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Public Interest Entities

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Public Interest Entities General Provisions Definition of independence Conceptual framework Network firms Public interest entities Related entities – PowerPoint PPT presentation

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Title: Public Interest Entities


1
Public Interest Entities
  • General Provisions
  • Definition of independence
  • Conceptual framework
  • Network firms
  • Public interest entities
  • Related entities
  • Those charged with governance

2
Public Interest Entities
  • General Provisions contd
  • Documentation
  • Engagement period
  • Mergers and acquisitions
  • Other considerations

3
Public Interest Entities
  • Definition of Independence
  • 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.
  • 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, weighing
    all the specific facts and circumstances, that a
    firms, of a member of the audit teams,
    integrity, objectivity or professional skepticism
    has been compromised.

4
Public Interest Entities
  • Conceptual Framework Approach Threats and
    Safeguards

5
Public Interest Entities
  • Conceptual Framework Threats
  • Self-interest
  • The threat that a financial or other interest
    will inappropriate influence the professional
    accountants judgment or behavior.
  • Self-review
  • The threat that a professional accountant will
    not appropriately evaluate the results of a
    previous judgment made or service performed on
    which the accountant will rely when forming a
    judgment as part of providing the current
    service.
  • Advocacy
  • The threat that a professional accountant will
    promote a clients position to the point that the
    accountants objectivity is compromised.

6
Public Interest Entities
  • Conceptual Framework Threats
  • Familiarity
  • The threat that due to a long or close
    relationship with a client, a professional
    accountant will be too sympathetic to their
    interests or too accepting of their work.
  • Intimidation
  • The threat that a professional accountant will be
    deterred from acting objectively because of
    actual or perceived pressures, including attempts
    to exercise undue influence over the accountant.

7
Public Interest Entities
  • Conceptual Framework Safeguards
  • Safeguards fall into two broad categories
  • Those created by the profession, legislation or
    regulation and
  • Those in the work environment.

8
Public Interest Entities
  • Conceptual Framework Prohibitions
  • When safeguards are never adequate

9
Public Interest Entities
  • Network Firms
  • Network firms are required to be independent of
    audit clients of other firms within the network
  • Network is defined as a larger structure that is
  • Aimed at co-operation and
  • Clearly aimed at profit or cost sharing or shares
    common ownership, control or management, common
    quality control policies and procedures, common
    business strategy, the use of a common
    brand-name, or a significant part of professional
    resources.

10
Public Interest Entities
  • Public Interest Entities
  • Public interest entities defined as
  • Listed entities and
  • Entities
  • defined by regulation or legislation as a public
    interest entity, or
  • for which the audit is required by regulation or
    legislation to be conducted in compliance with
    the same independence requirements that apply to
    the audit of listed entities.

11
Public Interest Entities
  • Public Interest Entities
  • Firms and member bodies are encouraged to
    determine whether to treat other entities as
    public interest entities because the entities
    have a large number and wide range of
    stakeholders
  • Factors to be considered include
  • The nature of the business, such as the holding
    of assets in a fiduciary capacity for a large
    number of stakeholders
  • Size and
  • Number of employees.

12
Public Interest Entities
  • Related Entities
  • Related entities of the audit client are defined
    as
  • An entity that has direct or indirect control
    over the client if the client is material to such
    entity
  • An entity with a direct financial interest in the
    client if that entity has significant influence
    over the client and the interest in the client is
    material to such entity
  • An entity over which the client has direct or
    indirect control
  • An entity in which the client, or an entity over
    which the client has direct or indirect control,
    has a direct financial interest that gives it
    significant influence over such entity and the
    interest is material to the client and its
    related entity and
  • An entity which is under common control with the
    client (a sister entity) if the sister entity
    and the client are both material to the entity
    that controls both the client and the sister
    entity.

13
Public Interest Entities
  • Related Entities
  • Listed entities
  • References to audit client include its related
    entities
  • Independence is required from all related
    entities.
  • Non-listed entities
  • Independence is required from related entities
    over which the audit client has direct or
    indirect control.
  • When the audit team knows, or has reason to
    believe, a relationship or circumstance involving
    a related entity is relevant to the evaluation of
    the firms independence, that related entity
    shall be included in the evaluation of
    independence.

14
Public Interest Entities
  • Those Charged with Governance
  • Regular communication with those charged with
    governance is encouraged.
  • Communication enables those charged with
    governance to
  • Consider the firms judgments in identifying and
    evaluating threats to independence,
  • Consider the appropriateness of safeguards
    applied, and
  • Take appropriate action.

15
Public Interest Entities
  • Documentation
  • The professional accountant shall document
    conclusions regarding compliance with
    independence requirements and the substance of
    relevant discussions supporting conclusions
  • When safeguards are required, the nature of the
    threat and safeguards in place or applied to
    reduce threat to an acceptable level shall be
    documented.
  • When a threat required significant analysis to
    determine whether safeguards were necessary and
    the accountant concluded safeguards were not
    necessary because the threat was already at an
    acceptable level, the nature of the threat and
    rationale for the conclusion shall be documented.

16
Public Interest Entities
  • Engagement Period
  • Independence is required during the engagement
    period and the period covered by the financial
    statements.
  • The engagement period starts when the audit team
    begins to perform audit services and ends when
    the audit report is issued.
  • If the engagement is recurring, the period ends
    at the later of the notification by either party
    that the professional relationship has terminated
    or the issuance of the final report.

17
Public Interest Entities
  • Mergers and Acquisitions
  • When, as a result of merger or acquisition, an
    entity becomes a related entity of the audit
    client, the firm shall
  • Identify and evaluate previous and current
    relationships that could affect independence, and
  • Take steps necessary by the effective date of the
    merger or acquisition to terminate any current
    interests or relationships that are not
    permitted.

18
Public Interest Entities
  • Mergers and Acquisitions
  • If the firm cannot reasonably terminate an
    interest or relationship by the effective date,
    the firm shall
  • Evaluate the significance of the threat, and
  • Discuss the matter with those charged with
    governance and if those charged with governance
    request the firm to continue as auditor, the firm
    shall do so only if
  • The interest or relationship will be terminated
    as soon as reasonably possible and in all cases
    within six months of the effective date
  • Any individual with such an interest or
    relationship is not a member of the engagement
    team or the individual responsible for the
    engagement quality control review and
  • Appropriate transitional measures are applied and
    discussed with those charged with governance.

19
Public Interest Entities
  • Mergers and Acquisitions
  • When the firm has completed a significant amount
    of audit work before the effective date of the
    merger or acquisition and can complete the audit
    in a short period of time, and those charged with
    governance request the firm to complete the audit
    while continuing with an interest or relationship
    that would otherwise be prohibited, the firm
    shall do so only if
  • The firm has evaluated the significance of the
    threats and discussed such evaluation with those
    charged with governance
  • The individual with such an interest or
    relationship is not a member of the engagement
    team or the individual responsible for the
    engagement quality control review
  • Appropriate transitional measures are applied
    and
  • The firm ceases to be the auditor no later than
    the issuance of the audit report.

20
Public Interest Entities
  • Mergers and Acquisitions
  • In all cases, the firm shall determine whether,
    even if all the requirements can be met, the
    interests or relationships create threats that
    would remain so significant that objectivity
    would be compromised .
  • The firm shall document any prohibited interests
    or relationships that will not be terminated by
    the effective date of the merger or acquisition,
    including the
  • Reasons why the interest or relationship was not
    terminated
  • Transitional measures applied
  • Results of the discussion with those charged with
    governance and
  • Rationale as to why the threats that remain are
    not so significant that objectivity would be
    compromised.

21
Public Interest Entities
  • Other Considerations
  • An inadvertent violation of an independence
    requirement generally will be deemed not to
    compromise independence provided
  • The firm has appropriate quality control policies
    and procedures (equivalent to ISCQ 1) in place to
    maintain independence and
  • Once discovered, the violation is corrected
    promptly and any necessary safeguards are applied
    to eliminate any threat or reduce it to an
    acceptable level.
  • The firm shall determine whether to discuss the
    matter with those charged with governance.

22
Public Interest Entities
  • Key Independence Provisions
  • General Provision
  • Financial interests
  • Loans and guarantees
  • Business relationship
  • Family and personal relationships
  • Employments with an audit client

23
Public Interest Entities
  • Key Independence Provisions
  • Temporary staff assignments
  • Recent service with an audit client
  • Serving as a director or officer
  • Long association (including partner rotation)
  • Provision of non-assurance services
  • Fees

24
Public Interest Entities
  • Key Independence Provisions
  • Compensation and evaluation policies
  • Gifts and hospitality
  • Actual of threatened litigation
  • Reports that include a restriction on use or
    distribution

25
Public Interest Entities
  • General Provision
  • The slides that follow cover particular
    circumstances or relationships addressed in
    Section 290 of the Code.
  • However, Section 290 does not describe all of the
    circumstances or relationships that create or may
    create threats to independence.
  • The firm and members of the audit team shall
    evaluate the implications of similar, but
    different, circumstances and relationships and
    determine whether safeguards can be applied when
    necessary to eliminate the threats or reduce them
    to an acceptable level.

26
Public Interest Entities
  • Financial Interests
  • A firm, a member of the audit team, or an
    immediate family member shall not have a direct
    financial interest or material indirect financial
    interest in the audit client.

27
Public Interest Entities
  • Financial Interests
  • Partners, and their immediate family members,
    shall not have a direct financial interest or
    material indirect financial interest in any audit
    client served by engagement partners located in
    the same office.
  • Partners and managerial employees who provide
    non-audit services to an audit client, except
    those whose involvement is minimal, or their
    immediate family members, shall not have a direct
    financial interest or material indirect financial
    interest in such audit client.

28
Public Interest Entities
  • Financial Interests contd
  • Financial interests held by immediate family
    members of
  • Partners in the office of the engagement partner,
    or
  • Partners or managerial employees who provide
    non-audit services to the audit client
  • will not compromise independence if the interest
    is received as a result of the family members
    employment rights and safeguards are applied when
    necessary.
  • When the immediate family member has the right to
    dispose of the interest or, in the case of stock
    options, exercise the option, the interest shall
    be disposed of or forfeited as soon as
    practicable.

29
Public Interest Entities
  • Financial Interests
  • Those prohibited from having a direct or material
    indirect financial interest in an audit client
    shall not hold such interest as trustee unless
  • The trustee, or immediate family member, or the
    firm are not beneficiaries of the trust
  • The interest in the audit client is not material
    to the trust
  • The trust cannot exercise significant influence
    over the audit client and
  • The trustee, or immediate family member, or the
    firm cannot significantly influence any
    investment decision involving a financial
    interest in the audit client.

30
Public Interest Entities
  • Financial Interests
  • A firm, a member of the audit team, or an
    immediate family member shall not have a
    financial interest in an entity that the audit
    client also has an interest in if the interest is
    material to any party and the audit client can
    exercise significant influence over the entity.

31
Public Interest Entities
  • Financial Interests
  • If the firm, a partner or employee of the firm,
    or immediate family member, receives a financial
    interest that would not be permitted, for example
    by way of an inheritance, gift or as a result of
    a merger
  • If received by the firm, a member of the audit
    team, or immediate family member, the interest
    shall be disposed of immediately, or if the
    interest is indirect, a sufficient amount shall
    be disposed of such that the remaining interest
    is immaterial
  • If received by an individual who is not a member
    of the audit team, or immediate family member,
    the interest shall be disposed of as soon as
    possible, or if the interest is indirect, a
    sufficient amount shall be disposed of such that
    the remaining interest is immaterial

32
Public Interest Entities
  • Financial Interests
  • Threats may be created
  • If a member of audit team knows a close family
    member, or other individuals ,such as
    professionals in the firm or close personal
    friends, holds a direct financial interest or
    material indirect financial interest in the audit
    client
  • A firms retirement benefit plan holds a direct
    financial interest or material indirect financial
    interest in an audit client
  • A firm, a member of the audit team, or immediate
    family member, has a financial interest in an
    entity and a director, officer or controlling
    owner of the audit client is also known to have a
    financial interest in that entity

33
Public Interest Entities
  • Loans and Guarantees
  • Audit clients that are banks or similar
    institutions
  • A firm, a member of the audit team, or immediate
    family member, may not have a loan or guarantee
    of a loan provided it is made under normal
    lending procedures, terms and conditions.
  • If a loan to a firm is permitted under the above
    and is material to the audit client or the firm,
    it may be possible to apply safeguards to reduce
    the threat to an acceptable level.
  • Audit clients that are not banks or similar
    institutions
  • A firm, a member of the audit team, or immediate
    family member, may have a loan or guarantee of a
    loan unless it is immaterial to the firm or
    member of the audit team and the immediate family
    member, and the client.

34
Public Interest Entities
  • Loans and Guarantees
  • A firm, a member of the audit team, or an
    immediate family member, shall not make or
    guarantee a loan to an audit client unless the
    loan or guarantee is immaterial to both the firm
    or member of the audit team and the immediate
    family member, and the client.

35
Public Interest Entities
  • Business Relationships
  • A firm shall not have a business relationship
    with an audit client or its management unless any
    financial interest is immaterial and the business
    relationship is insignificant to the firm and the
    client or its management.
  • If any financial interest from a business
    relationship between a member of the audit team
    and the audit client or its management is
    material or the relationship is significant to
    that member, the individual should be removed
    from the audit team.
  • If the business relationship is between an
    immediate family member of a member of the audit
    team and the audit client or its managements, any
    threat shall be evaluated and safeguards applied
    when necessary.

36
Public Interest Entities
  • Business Relationships
  • The purchase of goods and services from an audit
    client by the firm, or a member of the audit team
    or an immediate family member, does not generally
    create threats to independence if the transaction
    is in the normal course of business and at arms
    length.
  • If the nature or magnitude of the transactions is
    such that a self-interest threat is created,
    safeguards shall be applied when necessary.

37
Public Interest Entities
  • Family and Personal Relationships
  • An individual who has an immediate family member
    in one of the following positions at an audit
    client, or who was in the position during any
    period covered by the engagement or financial
    statements, shall not be a member of the audit
    team
  • A director or officer or
  • An employee in a position to exert significant
    influence over the preparation of the accounting
    records or the financial statements.

38
Public Interest Entities
  • Family and Personal Relationships
  • Threats to independence are created when a member
    of the audit team has an immediate family member
    who is an employee in a position to exert
    significant influence over the clients financial
    position, financial performance or cash flows.
  • The significance of the threats shall be
    evaluated and safeguards applied when necessary.

39
Public Interest Entities
  • Family and Personal Relationships contd
  • Threats to independence are created when a member
    of the audit team has a close family member in
    one of the following positions at an audit
    client
  • A director or officer or
  • An employee in a position to exert significant
    influence over the preparation of the accounting
    records of the financial statements.
  • The significance of the threats shall be
    evaluated and safeguards applied when necessary.

40
Public Interest Entities
  • Family and Personal Relationships
  • Threats to independence are created if a member
    of the audit team has a close relationship with
    other persons in one of the following positions
    at an audit client
  • A director or officer or
  • An employee in a position to exert significant
    influence over the preparation of the accounting
    records of the financial statements.
  • A member of the audit team who has such a
    relationship shall consult in accordance with
    firm policies and procedures.
  • The significance of the threats shall be
    evaluated and safeguards applied when necessary.

41
Public Interest Entities
  • Employment with an Audit Client
  • A former member of audit team or partner of the
    firm shall not join an audit client as director
    or officer or an employee in a position to exert
    significant influence over the accounting records
    or financial statements unless
  • The individual is not entitled to any benefits or
    payments from the firm, unless made in accordance
    with fixed pre-determined arrangements and any
    amount owed to the individual is not material to
    the firm and
  • The individual does not continue to participate,
    or appear to participate, in the firms business
    or professional activities.

42
Public Interest Entities
  • Employment with an Audit Client contd
  • If no significant connection remains between the
    firm and the former member of the audit team or
    partner, the significance of the threats shall be
    evaluated and safeguards applied when necessary.
  • Firm policies and procedures shall require
    members of the audit team to notify the firm when
    entering employment negotiations with an audit
    client. Safeguards shall be applied when
    necessary.

43
Public Interest Entities
  • Employment with an Audit Client contd
  • Independence is compromised if a key audit
    partner or the firms Senior or Managing Partner
    joins the audit client as a director or officer
    or an employee in a position to exert significant
    influence over the accounting records or
    financial statements unless a specified period
    has passed.
  • An exception exists if a former key audit partner
    or the firms Senior or Managing Partner is in
    such a position as a result of a business
    combination, provided certain criteria are
    satisfied.

44
Public Interest Entities
  • Employment with an Audit Client contd
  • Key audit partners include the
  • Engagement partner
  • Individual responsible for the engagement quality
    control review and
  • Other audit partners on the engagement team who
    make key decisions or judgments on significant
    matters with respect to the audit.
  • Specified period
  • In the case of key audit partners, the client
    has issued audited financial statements covering
    a period of not less than twelve months and the
    partner was not a member of the audit team with
    respect to the audit of those financial
    statements.
  • In the case of the former Senior or Managing
    Partner, twelve months have passed since the
    individual held that role.

45
Public Interest Entities
  • Temporary Staff Assignments
  • Such assistance may be given only for a short
    period of time.
  • Firm personnel shall not
  • Provide a non-assurance service that would not be
    permitted under section 290 or
  • Assume a management responsibility.
  • In all cases the audit client shall be
    responsible for directing and supervising the
    activities of the loaned staff.
  • The significance of any threats shall be
    evaluated and safeguards applied when necessary.

46
Public Interest Entities
  • Serving as a Director or Officer
  • A partner or employee of the firm shall not serve
    as a director or officer of an audit client.
  • A partner or employee may serve as Company
    Secretary if
  • The practice is specifically permitted under
    local laws and professional rules of practice
  • Management makes all relevant decision
  • The duties are routine and administrative and
  • The significance of the threats are evaluated and
    safeguards applied when necessary.

47
Public Interest Entities
  • Long Association of Senior Personnel
  • Using the same senior personnel on an audit
    engagement over a long period of time creates
    threats to independence, which should be
    evaluated and safeguards applied when necessary.
  • Key audit partners shall rotate after seven years
    and shall not be a member of the engagement team
    or a key audit partner for the client for two
    years.

48
Public Interest Entities
  • Long Association of Senior Personnel
  • Where continuity is especially important to audit
    quality, key audit partners may, in rare cases
    due to unforeseen circumstances outside of the
    firms control, be permitted one additional year
    as long as threats to independence can be
    eliminated or reduced to an acceptable level by
    applying safeguards.
  • The time served as a key audit partner is taken
    into account when the audit client becomes a
    public interest entity.
  • An additional year is permitted only when the
    individual has served as a key audit partner for
    six or more years when the audit client becomes a
    public interest entity.

49
Public Interest Entities
  • Long Association of Senior Personnel contd
  • During the two year time out period, the
    individual shall not
  • Participate in the audit of the entity
  • Provide quality control for the engagement
  • Consult with the engagement team or the client
    regarding technical or industry-specific issues,
    transactions or events or
  • Otherwise directly influence the outcome of the
    engagement.

50
Public Interest Entities
  • Long Association of Senior Personnel
  • Rotation is not required if
  • The firm has only a few people with the necessary
    knowledge and experience to serve as a key audit
    partner
  • An independent regulator has provided an
    exemption from rotation in such circumstances
  • The independent regulator has specified
    alternative safeguards and
  • The alternative safeguards are applied.

51
Public Interest Entities
  • Provision of Non-assurance Services
  • Before the firm accepts an engagement to provide
    a non-assurance service to an audit client, a
    determination shall be made whether providing the
    service creates a threat to independence.
  • The firm shall not provide the service if the
    threats cannot be reduced to an acceptable level
    by the application of safeguards.

52
Public Interest Entities
  • Provision of Non-assurance Services
  • A firm may provide a non-assurance service that
    would otherwise be restricted to the following
    related entities, provided the results of the
    services will not be subject to audit procedures
  • An entity that has direct or indirect control
    over the audit client
  • An entity with a direct financial interest in the
    audit client if that entity has significant
    influence over the client and the interest in the
    client is material to the entity or
  • An entity under common control with the audit
    client.
  • The significance of any threats shall be
    evaluated and safeguards applied when necessary.

53
Public Interest Entities
  • Provision of Non-assurance Services contd
  • A non-assurance service provided to the audit
    client before the client becomes a public
    interest entity does not compromise the firms
    independence if
  • The service was permissible for audit clients
    that are not public interest entities
  • The service that is not permitted for public
    interest entities is terminated before or as soon
    as practicable after the client becomes a public
    interest entity and
  • Safeguards are applied when necessary.

54
Public Interest Entities
  • Management Responsibilities
  • A firm shall not assume a management
    responsibility for an audit client.
  • To avoid the risk of assuming a management
    responsibility, the firm shall be satisfied that
    a member of management is responsible for
  • Making the significant judgments and decisions
    that are the proper responsibility of management
  • Evaluating the results of the service and
  • Accepting responsibility for the actions to be
    taken from results of the service.

55
Public Interest Entities
  • Preparing Accounting Records and Financial
    Statements
  • Except in emergency situations, a firm shall not
    provide accounting and bookkeeping services,
    including payroll services , to an audit client
    or prepare financial statements on which the firm
    will express an opinion or financial information
    which forms the basis of financial statements.
  • A firm may provide services of a routine and
    mechanical nature for divisions or related
    entities if the personnel providing the service
    are not on the audit team and
  • The divisions or related entities are
    collectively immaterial or
  • The services relate to matters which are
    collectively immaterial to the financial
    statements of the division or related entity.

56
Public Interest Entities
  • Preparing Accounting Records and Financial
    Statements
  • Emergency Situations
  • In emergency or other unusual situations when it
    is impractical for the audit client to make other
    arrangements, accounting and bookkeeping services
    that would otherwise be prohibited may be
    provided if
  • Those who provide the services are not on the
    audit team
  • The services provided only for a short period of
    time and are not expected to recur and
  • The situation is discussed with those charged
    with governance.

57
Public Interest Entities
  • Valuation Services
  • Valuation services may create a self-review
    threat, which shall be evaluated and safeguards
    applied when necessary.
  • A firm shall not provide valuation services if
    the valuations would have a material effect,
    separately or in the aggregate, on the financial
    statements.

58
Public Interest Entities
  • Taxation Services
  • Tax Return Preparation
  • Providing tax return preparation services does
    not generally create a threat to independence if
    management takes responsibility for the returns
    and any significant judgments made.

59
Public Interest Entities
  • Taxation Services contd
  • Tax Calculations
  • Preparing calculations of current and deferred
    tax liabilities (or assets) for purpose of
    preparing accounting entries that will be
    subsequently audited by the firm creates a
    self-review threat.
  • The significance shall be evaluated and
    safeguards applied when necessary.

60
Public Interest Entities
  • Taxation Services
  • Tax Planning and Other Tax Advisory Services
  • A self-review threat may be created when advice
    will affect matters to be reflected in the
    financial statements. The threat shall be
    evaluated and safeguards applied when necessary.
  • A firm shall not provide tax advice if the
    effectiveness of the advice depends on a
    particular accounting treatment or financial
    statement presentation and
  • The audit team has reasonable doubt as to the
    appropriateness of the related accounting
    treatment or presentation and
  • The outcome or consequence of the corporate
    finance advice would have a material effect on
    the financial statements.

61
Public Interest Entities
  • Taxation Services
  • Assistance in the Resolution of Tax Disputes
  • An advocacy or self-review threat may be created
    when the firm assists the audit client with the
    resolution of a tax dispute once the tax
    authorities have notified the client that they
    have rejected the clients arguments and the
    matter is being referred for determination in a
    formal proceeding. The threats shall be evaluated
    and safeguards applied when necessary.
  • A firm shall not act as an advocate for the audit
    client before a public tribunal or court in the
    resolution of a tax matter if the amounts
    involved are material to the financial
    statements.

62
Public Interest Entities
  • Internal Audit Services
  • When providing internal audit services to an
    audit client, firm personnel shall not assume a
    management responsibility, and the firm shall be
    satisfied that
  • The client designates an appropriate and
    competent resource to be in charge and
    acknowledge responsibility for internal controls
  • Management or those charged with governance
    review, assess and approve the scope, risk and
    frequency of the services
  • Management evaluates the adequacy and results
  • Management decides which recommendations to
    implement and
  • Management reports to those charge with
    governance the significant findings and
    recommendations.

63
Public Interest Entities
  • Internal Audit Services
  • If the firm provides internal audit services and
    the results of those services will be used in
    conducting the external audit, a self-review
    threat is created, which shall be evaluated and
    safeguards applied when necessary.
  • A firm shall not provide internal audit services
    that relate to
  • A significant part of the internal controls over
    financial reporting
  • Financial accounting systems that generate
    information that is, separately or in the
    aggregate, significant to the clients accounting
    records or financial statements or
  • Amounts or disclosures that are, separately or in
    the aggregate, material to the clients financial
    statements.

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Public Interest Entities
  • IT Systems Services
  • The firm may provide the following services
    provided firm personnel do not assume a
    management responsibility
  • Designing or implementing IT systems that are
    unrelated to internal control over financial
    reporting
  • Designing or implementing IT systems that do not
    generate information forming a significant part
    of the accounting records or financial
    statements
  • Implementation of off-the-shelf accounting or
    financial information reporting software not
    developed by the firm if no significant
    customization is required to meet the clients
    needs and
  • Evaluating and making recommendations on a system
    designed, implemented or operated by another or
    the client.

65
Public Interest Entities
  • IT Systems Services
  • A firm shall not provide services involving the
    design or implementation of IT systems that
  • Form a significant part of the internal control
    over financial reporting or
  • Generate information that is significant to the
    accounting records or financial statements.

66
Public Interest Entities
  • Litigation Support Services
  • If the firm provides litigation support services
    involving estimating damages or other amounts
    that affect the financial statements, the
    requirements regarding valuation services shall
    be followed.
  • For other litigation support services, the
    significance of any threat created shall be
    evaluated and safeguards applied when necessary.

67
Public Interest Entities
  • Legal Services
  • A 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.
  • A partner or employee shall not act as General
    Counsel for legal affairs of an audit client.
  • For other legal services, the significance of any
    threat created shall be evaluated and safeguards
    applied when necessary.

68
Public Interest Entities
  • Recruiting Services
  • Providing recruiting services may create threats
    to independence, which shall be evaluated and
    safeguards applied when necessary.
  • A firm may generally provide services such as
  • Reviewing the professional qualifications of
    candidates and providing advice on their
    suitability for a position and
  • Interviewing candidates and advising on their
    competence for financial accounting,
    administrative or control positions.

69
Public Interest Entities
  • Recruiting Services
  • A firm shall not provide the following services
    with respect to a director or officer of the
    audit client or senior management in a position
    to exert significant influence over the clients
    accounting records or financial statements
  • Searching for or seeking out candidates for such
    positions and
  • Undertaking reference checks of prospective
    candidates for such positions.

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Public Interest Entities
  • Corporate Finance Services
  • Providing corporate finance services may create
    threats to independence, which shall be evaluated
    and safeguards applied when necessary.
  • A firm shall not provide corporate finance advice
    if the effectiveness of the advice depends on a
    particular accounting treatment or financial
    statement presentation and
  • The audit team has reasonable doubt as to the
    appropriateness of the accounting treatment or
    presentation and
  • The outcome or consequence of the tax advice
    would have a material effect on the financial
    statements.

71
Public Interest Entities
  • Fees Relative Size
  • Threats are created when fees from an audit
    client represent a large proportion of the total
    fees of the firm or a large proportion of the
    total revenue of an individual partner or an
    individual office of the firm.
  • The threats shall be evaluated and safeguards
    applied when necessary.

72
Public Interest Entities
  • Fees Relative Size contd
  • If the total fees from the client are more than
    15 of the firms total fees for two years, the
    firm shall discuss which of the following
    safeguards to apply with those charged with
    governance
  • A pre-issuance engagement quality control review
    performed by a professional accountant who is not
    a member of the firm or
  • A post-issuance review equivalent to an
    engagement quality control performed by a
    professional accountant who is not a member of
    the firm.
  • If the total fees significantly exceed 15 of the
    firms total fees , the firm shall determine
    whether the significance of the threat is such
    that a pre-issuance review is necessary.

73
Public Interest Entities
  • Fees Overdue
  • A threat may be created when fees from an audit
    client remain unpaid for a long time.
  • Generally, the firm is excepted to require
    payment of any significant unpaid fees before the
    issue of the audit report for the following year.
  • If fees remain unpaid after the report has been
    issued, any threat shall be evaluated and
    safeguards applied when necessary.

74
Public Interest Entities
  • Contingent Fees
  • A contingent fee shall not be charged in respect
    of an audit engagement.
  • A contingent fee shall not be charged for a
    non-assurance service provided to an audit client
    if
  • The fee is charged by the firm and the fee is
    material or expected to be material to the firm
  • The fee is charged by a network firm that
    participates in a significant part of the audit
    and the fee is material or expect to be material
    to the network firm or
  • 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.

75
Public Interest Entities
  • Contingent Fees
  • For other contingent fee arrangements, threats to
    independence shall be evaluated and safeguards
    applied when necessary.

76
Public Interest Entities
  • Compensation and Evaluation Policies
  • Key audit partners shall not be evaluated on or
    compensated for the partners success in selling
    non-assurance services to their audit clients.
  • A threat may be created if other members of the
    audit team are evaluated on or compensated for
    their success in selling non-assurance services
    to their audit clients. The threat shall be
    evaluated and safeguards applied when necessary.

77
Public Interest Entities
  • Gifts and Hospitality
  • A firm or member of the audit team shall not
    accept gifts or hospitality from an audit client
    unless the value is trivial and inconsequential.

78
Public Interest Entities
  • Actual or Threatened Litigation
  • Litigation between the firm or a member of the
    audit team and an audit client creates a threat
    to independence.
  • The significance of the threat shall be evaluated
    and safeguards applied when necessary.
  • If safeguards do not reduce the threats to an
    acceptable level, the firm shall withdraw from
    the audit engagement.

79
Public Interest Entities
  • Reports that Include a Restriction on Use or
    Distribution
  • The Code provides for some modifications to the
    independence requirements for audit engagements
    where the report includes a restriction on use
    and distribution, unless the audit is required by
    law or regulation.
  • The modifications are permitted if the intended
    users of the report
  • Are knowledgeable as to the purpose and
    limitations of the report and
  • Explicitly agree to the application of the
    modified independence requirements.

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Public Interest Entities
  • Effective Date
  • The revised Code is effective on January 1, 2011.
  • Certain transitional provisions apply to the
    following
  • Public interest entities
  • Partner rotation
  • Non-assurance services
  • Fees relative size and
  • Compensation and evaluation policies.

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