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8 November 2012

Dear David

Thank you very much for your letter of 5 October. Unfortunately I only received it on 26 October and was overseas on holiday at that time. For some reason I did not receive your letter of 12 September.

Therefore, given your deadline for comment of 16 November, we do not have time to refer your reports to the Financial Reporting Council (FRC) Audit Quality Committee for more detailed comment. However we do very much believe that it is desirable to maximise the consistency and compatibility of the auditing regulatory frameworks, and welcome the opportunity to provide comment on your work.

Mr Michael Coleman, Chairman of the FRC Audit Quality Committee; Ms Merran Kelsall, FRC Audit Quality Committee Member and Chairman of the Auditing and Assurance Standards Board; and I reviewed your three reports, which are very comprehensive and well researched. We would like to make the following points on your reports on behalf of the FRC:

• Your discussion of the difficulty of defining audit quality is insightful and it seems that it would be ideal ifa definition of audit quality could be agreed to help improve communication on the issue.
  • A suggested definition discussed with Professor Arnold Schilder (Chair of the International Auditing and Assurance Standards Board (IAASB)) on his recent visit to Australia is "The likelihood that the audit process will identify when the financial report does not representa true and fair view of the organisation's financial position and performance and the likelihood that the auditor will clearly represent this opinion".
  • This definition is based on a discussion I had with James Sylph (Executive Director, Professional Standards, IAASB) in October 2011 as well as the chart (p. 4) in the IAASB document (attached) Audit Quality: An IAASB Perspective (January 2011) stating that inputs such as auditing standards and auditor attributes (both processes and people) are important contributors to audit quality.
  • We note that since issuing the thought piece on Audit Quality in January 2011, the IAASB has continued its work in this area, and anticipates issuing a more comprehensive document after its December 2012 Board meeting. This Framework for Audit Quality will include an expanded definition of a quality audit.
• We agree that there is a benefit in clarifying the roles of the auditor, management and the audit committee.
• We also recognise that going concern is one area where the expectations gap is significant and our submission to the IAASB on Improving the Auditor's Report (attached) offers suggestions to address this issue.
• We agree that the auditor reporting recommendations should only be applied to public interest entities and the definition of them needs to be clear. It may well be that some flexibility is required at the international level so that National Standards Setters can provide a clear definition in their own jurisdictions in the context of local laws and regulations. This would include consideration of which public sector entities would be included in the definition of public interest entities, recognising that at present audit reports in the public sector in Australia and Canada are more comprehensive than those in the private sector, and not likely to be recommended for change.
• Australia also has safeguards to maintain auditor independence and, after lengthy consultation with industry, the legislation was updated in June 2012, such that the FRC now has a strategic role in relation to audit quality (see attached article).
• In Australia the audit partner is required to sign the auditor's report.
• Like you, we are closely monitoring international developments in relation to proposals to strengthen regulation of auditors and improve auditor reporting given that we will be affected by decisions made by the European Union, the US Public Company Accounting Oversight Board and other organisations internationally.

Australia and Canada have much in common, but there are some interesting differences. In particular, while we both share a heritage as Commonwealth countries and we are both federations, our laws have developed in different ways. For example, over time the Australian States and the Commonwealth have agreed to develop a single securities regulator, the Australian Securities and Investments Commission (ASIC). ASIC regulates markets, companies and auditors and is responsible for conducting inspections of audit firms, including compliance with independence requirements and it also registers individual auditors. Australia's FRC has a specific role to provide strategic advice to Government in relation to audit quality.

We look forward to keeping in touch as you and others undertake research into the issue of audit quality.

Yours sincerely

SIGNED

Attachments

• FRC submission on IAASB Invitation to Comment Improving the Auditor's Report, October 2012
• Australian Shareholders Association survey on perceptions of the usefulness of Audit Reports, September 2012 [PDF 104KB]
• Audit Quality: An IAASB Perspective, January 2011
• New audit enhancement bill takes effect, June 2012