
- The characteristics of the compliance activity and the identified criteria;
- Identification of intended users and their needs, and consideration of materiality and the components of compliance engagement risk; and
- Personnel and expertise requirements, including the nature and extent of involvement by experts.
The assurance practitioner may decide to discuss elements of planning with management or other appropriate party when determining the scope of the engagement or to facilitate the conduct and management of the engagement (for example, to co‑ordinate some of the planned procedures with the work of the entity’s personnel). Although these discussions often occur, the overall engagement strategy and the engagement plan remain the assurance practitioner’s responsibility. When discussing matters included in the overall engagement strategy or engagement plan, care is required in order not to compromise the effectiveness of the engagement. For example, discussing the nature and timing of detailed procedures with the entity may compromise the effectiveness of the engagement by making the procedures too predictable.
Materiality of the compliance requirements is considered at the planning stage, and is reassessed during the engagement based on the findings. The materiality of any identified deficiencies in the compliance framework and/or non‑compliance with compliance requirements is considered when evaluating the findings of the compliance engagement.
Materiality is considered when determining the nature, timing and extent of evidence gathering procedures, and when evaluating whether a matter of non‑compliance is material. In considering materiality, the assurance practitioner understands and assesses what factors might influence the decisions of the intended users.
Materiality is considered when evaluating the effect of accumulated deficiencies in the compliance framework or matters of non‑compliance with the compliance requirements. Material deficiencies or matters of non‑compliance are those which could significantly impact the compliance requirements being met and reasonably be expected to influence relevant decisions of the intended users.
Materiality is considered in the context of quantitative and qualitative factors, such as relative magnitude of instances of detected or suspected matter(s) of non‑compliance, the nature and extent of the effect of these factors on the evaluation of compliance with the compliance requirements and the interests of the intended users. The assessment of materiality and the relative importance of quantitative and qualitative factors in a particular engagement are matters for the assurance practitioner’s professional judgement, taking into account specific regulatory reporting requirements.
Quantitative and qualitative factors which the assurance practitioner may consider when assessing materiality include:
- The magnitude of the instances of detected or suspected matter(s) of non-compliance with the compliance requirements.
- The financial impact of the matter(s) of non-compliance on the entity as a whole.
- The nature of the matter(s) of non-compliance – one off or systemic.
- Evidence of a robust compliance framework in place to detect, rectify and report matter(s) of non-compliance.
- Commonly accepted practices within the relevant industry.
- The nature of relevant transactions, whether they involve high volumes, large dollar values and complex transactions relative to the compliance activity as a whole.
- The extent of interest shown in particular aspects of the compliance activity by, for example, governing body, regulatory authorities and agencies or the public.
The assurance practitioner’s understanding of the compliance framework and compliance requirements, ordinarily, has a lesser depth for a limited assurance engagement than for a reasonable assurance engagement. The assurance practitioner’s procedures to obtain this understanding may include:
- Review and understand the relevant compliance requirements.
- Enquiring of those within the entity who, in the assurance practitioner’s judgement, may have relevant information.
- Observing operations.
- Inspecting documents, reports, printed and electronic records.
- Re-performing compliance procedures.
The nature and extent of procedures to gain this understanding are a matter for the assurance practitioner’s professional judgement and will depend on factors such as:
- The entity’s size and complexity;
- The nature of the activity to be examined, including the compliance requirement(s) to which the compliance procedures are directed and the risk that those compliance requirements will not be met;
- The extent to which IT is used; and
- The documentation available.
The nature and extent of planning and subsequent evidence-gathering procedures will vary with the engagement circumstances, and the maturity of the entity’s compliance framework.
Elements of an entity’s compliance framework ordinarily include the following:
- Procedures for identifying and updating compliance requirements.
- Staff training and awareness programs.
- Procedures for assessing the impact of compliance requirements on the entity’s key business activities.
- Controls embedded within key business processes designed to ensure compliance with requirements.
- Processes to identify and monitor the implementation of further mitigating actions required to ensure that compliance requirements are met.
- A monitoring plan to test key compliance controls on a periodic basis and report exceptions.
- Procedures for identifying, assessing, rectifying and reporting matters of non-compliance.
- Periodic sign off by management and/or external third party outsourced service providers as to compliance with requirements.
- A compliance governance structure that establishes responsibility for the oversight of compliance control activities with those charged with governance, typically a Board Audit, Risk Management or Compliance Committee.
Management is in a unique position to perpetrate fraud because of their ability to manipulate the entity’s records or prepare fraudulent reports by overriding controls that otherwise appear to be operating effectively. Although the level of risk of management override of controls will vary from entity to entity, the risk is nevertheless present in all entities. Due to the unpredictable way in which such override could occur, it is a risk that compliance requirements will not be met due to fraud and thus is a significant risk.
The assurance practitioner may consider undertaking the following procedures to obtain sufficient appropriate evidence of the risk of fraud in relation to the compliance requirements:
- Make enquiries of management with respect to compliance regarding:
- Management’s assessment of the risk that controls may be circumvented due to fraud, including the nature, extent and frequency of such assessment;
- Management’s process for identifying and responding to the risks of fraud;
- Management’s communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud; and
- Management’s communication, if any, to employees regarding its views on corrupt or fraudulent business practices and unethical behaviour;
- Make enquiries of those charged with governance, management, and others within the entity as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud with respect to compliance affecting the entity;
- Make enquiries of the internal audit function, where it exists, to determine whether it has knowledge of any actual, suspected or alleged fraud affecting the entity, and to obtain its views about the risks of fraud;
- Obtain an understanding of how those charged with governance exercise oversight of processes for identifying and responding to the risks of fraud in the entity and the internal controls that have been established to mitigate these risks as far as they relate to the compliance requirements;
- Consider whether other information obtained by the assurance practitioner indicates risks of compliance requirements not being met due to fraud, for which mitigating controls are necessary;
- Evaluate whether the information obtained from the other risk assessment procedures and related activities performed indicates that one or more fraud risk factors are present; and
- Identify controls over matters for which decisions or actions are not routine, such as adjustments to records, development of estimates and activities outside the normal course of business.
In obtaining an understanding of the compliance framework, including controls, the assurance practitioner determines whether the entity has an internal audit function and its effect on the controls within the compliance framework. The internal audit function ordinarily forms part of the entity’s internal control and governance structures. The responsibilities of the internal audit function may include, for example, monitoring of internal control, risk management, and review of compliance with laws and regulations, and is considered as part of the assurance practitioner’s assessment of risk.
Compliance engagements require the application of assurance skills and techniques to gather sufficient appropriate evidence as part of an iterative, systematic assurance engagement process. As the assurance practitioner performs planned procedures, the evidence obtained may differ significantly from that on which the planned procedures were based and cause the assurance practitioner to perform additional procedures.
When compliance requirements apply throughout the specified period, the assurance practitioner may consider the nature and frequency of the compliance activities undertaken, and modify the nature, timing and extent of evaluation and/or testing to be undertaken on compliance activities. Knowledge of non‑compliance observed in prior periods is likely to lead the assurance practitioner to increase the extent of evaluation and/or testing throughout the specified period.
The assurance practitioner may become aware of a matter(s) that causes the assurance practitioner to believe that there are deficiencies in the compliance framework or the compliance activity is not compliant with the compliance requirements. In such cases, the assurance practitioner may investigate such differences by, for example, inquiring of the appropriate party(ies) or performing other procedures as appropriate in the circumstances.
The level of assurance obtained in a limited assurance engagement is lower than in a reasonable assurance engagement, therefore the procedures the assurance practitioner performs in a limited assurance engagement are different in nature and timing from, and are less in extent than for, a reasonable assurance engagement. The primary differences between the assurance practitioner’s overall responses to assessed risks and further procedures conducted in a reasonable assurance engagement and a limited assurance engagement on compliance include:
- The emphasis placed on the nature of various procedures as a source of evidence will likely differ, depending on the engagement circumstances. For example, the assurance practitioner may judge it to be appropriate in the circumstances of a particular limited assurance engagement to place relatively greater emphasis on indirect evaluation of compliance activities, such as enquiries of the entity’s personnel, and relatively less emphasis, on evaluation of compliance activities, such as observation, re-performance or inspection, than may be the case for a reasonable assurance engagement.
- In a limited assurance engagement, the further procedures performed are less in extent than in a reasonable assurance engagement in that those procedures may involve:
- Selecting fewer items for examination;
- Performing fewer types of procedures; or
- Performing procedures at fewer locations.
Work Performed by Another Assurance Practitioner or a Responsible Party’s or Evaluator’s Expert
(Ref: Para. 48)
When information on compliance activities to be used as evidence has been prepared using the work of a responsible party’s or evaluator’s expert, the nature, timing and extent of procedures with respect to the work of the responsible party’s or evaluator’s expert may be affected by such matters as:
- The nature and complexity of the compliance activity to which the expert’s work relates;
- The risks of a material deficiency in the compliance framework or non-compliance with the compliance requirements throughout the specified period or as at a specified date;
- The availability of alternative sources of evidence or mitigating controls;
- The nature, scope and objectives of the expert’s work;
- Whether the expert is employed by the entity, or is a party engaged by it to provide relevant services;
- The extent to which the responsible party or evaluator can exercise control or influence over the work of the expert;
- Whether the expert is subject to technical performance standards or other professional or industry requirements;
- The nature and extent of any controls within the entity over the expert’s work;
- The assurance practitioner’s knowledge and experience of the expert’s field of expertise; and
- The assurance practitioner’s previous experience of the work of that expert.
The nature, timing and extent of the assurance practitioner’s procedures on specific work of the internal auditors will depend on the assurance practitioner’s assessment of the significance of that work to the assurance practitioner’s conclusions, the evaluation of the internal audit function and the evaluation of the specific work of the internal auditors. Such procedures may include:
- Examination of evidence of the operation of the compliance activity already examined by the internal auditors;
- Examination of evidence of the operation of other instances of the same compliance activity;
- Examination of the outcomes of monitoring of controls by internal auditors; and
- Observation of procedures performed by the internal auditors.
Irrespective of the degree of autonomy and objectivity of the internal audit function, such a function is not independent of the entity as is required of the assurance practitioner when performing the compliance engagement. The assurance practitioner has sole responsibility for the conclusion expressed in the assurance report, and that responsibility is not reduced by the assurance practitioner’s use of the work of the internal auditors.
Evaluation of Evidence
In evaluating any matter(s) of non‑compliance (corrected or un‑corrected) with the compliance requirements materiality is considered as specified in the terms of the engagement where relevant, any relevant legislative, regulatory or other (e.g. contractual) requirements which may apply and the effect on the decisions of the intended users of the assurance report and the assurance practitioner’s conclusion. (Ref: Para. 49-50)
For both reasonable and limited assurance engagements, if the assurance practitioner becomes aware of a matter that leads the assurance practitioner to question whether a material matter of non‑compliance exists, the assurance practitioner would ordinarily pursue the matter by performing other evidence gathering procedures sufficient to enable the assurance practitioner to form a conclusion. (Ref: Para. 44)
The person(s) from whom the assurance practitioner requests written representations will ordinarily be a member of senior management or those charged with governance. However, because management and governance structures vary by entity, reflecting influences such as different cultural and legal backgrounds, and size and ownership characteristics, it is not possible for this ASAE to specify for all engagements the appropriate person(s) from whom to request written representations. The process to identify the appropriate person(s) from whom to request written representations requires the exercise of professional judgement.
Assurance procedures with respect to the identification of subsequent events after period end are limited to examination of relevant reports, for example reports on compliance procedures, minutes of relevant committees and enquiry of management or other personnel as to significant matter(s) of non‑compliance with compliance requirements.
The assurance practitioner does not have any responsibility to perform procedures or make any enquiry after the date of the report. If however, after the date of the report, the assurance practitioner becomes aware of a matter identified, the assurance practitioner may consider re‑issuing the report. In an attestation engagement where the report has already been issued, the new report includes an Emphasis of Matter discussing the reason for the new report. In a direct engagement, the new report discusses the reason for the new report under a heading “Subsequent Events”.
The assurance practitioner may expand the report to include other information not intended as a qualification of the assurance practitioner’s conclusion. If the report includes other information it is a long-form report as the information is additional to the basic elements required in paragraph 56 for a short-form report. This additional information may be required by regulation or agreed in the terms of the engagement to meet the needs of users. When considering whether to include any such information the assurance practitioner assesses the materiality of that information in the context of the objectives of the engagement. Other information is not to be worded in such a manner that it may be regarded as a qualification of the assurance practitioner’s conclusion and may include for example:
- Relevant background information and historical context.
- The assurance approach.
- Underlying facts and criteria applied.
- Disclosure of materiality levels.
- Findings relating to particular aspects of the compliance engagement.
- Analysis of the causes of non-compliance with the compliance requirements.
- Recommendations for improvements to address identified compliance framework deficiencies.
The summary of the work performed helps the intended users understand the nature of the assurance conveyed by the assurance report. For many assurance engagements, infinite variations in procedures are possible in theory. It may be appropriate to include in the summary a statement that the work performed included evaluating the suitability of the criteria and the compliance requirements and the risks that threaten those compliance requirements not being met. ASAE 3000 provides application material on reporting on the applicable criteria.
In a limited assurance engagement an appreciation of the nature, timing, and extent of procedures performed is essential to understanding the assurance conveyed by the conclusion, therefore the summary of the work performed is ordinarily more detailed than for a reasonable assurance engagement and identifies the limitations on the nature, timing, and extent of procedures. It also may be appropriate to indicate certain procedures that were not performed that would ordinarily be performed in a reasonable assurance engagement. However, a complete identification of all such procedures may not be possible because the assurance practitioner’s required understanding and consideration of engagement risk is less than in a reasonable assurance engagement.
Factors to consider in determining the level of detail to be provided in the summary of the work performed include:
- Circumstances specific to the entity (e.g. the maturity of the entity’s compliance framework compared to those typical in the industry sector);
- Specific engagement circumstances affecting the nature and extent of the procedures performed; and
- The intended users’ expectations of the level of detail to be provided in the report, based on market practice, or applicable law or regulation.
It is important that the summary be written in an objective way that allows intended users to understand the work done as the basis for the assurance practitioner’s conclusion. In most cases this will not involve detailing the entire work plan, but on the other hand it is important for it not to be so summarised as to be ambiguous, nor written in a way that is overstated or embellished.
If the assurance practitioner’s report on compliance has been prepared for a specific purpose and is only relevant to the intended users, this is stated in the assurance practitioner’s report. In addition, the assurance practitioner may consider it appropriate to include wording that specifically restricts distribution of the assurance report other than to intended users, its use by others, or its use for other purposes.
Modifications to the assurance report may be made in the following circumstances:
- A qualified conclusion may be issued if the following matters are material but not pervasive:
- Unsuitable criteria mandated by legislation or regulation where the assurance practitioner is unable to resign from the engagement;
- Scope limitation;
- Non-compliance with the compliance requirements;
- Misstatement in the Statement;
- An adverse conclusion may be issued if the following matters are both material and pervasive:
- Unsuitable criteria mandated by legislation or regulation where the assurance practitioner is unable to resign from the engagement;
- Non-compliance with the compliance requirements;
- Misstatement in the Statement;
- A disclaimer may be issued if there is a limitation of scope which is both material and pervasive.
Even if the assurance practitioner has expressed an adverse conclusion or a disclaimer of conclusion, it may be appropriate to describe in the basis for modification paragraph the reasons for any other matters of which the assurance practitioner is aware that would have required a modification to the conclusion, and the effects thereof.
When expressing a disclaimer of conclusion, because of a scope limitation, it is not ordinarily appropriate to identify the procedures that were performed nor include statements describing the characteristics of the assurance practitioner’s engagement; to do so might overshadow the disclaimer of conclusion.
Appropriate actions to respond to the circumstances identified in paragraph 65 may include:
- Obtaining legal advice about the consequences of different courses of action.
- Communicating with those charged with governance of the entity.
- Communicating with third parties (for example, a regulator) when required to do so.
- Modifying the assurance practitioner’s conclusion, or adding an Other Matter paragraph.
- Withdrawing from the engagement.
Certain matters identified during the course of the engagement may be of such importance that they would be communicated to those charged with governance. Unless stated otherwise in the terms of engagement, less important matters would be reported to a level of management that has the authority to take appropriate action.