The Audit Quality Review Board Ltd (“AQRB”) is a non profit company limited by guarantee, initiated and funded by the Australian auditing profession to act as an independent review body and comprising board members from a broad range of disciplines. The majority of the company’s directors (including the chairman) must be persons who have never been practising accountants.

1.2

Both the profession and the member firms had a specific purpose in setting up this company: to achieve a process of continual improvement in audit quality and to demonstrate publicly the commitment to ethical and professional standards relating to audit independence.

1.3

AQRB has therefore been established to monitor objectively the approach of participating firms to achieving these aims.

1.4

AQRB has established a Constitution, Code of Conduct and Rules which provide the framework for its operations. These Rules relate specifically to how the monitoring process shall work.

1.5

AQRB has entered into a Foundation Agreement with St James Ethics Centre. Under the terms of this agreement, St James will make recommendations to the AQRB board on ethical matters in respect of the affairs of AQRB when requested to do so by AQRB.

2 AQRB’s purpose and objective

Purpose

2.1

To monitor the processes by which audit firms seek to ensure their compliance with professional standards and legal obligations relating to independence and audit quality, with respect to their audits of the financial statements of Public Interest Entities*

* Amended 13 May 2008.

2.2

AQRB does this by:

(a) facilitating the completion of Quality Control Reports by Participating Audit Firms (see Section 4)

(b) reviewing Participating Monitored Audit Firms and producing reports from those reviews

(c) reporting to the public at least annually on the monitoring process.

Objective

2.3

To help improve the quality of the auditing of Public Interest Entities*. By doing so, AQRB aims to enhance the credibility and integrity of the Australian auditing framework, improve public confidence in that framework, and contribute to the continual improvement of the audit profession for the benefit of the Australian public.

* Amended 13 May 2008.

2.4

This objective also enables AQRB to complement and support the professional bodies in their quality assurance reviews, as set out in the memoranda of understanding between AQRB and each of the professional bodies.

3 Participation in the monitoring process

3.1

Any audit firm that is qualified to issue audit reports on financial statements of Public Interest Entities* may apply to participate in the monitoring process.

* Amended 13 May 2008.

3.2

That firm can apply to be either a Participating Audit Firm (PAF), or a Participating Monitored Audit Firm (PMAF), as follows:

Participating Audit Firm

enter into a ‘quality control form agreement’
complete the ‘Quality Control Report’ (QCR), which is in the form of a questionnaire, as required by the above agreement
submit a QCR to AQRB each year
pay an annual fee of $5,000 (or as determined by the AQRB board), with appropriate G.S.T., to AQRB’s nominated trust account for the filing of the QCR.

Additionally, a PAF might also decide to proceed to the next level, as follows:

Participating Monitored Audit Firm

enter into a ‘monitoring agreement’
pay the participation fee (see Section 7).

3.3

The quality control form agreement and monitoring agreement shall be hardcopy documents signed by one of the audit firm’s senior management. If the audit firm is part of a group of entities, it shall enter into any such agreement on behalf of each entity in the group, provided each entity is operating in Australia under the same name and is subject to the same national policies, procedures and quality assurance systems.

3.4

AQRB maintains a register on its website, listing:

the PMAFs
the PAFs whose QCR’s have been published on AQRB’s website.

4 Quality Control Reports (QCR)

4.1

QCR’s are submitted to AQRB electronically, in a secure, read-only format.

4.2

AQRB shall publish QCRs submitted to it by PMAFs that are subject to annual review under rule 5.3. AQRB shall review each other QCR submitted to it and shall, without an obligation to give reasons, inform the audit firm whether it has decided to publish or not to publish it. AQRB shall consult with the audit firm before taking such a decision.

4.3

In the event of the publication by AQRB of a QCR under paragraph 4.2, AQRB may, at any time, additionally publish any comment in the nature of a disclaimer relating to that QCR.

4.4

If AQRB publishes the QCR on its website, the audit firm may also publish it on its own website. If AQRB decides not to publish the QCR, the audit firm shall not publish it on its own website either. Whenever an audit firm publishes a copy of its QCR, it must include with that publication any AQRB disclaimer as directed by AQRB.

4.5

If an audit firm that has lodged a QCR considers there has been any significant material change to the information in that report, it shall notify AQRB within 60 days of becoming aware of the change.

5 How the monitoring process works

5.1

AQRB reviews each PMAF in order to understand the processes and documentation by which that audit firm monitors its compliance with professional standards and legal obligations relating to audit quality and independence, with respect to its audit of the financial statements of Public Interest Entities*.

* Amended 13 May 2008.

5.2

AQRB does not examine the merits of a particular audit, the conclusions reached in that audit (including conclusions about the application of accounting policies to that audit), or the appropriateness of the audit opinion, other than as merely incidental to the review of processes and documentation described in paragraph 5.1.

5.3

Reviews are conducted as follows:

100 or more publicly listed audit clients – annually
less than 100 publicly listed audit clients – at least 3-yearly.

The number of an audit firm’s publicly listed audit clients is determined from information in that audit firm’s most recent QCR.

5.4

AQRB appoints a Review Panel to carry out each review. The Review Panel consists of a minimum of two members of the AQRB board, at least one of whom has not been a practising accountant and at least one of whom has had previous professional auditing experience. The Chairman may also attend meetings and interviews as part of thereview. The Review Panel may contract additional reviewers to assist in the examination of audit engagement files to provide supporting evidence as to the operation of the audit firm’s quality control systems.

5.5

At the start of each review, the PMAF shall make available at least one ‘designated professional’, with suitable experience and qualifications, to give the Review Panel an explanation of the audit firm’s systems, structures and policies. This may include taking the panel through examples of audit client engagements, subject to paragraphs 5.7 and 5.9.

5.6

The PMAF shall give the Review Panel access to documentation related to, and reports arising from, the firm’s monitoring activities, including, but not limited to, those performed by ASIC or any accounting professional body, in so far as they relate to independence and quality control over audits of its Public Interest Entity* audit clients, including action taken, or planned to be taken in response to the findings of such monitoring activities. The PMAF also gives the Review Panel access to up to twenty* Public Interest Entity* audit engagement files that the panel has selected, together with all relevant documentation and information (subject to paragraphs 5.7 and 5.9). Each PMAF is required to have established a procedure to endeavour to obtain consent from all its Public Interest Entity* clients to review by AQRB, if selected. This may be done by including the consent in the annual engagement letter.

* Amended 13 May 2008.

5.7

Every PMAF must co-operate, and must use all reasonable efforts to ensure its designated professionals co-operate, with AQRB in the performance of a review. ‘Co-operation’ includes complying with any AQRB request, provided that:

(a) an AQRB request for documents or information is reasonable and relevant to the review, and does not relate to documents or information that is or are subject to legal professional privilege

(b) where the AQRB request is for an interview, the designated professional requested for interview has the appropriate expertise, experience and, if relevant, involvement in the audit client engagement.

5.8

A PMAF is entitled to have a representative (which may include that audit firm’s legal counsel) present at any interview conducted by AQRB as part of a review.

5.9

In relation to a particular audit client, a PMAF is not required to provide any documents or information to AQRB if:

(a) the client objects to being included in AQRB’s monitoring process, provided that the PMAF has used all reasonable efforts to obtain the consent of the client

(b) it would involve a breach of confidentiality owed to a client of that audit firm. In such a case, the PMAF must use all reasonable efforts to obtain the consent of the client to the disclosure of the documents or information

(c) the document or information requested is subject to legal professional privilege

(d) legal proceedings have started or been threatened between the PMAF and the audit client, or the PMAF and the audit client are otherwise in dispute, and the document or information requested relates to that audit client

(e) a regulator has begun a review, inspection or investigation of the PMAF, or the PMAF has reasonable grounds to believe that such a review, inspection or investigation is likely to occur within the next two months

(f) a regulator or a liquidator (provisional or otherwise) has begun a review, inspection or investigation of an audit client of the PMAF, or the PMAF has reasonable grounds to believe that such a review, inspection or investigation is likely to occur, and the document or information requested relates to that audit client

but in the event of any such non provision, the PMAF shall inform AQRB of the circumstances giving rise to that event.

5.10

A PMAF may require that AQRB defers a review of that firm if a regulator has begun a review, inspection or investigation of the firm, or the PMAF has reasonable grounds to believe that such a review, inspection or investigation is likely to occur within the next two months.

6 Reports and working papers

6.1

When a review is complete, the review panel prepares a draft Summary Review Report and a draft Detailed Review Report, and submits the drafts to the Reporting Committee for approval. The Reporting Committee consists of at least 5 AQRB board members determined by the Chairman, including those who sat on the Review Panel.

6.3

Once the Reporting Committee has approved the draft reports, the Review Panel gives them to the relevant PMAF. The PMAF may raise any concerns about the content of the reports within 30 working days of receiving them, including correcting any factual inaccuracies, before the reports are finalised.

6.4

If a dispute arises about the content, that dispute is presented to the Final Review Committee, which consists of as many AQRB board members as are available and such other advisers or specialists that the AQRB board considers desirable. The decision of the Final Review Committee is final.

6.5

AQRB shall finalise its reports as soon as practicable after receiving comments from the PMAF and referring any disputes to the Final Review Committee. The final reports may (but are not obliged to) include any of the PMAF’s responses to or comments on the draft reports.

6.6

AQRB shall give each PMAF a copy of the final reports applicable to it and shall publish the final Summary Review Report on its website, which may also include the PMAF’s response. The PMAF may also publish its final Summary Review Report with its response (if any).

6.7

The draft and final Summary Review Reports must not contain any commercially sensitive information or recommendations, and the draft and final Review Reports must not identify any clients of the PMAF by name or contain any information that could enable the identification of any clients.

6.8

The final Detailed Review Report records in greater detail the information contained in the final Summary Review Report. It may contain information relating to specific matters arising from the review (subject to paragraph 6.7) and recommendations regarding actions the PMAF should take to address any identified non-compliance with professional standards or legal obligations relating to independence and audit quality. It is not published on a website or elsewhere by either AQRB or the PMAF.

6.9

All Confidential Information prepared or received by AQRB inconnection with a review of a PMAF, together with the drafts and final version of the review reports, must be kept confidential by AQRB. AQRB must return all Confidential Information as originally supplied to it by the PMAF within 15 days of issuing the final Review Reports.

Annual report

6.10

AQRB shall publish an annual report commenting on the monitoring process and highlighting issues arising during the year. These reports shall not include information that could enable the identification of any PMAF or any client of a PMAF.

Breaches

6.11

If during a review AQRB has reasonable grounds to suspect a breach of professional standards or legal obligations relating to audit quality or independence, it shall notify the audit firm concerned within 10 working days of all information relating to that suspected breach and give the firm a reasonable opportunity to investigate the suspected breach.

Once the firm has completed its investigation, AQRB and the firm will meet to discuss the suspected breach. If AQRB and the firm agree that a breach has occurred, AQRB shall report the breach to the applicable professional body in accordance with the MoU between the professional body and AQRB unless the firm elects to notify the applicable professional body to the satisfaction of AQRB.

If the firm and AQRB agree that the breach is not material, AQRB will, in its report to the applicable professional body, recommend that no further action be taken. If the firm and AQRB agree that the breach is material, AQRB will, in its report to the applicable professional body, recommend such action be taken as it believes appropriate in the circumstances of the breach.

If AQRB and the firm cannot agree on whether a breach has occurred and remains unresolved, the parties will deal with the dispute in accordance with the resolution process contained in the Monitoring Agreement between AQRB and the firm, and the parties may refer the matter to the St James Ethics Centre for mediation in accordance with that process.

Working papers

6.12

AQRB is only entitled to keep a copy of its working papers and the final Review Reports. It is obliged to establish and maintain effective security measures to safeguard the working papers and the final Review Reports from unauthorised access, use, copying or disclosure.

6.13

AQRB will endeavour to ensure that its working papers do not identify any client of a PMAF by name or contain any information that could enable the identification of any client. Every PMAF is entitled to review the working papers related to its own review after the Review Reports are finalised. At the end of a review, a PMAF may (if it has reasonable grounds), require AQRB to remove information from the working papers which constitute commercially sensitive information.

6.14

AQRB keeps a review’s working papers for seven* years from the date of the publication of the final report, and must destroy or delete (as relevant) the working papers within 30 days from the end of that period.

* Amended 13 May 2008.

7 Participation fee

7.1

All amounts stated in this document are in Australian dollars and all payments must be made in Australian dollars. Participation fees do not include GST, and amounts stated in this document do not include any applicable taxes.

7.2

Audit firms wishing to become a PMAF must pay a participation fee, together with any GST applicable, to the nominated AQRB trust account. The participation fee is in addition to the annual fee of $5,000 payable under the quality control form agreement.

7.3

The participation fees for 2006 are:

PMAF with over 150 publicly listed entity audit clients

$400,000

Annual

PMAF with 100 to 150 publicly listed entity audit clients

$250,000

Annual

PMAF with less than 100 publicly listed entity audit clients

$75,000

Per review

7.4

AQRB will calculate and set the participation fees for subsequent years with reference to:

AQRB’s budget, as determined by its board for the relevant year
the number of PMAFs in that year
the number of publicly listed entities audited by a PMAF (as disclosed in its most recently submitted QCR)

However any proposal to charge participation fees for subsequent years in excess of the fees for 2006 (other than for increases in CPI over the previous year of the term) must be discussed with the Auditor Consultation Group, and will not be implemented unless AQRB has the written consent of 75% of those PMAFs who are subject to an annual review. AQRB may invite St James Ethics Centre to participate in the consultation process with the Auditor Consultation Group.

7.5

AQRB reviews its budget and participation fees annually in consultation with the Auditor Consultation Group. This is to ensure that the aggregate of participation fees for each year covers the budgeted operating costs of AQRB (taking into account any amounts unused in the previous year, and anticipated receipts under quality control form agreements). AQRB also sets a participation fee payment instalment schedule each year, to enable it to meet its ongoing costs as anticipated by that year’s budget.

7.6

AQRB invoices the PMAFs in advance for the participation fee, in accordance with the payment instalment schedule.

7.7

PMAFs pay the participation fees to AQRB’s nominated trust account within 30 days of the date of invoice. AQRB may charge interest at the default interest rate on any overdue invoice, starting on the 60th day after the date of the invoice and thereafter calculated at quarterly rests.

7.8

Each PMAF meets all reasonable out-of-pocket expenses for both its own and AQRB staff relating to travel and accommodation in respect of their own review.

8 The Auditor Consultation Group

8.1

The Auditor Consultation Group is hereby established for the purpose of consultation on the operation of these rules and related matters. It shall include a representative of each PMAF and such directors as the Chairman may designate. This Group provides a forum for PMAFs to discuss with AQRB matters such as the rules of operation, the monitoring process, the budget, the participation fees and any other aspect of AQRB’s operations.

8.2

Meetings of the Auditor Consultation Group are convened by the Chairman as required for general purposes (including any proposed changes to these Rules), and at least annually to review the proposed budget and participation fees.

9 Reviewers

9.1

AQRB appoints reviewers to assist in the reviews. Each reviewer must be a member in good standing of a professional body, and must comply with the AQRB code of conduct.

10 Withdrawal and termination from the monitoring process

10.1

A PMAF may withdraw from the monitoring process before its monitoring agreement has expired:

(a) at any time, after seeking the written consent of AQRB (consent must not be unreasonably withheld)

(b) within 60 days following any change to these rules of operation made in line with paragraph 11.2, if the PMAF concerned did not consent to the rule change.

10.2

AQRB may terminate the monitoring process of a PMAF:

if AQRB reasonably considers the audit firm to be non-cooperative and hence in breach of paragraph 5.7
if AQRB reasonably determines that the audit firm’s QCR is not materially correct in its description of quality procedures or their operation.

AQRB must advise the audit firm of its reasons for deciding toterminate.

10.3

A PMAF that withdraws or is terminated from the monitoring process in line with paragraph 10.1 must still pay the total participation fees payable for the full term of the monitoring agreement.

11 Amendment to Rules

11.1

Subject to paragraph 11.2, these Rules may be amended by resolution of the AQRB board.

11.2

Any proposed change to these Rules must be notified in writing to the PMAFs and shall not come into effect until 60 days after such notification. Unless at least 75% of those PMAFs that are subject to an annual review consent in writing to the proposed change, then such change shall not come into effect, until the AQRB board has caused consultation to take place with such PMAF’s and sufficient of those PMAF’s withdraw their disapproval so that at least 75% of those PMAFs approve. AQRB may invite St James Ethics Centre to participate in the consultation process with the PMAFs.

if AQRB reasonably considers the audit firm to be non-cooperative and hence in breach of paragraph 5.7
if AQRB reasonably determines that the audit firm’s QCR is not materially correct in its description of quality procedures or their operation.

AQRB must advise the audit firm of its reasons for deciding toterminate.

12 Definitions

Unless the contrary intention appears, the definitions applicable to the AQRB Constitution apply to these Rules, except as hereinafter defined.

AQRB: Audit Quality Review Board Ltd (ACN 117 029 231 ), a not-for-profit company limited by guarantee incorporated under the Corporations Act 2001 on 20 December 2005

AQRB request: a request by AQRB to a Participating Monitored Audit Firm or a designated professional to provide access to documents or information for the purpose of a review

Auditor Consultation Group: the committee established by clause 8

Confidential Information: any documents or other stored information disclosed to AQRB by a Participating Monitored Audit Firm for or inconnection with a review of the firm

CPI: means the All Groups Consumer Price Index (Weighted Average of Eight Capital Cities) published by the Australian Bureau of Statistics

Default Interest Rate: on any day, the aggregate of the cash rate target expressed as a percentage per annum quoted by the Reserve Bank of Australia and 1% per annum

designated professional: a partner, employee or independent contractor of a Participating Monitored Audit Firm

Detailed Review Report: a long-form report, in a format determined by the board of AQRB, giving a balanced commentary on and detailing procedural issues arising from a review and which may contain recommendations as described in paragraph 6.8 of these rules

Final Review Committee: the committee (consisting of as many AQRB board members as are available and such other advisers or specialists that the AQRB board considers desirable) that decides on any disputes that arise about the content of a draft review report

material form: information in any form of storage (whether visible or not) from which the information can be reproduced and any form in which the information is embodied or encoded

monitoring process: the reviews undertaken by AQRB (see section 5)

Participating Audit Firm (or PAF): an audit firm that has provided a Quality Control Report but has chosen not to enter into a monitoring agreement and participate further in the monitoring process

Participating Monitored Audit Firm (or PMAF): an audit firm that has entered into a monitoring agreement which has not terminated

participation fee: the fee for participating in the monitoring process

quality control form agreement: an agreement, in the form adopted by the directors, between an audit firm and AQRB under which the audit firm provides information on an annual basis about internal quality control processes and policies

professional bodies or accounting professional bodies means the Institute of Chartered Accountants in Australia, the National Institute of Accountants, and CPA Australia and any successor organisation to any of them

Quality Control Report (QCR): a report produced by an audit firm in respect of specified internal processes and policies, using the form attached to these rules as amended from time to time by AQRB following consultation with the Auditor Consultation Group

regulator: the Australian Securities & Investments Commission, the Australian Prudential Regulation Authority, or any other government body or judicial body with authority to review the records of a company

Reporting Committee: the AQRB committee that approves the draft review reports produced as a result of an AQRB review

review: a monitoring visit undertaken by AQRB in line with its purpose and objective (for full details see section 5)

reviewer: a person appointed by AQRB as a reviewer in addition to the board members

Review Panel: the panel approved of for the purpose of clause 5.4

Review Reports: the Summary Review Report and the Detailed Review Report

Summary Review Report: means the Institute of Chartered Accountants in Australia, the National Institute of Accountants, and CPA Australia and any successor organisation to any of them

working papers: all information, regardless of its material form, prepared by AQRB as part of a review of a Participating Monitored Audit Firm, including any draft reports

Changes to Rules of Operations

13 May 2008
The Rules of Operation were amended as follows:

Replace "Public Listed Entities", "publicly listed entities" and "listed entity" with "Public Interest Entities" in clauses 2.1, 2.3, 3.1, 5.1 and 5.6.

Replace "five" with "twenty" in clause 5.6.

Replace "six" with "seven" in clause 6.14.

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