For Professional Accountants

Code of Ethics
Nature of Ethics

◼ Study of moral principles and values that

govern the actions and decisions of an
individual or group.
◼ A branch of philosophy that deals with the
study of the rightness or wrongness of
human actions; can focus either on society
as a whole or on a particular group within the
society.
◼ Professional ethics extend beyond moral
principles. They include standards of
behavior for a professional person that are
designed for both practical and idealistic
purposes.
Nature of Ethics

◼ A mixture of moral and practical concept,

with a sprinkling of exhortation to ideal
conduct designed to invoke “right action”
on the part of the members of the
profession concerned – all reduced to
rules which are intended to be
enforceable, to some extent at least, by
disciplinary action.
(Ethical Standards of the Accounting
Profession, AICPA, 1966)
The Need for Professional
Ethics
◼ Professional ethics are imposed by a
profession on its members, who voluntarily
accept standards of professional behavior
more rigorous than those required by law.
◼ A code of ethics significantly affects the
reputation of a profession and the confidence
in which it is held.
◼ Such Codes attempt to:
▪ Ensure high standards of competence among a
group’s members
▪ Regulate and strengthen their relationships
▪ Promote and protect the image of the profession
and the welfare of the community
Ethical Dilemma

◼ Ethical dilemma is a situation that an individual

faces involving a decision about appropriate
behavior.
◼ Involves a situation in which the welfare of one
or more individuals is affected by the decision
◼ While personal ethics vary from individual to
individual, most people within are able to agree
about what is considered ethical and unethical
behavior.
◼ Accountants have their own honor system which
is called the Code of Ethics for Professional
Accountants in the Philippines.
International Code of Ethics for
Professional Accountants
◼ Developed by the International Ethics
Standards Board for Accountants (IESBA)
◼ Objective of the IESBA : serve the public
interest by setting high-quality ethics
standards for professional accountants.
International Code of Ethics for
Professional Accountants
Purpose of the Code
- Sets out fundamental principles of ethics for
professional accountants, w/c establish the standard
of behavior expected of a professional accountant.
- Provides a conceptual framework that professional
accountants are to apply in order to identify,
evaluate and address threats to compliance with the
fundamental principles.
- In the case of audits, reviews and other assurance
engagements, the Code sets out International
Independence Standards
International Code of Ethics for
Professional Accountants
◼ See overview of code
International Code of Ethics for
Professional Accountants
Effective Date Parts 1-3
• Parts 1, 2 and 3 will be effective as of June 15, 2019.
International Independence Standards (Parts 4A and
4B)
• Part 4A relating to independence for audit and review
engagements will be effective for audits and reviews of
financial statements for periods beginning on or after
June 15, 2019.
• Part 4B relating to independence for assurance
engagements with respect to subject matter covering
periods will be effective for periods beginning on or
after June 15, 2019; otherwise, it will be effective as of
June 15, 2019.
Relevant Provisions

◼ Code provisions most relevant to auditors

are:
- Part 1: Complying with the code,
fundamental principles and conceptual
framework
- Part 3: Professional accountants in public
practice
- Part 4a: Independence for audit and review
engagements
 PART 1
PART 1 COMPLYING WITH THE CODE,
FUNDAMENTAL PRINCIPLES AND
CONCEPTUAL FRAMEWORK
100 Complying with the Code
110 The Fundamental Principles
111 Integrity
112 Objectivity
113 Professional Competence & Due Care
114 Confidentiality
115 Professional Behavior
Section 100: Complying with Code

◼ A distinguishing mark of the accountancy

profession is its acceptance of the
responsibility to act in the public interest.
*
Therefore, a professional accountant’s
responsibility is not exclusively to satisfy
the needs of an individual client or
employer. In acting in the public interest a
professional accountant should observe
and comply with the ethical requirements
of this Code
The Fundamental Principles

◼ Integrity
◼ Objectivity
◼ Professional Competence and Due Care
◼ Confidentiality
◼ Professional Behavior
Integrity

◼ Obligation to be straightforward and honest in professional

and business relationships.
◼ Fair dealing and truthfulness
Objectivity

◼ Obligation not to compromise their professional or business

judgment because of bias, conflict of interest or the undue
influence of others.
Professional Competence and Due
Care
◼ Obligation to attain and maintain professional knowledge
and skill to be able to provide competent professional
services to clients or employers
◼ To act diligently in accordance with applicable technical and
professional standards when providing professional services
Confidentiality

◼ To respect the confidentiality of information acquired as a

result of professional and business relationships. (
◼ Obligation to refrain from disclosing confidential
information without proper and specific authority unless
there is legal or professional right or duty to disclose.
◼ Prohibits the use of confidential information acquired in the
course of providing professional services to their personal
advantage or the advantage of third parties.
Exceptions to the Rule of
Confidentiality
◼ Disclosure is permitted by law or authorized by the client or
employer
◼ Disclosure is required by law (litigation)
◼ Professional duty or right to disclose when not prohibited by law.
Professional Behavior

◼ Obligation to comply with relevant laws and regulations and

avoid any action that may bring discredit to the profession.
Conceptual Framework

◼ The circumstances in which professional

accountants operate may give rise to
specific threats to comply with the
fundamental principles.
◼ The conceptual framework specifies an
approach for a professional accountant to:
(a) Identify threats to compliance with
the fundamental principles; (b) Evaluate
the threats identified; and (c) Address the
threats by eliminating or reducing them
to an acceptable level
Threats to Compliance with the
Fundamental Principles
◼ Self – Interest Threat
◼ Self – Review Threat
◼ Advocacy Threat
◼ Familiarity Threat
◼ Intimidation Threat
Self – Interest Threat

◼ Occur as a result of a financial interest of a

professional accountant or of an immediate
or close family member.
◼ Examples:
▪ Having a direct financial interest or a material indirect financial interest in the
client.
▪ Having a loan from the client
▪ Excessive reliance on revenue from a single attest client
▪ Having a material joint venture with the client
▪ Potential employment from client
Self – Review Threat

◼ Occur when a previous judgment needs to be

re-evaluated by the professional accountant
responsible for that judgment.
◼ Example:
▪ The CPA firm has provided nonaudit services relating to the information
system and the accountant is now considering results obtained from that
information system in the audit
Advocacy Threat

◼ Occur when a professional accountant

promotes a position or opinion to the point
that subsequent objectivity may be
compromised.
◼ Examples:
▪ Promoting client securities as part of an initial public offering
▪ Representing a client in litigation, tax court or disputes with third parties
Familiarity Threat
◼ Occur when, because of a close
relationship, a professional
accountant becomes too sympathetic
to the interest of others
◼ Examples:
▪ A spouse or a close friend holds a key position with the client
▪ A partner has provided attest services for a prolonged period
▪ An accountant performs insufficient audit procedures when
considering the results of a nonattest service performed by the
accountant’s firm
▪ An accountant for the CPA firm recently was a director or officer
of the client firm
▪ Accepting gifts or preferential treatment of significant value from
the client.
Intimidation Threat

◼ Occur when a professional accountant may

be deterred from acting objectively by
threats, actual or perceived
◼ Examples:
▪ Threat to replace firm over a disagreement with the application of an
accounting principle
▪ Pressure to reduce audit procedures for purpose of reducing audit fees
▪ Being threatened with litigation
Evaluating Threats

◼ When the professional accountant identifies

a threat to compliance with the fundamental
principles, the accountant shall evaluate
whether such a threat is at an acceptable
level.
◼ An acceptable level is a level at which a
professional accountant using the
reasonable and informed third party test
would likely conclude that the accountant
complies with the fundamental principles
Addressing Threats

◼ If the professional accountant determines that the

identified threats to compliance with the
fundamental principles are not at an acceptable level,
the accountant shall address the threats by
eliminating them or reducing them to an acceptable
level.
◼ The accountant shall do so by: (a) Eliminating the
circumstances, including interests or relationships,
that are creating the threats; (b) Applying safeguards,
where available and capable of being applied, to
reduce the threats to an acceptable level; or (c)
Declining or ending the specific professional activity.
Considerations for Audits, Reviews
and Other Assurance Engagements
◼ Professional accountants in public practice are required by
International Independence Standards to be independent when
performing audits, reviews, or other assurance engagements.
Independence is linked to the fundamental principles of
objectivity and integrity.
◼ Independence comprises
◼ :(a) Independence of mind – the state of mind that permits the
expression of a conclusion without being affected by influences
that compromise professional judgment, thereby allowing an
individual to act with integrity, and exercise objectivity and
professional skepticism.
◼ (b) Independence in appearance – the avoidance of facts and
circumstances that are so significant that a reasonable and
informed third party would be likely to conclude that a firm’s or
an audit or assurance team member’s integrity, objectivity or
professional skepticism has been compromised
Considerations for Audits, Reviews
and Other Assurance Engagements
◼ Under auditing, review and other assurance
standards, professional accountants in public
practice are required to exercise professional
skepticism when planning and performing
audits, reviews and other assurance
engagements
◼ In an audit of financial statements,
compliance with the fundamental principles,
individually and collectively, supports the
exercise of professional skepticism
 Part 3
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
300 Applying the Conceptual Framework – Professional
Accountants in Public Practice
310 Conflicts of Interest
320 Professional Appointments
321 Second Opinions
330 Fees and Other Types of Remuneration
340 Inducements, including Gifts and Hospitality
350 Custody of Client Assets
360 Responding to Non-Compliance with Laws & Regulations
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

◼ Identifying threats – as previously discussed

APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
▪ Consider client & its operating environment
For example, providing a non-assurance service to
an audit client that is a public interest entity might
be perceived to result in a higher level of threat
- May also consider corporate governance structure
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
◼ Consider firm & its operating environment
◼ Examples:
▪ Leadership of the firm that promotes compliance
with the fundamental principles and establishes the
expectation that assurance team members will act in
the public interest.
▪ Policies or procedures for establishing and monitoring
compliance with the fundamental principles by all
personnel.
▪ Management of the reliance on revenue received
from a single client.
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
◼ Consideration of new information or changes in
facts/circumstances
Examples:
▪ When the scope of a professional service is expanded.
▪ When the client becomes a listed entity or acquires
another business unit.
▪ When there is a change in the professional
accountant’s personal or immediate family
relationships.
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Addressing Threats
Examples of safeguards:
◼ Assigning additional time and qualified personnel to
required tasks when an engagement has been
accepted might address a self-interest threat.
◼ Having an appropriate reviewer who was not a
member of the team review the work performed or
advise as necessary might address a self-review
threat.
◼ Using different partners and engagement teams with
separate reporting lines for the provision of non-
assurance services to an assurance client might
address self-review, advocacy or familiarity threats.
CONFLICTS OF INTEREST

◼ A conflict of interest creates threats to compliance

with the principle of objectivity and might create
threats to compliance with the other fundamental
principles.
◼ Such threats might be created when:
▪ (a) A professional accountant provides a professional
service related to a particular matter for two or more
clients whose interests with respect to that matter are in
conflict; or
▪ (b) The interests of a professional accountant with respect
to a particular matter and the interests of the client for
whom the accountant provides a professional service
related to that matter are in conflict.
CONFLICTS OF INTEREST
◼ Examples :
● Providing a transaction advisory service to a
client seeking to acquire an audit client, where the
firm has obtained confidential information during
the course of the audit that might be relevant to
the transaction.
● Providing advice to two clients at the same time
where the clients are competing to acquire the
same company and the advice might be relevant
to the parties’ competitive positions.
● Providing services to a seller and a buyer in
relation to the same transaction.
CONFLICTS OF INTEREST

Conflict Identification
◼ Before accepting a new client relationship,
engagement, or business relationship, a professional
accountant shall take reasonable steps to identify
circumstances that might create a conflict of interest
◼ A professional accountant shall remain alert to
changes over time in the nature of services, interests
and relationships that might create a conflict of
interest while performing an engagement.
◼ If the firm is a member of a network, a professional
accountant shall consider conflicts of interest that
the accountant has reason to believe might exist or
arise due to interests and relationships of a network
firm
CONFLICTS OF INTEREST
Threats Created by Conflicts of Interest
◼ In general, the more direct the connection between the
professional service and the matter on which the parties’
interests conflict, the more likely the level of the threat is
not at an acceptable level.
◼ Examples of safeguards to address threats created by a
conflict of interest :
● Having separate engagement teams who are provided
with clear policies and procedures on maintaining
confidentiality.
● Having an appropriate reviewer, who is not involved in
providing the service or otherwise affected by the conflict,
review the work performed to assess whether the key
judgments and conclusions are appropriate
CONFLICTS OF INTEREST

Disclosure and Consent

◼ A professional accountant shall exercise professional
judgment to determine whether the nature and
significance of a conflict of interest are such that specific
disclosure and explicit consent are necessary when
addressing the threat created by the conflict of interest
◼ Disclosure & consent might take ff. forms:
▪ General disclosure to clients of circumstances where, as is
common commercial practice, the professional accountant does
not provide professional services exclusively to any one client
▪ Specific disclosure to affected clients of the conflict in sufficient
detail to enable the client to make an informed decision and to
provide explicit consent
▪ Consent might be implied by clients’ conduct
CONFLICTS OF INTEREST
Disclosure and Consent
If a professional accountant has determined that
explicit consent is necessary and the client has
refused to provide consent, the accountant shall
either:
(a) End or decline to perform professional services
that would result in the conflict of interest; or
(b) End relevant relationships or dispose of
relevant interests to eliminate the threat or
reduce it to an acceptable level.
CONFLICTS OF INTEREST

Confidentiality
◼ A professional accountant shall remain alert
to the principle of confidentiality, including
when making disclosures or sharing
information within the firm or network and
seeking guidance from third parties
CONFLICTS OF INTEREST
◼ When making specific disclosure for the purpose of obtaining
explicit consent would result in a breach of confidentiality, and
such consent cannot therefore be obtained, the firm shall only
accept or continue an engagement if:
▪ (a) The firm does not act in an advocacy role for one client in an
adversarial position against another client in the same matter;
▪ (b) Specific measures are in place to prevent disclosure of confidential
information between the engagement teams serving the two clients;
and
▪ (c) The firm is satisfied that a reasonable and informed third party
would be likely to conclude that it is appropriate for the firm to accept
or continue the engagement because a restriction on the firm’s ability
to provide the professional service would produce a disproportionate
adverse outcome for the clients or other relevant third parties
PROFESSIONAL APPOINTMENTS

Client Engagement & Acceptance

◼ Threats to compliance with the principles of integrity
or professional behavior might be created, for
example, from questionable issues associated with
the client (its owners, management or activities
◼ A self-interest threat to compliance with the
principle of professional competence and due care is
created if the engagement team does not possess, or
cannot acquire, the competencies to perform the
professional services
◼ Example of relevant safeguard is assigning sufficient
engagement personnel with the necessary
competencies.
PROFESSIONAL APPOINTMENTS

Changes in a Professional Appointment

◼ A professional accountant shall determine
whether there are any reasons for not accepting
an engagement when the accountant:
(a) Is asked by a potential client to replace another
accountant;
(b) Considers tendering for an engagement held by
another accountant; or
(c) Considers undertaking work that is
complementary or additional to that of another
accountant.
PROFESSIONAL APPOINTMENTS

Changes in a Professional Appointment

◼ If unable to communicate with the existing or
predecessor accountant, the proposed accountant
shall take other reasonable steps to obtain
information about any possible threats
◼ When an existing or predecessor accountant is asked
to respond to a communication from a proposed
accountant, the existing or predecessor accountant
shall:
(a) Comply with relevant laws and regulations
governing the request; and
(b) Provide any information honestly and
unambiguously
PROFESSIONAL APPOINTMENTS

Changes in Audit or Review Appointments

In the case of an F/S audit or review, a PA shall request the existing/
predecessor accountant to provide known information regarding which the
proposed accountant needs to be aware before deciding whether to accept
the engagement. Except for the circumstances involving noncompliance or
suspected non-compliance with laws and regulations :
(a) If the client consents to the existing or predecessor accountant
disclosing any such facts or other information, the existing or
predecessor accountant shall provide the information honestly and
unambiguously; and
(b) If the client fails or refuses to grant the existing or predecessor
accountant permission to discuss the client’s affairs with the proposed
accountant, the existing or predecessor accountant shall disclose this
fact to the proposed accountant, who shall carefully consider such
failure or refusal when determining whether to accept the appointment
PROFESSIONAL APPOINTMENTS

Client and Engagement Continuance

For a recurring client engagement, a
professional accountant shall periodically
review whether to continue with the
engagement
Using the Work of an Expert
When a professional accountant intends to use
the work of an expert, the accountant shall
determine whether the use is warranted.
SECOND OPINIONS
◼ A professional accountant might be asked to provide a
second opinion on the application of accounting, auditing,
reporting or other standards or principles to (a) specific
circumstances, or (b) transactions by or on behalf of a
company or an entity that is not an existing client
◼ Providing a second opinion to an entity that is not an
existing client might create a self-interest or other threat
to compliance with one or more of the fundamental
principles
◼ If an entity seeking a second opinion from a professional
accountant will not permit the accountant to
communicate with the existing or predecessor accountant,
the accountant shall determine whether the accountant
may provide the second opinion sought.
FEES AND OTHER TYPES OF
REMUNERATION
◼ The level and nature of fee and other
remuneration arrangements might create a self-
interest threat to compliance with one or more
of the fundamental principles
◼ A professional accountant might quote whatever
fee is considered appropriate. Quoting a fee
lower than another accountant is not in itself
unethical. But if it precludes him from observing
standards, it creates a self-interest threat.
◼ Safeguards: adjust engagement fee/scope or
have a reviewer review work performed
FEES AND OTHER TYPES OF
REMUNERATION
Contingent Fees
◼ Contingent fees are used for certain types of non-assurance
services. These might create threats to compliance with the
fundamental principles, particularly a self-interest threat, in
certain circumstances
◼ Safeguards: have reviewer review work, obtain advance
agreement w/ client on basis of remuneration
Referral Fees or Commissions
◼ A self-interest threat to compliance with the principles of
objectivity and professional competence and due care is created
if a PA pays or receives a referral fee or receives a commission
relating to a client.
◼ Safeguards: advance agreement w/ client on commission
arrangements, disclosure to client of referral fees/commission
arrangements
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
◼ Offering or accepting inducements might create a self-
interest, familiarity or intimidation threat to compliance
with the fundamental principles, particularly the principles
of integrity, objectivity and professional behavior.
◼ An inducement is an object, situation, or action that is
used as a means to influence another individual’s behavior,
but not necessarily with the intent to improperly influence
that individual’s behavior.
◼ Examples: ● Gifts. ● Hospitality. ● Entertainment. ●
Political or charitable donations. ● Appeals to friendship
and loyalty. ● Employment or other commercial
opportunities. ● Preferential treatment, rights or
privileges.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
◼ PA shall not offer nor accept any inducement
perceived as intended to improperly influence
the behavior of the recipient or of another
individual.
◼ If the PA becomes aware of an inducement
offered with intent to improperly influence
behavior, threats to compliance with the
fundamental principles might still be created
even if PA does not offer nor accept such an
inducement
◼ Safeguards: inform senior mgt., amend/
terminate business relationship w/ client
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
◼ Examples where offering/accepting inducement
might create threats even if there is no actual or
perceived intent to improperly influence
behavior:
● Self-interest threats: PA is offered hospitality
from the prospective acquirer of a client while
providing corporate finance services to the client.
● Familiarity threats: PA regularly takes an existing
or prospective client to sporting events.
● Intimidation threats: PA accepts hospitality from
a client, the nature of which could be perceived to
be inappropriate were it to be publicly disclosed.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
◼ To eliminate threats: decline/not offer
inducement, transfer servicing of client to
another individual
◼ Examples of safeguards:
▪ Being transparent with senior management of the
firm or of the client about offering or accepting an
inducement.
▪ Reimbursing the cost of the inducement, such as
hospitality, received.
▪ As soon as possible, returning the inducement, such
as a gift, after it was initially accepted.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
Immediate or Close Family Members
◼ A PA shall remain alert to potential threats to the
accountant’s compliance with the fundamental principles
created by the offering of an inducement:
(a) By an immediate or close family member of the accountant to
an existing or prospective client of the accountant.
(b) To an immediate or close family member of the accountant by
an existing or prospective client of the accountant.
◼ Where the PA becomes aware of an inducement being
offered to or made by an immediate/close family member
where there is intent to improperly influence the behavior
of the PA or client, the accountant shall advise the
immediate or close family member not to offer or accept
the inducement
CUSTODY OF CLIENT ASSETS

◼ Holding client assets creates a self-interest or other

threat to compliance with the principles of
professional behavior and objectivity.
◼ A professional accountant shall not assume custody
of client money or other assets unless permitted to
do so by law and in accordance with any conditions
under which such custody may be taken.
◼ As part of client and engagement acceptance
procedures related to assuming custody of client
money or assets, a professional accountant shall: (a)
Make inquiries about the source of the assets; and (b)
Consider related legal and regulatory obligations.
CUSTODY OF CLIENT ASSETS

◼ A professional accountant entrusted with money

or other assets belonging to others shall: (a)
Comply with the laws and regulations relevant to
holding and accounting for the assets; (b) Keep
the assets separately from personal or firm
assets; (c) Use the assets only for the purpose for
which they are intended; and (d) Be ready at all
times to account for the assets and any income,
dividends, or gains generated, to any individuals
entitled to that accounting.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS
◼ A self-interest or intimidation threat to compliance
with the principles of integrity and professional
behavior is created when a professional accountant
becomes aware of non-compliance or suspected
noncompliance with laws and regulations.
◼ Non-compliance with laws and regulations (“non-
compliance”) comprises acts of omission or
commission, intentional or unintentional, which are
contrary to the prevailing laws or regulations
committed by the following parties: (a) A client; (b)
Those charged with governance of a client; (c)
Management of a client; or (d) Other individuals
working for or under the direction of a client.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS
◼ Examples of laws and regulations which this section
addresses include those that deal with: ● Fraud,
corruption and bribery. ● Money laundering, terrorist
financing and proceeds of crime. ● Securities markets and
trading. ● Banking and other financial products and
services. ● Data protection. ● Tax and pension liabilities
and payments. ● Environmental protection. ● Public
health and safety.
◼ When encountering non-compliance or suspected non-
compliance with laws/regulations, the PA shall obtain an
understanding of the legal/regulatory provisions and
comply with them, including: (a) Any requirement to
report the matter to an appropriate authority; and (b) Any
prohibition on alerting the client.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Responsibilities of All Professional

Accountants Where a PA becomes aware of a
matter to which this section applies, the steps
that the accountant takes to comply with this
section shall be taken on a timely basis. In
taking timely steps, the accountant shall have
regard to the nature of the matter and the
potential harm to the interests of the entity,
investors, creditors, employees or the general
public.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS
Audits of Financial Statements
Obtaining an Understanding of the Matter
◼ If a PA engaged to perform an F/S audit becomes aware of
information concerning noncompliance or suspicion
thereof, the accountant shall obtain an understanding of
the matter.
◼ If the PA identifies or suspects that non-compliance has
occurred or might occur, the PA shall discuss the matter
with the appropriate level of management and, where
appropriate, those charged with governance
◼ If the PA believes that management is involved in the non-
compliance or suspected non-compliance, the accountant
shall discuss the matter with those charged with
governance.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Addressing the Matter
In discussing the non-compliance or suspected non-
compliance with management and, where appropriate,
those charged with governance, the PA shall advise them to
take appropriate and timely actions, if they have not already
done so, to:
(a) Rectify, remediate or mitigate the consequences of the
noncompliance;
(b) Deter the commission of the non-compliance where it
has not yet occurred; or
(c) Disclose the matter to an appropriate authority where
required by law or regulation or where considered
necessary in the public interest.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Determining Whether Further Action Is Needed
◼ The PA shall assess the appropriateness of the
response of management and, where applicable,
those charged with governance.
◼ In light of the response of management and,
where applicable, those charged with
governance, the PA shall determine if further
action is needed in the public interest.
◼ The PA shall exercise professional judgment in
determining the need for, and nature and extent
of, further action
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Determining Whether to Disclose the Matter to an Appropriate
Authority
◼ Disclosure of the matter to an appropriate authority would
be precluded if doing so would be contrary to law or
regulation
◼ The determination of whether to make such a disclosure
depends in particular on the nature and extent of the
actual or potential harm that is or might be caused by the
matter to investors, creditors, employees or the general
public.
◼ The determination of whether to make such a disclosure
will also depend on external factors (e.g, protection from
liability/retaliation)
 PART4A: INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS

400 Applying the Conceptual Framework to Independence for Audit and Review
Engagements
410 Fees
411 Compensation and Evaluation Policies
420 Gifts and Hospitality
430 Actual or Threatened Litigation
510 Financial Interests
511 Loans and Guarantees
520 Business Relationships
521 Family and Personal Relationships
522 Recent Service with an Audit Client
523 Serving as a Director or Officer of an Audit Client
524 Employment with an Audit Client
525 Temporary Personnel Assignments
540 Long Association of Personnel (Including Partner Rotation) with an Audit Client
 PART4A: INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS

600 Provision of Non-Assurance Services to an Audit Client

601 Accounting and Bookkeeping Services
602 Administrative Services
603 Valuation Services
604 Tax Services
605 Internal Audit Services
606 Information Technology Systems Services
607 Litigation Support Services
608 Legal Services
609 Recruiting Services
610 Corporate Finance Services
800 Reports on Special Purpose Financial Statements that include a Restriction on Use
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ This Part applies to both audit and review engagements. The terms
“audit,” “audit team,” “audit engagement,” “audit client,” and “audit
report” apply equally to review, review team, review engagement,
review client, and review engagement report.
◼ In this Part, the term “professional accountant” refers to individual
professional accountants in public practice and their firms.
◼ Independence is linked to the principles of objectivity and integrity. It
comprises:
◼ (a) Independence of mind – the state of mind that permits the expression
of a conclusion without being affected by influences
◼ that compromise professional judgment, thereby allowing an individual
to act with integrity, and exercise objectivity and professional skepticism.
(b) Independence in appearance – the avoidance of facts and
circumstances that are so significant that a reasonable and informed
third party would be likely to conclude that a firm’s, or an audit team
member’s, integrity, objectivity or professional skepticism has been
compromised.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ A firm performing an audit engagement shall be

independent.
◼ A firm shall apply the conceptual framework set
out in Section 120 to identify, evaluate and
address threats to independence in relation to
an audit engagement.
◼ As defined, an audit client that is a listed entity
includes all of its related entities.
◼ Independence, as required by this Part, shall be
maintained during both: (a) The engagement
period; and (b) The period covered by the
financial statements.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ If an entity becomes an audit client during or

after the period covered by the financial
statements on which the firm will express an
opinion, the firm shall determine whether any
threats to independence are created by:
◼ (a) Financial or business relationships with the
audit client during or after the period covered by
the financial statements but before accepting
the audit engagement; or
◼ (b) Previous services provided to the audit client
by the firm or a network firm.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ A network firm shall be independent of the audit clients of

the other firms within the network as required by this Part.
◼ When associated with a larger structure of other firms and
entities, a firm shall:
◼ (a) Exercise professional judgment to determine whether
a network is created by such a larger structure;
◼ (b) Consider whether a reasonable and informed third
party would be likely to conclude that the other firms and
entities in the larger structure are associated in such a way
that a network exists; and
◼ (c) Apply such judgment consistently throughout such a
larger structure.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ When determining whether a network is created by a larger

structure of firms and other entities, a firm shall conclude that a
network exists when such a larger structure is aimed at co-
operation and:
◼ (a) It is clearly aimed at profit or cost sharing among the entities
within the structure);
◼ (b) The entities within the structure share common ownership,
control or management.
◼ (c) The entities within the structure share common quality
control policies and procedures.
◼ (d) The entities within the structure share a common business
strategy.
◼ (e) The entities within the structure share the use of a common
brand name; or
◼ (f) The entities within the structure share a significant part of
professional resources.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ If a firm or a network sells a component of its practice, and the

component continues to use all or part of the firm’s or network’s
name for a limited time, the relevant entities shall determine
how to disclose that they are not network firms when presenting
themselves to outside parties.
◼ A firm shall document conclusions regarding compliance with
this Part, and the substance of any relevant discussions that
support those conclusions. In particular:
◼ (a) When safeguards are applied to address a threat, the firm
shall document the nature of the threat and the safeguards in
place or applied; and
◼ (b) When a threat required significant analysis and the firm
concluded that the threat was already at an acceptable level, the
firm shall document the nature of the threat and the rationale
for the conclusion.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Mergers and Acquisitions

◼ An entity might become a related entity of an audit client
because of a merger or acquisition.
◼ In the above circumstances:
◼ (a) The firm shall identify and evaluate previous and
current interests and relationships with the related entity
that, taking into account any actions taken to address the
threat, might affect its independence and therefore its
ability to continue the audit engagement after the
effective date of the merger or acquisition; and
◼ (b) the firm shall take steps to end any interests or
relationships that are not permitted by the Code by the
effective date of the merger or acquisition.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ Mergers and Acquisitions

◼ If the interest or relationship cannot reasonably
be ended by the effective date of the merger or
acquisition, the firm shall:
◼ (a) Evaluate the threat that is created by the
interest or relationship; and
◼ (b) Discuss with those charged with governance
the reasons why the interest or relationship
cannot reasonably be ended by the effective
date and the evaluation of the level of the threat.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Mergers and Acquisitions

If, following the discussion set out in the previous paragraph, those
charged with governance request the firm to continue as the
auditor, the firm shall do so only if:
(a) The interest or relationship will be ended as soon as reasonably
possible but no later than six months after the effective date of
the merger or acquisition;
(b) Any individual who has such an interest or relationship,
including one that has arisen through performing a non-
assurance service that would not be permitted by Section 600
and its subsections, will not be a member of the engagement
team for the audit or the individual responsible for the
engagement quality control review; and
(c) Transitional measures will be applied, as necessary, and
discussed with those charged with governance.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Breach of an Independence Provision

◼ If a firm concludes that a breach of a requirement in
this Part has occurred, the firm shall:
◼ (a) End, suspend or eliminate the interest or
relationship that created the breach and address the
consequences of the breach;
◼ (b) Consider whether any legal or regulatory
requirements apply to the breach and, if so:
▪ (i) Comply with those requirements; and
▪ (ii) Consider reporting the breach to a professional or
regulatory body or oversight authority if such reporting is
common practice or expected in the relevant jurisdiction;
(cont’d next slide)
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

(c) Promptly communicate the breach in accordance with its

policies and procedures to:
(i) The engagement partner;
(ii) Those with responsibility for the policies and procedures
relating to independence;
(iii) Other relevant personnel in the firm and, where appropriate,
the network; and
(iv) Those subject to the independence requirements in Part 4A
who need to take appropriate action;
(d) Evaluate the significance of the breach and its impact on the
firm’s objectivity and ability to issue an audit report; and
(e) Depending on the significance of the breach, determine:
(i) Whether to end the audit engagement; or
(ii) Whether it is possible to take action that satisfactorily
addresses the consequences of the breach and whether such
action can be taken and is appropriate in the circumstances.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Breach of an Independence Provision

◼ If the firm determines that action cannot be
taken to address the consequences of the breach
satisfactorily, the firm shall inform those
charged with governance as soon as possible
and take the steps necessary to end the audit
engagement in compliance with any applicable
legal or regulatory requirements. Where ending
the engagement is not permitted by laws or
regulations, the firm shall comply with any
reporting or disclosure requirements.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

◼ If the firm determines that action can be taken to address

the consequences of the breach satisfactorily, the firm
shall discuss with those charged with governance:
◼ (a) The significance of the breach, including its nature and
duration;
◼ (b) How the breach occurred and how it was identified;
◼ (c) The action proposed or taken and why the action will
satisfactorily address the consequences of the breach and
enable the firm to issue an audit report;
◼ (d) The conclusion that, in the firm’s professional
judgment, objectivity has not been compromised and the
rationale for that conclusion; and
◼ (e) Any steps proposed or taken by the firm to reduce or
avoid the risk of further breaches occurring.
 FEES
◼ The nature and level of fees or other types of
remuneration might create a self-interest or
intimidation threat.
Fees – Relative Size
◼ When the total fees generated from an audit client
by the firm expressing the audit opinion represent a
large proportion of the total fees of that firm, the
dependence on that client and concern about losing
the client create a self-interest or intimidation threat.
◼ An example of an action that might be a safeguard to
address such a self-interest or intimidation threat is
increasing the client base in the firm to reduce
dependence on the audit client.
 FEES
Audit Clients that are Public Interest Entities
R410.4 Where an audit client is a public interest entity and,
for two consecutive years, the total fees from the client and
its related entities represent more than 15% of the total fees
received by the firm expressing the opinion on the financial
statements of the client, the firm shall:
(a) Disclose to those charged with governance of the audit
client the fact that the total of such fees represents more
than 15% of the total fees received by the firm; and
(b) Discuss whether either of the following actions might be
a safeguard to address the threat created by the total
fees received by the firm from the client, and if so, apply
it:
 FEES
(i) Prior to the audit opinion being issued on the second year’s
financial statements, a professional accountant, who is not a
member of the firm expressing the opinion on the financial
statements, performs an engagement quality control review of
that engagement; or a professional body performs a review of
that engagement that is equivalent to an engagement quality
control review (“a pre-issuance review”); or
(ii) After the audit opinion on the second year’s financial
statements has been issued, and before the audit opinion
being issued on the third year’s financial statements, a
professional accountant, who is not a member of the firm
expressing the opinion on the financial statements, or a
professional body performs a review of the second year’s audit
that is equivalent to an engagement quality control review (“a
post-issuance review”).
 FEES

R410.5 When the total fees described in paragraph

R410.4 significantly exceed 15%, the firm shall
determine whether the level of the threat is such that a
post-issuance review would not reduce the threat to an
acceptable level. If so, the firm shall have a pre-
issuance review performed.
R410.6 If the fees described in paragraph R410.4
continue to exceed 15%, the firm shall each year:
◼ (a) Disclose to and discuss with those charged with
governance the matters set out in paragraph R410.4;
and
◼ (b) Comply with paragraphs R410.4(b) and R410.5.
 FEES

Fees – Overdue
When a significant part of fees due from an
audit client remains unpaid for a long time, the
firm shall determine:
(a) Whether the overdue fees might be
equivalent to a loan to the client; and
(b) Whether it is appropriate for the firm to be
re-appointed or continue the audit
engagement.
 FEES
Contingent Fees
◼ A firm shall not charge directly or indirectly a contingent fee for
an audit engagement
◼ A firm or network firm shall not charge directly or indirectly a
contingent fee for a non-assurance service provided to an audit
client, if:
◼ (a) The fee is charged by the firm expressing the opinion on the
financial statements and the fee is material or expected to be
material to that firm;
◼ (b) The fee is charged by a network firm that participates in a
significant part of the audit and the fee is material or expected to
be material to that firm; or
◼ (c) The outcome of the non-assurance service, and therefore the
amount of the fee, is dependent on a future or contemporary
judgment related to the audit of a material amount in the
financial statements.
 COMPENSATION & EVALUATION
POLICIES
◼ A firm’s evaluation or compensation policies might
create a self-interest threat
◼ When an audit team member for a particular audit
client is evaluated on or compensated for selling non-
assurance services to that audit client, the level of
the self-interest threat will depend on:
◼ (a) What proportion of the compensation or
evaluation is based on the sale of such services;
◼ (b) The role of the individual on the audit team; and
◼ (c) Whether the sale of such non-assurance services
influences promotion decisions.
 COMPENSATION & EVALUATION
POLICIES
◼ Example of action that might eliminate such a
self-interest threat : removing that individual
from the audit team.
◼ Example of safeguard to address such a self-
interest threat: having an appropriate reviewer
review the work of the audit team member.
◼ A firm shall not evaluate or compensate a key
audit partner based on that partner’s success in
selling non-assurance services to the partner’s
audit client.
 GIFTS AND HOSPITALITY

◼ Accepting gifts and hospitality from an audit

client might create a self-interest, familiarity
or intimidation threat.
◼ A firm, network firm or an audit team
member shall not accept gifts and hospitality
from an audit client, unless the value is trivial
and inconsequential.
 ACTUAL OR THREATENED
LITIGATION
◼ When litigation with an audit client occurs, or appears
likely, self-interest and intimidation threats are created.
◼ Factors that are relevant in evaluating the level of such
threats include: ● The materiality of the litigation. ●
Whether the litigation relates to a prior audit engagement.
◼ If the litigation involves an audit team member, an
example of an action that might eliminate such self-
interest and intimidation threats is removing that
individual from the audit team.
◼ An example of a safeguard to address such self-interest
and intimidation threats is to have an appropriate
reviewer review the work performed.
 FINANCIAL INTERESTS

◼ Holding a financial interest in an audit client

might create a self-interest threat.
◼ A financial interest might be held directly or
indirectly through an intermediary such as a
collective investment vehicle, an estate or a trust.
◼ Direct financial interest : When a beneficial owner
has control over the intermediary or ability to
influence its investment decisions
◼ Indirect financial interest : when a beneficial
owner has no control over the intermediary or
ability to influence its investment decisions
 FINANCIAL INTERESTS

◼ To determine “materiality” of a financial interest,

the combined net worth of the individual and the
individual’s immediate family members may be
taken into account.
◼ Factors that are relevant in evaluating the level
of a self-interest threat created by holding a
financial interest in an audit client include:
● The role of the individual holding the financial
interest.
● Whether the financial interest is direct or indirect.
● The materiality of the financial interest.
 FINANCIAL INTERESTS
Financial Interests Held by the Firm, a Network Firm, Audit Team
Members and Others
◼ R510.4 A direct financial interest or a material indirect financial
interest in the audit client shall not be held by:
◼ (a) The firm or a network firm;
◼ (b) An audit team member, or any of that individual’s immediate
family;
◼ (c) Any other partner in the office in which an engagement
partner practices in connection with the audit engagement, or
any of that other partner’s immediate family; or
◼ (d) Any other partner or managerial employee who provides non-
audit services to the audit client, except for any whose
involvement is minimal, or any of that individual’s immediate
family.
 FINANCIAL INTERESTS
◼ As an exception to the foregoing, an immediate
family member may hold a direct or material indirect
financial interest in an audit client, provided that:
◼ (a) The family member received the financial interest
because of employment rights, for example through
pension or share option plans, and, when necessary,
the firm addresses the threat created by the financial
interest; and
◼ (b) The family member disposes of or forfeits the
financial interest as soon as practicable when the
family member has or obtains the right to do so, or in
the case of a stock option, when the family member
obtains the right to exercise the option.
 FINANCIAL INTERESTS

Financial Interests in an Entity Controlling an

Audit Client
When an entity has a controlling interest in an
audit client and the client is material to the
entity, neither the firm, nor a network firm, nor
an audit team member, nor any of that
individual’s immediate family shall hold a
direct or material indirect financial interest in
that entity.
 FINANCIAL INTERESTS
Financial Interests Held as Trustee
Paragraph R510.4 shall also apply to a financial interest in an audit
client held in a trust for which the firm, network firm or individual
acts as trustee, unless:
(a) None of the following is a beneficiary of the trust: the trustee,
the audit team member or any of that individual’s immediate
family, the firm or a network firm;
(b) The interest in the audit client held by the trust is not material
to the trust;
(c) The trust is not able to exercise significant influence over the
audit client; and
(d) None of the following can significantly influence any
investment decision involving a financial interest in the audit
client: the trustee, the audit team member or any of that
individual’s immediate family, the firm or a network firm.
 FINANCIAL INTERESTS
Financial Interests in Common with the Audit Client
R510.8 (a) A firm, or a network firm, or an audit team member, or
any of that individual’s immediate family shall not hold a financial
interest in an entity when an audit client also has a financial interest
in that entity, unless:
(i) The financial interests are immaterial to the firm, the network
firm, the audit team member and that individual’s immediate
family member and the audit client, as applicable; or
(ii) The audit client cannot exercise significant influence over the
entity.
(b) Before an individual who has a financial interest described in
paragraph R510.8(a) can become an audit team member, the
individual or that individual’s immediate family member shall either:
(i) Dispose of the interest; or (ii) Dispose of enough of the interest
so that the remaining interest is no longer material.
 FINANCIAL INTERESTS
Financial Interests Received Unintentionally
R510.9 If a firm, a network firm or a partner or employee of the firm or a
network firm, or any of that individual’s immediate family, receives a direct
financial interest or a material indirect financial interest in an audit client by
way of an inheritance, gift, as a result of a merger or in similar
circumstances and the interest would not otherwise be permitted to be held
under this section, then:
(a) If the interest is received by the firm or a network firm, or an audit team
member or any of that individual’s immediate family, the financial interest
shall be disposed of immediately, or enough of an indirect financial interest
shall be disposed of so that the remaining interest is no longer material; or
(b) (i) If the interest is received by an individual who is not an audit team
member, or by any of that individual’s immediate family, the financial
interest shall be disposed of as soon as possible, or enough of an indirect
financial interest shall be disposed of so that the remaining interest is no
longer material; and (ii) Pending the disposal of the financial interest, when
necessary the firm shall address the threat created.
 LOANS AND GUARANTEES
◼ A loan or a guarantee of a loan with an audit client might
create a self-interest threat
◼ A firm, a network firm, an audit team member, or any of
that individual’s immediate family shall not make or
guarantee a loan to an audit client unless the loan or
guarantee is immaterial to: (a) The firm, the network firm
or the individual making the loan or guarantee, as
applicable; and (b) The client
◼ A firm, a network firm, an audit team member, or any of
that individual’s immediate family shall not accept a loan,
or a guarantee of a loan, from an audit client that is a bank
or a similar institution unless the loan or guarantee is
made under normal lending procedures, terms and
conditions.
 LOANS AND GUARANTEES
◼ A firm, a network firm, an audit team member, or any of
that individual’s immediate family shall not have deposits
or a brokerage account with an audit client that is a bank,
broker or similar institution, unless the deposit or account
is held under normal commercial terms.
Loans and Guarantees with an Audit Client that is Not a Bank
or Similar Institution
◼ A firm, a network firm, an audit team member, or any of
that individual’s immediate family shall not accept a loan
from, or have a borrowing guaranteed by, an audit client
that is not a bank or similar institution, unless the loan or
guarantee is immaterial to: (a) The firm, the network firm,
or the individual receiving the loan or guarantee, as
applicable; and (b) The client.
 BUSINESS RELATIONSHIPS
◼ A firm, a network firm or an audit team member shall not have a
close business relationship with an audit client or its
management unless any financial interest is immaterial and the
business relationship is insignificant to the client or its
management and the firm, the network firm or the audit team
member, as applicable
◼ A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not have a business
relationship involving the holding of an interest in a closely-held
entity when an audit client or a director or officer of the client, or
any group thereof, also holds an interest in that entity, unless: (a)
The business relationship is insignificant to the firm, the network
firm, or the individual as applicable, and the client; (b) The
financial interest is immaterial to the investor or group of
investors; and (c) The financial interest does not give the
investor, or group of investors, the ability to control the closely-
held entity.
 FAMILY AND PERSONAL
RELATIONSHIPS
◼ Family or personal relationships with client personnel
might create a self-interest, familiarity or
intimidation threat.
◼ An individual shall not participate as an audit team
member when any of that individual’s immediate
family:
◼ (a) Is a director or officer of the audit client;
◼ (b) Is an employee in a position to exert significant
influence over the preparation of the client’s
accounting records or the financial statements on
which the firm will express an opinion; or
◼ (c) Was in such position during any period covered by
the engagement or the financial statements.
 FAMILY AND PERSONAL
RELATIONSHIPS
◼ An audit team member shall consult in accordance with firm
policies and procedures if the audit team member has a close
relationship with an individual who is not an immediate or close
family member, but who is: (a) A director or officer of the audit
client; or (b) An employee in a position to exert significant
influence over the preparation of the client’s accounting records
or the financial statements on which the firm will express an
opinion.
◼ Partners and employees of the firm shall consult in accordance
with firm policies and procedures if they are aware of a personal
or family relationship between: (a) A partner or employee of the
firm or network firm who is not an audit team member; and (b) A
director or officer of the audit client or an employee of the audit
client in a position to exert significant influence over the
preparation of the client’s accounting records or the financial
statements on which the firm will express an opinion.
 RECENT SERVICE WITH AN
AUDIT CLIENT
◼ If an audit team member has recently served as a
director or officer, or employee of the audit
client, a self-interest, self-review or familiarity
threat might be created
◼ The audit team shall not include an individual
who, during the period covered by the audit
report: (a) Had served as a director or officer of
the audit client; or (b) Was an employee in a
position to exert significant influence over the
preparation of the client’s accounting records or
the financial statements on which the firm will
express an opinion.
 SERVING AS A DIRECTOR OR
OFFICER OF AN AUDIT CLIENT
◼ A partner or employee of the firm or a network firm
shall not serve as a director or officer of an audit
client of the firm.
◼ A partner or employee of the firm or a network firm
shall not serve as Company Secretary for an audit
client of the firm, unless: (a) This practice is
specifically permitted under local law, professional
rules or practice; (b) Management makes all relevant
decisions; and (c) The duties and activities performed
are limited to those of a routine and administrative
nature, such as preparing minutes and maintaining
statutory returns.
 EMPLOYMENT WITH AN AUDIT
CLIENT
◼ Employment relationships with an audit client might create a self-
interest, familiarity or intimidation threat.
◼ The firm shall ensure that no significant connection remains between
the firm or a network firm and:
◼ (a) A former partner who has joined an audit client of the firm; or
◼ (b) A former audit team member who has joined the audit client, if either
has joined the audit client as: (i) A director or officer; or (ii) An employee
in a position to exert significant influence over the preparation of the
client’s accounting records or the financial statements on which the firm
will express an opinion. A significant connection remains between the
firm or a network firm and the individual, unless: (a) The individual is not
entitled to any benefits or payments from the firm or network firm that
are not made in accordance with fixed pre-determined arrangements;
◼ (b) Any amount owed to the individual is not material to the firm or the
network firm; and (c) The individual does not continue to participate or
appear to participate in the firm’s or the network firm’s business or
professional activities.
 EMPLOYMENT WITH AN AUDIT
CLIENT
◼ A firm or network firm shall have policies and procedures that
require audit team members to notify the firm or network firm
when entering employment negotiations with an audit client.
◼ if an individual who was a key audit partner with respect to an
audit client that is a public interest entity joins the client as: (a) A
director or officer; or (b) An employee in a position to exert
significant influence over the preparation of the client’s
accounting records or the financial statements on which the firm
will express an opinion, independence is compromised unless,
subsequent to the individual ceasing to be a key audit partner: (i)
The audit client has issued audited financial statements covering
a period of not less than twelve months; and (ii) The individual
was not an audit team member with respect to the audit of
those financial statements.
 EMPLOYMENT WITH AN AUDIT
CLIENT
◼ If an individual who was the Senior or Managing
Partner (Chief Executive or equivalent) of the firm
joins an audit client that is a public interest entity as:
◼ (a) A director or officer; or
◼ (b) An employee in a position to exert significant
influence over the preparation of the client’s
accounting records or the financial statements on
which the firm will express an opinion, independence
is compromised, unless twelve months have passed
since the individual was the Senior or Managing
Partner (Chief Executive or equivalent) of the firm.
 TEMPORARY PERSONNEL
ASSIGNMENTS
◼ The loan of personnel to an audit client might create
a self-review, advocacy or familiarity threat
◼ A firm or network firm shall not loan personnel to an
audit client unless:
◼ (a) Such assistance is provided only for a short period
of time;
◼ (b) The personnel are not involved in providing non-
assurance services that would not be permitted
under Section 600 and its subsections; and
◼ (c) The personnel do not assume management
responsibilities and the audit client is responsible for
directing and supervising the activities of the
personnel
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

◼ When an individual is involved in an audit engagement

over a long period of time, familiarity and self-interest
threats might be created
◼ If a firm decides that the level of the threats created can
only be addressed by rotating the individual off the audit
team, the firm shall determine an appropriate period
during which the individual shall not: (a) Be a member of
the engagement team for the audit engagement; (b)
Provide quality control for the audit engagement; or (c)
Exert direct influence on the outcome of the audit
engagement. The period shall be of sufficient duration to
allow the familiarity and self-interest threats to be
addressed. In the case of a public interest entity,
paragraphs R540.5 to R540.20 also apply.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

◼ In respect of an audit of a public interest entity,

an individual shall not act in any of the following
roles, or a combination of such roles, for a period
of more than seven cumulative years (the “time-
on” period): (a) The engagement partner; (b) The
individual appointed as responsible for the
engagement quality control review; or (c) Any
other key audit partner role. After the time-on
period, the individual shall serve a “cooling-off”
period.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

Cooling-off Period
◼ If the individual acted as the engagement partner for
seven cumulative years, the cooling-off period shall
be five consecutive years
◼ Where the individual has been appointed as
responsible for the engagement quality control
review and has acted in that capacity for seven
cumulative years, the cooling-off period shall be
three consecutive years.
◼ If the individual has acted as a key audit partner
other than in the capacities set out in paragraphs
R540.11 and R540.12 for seven cumulative years, the
cooling-off period shall be two consecutive years.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

For the duration of the relevant cooling-off period, the individual shall not:
(a) Be an engagement team member or provide quality control for the audit
engagement;
(b) Consult with the engagement team or the client regarding technical or
industry-specific issues, transactions or events affecting the audit
engagement (other than discussions with the engagement team limited to
work undertaken or conclusions reached in the last year of the individual’s
time-on period where this remains relevant to the audit);
(c) Be responsible for leading or coordinating the professional services
provided by the firm or a network firm to the audit client, or overseeing the
relationship of the firm or a network firm with the audit client; or
(d) Undertake any other role or activity not referred to above with respect
to the audit client, including the provision of nonassurance services that
would result in the individual:
(i) Having significant or frequent interaction with senior management or
those charged with governance; or
(ii) (Exerting direct influence on the outcome of the audit engagement.
PROVISION OF NON-ASSURANCE
SERVICES TO AN AUDIT CLIENT
◼ Providing non-assurance services to audit clients
might create threats to compliance with the
fundamental principles and threats to
independence
◼ Before a firm or a network firm accepts an
engagement to provide a non-assurance service
to an audit client, the firm shall determine
whether providing such a service might create a
threat to independence
◼ A firm or a network firm shall not assume a
management responsibility for an audit client.
 ACCOUNTING AND
BOOKKEEPING SERVICES
◼ Providing accounting and bookkeeping services to an
audit client might create a self-review threat.
◼ A firm or a network firm shall not provide to an audit
client that is not a public interest entity accounting
and bookkeeping services including preparing
financial statements on which the firm will express an
opinion or financial information which forms the
basis of such financial statements, unless: (a) The
services are of a routine or mechanical nature; and
(b) The firm addresses any threats that are created
by providing such services that are not at an
acceptable level.
 ACCOUNTING AND
BOOKKEEPING SERVICES
◼ Subject to paragraph R601.7, a firm or a
network firm shall not provide to an audit
client that is a public interest entity
accounting and bookkeeping services
including preparing financial statements on
which the firm will express an opinion or
financial information which forms the basis
of such financial statements.
 ADMINISTRATIVE SERVICES

◼ Providing administrative services to an audit

client does not usually create a threat
 VALUATION SERVICES
◼ Providing valuation services to an audit client might
create a self-review or advocacy threat.
◼ A firm or a network firm shall not provide a valuation
service to an audit client that is not a public interest
entity if: (a) The valuation involves a significant
degree of subjectivity; and (b) The valuation will have
a material effect on the financial statements on
which the firm will express an opinion
◼ A firm or a network firm shall not provide a valuation
service to an audit client that is a public interest
entity if the valuation service would have a material
effect, individually or in the aggregate, on the
financial statements on which the firm will express an
opinion.
 TAX SERVICES

◼ Providing tax services to an audit client might

create a self-review or advocacy threat.
◼ Providing tax return preparation services does
not usually create a threat.
◼ A firm or a network firm shall not prepare tax
calculations of current and deferred tax liabilities
(or assets) for an audit client that is a public
interest entity for the purpose of preparing
accounting entries that are material to the
financial statements on which the firm will
express an opinion
 TAX SERVICES

◼ A firm or a network firm shall not provide tax

planning and other tax advisory services to an audit
client when the effectiveness of the tax advice
depends on a particular accounting treatment or
presentation in the financial statements and:
◼ (a) The audit team has reasonable doubt as to the
appropriateness of the related accounting treatment
or presentation under the relevant financial reporting
framework; and
◼ (b) The outcome or consequences of the tax advice
will have a material effect on the financial
statements on which the firm will express an opinion.
 TAX SERVICES

◼ Providing tax valuation services to an audit client

might create a self-review or advocacy threat
◼ A firm or a network firm shall not provide tax
services that involve assisting in the resolution of
tax disputes to an audit client if: (a) The services
involve acting as an advocate for the audit client
before a public tribunal or court in the resolution
of a tax matter; and
◼ (b) The amounts involved are material to the
financial statements on which the firm will
express an opinion.
 INTERNAL AUDIT SERVICES
◼ Providing internal audit services to an audit client might create a
selfreview threat.
◼ When providing an internal audit service to an audit client, the firm shall
be satisfied that:
◼ (a) The client designates an appropriate and competent resource,
preferably within senior management, to: (i) Be responsible at all times
for internal audit activities; and (ii) Acknowledge responsibility for
designing, implementing, monitoring and maintaining internal control.
(b) The client’s management or those charged with governance reviews,
assesses and approves the scope, risk and frequency of the internal audit
services;
◼ (c) The client’s management evaluates the adequacy of the internal audit
services and the findings resulting from their performance;
◼ (d) The client’s management evaluates and determines which
recommendations resulting from internal audit services to implement
and manages the implementation process; and
◼ (e) The client’s management reports to those charged with governance
the significant findings and recommendations resulting from the internal
audit services.
 INTERNAL AUDIT SERVICES
◼ A firm or a network firm shall not provide internal
audit services to an audit client that is a public
interest entity, if the services relate to:
◼ (a) A significant part of the internal controls over
financial reporting;
◼ (b) Financial accounting systems that generate
information that is, individually or in the aggregate,
material to the client’s accounting records or
financial statements on which the firm will express an
opinion; or
◼ (c) Amounts or disclosures that are, individually or in
the aggregate, material to the financial statements
on which the firm will express an opinion.
 INFORMATION TECHNOLOGY
SYSTEMS SERVICES
◼ Providing information technology (IT) systems services to an
audit client might create a self-review threat.
◼ When providing IT systems services to an audit client, the firm or
network firm shall be satisfied that:
◼ (a) The client acknowledges its responsibility for establishing and
monitoring a system of internal controls;
◼ (b) The client assigns the responsibility to make all management
decisions with respect to the design and implementation of the
hardware or software system to a competent employee,
preferably within senior management;
◼ (c) The client makes all management decisions with respect to
the design and implementation process;
◼ (d) The client evaluates the adequacy and results of the design
and implementation of the system; and
◼ (e) The client is responsible for operating the system (hardware
or software) and for the data it uses or generates.
 INFORMATION TECHNOLOGY
SYSTEMS SERVICES
◼ A firm or a network firm shall not provide IT
systems services to an audit client that is a
public interest entity if the services involve
designing or implementing IT systems that:
(a) Form a significant part of the internal
control over financial reporting; or
◼ (b) Generate information that is significant to
the client’s accounting records or financial
statements on which the firm will express an
opinion.
 LITIGATION SUPPORT SERVICES

◼ Providing certain litigation support services

to an audit client might create a self-review
or advocacy threat.
 LEGAL SERVICES

◼ Providing legal services to an audit client might

create a self-review or advocacy threat.
◼ A partner or employee of the firm or the network
firm shall not serve as General Counsel for legal
affairs of an audit client.
◼ A firm or a network firm shall not act in an
advocacy role for an audit client in resolving a
dispute or litigation when the amounts involved
are material to the financial statements on which
the firm will express an opinion
 RECRUITING SERVICES
◼ Providing recruiting services to an audit client might
create a self-interest, familiarity or intimidation threat.
◼ When a firm or network firm provides recruiting services
to an audit client, the firm shall be satisfied that:
◼ (a) The client assigns the responsibility to make all
management decisions with respect to hiring the
candidate for the position to a competent employee,
preferably within senior management; and
◼ (b) The client makes all management decisions with
respect to the hiring process, including: ● Determining the
suitability of prospective candidates and selecting suitable
candidates for the position. ● Determining employment
terms and negotiating details, such as salary, hours and
other compensation.
 CORPORATE FINANCE SERVICES

◼ Providing corporate finance services to an audit client might

create a self-review or advocacy threat.
◼ A firm or a network firm shall not provide corporate finance
services to an audit client that involve promoting, dealing in, or
underwriting the audit client’s shares.
◼ A firm or a network firm shall not provide corporate finance
advice to an audit client where the effectiveness of such advice
depends on a particular accounting treatment or presentation in
the financial statements on which the firm will express an
opinion and: (a) The audit team has reasonable doubt as to the
appropriateness of the related accounting treatment or
presentation under the relevant financial reporting framework;
and
◼ (b) The outcome or consequences of the corporate finance
advice will have a material effect on the financial statements on
which the firm will express an opinion.