PES 1

International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand)

Mandatory Date:
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Statement of Authority

PROFESSIONAL AND ETHICAL STANDARD 1

International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (PES 1)

This Standard was issued on 20 December 2018 by the New Zealand Auditing and Assurance Standards Board of the External Reporting Board pursuant to section 12(b) of the Financial Reporting Act 2013.

This Standard is a disallowable instrument for the purposes of the Legislation Act 2012, and pursuant to section 27(1) of the Financial Reporting Act 2013 takes effect on 17 January 2019.

An assurance practitioner that is required to apply this Standard is required to apply it as follows:

  • Parts 1 and 3 will be effective as of 15 June 2019.

  • Part 2 is effective on 15 December 2020.

  • Part 4A relating to independence for audit and review engagements will be effective for periods beginning on or after 15 June 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 15 June 2019; otherwise it will be effective as of 15 June 2019.

Early adoption is permitted.

Paragraph R540.19 shall have effect only for audits of financial statements for periods beginning prior to 15 December 2023.

In finalising this Standard, the New Zealand Auditing and Assurance Standards Board has carried out appropriate consultation in accordance with section 22(1) of the Financial Reporting Act 2013.

This Standard has been issued as a result of the issuance of the International Code of Ethics for Professional Accountants, including International Independence Standards by the International Ethics Standards Board for Accountants.

This Standard, when applied, supersedes Professional and Ethical Standard 1 (Revised), Code of Ethics for Assurance Practitioners.

This compilation was prepared in June 2023 and incorporates amendments up to and including June 2023.

 

Copyright

COPYRIGHT

© External Reporting Board (“XRB”) 2018

This XRB standard contains copyright material and reproduces, with the permission of the International Federation of Accountants (IFAC), parts of the corresponding international standard issued by the International Ethics Standards Board for Accountants (IESBA), and published by IFAC. Reproduction within New Zealand in unaltered form (retaining this notice) is permitted for personal and non- commercial use subject to the inclusion of an acknowledgement of the source.

Requests and enquiries concerning reproduction and rights for commercial purposes within New Zealand should be addressed to the Chief Executive, External Reporting Board at the following email address: enquiries@xrb.govt.nz

All existing rights (including copyrights) in this material outside of New Zealand are reserved by IFAC, with the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further information can be obtained from IFAC at www.ifac.org or by writing to permissions@ifac.org

ISBN 978-0-947505-61-5

 

Table of pronouncements – Professional and Ethical Standard 1 International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand)

This table lists the pronouncements establishing and amending PES 1.

Pronouncements

Date approved

Effective date

Professional and Ethical Standard 1, International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand)

December 2018

Professional and Ethical Standard 1 is effective on 15 June 2019 or for periods beginning on or after 15 June 2019.

Amendments to Professional and Ethical Standard 1: Part 2, Assurance Practitioners Performing Professional Activities Pursuant to their Relationship with the Firm

October 2020

Amendments in this Standard are effective on 15 December 2020. Early adoption is permitted.

Amendments to Professional and Ethical Standard 1: Part 4B – Independence for Assurance Engagements Other Than Audit and Review Engagements

February 2020

Amendments in this Standard are effective for periods beginning on or after 15 June 2021, or on 15 June 2021. Early adoption is permitted.

Annual Improvements 2020

April 2021

Effective on 15 June 2021.

Revisions to the Code to promote the Role and Mindset expected of Assurance Practitioners

October 2020

Effective on 31 December 2021. Early adoption is permitted.

Revisions to Professional and Ethical Standard 1: Addressing the Objectivity of an Engagement Quality Reviewer and Other Appropriate Reviewers

July 2021

For audits or reviews of financial statements, effective for periods beginning on or after 15 December 2022, otherwise effective from 15 December 2022.

Amendments to Professional and Ethical Standard 1: Revisions to the Fee-Related Provisions of the Code

March 2022

For audits or reviews of financial statements or assurance engagements over subject matters covering periods, effective for periods beginning on or after 15 December 2022, otherwise effective from 15 December 2022.

Amendments to Professional and Ethical Standard 1: Revisions to the Non-Assurance Services Provisions of the Code

June 2022

For audits or reviews of financial statements or assurance engagements over subject matters covering periods, effective for periods beginning on or after 15 December 2022, otherwise effective from 15 December 2022.

Amendments to Professional and Ethical Standard 1: Quality Management-related Conforming Amendments to the Code and Other Contextual Amendments

August 2022

Effective on 15 December 2022.

Amendments to Auditing and Review Engagement Standards as a Result of the Revisions to Financial Reporting Standards

May 2023

Mandatory date of 1 January 2023.

Revisions to the Definition of Engagement Team and Group Audits

June 2023

Mandatory date of 15 December 2023.

 

Table of Amended Paragraphs in PES 1

Paragraph affected

How affected

By … [date]

Part 2

R120.4, R300.5, NZ300.5 A1.1

NZ R120.4.1, NZ R300.5

120.3 A1,300.5 A1

 

Added

Deleted

Amended

Amendments to Professional and Ethical Standard 1: Part 2, Assurance Practitioners Performing Professional Activities Pursuant to their Relationship with the Firm [Oct 2020]

Part 4B

Amended

Amendments to Professional and Ethical Standard 1: Part 4B – Independence for Assurance Engagements Other Than Audit and Review Engagements [Feb 2020]

Definition Assurance Practitioner

Amended

Annual Improvements 2020 [April 2021]

Part 1, various paragraphs

Amended

Revisions to the Code to Promote the Role and Mindset Expected of Assurance Practitioners [Oct 2020]

Part 3, section 325

300.6 A1, 540.13 A1

Added

Revisions to Professional and Ethical Standard 1: Addressing the Objectivity of an Engagement Quality Reviewer and Other Appropriate Reviewers [July 2021]

Section 410

Section 905

120.15A3, 400.2

270.3 A2, 320.3 A4,

NZ400.2

Amended

Amended 

Added

Amended

Deleted

Amendments to Professional and Ethical Standard 1: Revisions to the Fee-Related Provisions of the Code [March 2022]

Section 600

Section 950

R400.13-R400.14, 400.31 A2,

400.31 A4-400.32 A1, R900.13- R900.14, 900.34 A1-900.34 A2

R400.31, 400.31 A3, R525.4,

900.11 A2, 900.11 A3, 900.32 A1,

R900.33

Amended

Amended 

Added

 

 

 

Amended

Amendments to Professional and Ethical Standard 1: Revisions to the Non-Assurance Services Provisions of the Code [June 2022]

120.15 A3, 300.7 A5, 320.3 A4,

330.4 A2, Part 4A, 900.3, Glossary

Amended

Amendments to Professional and Ethical Standard 1: Quality Management-related Conforming Amendments to the Code and Other Contextual Amendments [August 2022]

Footnote 6

Amended

Amendments to Auditing and Review Engagement Standards as a Result of the Revisions to Financial Reporting Standards [May 2023]

400.6

400.8-400.12

Section 405

300.8 A2, 310.8 A3

320.3 A3, NZ R360.16.1 (a), (b)

NZ R360.17.1 (a), (b)

NZ R360.18.1, 360.18 A1,

R400.31, 400.30 A1, 400.31 A1

510.4 A1, R540.4(b), R540.20(a),

605.4 A2, 605.4 A3, R800.10(b) (ii), R900.30 A1, R900.32

R940.4(b), R990.7(b)(ii)

Glossary

Amended

Added

Added

Amended

Revisions to the Definition of Engagement Team and Group Audits [June 2023]

(This Guide is a non-authoritative aid to using the Code.)

Purpose of the Code

1. Professional and Ethical Standard 1, International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (“the Code”) sets out fundamental principles of ethics for assurance practitioners, reflecting the profession’s recognition of its public interest responsibility. These principles establish the standard of behaviour expected of an assurance practitioner. The fundamental principles are: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

2. The Code provides a conceptual framework that assurance practitioners are to apply in order to identify, evaluate and address threats to compliance with the fundamental principles. The Code sets out requirements and application material on various topics to help assurance practitioners apply the conceptual framework to those topics.

3. In the case of audits, reviews and other assurance engagements, the Code sets out International Independence Standards (New Zealand), established by the application of the conceptual framework to threats to independence in relation to these engagements.

How the Code is Structured

4. The Code contains the following material:

  • Part 1 – Complying with the Code, Fundamental Principles and Conceptual Framework, which includes the fundamental principles and the conceptual framework.

  • Part 2 – Assurance Practitioners Performing Professional Activities Pursuant to Their Relationship with the Firm, is applicable to individuals who are assurance practitioners when performing professional activities pursuant to their relationship with the firm, whether as a contractor, employee or owner.

  • Part 3 – Application of the Code, Fundamental Principles and Conceptual Framework, which sets out additional material that applies to assurance practitioners when providing assurance services.

  • International Independence Standards (New Zealand), which sets out additional material that applies to assurance practitioners when providing assurance services, as follows:

  • Part 4A – Independence for Audit and Review Engagements, which applies when performing audit or review engagements.

  • Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, which applies when performing assurance engagements that are not audit or review engagements.

  • Glossary, which contains defined terms (together with additional explanations where appropriate) and described terms which have a specific meaning in certain parts of the Code.

5. The Code contains sections which address specific topics. Some sections contain subsections dealing with specific aspects of those topics. Each section of the Code is structured, where appropriate, as follows:

  • Introduction – sets out the subject matter addressed within the section, and introduces the requirements and application material in the context of the conceptual framework. Introductory material contains information, including an explanation of terms used, which is important to the understanding and application of each Part and its sections.

  • Requirements – establish general and specific obligations with respect to the subject matter addressed.

  • Application material – provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance to assist in complying with the requirements.

How to Use the Code

The Fundamental Principles, Independence and Conceptual Framework

6. The Code requires assurance practitioners to comply with the fundamental principles of ethics. The Code also requires them to apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles. Applying the conceptual framework requires exercising professional judgement, remaining alert for new information and to changes in facts and circumstances, and using the reasonable and informed third party test.

7. The conceptual framework recognises that the existence of conditions, policies and procedures established by the profession, legislation, regulation, or the firm, might impact the identification of threats. Those conditions, policies and procedures might also be a relevant factor in the assurance practitioner’s evaluation of whether a threat is at an acceptable level. When threats are not at an acceptable level, the conceptual framework requires the assurance practitioner to address those threats. Applying safeguards is one way that threats might be addressed. Safeguards are actions individually or in combination that the assurance practitioner takes that effectively reduce threats to an acceptable level.

8. In addition, the Code requires assurance practitioners to be independent when performing audit, review and other assurance engagements. The conceptual framework applies in the same way to identifying, evaluating and addressing threats to independence as to threats to compliance with the fundamental principles.

9. Complying with the Code requires knowing, understanding and applying:

  • All of the relevant provisions of a particular section in the context of Part 1, together with the additional material set out in Sections 200, 300, 400 and 900, as applicable.

  • All of the relevant provisions of a particular section, for example, applying the provisions that are set out under the subheadings titled “General” and “All Audit Clients” together with additional specific provisions, including those set out under the subheadings titled “Audit or Review Clients that are not Public Interest Entities” or “Audit or Review Clients that are Public Interest Entities.”

  • All of the relevant provisions set out in a particular section together with any additional provisions set out in any relevant subsection.

Requirements and Application Material

10. Requirements and application material are to be read and applied with the objective of complying with the fundamental principles, applying the conceptual framework and, when performing audit, review and other assurance engagements, being independent.

Requirements

11. Requirements are designated with the letter “R” and, in most cases, include the word “shall.” The word “shall” in the Code imposes an obligation on an assurance practitioner or firm to comply with the specific provision in which “shall” has been used.

12. In some situations, the Code provides a specific exception to a requirement. In such a situation, the provision is designated with the letter “R” but uses “may” or conditional wording.

13. When the word “may” is used in the Code, it denotes permission to take a particular action in certain circumstances, including as an exception to a requirement. It is not used to denote possibility.

14. When the word “might” is used in the Code, it denotes the possibility of a matter arising, an event occurring or a course of action being taken. The term does not ascribe any particular level of possibility or likelihood when used in conjunction with a threat, as the evaluation of the level of a threat depends on the facts and circumstances of any particular matter, event or course of action.

Application Material

15. In addition to requirements, the Code contains application material that provides context relevant to a proper understanding of the Code. In particular, the application material is intended to help an assurance practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework. Application material is designated with the letter “A.”

16. Where application material includes lists of examples, these lists are not intended to be exhaustive.

Appendix to Guide to the Code

17. The Appendix to this Guide provides an overview of the Code.

Appendix to the Guide to the Code

NEW ZEALAND PREFACE

Professional and Ethical Standard 1, International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand), (“the Code”), issued by the NZAuASB is based on the International Code of Ethics for Professional Accountants (including International Independence Standards (“the International Code”). The International Code is issued by the International Ethics Standards Board for Accountants. It is published by the International Federation of Accountants (IFAC) and used with permission of IFAC, as it applies to assurance practitioners in New Zealand.

New Zealand additions and deletions are prefixed with NZ in the Code.

The Code is based on a number of fundamental principles that express the basic tenets of professional and ethical behaviour and conduct. Assurance practitioners must abide by these fundamental principles when performing assurance engagements.

The International Independence Standards (New Zealand) set out requirements that apply to all entities and all assurance practitioners. Small entities and small firms, in certain circumstances, may face difficulties implementing the requirements. Many of the examples provided of actions that might reduce the threat may not be available to small entities and small firms. For example, involving individuals within the firm who are not members of the assurance team in, for example, providing non-assurance services to an assurance client, may not reduce the threats to independence to an acceptable level given the likely closeness of relationships of staff within small firms.

NEW ZEALAND SCOPE AND APPLICATION

NZ1.1 Professional and Ethical Standard 1, International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (“the Code”) is effective from 15 June 2019 and supersedes Professional and Ethical Standard 1 (Revised), Code of Ethics for Assurance Practitioners, issued by the XRB in January 2013. Early adoption of the Code is permitted.

NZ1.2 The Code is intended to apply to all those who perform assurance engagements, even if they are not part of the accountancy profession. The Code makes reference to the accountancy profession to establish a benchmark and is not intended to exclude assurance practitioners that are not part of the accountancy profession. Some professions may have requirements and guidance that differ from those contained in the Code. Assurance practitioners from other professions, including any person or organisation appointed or engaged to perform assurance engagements, need to be aware of these differences and comply with the more stringent requirements and guidance.

NZ1.3 The Code is not intended to detract from responsibilities which may be imposed by law or regulation.

NZ1.4 In applying the requirements outlined in the Code, assurance practitioners shall be guided not merely by the words, but also by the spirit of the Code.

SECTION 100 - COMPLYING WITH THE CODE

Introduction

100.1 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.

100.2 Confidence in the accountancy profession is a reason why businesses, governments and other organisations involve professional accountants in a broad range of areas including financial and corporate reporting, assurance and other professional activities. Accountants understand and acknowledge that such confidence is based on the skills and values that accountants bring to the professional activities they undertake, including:

  1. Adherence to ethical principles and professional standards;

  2. Use of business acumen;

  3. Application of expertise on technical and other matters; and

  4. Exercise of professional judgement.

The application of these skills and values enables accountants to provide advice or other output that meets the purpose for which it was provided, and which can be relied upon by the intended users of such output.

100.3 The Code sets out high quality standards of ethical behaviour expected of professional accountants for adoption by professional accountancy organisations which are members of the International Federation of Accountants (IFAC), or for use by such members as a basis for their codes of ethics. The Code may also be used or adopted by those responsible for setting ethics standards for professional accountants in particular sectors or jurisdictions and by firms in developing their ethics and independence policies.

100.4 The Code establishes five fundamental principles to be complied with by all professional accountants. It also includes a conceptual framework that sets out the approach to be taken to identify, evaluate and address threats to compliance with those fundamental principles and, for audits and other assurance engagements, threats to independence. The Code also applies the fundamental principles and the conceptual framework to a range of facts and circumstances that professional accountants may encounter, whether in business or in public practice.

Requirements and Application Material

100.5 A1 The requirements in the Code, designated with the letter “R,” impose obligations.

100.5 A2 Application material, designated with the letter “A,” provides context, explanations, suggestions for actions or matters to consider, illustrations and other guidance relevant to a proper understanding of the Code. In particular, the application material is intended to help an assurance practitioner to understand how to apply the conceptual framework to a particular set of circumstances and to understand and comply with a specific requirement. While such application material does not of itself impose a requirement, consideration of the material is necessary to the proper application of the requirements of the Code, including application of the conceptual framework.

R100.6 An assurance practitioner shall comply with the Code.

100.6 A1 Upholding the fundamental principles and compliance with the specific requirements of the Code enable assurance practitioners to meet their responsibility to act in the public interest.

100.6 A2 Complying with the Code includes giving appropriate regard to the aim and intent of the specific requirements.

100.6 A3 Compliance with the requirements of the Code does not mean that assurance practitioners will have always met their responsibility to act in the public interest. There might be unusual or exceptional circumstances in which an assurance practitioner believes that complying with a requirement or requirements of the Code might not be in the public interest or would lead to a disproportionate outcome. In those circumstances, the assurance practitioner is encouraged to consult with an appropriate body such as a professional or regulatory body.

100.6 A4 In acting in the public interest, an assurance practitioner considers not only the preferences or requirements of an individual client or employing organisation, but also the interests of other stakeholders when performing professional activities.

R100.7 If there are circumstances where laws or regulations preclude an assurance practitioner from complying with certain parts of the Code, those laws and regulations prevail, and the assurance practitioner shall comply with all other parts of the Code.

100.7 A1 The principle of professional behaviour requires an assurance practitioner to comply with relevant laws and regulations.

Breaches of the Code

R100.8 Paragraphs R400.80 to R400.89 and R900.50 to R900.55 address a breach of International Independence Standards (New Zealand). An assurance practitioner who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the assurance practitioner’s ability to comply with the fundamental principles. The assurance practitioner shall also:

  1. Take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and
  2. Determine whether to report the breach to the relevant parties.

100.8 A1 Relevant parties to whom such a breach might be reported include those who might have been affected by it, a professional or regulatory body or an oversight authority.

SECTION 110 - THE FUNDAMENTAL PRINCIPLES

General

110.1 A1 There are five fundamental principles of ethics for assurance practitioners:

  1. Integrity – to be straightforward and honest in all professional and business relationships.

  2. Objectivity – to exercise professional or business judgements without being compromised by:

    1. Bias;

    2. Conflict of interest; or

    3. Undue influence of, or undue reliance on, individuals, organisations, technology or other factors.

  3. Professional Competence and Due Care – to:

    1. Attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent assurance services, based on current standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board and relevant legislation; and

    2. Act diligently and in accordance with standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

  4. Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships.

  5. Professional Behaviour – to:

    1. Comply with relevant laws and regulations;

    2. Behave in a manner consistent with the profession’s responsibility to act in the public interest in all professional activities and business relationships; and

    3. Avoid any conduct that the assurance practitioner knows or should know might discredit the profession.

R110.2 An assurance practitioner shall comply with each of the fundamental principles.

110.2 A1 The fundamental principles of ethics establish the standard of behaviour expected of an assurance practitioner. The conceptual framework establishes the approach which an assurance practitioner is required to apply in complying with those fundamental principles. Subsections 111 to 115 set out requirements and application material related to each of the fundamental principles.

110.2 A2 An assurance practitioner might face a situation in which complying with one fundamental principle conflicts with complying with one or more other fundamental principles. In such a situation, the assurance practitioner might consider consulting, on an anonymous basis if necessary, with:

  • Others within the firm.

  • Those charged with governance.

  • A professional body.

  • A regulatory body.

  • Legal counsel.

However, such consultation does not relieve the assurance practitioner from the responsibility to exercise professional judgement to resolve the conflict or, if necessary, and unless prohibited by law or regulation, disassociate from the matter creating the conflict.

110.2 A3 The assurance practitioner is encouraged to document the substance of the issue, the details of any discussions, the decisions made and the rationale for those decisions.

SUBSECTION 111 – INTEGRITY

R111.1 An assurance practitioner shall comply with the principle of integrity, which requires an assurance practitioner to be straightforward and honest in all professional and business relationships.

111.1 A1 Integrity involves fair dealing, truthfulness and having the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organisational consequences.

111.1 A2 Acting appropriately would involve:

  1. Standing one’s ground when confronted by dilemmas and difficult situations; or

  2. Challenging others as and when circumstances warrant, in a manner appropriate to the circumstances.

R111.2 An assurance practitioner shall not knowingly be associated with reports, returns, communications or other information where the assurance practitioner believes that the information:

  1. Contains a materially false or misleading statement;

  2. Contains statements or information provided recklessly; or

  3. Omits or obscures required information where such omission or obscurity would be misleading.

111.2 A1 If an assurance practitioner provides a modified report in respect of such a report, return, communication or other information, the assurance practitioner is not in breach of paragraph R111.2.

R111.3 When an assurance practitioner becomes aware of having been associated with information described in paragraph R111.2, the assurance practitioner shall take steps to be disassociated from that information.

SUBSECTION 112 – OBJECTIVITY

R112.1 An assurance practitioner shall comply with the principle of objectivity, which requires an assurance practitioner to exercise professional or business judgement without being compromised by:

  1. Bias;

  2. Conflict of interest; or

  3. Undue influence, or undue reliance on, individuals, organisations, technology or other factors.

R112.2 An assurance practitioner shall not undertake a professional activity if a circumstance or relationship unduly influences the assurance practitioner’s professional judgement regarding that activity.

SUBSECTION 113 – PROFESSIONAL COMPETENCE AND DUE CARE

R113.1 An assurance practitioner shall comply with the principle of professional competence and due care, which requires an assurance practitioner to:

  1. Attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent assurance service, based on standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board and relevant legislation; and

  2. Act diligently and in accordance with the standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

113.1 A1 Serving clients with professional competence requires the exercise of sound judgement in applying professional knowledge and skill when undertaking professional activities.

113.1 A2 Maintaining professional competence requires a continuing awareness and an understanding of relevant technical, professional, business and technology-related developments. Continuing professional development enables an assurance practitioner to develop and maintain the capabilities to perform competently within the assurance environment.

113.1 A3 Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis.

R113.2 In complying with the principle of professional competence and due care, an assurance practitioner shall take reasonable steps to ensure that those working in a professional capacity under the assurance practitioner’s authority have appropriate training and supervision.

R113.3 Where appropriate, an assurance practitioner shall make clients, or other users of the assurance practitioner’s assurance services, aware of the limitations inherent in the services.

SUBSECTION 114 – CONFIDENTIALITY

R114.1 An assurance practitioner shall comply with the principle of confidentiality, which requires an assurance practitioner to respect the confidentiality of information acquired as a result of professional and business relationships. An assurance practitioner shall:

  1. Be alert to the possibility of inadvertent disclosure, including in a social environment, and particularly to a close business associate or an immediate or a close family member;

  2. Maintain confidentiality of information within the firm;

  3. Maintain confidentiality of information disclosed by a prospective client;

  4. Not disclose confidential information acquired as a result of professional and business relationships outside the firm without proper and specific authority, unless there is a legal or professional duty or right to disclose;

  5. Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the assurance practitioner or for the advantage of a third party;

  6. Not use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended; and

  7. Take reasonable steps to ensure that personnel under the assurance practitioner’s control, and individuals from whom advice and assistance are obtained, respect the assurance practitioner’s duty of confidentiality.

114.1 A1 Confidentiality serves the public interest because it facilitates the free flow of information from the assurance practitioner’s client to the assurance practitioner in the knowledge that the information will not be disclosed to a third party. Nevertheless, the following are circumstances where assurance practitioners are or might be required to disclose confidential information or when such disclosure might be appropriate:

  1. Disclosure is required by law, for example:

    1. Production of documents or other provision of evidence in the course of legal proceedings; or

    2. Disclosure to the appropriate public authorities of infringements of the law that come to light;

  2. Disclosure is permitted by law and is authorised by the client; and

  3. There is a professional duty or right to disclose, when not prohibited by law:

    1. To comply with the quality review of a professional body;

    2. To respond to an enquiry or investigation by a professional or regulatory body;

    3. To protect the professional interests of an assurance practitioner in legal proceedings; or

    4. To comply with standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

NZ114.1 A1 The circumstances in paragraph 114.1 A1 do not take into account New Zealand legal and regulatory requirements. An assurance practitioner considering disclosing confidential information about a client without their consent is advised to first obtain legal advice.

114.1 A2 In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include:

  • Whether the interests of any parties, including third parties whose interests might be affected, could be harmed if the client consents to the disclosure of information by the assurance practitioner.

  • Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include:

  • Unsubstantiated facts.

  • Incomplete information.

  • Unsubstantiated conclusions.

  • The proposed type of communication, and to whom it is addressed.

  • Whether the parties to whom the communication is addressed are appropriate recipients.

R114.2 An assurance practitioner shall continue to comply with the principle of confidentiality even after the end of the relationship between the assurance practitioner and a client. When acquiring a new client, the assurance practitioner is entitled to use prior experience but shall not use or disclose any confidential information acquired or received as a result of a professional or business relationship.

SUBSECTION 115 – PROFESSIONAL BEHAVIOUR

R115.1 An assurance practitioner shall comply with the principle of professional behaviour, which requires an assurance practitioner to:

  1. Comply with relevant laws and regulations;

  2. Behave in a manner consistent with the profession’s responsibility to act in the public interest in all professional activities and business relationships; and

  3. Avoid any conduct that the assurance practitioner knows or should know might discredit the profession.

An assurance practitioner shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.

115.1 A1 Conduct that might discredit the accountancy profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession.

R115.2 When undertaking marketing or promotional activities, an assurance practitioner shall not bring the accountancy profession into disrepute. An assurance practitioner shall be honest and truthful and shall not make:

  1. Exaggerated claims for the services offered by, or the qualifications or experience of, the assurance practitioner; or

  2. Disparaging references or unsubstantiated comparisons to the work of others.

115.2 A1 If an assurance practitioner is in doubt about whether a form of advertising or marketing is appropriate, the assurance practitioner is encouraged to consult with the relevant professional body.

SECTION 120 - THE CONCEPTUAL FRAMEWORK

Introduction

120.1 The circumstances in which assurance practitioners operate might create threats to compliance with the fundamental principles. Section 120 sets out requirements and application material, including a conceptual framework, to assist assurance practitioners in complying with the fundamental principles and meeting their responsibility to act in the public interest. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter assurance practitioners from concluding that a situation is permitted solely because that situation is not specifically prohibited by the Code.

120.2 The conceptual framework specifies an approach for an assurance practitioner to:

  1. Identify threats to compliance with the fundamental principles;

  2. Evaluate the threats identified; and

  3. Address the threats by eliminating or reducing them to an acceptable level.

Requirements and Application Material General

R120.3 The assurance practitioner shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in Section 110.

120.3 A1 Additional requirements and application material that are relevant to the application of the conceptual framework are set out in:

  1. Part 2 – Assurance Practitioners Performing Professional Activities Pursuant to Their Relationship with the Firm;

  2. Part 3 – Application of the Code, Fundamental Principles and Conceptual Framework; and

  3. International Independence Standards (New Zealand), as follows:

    1. Part 4A – Independence for Audit and Review Engagements; and

    2. Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements.

R120.4 When dealing with an ethics issue the assurance practitioner shall consider the context in which the issue has arisen or might arise. Where an individual who is an assurance practitioner is performing professional activities pursuant to the assurance practitioner’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances.

R120.5 When applying the conceptual framework, the assurance practitioner shall:

  1. Have an enquiring mind;

  2. Exercise professional judgement; and

  3. Use the reasonable and informed third party test described in paragraph

Having an Enquiring Mind

120.5 A1 An enquiring mind is a prerequisite to obtaining an understanding of known facts and circumstances necessary for the proper application of the conceptual framework. Having an enquiring mind involves:

  1. Considering the source, relevance and sufficiency of information obtained, taking into account the nature, scope and outputs of the professional activity being undertaken; and

  2. Being open and alert to a need for further investigation or other action.

120.5 A2 When considering the source, relevance and sufficiency of information obtained, the assurance practitioner might consider, among other matters, whether:

  • New information has emerged or there have been changes in facts and circumstances.

  • The information or its source might be influenced by bias or self-interest.

  • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the assurance practitioner.

  • There is an inconsistency between the known facts and circumstances and the assurance practitioner’s expectations.

  • The information provides a reasonable basis on which to reach a conclusion.

  • There might be other reasonable conclusions that could be reached from the information obtained.

120.5 A3 Paragraph R120.5 requires all assurance practitioners to have an enquiring mind when identifying, evaluating and addressing threats to the fundamental principles. This prerequisite for applying the conceptual framework applies to all assurance practitioners regardless of the professional activity undertaken. Under auditing, review and other assurance standards, including those issued by the NZAuASB, assurance practitioners are also required to exercise professional scepticism, which includes a critical assessment of evidence.

Exercising Professional Judgement

120.5 A4 Professional judgement involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, taking into account the nature and scope of the particular assurance activities, and the interests and relationships involved.

120.5 A5 Professional judgement is required when the assurance practitioner applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances. In making this determination, the assurance practitioner might consider matters such as whether:

  • The assurance practitioner’s expertise and experience are sufficient to reach a conclusion.

  • There is a need to consult with others with relevant expertise or experience.

  • The assurance practitioner’s own preconception or bias might be affecting the assurance practitioner’s exercise of professional judgement.

Reasonable and Informed Third Party

120.5 A6 The reasonable and informed third party test is a consideration by the assurance practitioner about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the assurance practitioner knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an assurance practitioner, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the assurance practitioner’s conclusions in an impartial manner.

Identifying Threats

R120.6 The assurance practitioner shall identify threats to compliance with the fundamental principles.

120.6 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the assurance practitioner’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the profession, legislation, regulation, or the firm that can enhance the assurance practitioner acting ethically might also help identify threats to compliance with the fundamental principles. Paragraph 120.8 A2 includes general examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats.

120.6 A2 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements might differ and, consequently, different types of threats might be created.

120.6 A3 Threats to compliance with the fundamental principles fall into one or more of the following categories:

  1. Self-interest threat – the threat that a financial or other interest will inappropriately influence an assurance practitioner’s judgement or behaviour;

  2. Self-review threat – the threat that an assurance practitioner will not appropriately evaluate the results of a previous judgement made, or an activity performed by the assurance practitioner, or by another individual within the assurance practitioner’s firm, on which the assurance practitioner will rely when forming a judgement as part of performing a current activity;

  3. Advocacy threat – the threat that an assurance practitioner will promote a client’s position to the point that the assurance practitioner’s objectivity is compromised;

  4. Familiarity threat – the threat that due to a long or close relationship with a client, an assurance practitioner will be too sympathetic to their interests or too accepting of their work; and

  5. Intimidation threat – the threat that an assurance practitioner will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the assurance practitioner.

120.6 A4 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle.

Evaluating Threats

R120.7 When the assurance practitioner identifies a threat to compliance with the fundamental principles, the assurance practitioner shall evaluate whether such a threat is at an acceptable level.

Acceptable Level

120.7 A1 An acceptable level is a level at which an assurance practitioner using the reasonable and informed third party test would likely conclude that the assurance practitioner complies with the fundamental principles.

Factors Relevant in Evaluating the Level of Threats

120.8 A1 The consideration of qualitative as well as quantitative factors is relevant in the assurance practitioner’s evaluation of threats, as is the combined effect of multiple threats, if applicable.

120.8 A2 The existence of conditions, policies and procedures described in paragraph 120.6 A1 might also be factors that are relevant in evaluating the level of threats to compliance with fundamental principles. Examples of such conditions, policies and procedures include:

  • Corporate governance requirements.

  • Educational, training and experience requirements for the profession.

  • Effective complaint systems which enable the assurance practitioner and the general public to draw attention to unethical behaviour.

  • An explicitly stated duty to report breaches of ethics requirements.

  • Professional or regulatory monitoring and disciplinary procedures.

Consideration of New Information or Changes in Facts and Circumstances

R120.9 If the assurance practitioner becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the assurance practitioner shall re-evaluate and address that threat accordingly.

120.9 A1 Remaining alert throughout the professional activity assists the assurance practitioner in determining whether new information has emerged or changes in facts and circumstances have occurred that:

  1. Impact the level of a threat; or

  2. Affect the assurance practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats.

120.9 A2 If new information results in the identification of a new threat, the assurance practitioner is required to evaluate and, as appropriate, address this threat. (Ref: Paras. R120.7 and R120.10).

Addressing Threats

R120.10 If the assurance practitioner determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the assurance practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The assurance practitioner shall do so by:

  1. Eliminating the circumstances, including interests or relationships, that are creating the threats;

  2. Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or

  3. Declining or ending the specific professional activity.

Actions to Eliminate Threats

120.10 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat. However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level.

Safeguards

120.10 A2 Safeguards are actions, individually or in combination, that the assurance practitioner takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.

Consideration of Significant Judgements Made and Overall Conclusions Reached

R120.11 The assurance practitioner shall form an overall conclusion about whether the actions that the assurance practitioner takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the assurance practitioner shall:

  1. Review any significant judgements made or conclusions reached; and

  2. Use the reasonable and informed third party test. Other Considerations when Applying the Conceptual Framework

Bias

120.12 A1 Conscious or unconscious bias affects the exercise of professional judgement when identifying, evaluating and addressing threats to compliance with the fundamental principles.

120.12 A2 Examples of potential bias to be aware of when exercising professional judgement include:

  • Anchoring bias, which is a tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed.

  • Automation bias, which is a tendency to favour output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose.

  • Availability bias, which is a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not.

  • Confirmation bias, which is a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief.

  • Groupthink, which is a tendency for a group of individuals to discourage individual creativity and responsibility and as a result reach a decision without critical reasoning or consideration of alternatives.

  • Overconfidence bias, which is a tendency to overestimate one's own ability to make accurate assessments of risk or other judgements or decisions.

  • Representation bias, which is a tendency to base an understanding on a pattern of experiences, events or beliefs that is assumed to be representative.

  • Selective perception, which is a tendency for a person's expectations to influence how the person views a particular matter or person.

120.12 A3 Actions that might mitigate the effect of bias include:

  • Seeking advice from experts to provide additional input.

  • Consulting with others to ensure appropriate challenge as part of the evaluation process.

  • Receiving training related to the identification of bias as part of professional development.

Organisational Culture

120.13 A1 The effective application of the conceptual framework by an assurance practitioner is enhanced when the importance of ethical values that align with the fundamental principles and other provisions set out in the Code is promoted through the internal culture of the assurance practitioner’s organisation.

120.13 A2 The promotion of an ethical culture within an organisation is most effective when:

  1. Leaders and those in managerial roles promote the importance of, and hold themselves and others accountable for demonstrating the ethical values of the organisation;

  2. Appropriate education and training programs, management processes, and performance evaluation and reward criteria that promote an ethical culture are in place;

  3. Effective policies and procedures are in place to encourage and protect those who report actual or suspected illegal or unethical behaviour, including whistle- blowers; and

  4. The organisation adheres to ethical values in its dealings with third parties.

120.13 A3 Assurance practitioners are expected to encourage and promote an ethics-based culture in their organisation, taking into account their position and seniority.

Considerations for Audits, Reviews, Other Assurance and Related Services Engagements

Firm Culture

120.14 A1 Professional and Ethical Standard 3 (Revised)1 sets out requirements and application material relating to firm culture in the context of a firm’s responsibilities to design, implement and operate a system of quality management for audits or reviews of financial statements, or other assurance or related services engagements.

Independence

120.15 A1 Assurance practitioners are required by International Independence Standards (New Zealand) to be independent when performing audits, reviews, or other assurance engagements. Independence is linked to the fundamental principles of objectivity and integrity. It comprises:

  1. Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

  2. 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, review or assurance team member’s integrity, objectivity or professional scepticism has been compromised.

120.15 A2 International Independence Standards (New Zealand) set out requirements and application material on how to apply the conceptual framework to maintain independence when performing audits, reviews or other assurance engagements. Assurance practitioners and firms are required to comply with these standards in order to be independent when conducting such engagements. The conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles applies in the same way to compliance with independence requirements. The categories of threats to compliance with the fundamental principles described in paragraph 120.6 A3 are also the categories of threats to compliance with independence requirements.

120.15 A3 Conditions, policies and procedures described in paragraphs 120.6 A1 and 120.8 A2 that might assist in identifying and evaluating threats to compliance with the fundamental principles might also be factors relevant to identifying and evaluating threats to independence. In the context of audits, reviews and other assurance engagements, a system of quality management designed, implemented and operated by a firm in accordance with the quality management standards issued by the New Zealand Auditing and Assurance Standards Board is an example of such conditions, policies and procedures.

Professional Scepticism

120.16 A1 Under auditing, review and other assurance standards, including those issued by the New Zealand Auditing and Assurance Standards Board, assurance practitioners are required to exercise professional scepticism when planning and performing audits, reviews and other assurance engagements. Professional scepticism and the fundamental principles that are described in Section 110 are inter-related concepts.

120.16 A2 In an audit of financial statements, compliance with the fundamental principles, individually and collectively, supports the exercise of professional scepticism, as shown in the following examples:

  • Integrity requires the assurance practitioner to be straightforward and honest. For example, the assurance practitioner complies with the principle of integrity by:

    • Being straightforward and honest when raising concerns about a position taken by a client;

    • Pursuing enquiries about inconsistent information and seeking further audit evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances.

    • Having the strength of character to act appropriately. This would involve:

(a) Standing one's ground when confronted by dilemmas and difficult situations.

(b) Challenging others as and when circumstances warrant, in a manner appropriate to the circumstances.

In doing so, the assurance practitioner demonstrates the critical assessment of audit evidence that contributes to the exercise of professional scepticism.

  • Objectivity requires the assurance practitioner to exercise professional or business judgement without being compromised by:

(a) Bias;

(b) Conflict of interest; or

(c) Undue influence of, or reliance on, individuals, organisations, technology or other factors.

For example, the assurance practitioner complies with the principle of objectivity by:

(a) Recognising circumstances or relationships such as familiarity with the client, that might compromise the assurance practitioner’s professional or business judgement; and

(b) Considering the impact of such circumstances and relationships on the assurance practitioner’s judgement when evaluating the sufficiency and appropriateness of audit evidence related to a matter material to the client's financial statements.

In doing so, the assurance practitioner behaves in a manner that contributes to the exercise of professional scepticism.

  • Professional competence and due care requires the assurance practitioner to have professional knowledge and skill at the level required to ensure the provision of competent professional service, and to act diligently in accordance with applicable standards, laws and regulations. For example, the assurance practitioner complies with the principle of professional competence and due care by:

(a) Applying knowledge that is relevant to a particular client’s industry and business activities in order to properly identify risks of material misstatement;

(b) Designing and performing appropriate audit procedures; and

(c) Applying relevant knowledge when critically assessing whether audit evidence is sufficient and appropriate in the circumstances.

In doing so, the assurance practitioner behaves in a manner that contributes to the exercise of professional scepticism.

1 Professional and Ethical Standard 3 (Revised), Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements

SECTION 200 - APPLYING THE CONCEPTUAL FRAMEWORK – ASSURANCE PRACTITIONERS PERFORMING PROFESSIONAL ACTIVITIES PURSUANT TO THEIR RELATIONSHIP WITH THE FIRM.

Introduction

200.1 This Part of the Code sets out requirements and application material for assurance practitioners, performing professional activities pursuant to their relationship with the firm, when applying the conceptual framework set out in Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by assurance practitioners, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires assurance practitioners to be alert for such facts and circumstances.

200.2 Investors, creditors, employing organisations and other sectors of the business community, as well as governments and the general public, might rely on the work of assurance practitioners. Assurance practitioners might be solely or jointly responsible for the preparation and reporting of financial and other information, on which both their employing organisations and third parties might rely. They might also be responsible for providing effective financial management and competent advice on a variety of business-related matters.

200.3 An assurance practitioner might be an employee, contractor, partner, director (executive or non-executive), owner-manager, or volunteer of an employing organisation. The legal form of the relationship of the assurance practitioner with the employing organisation has no bearing on the ethical responsibilities placed on the assurance practitioner.

200.4 [Amended by the NZAuASB]

NZ200.4 In this Part, the term “assurance practitioner” refers to an individual who is an assurance practitioner when performing professional activities pursuant to the assurance practitioner’s relationship with the assurance practitioner’s firm, whether as a contractor, employee or owner. The provisions in Part 2 deal mainly with matters that are relevant to professional activities that occur internally within the employing organisation. A number of those provisions may be less relevant to an assurance practitioner. The assurance practitioner uses professional judgement when determining which of those provisions are relevant to the assurance practitioner. More information on when Part 2 is applicable to assurance practitioners is set out in paragraphs R120.4, R300.5 and 300.5 A1.

Requirements and Application Material
General

R200.5 An assurance practitioner shall comply with the fundamental principles set out in Section 110 and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to compliance with the fundamental principles.

200.5 A1 An assurance practitioner has a responsibility to further the legitimate objectives of the assurance practitioner’s employing organisation. The Code does not seek to hinder assurance practitioners from fulfilling that responsibility, but addresses circumstances in which compliance with the fundamental principles might be compromised.

200.5 A2 Assurance practitioners may promote the position of the employing organisation when furthering the legitimate goals and objectives of their employing organisation, provided that any statements made are neither false nor misleading. Such actions usually would not create an advocacy threat.

200.5 A3 The more senior the position of an assurance practitioner, the greater will be the ability and opportunity to access information, and to influence policies, decisions made and actions taken by others involved with the employing organisation. To the extent that they are able to do so, taking into account their position and seniority in the organisation, assurance practitioners are expected to encourage and promote an ethics- based culture in the organisation. Examples of actions that might be taken include the introduction, implementation and oversight of:

  • Ethics education and training programs.

  • Ethics and whistle-blowing policies.

  • Policies and procedures designed to prevent non-compliance with laws and regulations.

Identifying Threats

200.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The following are examples of facts and circumstances within each of those categories that might create threats for an assurance practitioner when undertaking a professional activity:

  1. Self-interest Threats

    • An assurance practitioner holding a financial interest in, or receiving a loan or guarantee from, the employing organisation.
    • An assurance practitioner participating in incentive compensation arrangements offered by the employing organisation.
    • An assurance practitioner having access to corporate assets for personal use.
    • An assurance practitioner being offered a gift or special treatment from a supplier of the employing organisation.
  2. Self-review Threats
    • An assurance practitioner determining the appropriate accounting treatment for a business combination after performing the feasibility study supporting the purchase decision.
  3. Advocacy Threats
    • An assurance practitioner having the opportunity to manipulate information in a prospectus in order to obtain favourable financing.
  4. Familiarity Threats
    • An assurance practitioner being responsible for the financial reporting of the employing organisation when an immediate or close family member employed by the organisation makes decisions that affect the financial reporting of the organisation.
    • An assurance practitioner having a long association with individuals influencing business decisions.
  5. Intimidation Threats
    • An assurance practitioner or immediate or close family member facing the threat of dismissal or replacement over a disagreement about:
      • The application of an accounting principle.
      • The way in which financial information is to be reported.
      • An individual attempting to influence the decision-making process of the assurance practitioner, for example with regard to the awarding of contracts or the application of an accounting principle.
Evaluating Threats

200.7 A1 The conditions, policies and procedures described in paragraphs 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level.

200.7 A2 The assurance practitioner’s evaluation of the level of a threat is also impacted by the nature and scope of the professional activity.

200.7 A3 The assurance practitioner’s evaluation of the level of a threat might be impacted by the work environment within the employing organisation and its operating environment. For example:

  • Leadership that stresses the importance of ethical behaviour and the expectation that employees will act in an ethical manner.

  • Policies and procedures to empower and encourage employees to communicate ethics issues that concern them to senior levels of management without fear of retribution.

  • Policies and procedures to implement and monitor the quality of employee performance.

  • Systems of corporate oversight or other oversight structures and strong internal controls.

  • Recruitment procedures emphasising the importance of employing high calibre competent personnel.

  • Timely communication of policies and procedures, including any changes to them, to all employees, and appropriate training and education on such policies and procedures.

  • Ethics and code of conduct policies.

200.7 A4 Assurance practitioners might consider obtaining legal advice where they believe that unethical behaviour or actions by others have occurred, or will continue to occur, within the employing organisation.

Addressing Threats

200.8 A1 Sections 210 to 270 describe certain threats that might arise during the course of performing professional activities and include examples of actions that might address such threats.

200.8 A2 In extreme situations, if the circumstances that created the threats cannot be eliminated and safeguards are not available or capable of being applied to reduce the threat to an acceptable level, it might be appropriate for an assurance practitioner to resign from the employing organisation.

Communicating with Those Charged with Governance

R200.9 When communicating with those charged with governance in accordance with the Code, an assurance practitioner shall determine the appropriate individual(s) within the employing organisation’s governance structure with whom to communicate. If the assurance practitioner communicates with a subgroup of those charged with governance, the assurance practitioner shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed.

200.9 A1 In determining with whom to communicate, an assurance practitioner might consider:

  1. The nature and importance of the circumstances; and

  2. The matter to be communicated.

200.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance.

R200.10 If an assurance practitioner communicates with individuals who have management responsibilities as well as governance responsibilities, the assurance practitioner shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the assurance practitioner would otherwise communicate.

200.10 A1 In some circumstances, all of those charged with governance are involved in managing the employing organisation, for example, a small business where a single owner manages the organisation and no one else has a governance role. In these cases, if matters are communicated with individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the assurance practitioner has satisfied the requirement to communicate with those charged with governance.

SECTION 210 - CONFLICTS OF INTEREST

Introduction

210.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

210.2 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:

  1. An assurance practitioner undertakes a professional activity related to a particular matter for two or more parties whose interests with respect to that matter are in conflict; or

  2. The interest of an assurance practitioner with respect to a particular matter and the interests of a party for whom the assurance practitioner undertakes a professional activity related to that matter are in conflict.

A party might include an employing organisation, a vendor, a customer, a lender, a shareholder, or another party.

210.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest.

Requirements and Application Material General

R210.4 An assurance practitioner shall not allow a conflict of interest to compromise professional or business judgement.

210.4 A1 Examples of circumstances that might create a conflict of interest include:

  • Serving in a management or governance position for two employing organisations and acquiring confidential information from one organisation that might be used by the assurance practitioner to the advantage or disadvantage of the other organisation.

  • Undertaking a professional activity for each of two parties in a partnership, where both parties are employing the assurance practitioner to assist them to dissolve their partnership.

  • Preparing financial information for certain members of management of the assurance practitioner’s employing organisation who are seeking to undertake a management buy-out.

  • Being responsible for selecting a vendor for the employing organisation when an immediate family member of the assurance practitioner might benefit financially from the transaction.

  • Serving in a governance capacity in an employing organisation that is approving certain investments for the company where one of those investments will increase the value of the investment portfolio of the assurance practitioner or an immediate family member.

Conflict Identification

R210.5 An assurance practitioner shall take reasonable steps to identify circumstances that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying:

  1. The nature of the relevant interests and relationships between the parties involved; and

  2. The activity and its implication for relevant parties.

R210.6 An assurance practitioner shall remain alert to changes over time in the nature of the activities, interests and relationships that might create a conflict of interest while performing a professional activity.

Threats Created by Conflicts of Interest

210.7 A1 In general, the more direct the connection between the professional activity and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level.

210.7 A2 An example of an action that might eliminate threats created by conflicts of interest is withdrawing from the decision-making process related to the matter giving rise to the conflict of interest.

210.7 A3 Examples of actions that might be safeguards to address threats created by conflicts of interest include:

  • Restructuring or segregating certain responsibilities and duties.

  • Obtaining appropriate oversight, for example, acting under the supervision of an executive or non-executive director.

Disclosure and Consent

General

210.8 A1 It is generally necessary to:

  1. Disclose the nature of the conflict of interest and how any threats created were addressed to the relevant parties, including to the appropriate levels within the employing organisation affected by a conflict; and

  2. Obtain consent from the relevant parties for the assurance practitioner to undertake the professional activity when safeguards are applied to address the threat.

210.8 A2 Consent might be implied by a party’s conduct in circumstances where the assurance practitioner has sufficient evidence to conclude that the parties know the circumstances at the outset and have accepted the conflict of interest if they do not raise an objection to the existence of the conflict.

210.8 A3 If such disclosure or consent is not in writing, the assurance practitioner is encouraged to document:

  1. The nature of the circumstances giving rise to the conflict of interest;

  2. The safeguards applied to address the threats when applicable; and

  3. The consent obtained.

Other Considerations

210.9 A1 When addressing a conflict of interest, the assurance practitioner is encouraged to seek guidance from within the employing organisation or from others, such as a professional body, legal counsel or another assurance practitioner. When making such disclosures or sharing information within the employing organisation and seeking guidance of third parties, the principle of confidentiality applies.

SECTION 220 - PREPARATION AND PRESENTATION OF INFORMATION

Introduction

220.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

220.2 Preparing or presenting information might create a self-interest, intimidation or other threats to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

220.3 A1 Assurance practitioners at all levels in an employing organisation are involved in the preparation or presentation of information both within and outside the organisation.

220.3 A2 Stakeholders to whom, or for whom, such information is prepared or presented, include:

  • Management and those charged with governance.

  • Investors and lenders or other creditors.

  • Regulatory bodies.

This information might assist stakeholders in understanding and evaluating aspects of the employing organisation’s state of affairs and in making decisions concerning the organisation. Information can include financial and non-financial information that might be made public or used for internal purposes.

Examples include:

  • Operating and performance reports.

  • Decision support analyses.

  • Budgets and forecasts.

  • Information provided to the internal and external auditors.

  • Risk analyses.

  • General and special purpose financial statements.

  • Tax returns.

  • Reports filed with regulatory bodies for legal and compliance purposes.

 

220.3 A3 For the purposes of this section, preparing or presenting information includes recording, maintaining and approving information.

R220.4 When preparing or presenting information, an assurance practitioner shall:

  1. Prepare or present the information in accordance with a relevant reporting framework, where applicable;

  2. Prepare or present the information in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately;

  3. Exercise professional judgement to:

    1. Represent the facts accurately and completely in all material respects;

    2. Describe clearly the true nature of business transactions or activities; and

    3. Classify and record information in a timely and proper manner; and

  4. Not omit anything with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately.

220.4 A1 An example of influencing a contractual or regulatory outcome inappropriately is using an unrealistic estimate with the intention of avoiding violation of a contractual requirement such as a debt covenant or of a regulatory requirement such as a capital requirement for a financial institution.

Use of Discretion in Preparing or Presenting Information

R220.5 Preparing or presenting information might require the exercise of discretion in making professional judgements. The assurance practitioner shall not exercise such discretion with the intention of misleading others or influencing contractual or regulatory outcomes inappropriately.

220.5 A1 Examples of ways in which discretion might be misused to achieve inappropriate outcomes include:

  • Determining estimates, for example, determining fair value estimates in order to misrepresent profit or loss.

  • Selecting or changing an accounting policy or method among two or more alternatives permitted under the applicable financial reporting framework, for example, selecting a policy for accounting for long-term contracts in order to misrepresent profit or loss.

  • Determining the timing of transactions, for example, timing the sale of an asset near the end of the fiscal year in order to mislead.

  • Determining the structuring of transactions, for example, structuring financing transactions in order to misrepresent assets and liabilities or classification of cash flows.

  • Selecting disclosures, for example, omitting or obscuring information relating to financial or operating risk in order to mislead.

R220.6 When performing professional activities, especially those that do not require compliance with a relevant reporting framework, the assurance practitioner shall exercise professional judgement to identify and consider:

  1. The purpose for which the information is to be used;

  2. The context within which it is given; and

  3. The audience to whom it is addressed.

220.6 A1 For example, when preparing or presenting pro forma reports, budgets or forecasts, the inclusion of relevant estimates, approximations and assumptions, where appropriate, would enable those who might rely on such information to form their own judgements.

220.6 A2 The assurance practitioner might also consider clarifying the intended audience, context and purpose of the information to be presented.

Relying on the Work of Others

R220.7 An assurance practitioner who intends to rely on the work of others, either internal or external to the employing organisation, shall exercise professional judgement to determine what steps to take, if any, in order to fulfil the responsibilities set out in paragraph R220.4.

220.7 A1 Factors to consider in determining whether reliance on others is reasonable include:

  • The reputation and expertise of, and resources available to, the other individual or organisation.

  • Whether the other individual is subject to applicable professional and ethics standards.

Such information might be gained from prior association with, or from consulting others about, the other individual or organisation.

Addressing Information that Is or Might be Misleading

R220.8 When the assurance practitioner knows or has reason to believe that the information with which the assurance practitioner is associated is misleading, the assurance practitioner shall take appropriate actions to seek to resolve the matter.

220.8 A1 Actions that might be appropriate include:

  • Discussing concerns that the information is misleading with the assurance practitioner’s superior and/or the appropriate level(s) of management within the assurance practitioner’s employing organisation or those charged with governance, and requesting such individuals to take appropriate action to resolve the matter. Such action might include:

  • Having the information corrected.

  • If the information has already been disclosed to the intended users, informing them of the correct information.

  • Consulting the policies and procedures of the employing organisation (for example, an ethics or whistle-blowing policy) regarding how to address such matters internally.

220.8 A2 The assurance practitioner might determine that the employing organisation has not taken appropriate action. If the assurance practitioner continues to have reason to believe that the information is misleading, the following further actions might be appropriate provided that the assurance practitioner remains alert to the principle of confidentiality:

  • Consulting with:

  • A relevant professional body.

  • The internal or external auditor of the employing organisation.

  • Legal counsel.

  • Determining whether any requirements exist to communicate to:

  • Third parties, including users of the information.

  • Regulatory and oversight authorities.

R220.9 If after exhausting all feasible options, the assurance practitioner determines that appropriate action has not been taken and there is reason to believe that the information is still misleading, the assurance practitioner shall refuse to be or to remain associated with the information.

220.9 A1 In such circumstances, it might be appropriate for an assurance practitioner to resign from the employing organisation.

Documentation

220.10 A1 The assurance practitioner is encouraged to document:

  • The facts.

  • The accounting principles or other relevant professional standards involved.

  • The communications and parties with whom matters were discussed.

  • The courses of action considered.

  • How the assurance practitioner attempted to address the matter(s).

Other Considerations

220.11 A1 Where threats to compliance with the fundamental principles relating to the preparation or presentation of information arise from a financial interest, including compensation and incentives linked to financial reporting and decision making, the requirements and application material set out in Section 240 apply.

220.11 A2 Where the misleading information might involve non-compliance with laws and regulations, the requirements and application material set out in Section 260 apply.

220.11 A3 Where threats to compliance with the fundamental principles relating to the preparation or presentation of information arise from pressure, the requirements and application material set out in Section 270 apply.

SECTION 230 - ACTING WITH SUFFICIENT EXPERTISE

Introduction

230.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

230.2 Acting without sufficient expertise creates a self-interest threat to compliance with the principle of professional competence and due care. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

R230.3 An assurance practitioner shall not intentionally mislead an employing organisation as to the level of expertise or experience possessed.

230.3 A1 The principle of professional competence and due care requires that an assurance practitioner only undertake significant tasks for which the assurance practitioner has, or can obtain, sufficient training or experience.

230.3 A2 A self-interest threat to compliance with the principle of professional competence and due care might be created if an assurance practitioner has:

  • Insufficient time for performing or completing the relevant duties.

  • Incomplete, restricted or otherwise inadequate information for performing the duties.

  • Insufficient experience, training and/or education.

  • Inadequate resources for the performance of the duties.

230.3 A3 Factors that are relevant in evaluating the level of such a threat include:

  • The extent to which the assurance practitioner is working with others.

  • The relative seniority of the assurance practitioner in the business.

  • The level of supervision and review applied to the work.

230.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Obtaining assistance or training from someone with the necessary expertise.

  • Ensuring that there is adequate time available for performing the relevant duties.

R230.4 If a threat to compliance with the principle of professional competence and due care cannot be addressed, an assurance practitioner shall determine whether to decline to perform the duties in question. If the assurance practitioner determines that declining is appropriate, the assurance practitioner shall communicate the reasons.

Other Considerations

230.5 A1 The requirements and application material in Section 270 apply when an assurance practitioner is pressured to act in a manner that might lead to a breach of the principle of professional competence and due care.

SECTION 240 - FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL REPORTING AND DECISION MAKING

Introduction

240.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

240.2 Having a financial interest, or knowing of a financial interest held by an immediate or close family member might create a self-interest threat to compliance with the principles of objectivity or confidentiality. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

R240.3 An assurance practitioner shall not manipulate information or use confidential information for personal gain or for the financial gain of others.

240.3 A1 Assurance practitioners might have financial interests or might know of financial interests of immediate or close family members that, in certain circumstances, might create threats to compliance with the fundamental principles. Financial interests include those arising from compensation or incentive arrangements linked to financial reporting and decision making.

240.3 A2 Examples of circumstances that might create a self-interest threat include situations in which the assurance practitioner or an immediate or close family member:

  • Has a motive and opportunity to manipulate price-sensitive information in order to gain financially.

  • Holds a direct or indirect financial interest in the employing organisation and the value of that financial interest might be directly affected by decisions made by the assurance practitioner.

  • Is eligible for a profit-related bonus and the value of that bonus might be directly affected by decisions made by the assurance practitioner.

  • Holds, directly or indirectly, deferred bonus share rights or share options in the employing organisation, the value of which might be affected by decisions made by the assurance practitioner.

  • Participates in compensation arrangements which provide incentives to achieve targets or to support efforts to maximise the value of the employing organisation’s shares. An example of such an arrangement might be through participation in incentive plans which are linked to certain performance conditions being met.

240.3 A3 Factors that are relevant in evaluating the level of such a threat include:

  • The significance of the financial interest. What constitutes a significant financial interest will depend on personal circumstances and the materiality of the financial interest to the individual.

  • Policies and procedures for a committee independent of management to determine the level or form of senior management remuneration.

  • In accordance with any internal policies, disclosure to those charged with governance of:

  • All relevant interests.

  • Any plans to exercise entitlements or trade in relevant shares.

  • Internal and external audit procedures that are specific to address issues that give rise to the financial interest.

240.3 A4 Threats created by compensation or incentive arrangements might be compounded by explicit or implicit pressure from superiors or colleagues. See Section 270, Pressure to Breach the Fundamental Principles.

SECTION 250 - INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY

Introduction

250.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

250.2 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 behaviour.

250.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when undertaking professional activities that does not constitute non-compliance with laws and regulations. This section also requires an assurance practitioner to comply with relevant laws and regulations when offering or accepting inducements.

Requirements and Application Material General

250.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behaviour, but not necessarily with the intent to improperly influence that individual’s behaviour. Inducements can range from minor acts of hospitality between business colleagues to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:

  • Gifts.

  • Hospitality.

  • Entertainment.

  • Political or charitable donations.

  • Appeals to friendship and loyalty.

  • Employment or other commercial opportunities.

  • Preferential treatment, rights or privileges.

Inducements Prohibited by Laws and Regulations

R250.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The assurance practitioner shall obtain an understanding of relevant laws and regulations and comply with them when the assurance practitioner encounters such circumstances.

Inducements Not Prohibited by Laws and Regulations

250.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles.

Inducements with Intent to Improperly Influence Behaviour

R250.7 An assurance practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the assurance practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.

R250.8 An assurance practitioner shall not accept, or encourage others to accept, any inducement that the assurance practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.

250.9 A1 An inducement is considered as improperly influencing an individual’s behaviour if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual who has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for an assurance practitioner in considering what constitutes unethical behaviour on the part of the assurance practitioner and, if necessary by analogy, other individuals.

250.9 A2 A breach of the fundamental principle of integrity arises when an assurance practitioner offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behaviour of the recipient or of another individual.

250.9 A3 The determination of whether there is actual or perceived intent to improperly influence behaviour requires the exercise of professional judgement. Relevant factors to consider might include:

  • The nature, frequency, value and cumulative effect of the inducement.

  • Timing of when the inducement is offered relative to any action or decision that it might influence.

  • Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding.

  • Whether the inducement is an ancillary part of a professional activity, for example, offering or accepting lunch in connection with a business meeting.

  • Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the employing organisation, such as other customers or vendors.

  • The roles and positions of the individuals offering or being offered the inducement.

  • Whether the assurance practitioner knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the counterparty’s employing organisation.

  • The degree of transparency with which the inducement is offered.

  • Whether the inducement was required or requested by the recipient.

  • The known previous behaviour or reputation of the offeror.

Consideration of Further Actions

250.10 A1 If the assurance practitioner becomes aware of an inducement offered with actual or perceived intent to improperly influence behaviour, threats to compliance with the fundamental principles might still be created even if the requirements in paragraphs R250.7 and R250.8 are met.

250.10 A2 Examples of actions that might be safeguards to address such threats include:

  • Informing senior management or those charged with governance of the employing organisation of the assurance practitioner or the offeror regarding the offer.

  • Amending or terminating the business relationship with the offeror.

Inducements with No Intent to Improperly Influence Behaviour

250.11 A1 The requirements and application material set out in the conceptual framework apply when an assurance practitioner has concluded there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another individual.

250.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level.

250.11 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the assurance practitioner has concluded there is no actual or perceived intent to improperly influence behaviour include:

  • Self-interest threats

  • An assurance practitioner is offered part-time employment by a vendor.

  • Familiarity threats

  • An assurance practitioner regularly takes a customer or supplier to sporting events.

  • Intimidation threats

  • An assurance practitioner accepts hospitality, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.

250.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 250.9 A3 for determining intent.

250.11 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include:

  • Declining or not offering the inducement.

  • Transferring responsibility for any business-related decision involving the counterparty to another individual who the assurance practitioner has no reason to believe would be, or would be perceived to be, improperly influenced in making the decision.

250.11 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include:

  • Being transparent with senior management or those charged with governance of the employing organisation of the assurance practitioner or of the counterparty about offering or accepting an inducement.

  • Registering the inducement in a log maintained by the employing organisation of the assurance practitioner or the counterparty.

  • Having an appropriate reviewer, who is not otherwise involved in undertaking the professional activity, review any work performed or decisions made by the assurance practitioner with respect to the individual or organisation from which the assurance practitioner accepted the inducement.

  • Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to those charged with governance or the individual who offered the 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.

Immediate or Close Family Members

R250.12 An assurance practitioner shall remain alert to potential threats to the assurance practitioner’s compliance with the fundamental principles created by the offering of an inducement:

  1. By an immediate or close family member of the assurance practitioner to a counterparty with whom the assurance practitioner has a professional relationship; or

  2. To an immediate or close family member of the assurance practitioner by a counterparty with whom the assurance practitioner has a professional relationship.

R250.13 Where the assurance practitioner becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence the behaviour of the assurance practitioner or of the counterparty, or considers a reasonable and informed third party would be likely to conclude such intent exists, the assurance practitioner shall advise the immediate or close family member not to offer or accept the inducement.

250.13 A1 The factors set out in paragraph 250.9 A3 are relevant in determining whether there is actual or perceived intent to improperly influence the behaviour of the assurance practitioner or of the counterparty. Another factor that is relevant is the nature or closeness of the relationship, between:

  1. The assurance practitioner and the immediate or close family member;

  2. The immediate or close family member and the counterparty; and

  3. The assurance practitioner and the counterparty.

For example, the offer of employment, outside of the normal recruitment process, to the spouse of the assurance practitioner by a counterparty with whom the assurance practitioner is negotiating a significant contract might indicate such intent.

250.13 A2 The application material in paragraph 250.10 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence the behaviour of the assurance practitioner or of the counterparty even if the immediate or close family member has followed the advice given pursuant to paragraph R250.13.

Application of the Conceptual Framework

250.14 A1 Where the assurance practitioner becomes aware of an inducement offered in the circumstances addressed in paragraph R250.12, threats to compliance with the fundamental principles might be created where:

  1. The immediate or close family member offers or accepts the inducement contrary to the advice of the assurance practitioner pursuant to paragraph R250.13; or

  2. The assurance practitioner does not have reason to believe an actual or perceived intent to improperly influence the behaviour of the assurance practitioner or of the counterparty exists.

250.14A2 The application material in paragraphs 250.11 A1 to 250.11 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 250.13 A1.

Other Considerations

250.15 A1 If an assurance practitioner is offered an inducement by the employing organisation relating to financial interests, compensation and incentives linked to performance, the requirements and application material set out in Section 240 apply.

250.15 A2 If an assurance practitioner encounters or is made aware of inducements that might result in non-compliance or suspected non-compliance with laws and regulations by other individuals working for or under the direction of the employing organisation, the requirements and application material set out in Section 260 apply.

250.15 A3 If an assurance practitioner faces pressure to offer or accept inducements that might create threats to compliance with the fundamental principles, the requirements and application material set out in Section 270 apply.

SECTION 260 - RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS

Introduction

260.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

260.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when an assurance practitioner becomes aware of non-compliance or suspected non-compliance with laws and regulations.

260.3 An assurance practitioner might encounter or be made aware of non-compliance or suspected non-compliance in the course of carrying out professional activities. This section guides the assurance practitioner in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non- compliance with:

  1. Laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the employing organisation’s financial statements; and

  2. Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the employing organisation’s financial statements, but compliance with which might be fundamental to the operating aspects of the employing organisation’s business, to its ability to continue its business, or to avoid material penalties.

Objectives of the Assurance Practitioner in Relation to Non-compliance with Laws and Regulations

260.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the assurance practitioner are:

  1. To comply with the principles of integrity and professional behaviour;

  2. By alerting management or, where appropriate, those charged with governance of the employing organisation, to seek to:

    1. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or

    2. Deter the non-compliance where it has not yet occurred; and

  3. To take such further action as appropriate in the public interest.

Requirements and Application Material
General

260.5 A1 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:

  1. The assurance practitioner’s employing organisation;

  2. Those charged with governance of the employing organisation;

  3. Management of the employing organisation; or

  4. Other individuals working for or under the direction of the employing organisation.

260.5 A2 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.

260.5 A3 Non-compliance might result in fines, litigation or other consequences for the employing organisation, potentially materially affecting its financial statements. Importantly, such non-compliance might have wider public interest implications in terms of potentially substantial harm to investors, creditors, employees or the general public. For the purposes of this section, non-compliance that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations endangering the health or safety of employees or the public.

R260.6 In some jurisdictions, there are legal or regulatory provisions governing how assurance practitioners are required to address non-compliance or suspected non- compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section. When encountering such non-compliance or suspected non-compliance, the assurance practitioner shall obtain an understanding of those legal or regulatory provisions and comply with them, including:

  1. Any requirement to report the matter to an appropriate authority; and

  2. Any prohibition on alerting the relevant party.

260.6 A1 A prohibition on alerting the relevant party might arise, for example, pursuant to anti- money laundering legislation.

260.7 A1 This section applies regardless of the nature of the employing organisation, including whether or not it is a public interest entity.

260.7 A2 An assurance practitioner who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the employing organisation, its stakeholders and the general public.

260.7 A3 This section does not address:

  1. Personal misconduct unrelated to the business activities of the employing organisation; and

  2. Non-compliance by parties other than those specified in paragraph 260.5 A1.

The assurance practitioner might nevertheless find the guidance in this section helpful in considering how to respond in these situations.

Responsibilities of the Employing Organisation’s Management and Those Charged with Governance

260.8 A1 The employing organisation’s management, with the oversight of those charged with governance, is responsible for ensuring that the employing organisation’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by:

  1. The employing organisation;

  2. An individual charged with governance of the employing organisation;

  3. A member of management; or

  4. Other individuals working for or under the direction of the employing organisation.

Responsibilities of All Assurance Practitioners

R260.9 If protocols and procedures exist within the assurance practitioner’s employing organisation to address non-compliance or suspected non-compliance, the assurance practitioner shall consider them in determining how to respond to such non-compliance.

260.9 A1 Many employing organisations have established protocols and procedures regarding how to raise non-compliance or suspected non-compliance internally. These protocols and procedures include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols and procedures might allow matters to be reported anonymously through designated channels.

R260.10 Where an assurance practitioner becomes aware of a matter to which this section applies, the steps that the assurance practitioner takes to comply with this section shall be taken on a timely basis. For the purpose of taking timely steps, the assurance practitioner shall have regard to the nature of the matter and the potential harm to the interests of the employing organisation, investors, creditors, employees or the general public.

Responsibilities of Senior Assurance Practitioners

260.11 A1 Senior assurance practitioners are directors, officers or senior employees able to exert significant influence over, and make decisions regarding, the acquisition, deployment and control of the employing organisation’s human, financial, technological, physical and intangible resources. There is a greater expectation for such individuals to take whatever action is appropriate in the public interest to respond to non-compliance or suspected non-compliance than other assurance practitioners within the employing organisation. This is because of senior assurance practitioners’ roles, positions and spheres of influence within the employing organisation.

Obtaining an Understanding of the Matter

R260.12 If, in the course of carrying out professional activities, a senior assurance practitioner becomes aware of information concerning non-compliance or suspected non-compliance, the senior assurance practitioner shall obtain an understanding of the matter. This understanding shall include:

  1. The nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur;

  2. The application of the relevant laws and regulations to the circumstances; and

  3. An assessment of the potential consequences to the employing organisation, investors, creditors, employees or the wider public.

260.12 A1 A senior assurance practitioner is expected to apply knowledge and expertise, and exercise professional judgement. However, the assurance practitioner is not expected to have a level of understanding of laws and regulations greater than that which is required for the assurance practitioner’s role within the employing organisation. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

260.12A2 Depending on the nature and significance of the matter, the senior assurance practitioner might cause, or take appropriate steps to cause, the matter to be investigated internally. The assurance practitioner might also consult on a confidential basis with others within the employing organisation or a professional body, or with legal counsel.

Addressing the Matter

R260.13 If the senior assurance practitioner identifies or suspects that non-compliance has occurred or might occur, the assurance practitioner shall, subject to paragraph R260.9, discuss the matter with the assurance practitioner’s immediate superior, if any. If the assurance practitioner’s immediate superior appears to be involved in the matter, the assurance practitioner shall discuss the matter with the next higher level of authority within the employing organisation.

260.13 A1 The purpose of the discussion is to enable a determination to be made as to how to address the matter.

R260.14 The senior assurance practitioner shall also take appropriate steps to:

  1. Have the matter communicated to those charged with governance;

  2. Comply with applicable laws and regulations, including legal or regulatory provisions governing the reporting of non-compliance or suspected non- compliance to an appropriate authority;

  3. Have the consequences of the non-compliance or suspected non-compliance rectified, remediated or mitigated;

  4. Reduce the risk of re-occurrence; and

  5. Seek to deter the commission of the non-compliance if it has not yet occurred.

260.14 A1 The purpose of communicating the matter to those charged with governance is to obtain their concurrence regarding appropriate actions to take to respond to the matter and to enable them to fulfil their responsibilities.

260.14 A2 Some laws and regulations might stipulate a period within which reports of non- compliance or suspected non-compliance are to be made to an appropriate authority.

R260.15 In addition to responding to the matter in accordance with the provisions of this section, the senior assurance practitioner shall determine whether disclosure of the matter to the employing organisation’s external auditor, if any, is needed.

260.15 A1 Such disclosure would be pursuant to the senior assurance practitioner’s duty or legal obligation to provide all information necessary to enable the auditor to perform the audit.

Determining Whether Further Action Is Needed

R260.16 The senior assurance practitioner shall assess the appropriateness of the response of the assurance practitioner’s superiors, if any, and those charged with governance.

260.16 A1 Relevant factors to consider in assessing the appropriateness of the response of the senior assurance practitioner’s superiors, if any, and those charged with governance include whether:

  • The response is timely.

  • They have taken or authorised appropriate action to seek to rectify, remediate or mitigate the consequences of the non-compliance, or to avert the non-compliance if it has not yet occurred.

  • The matter has been disclosed to an appropriate authority where appropriate and, if so, whether the disclosure appears adequate.

R260.17 In light of the response of the senior assurance practitioner’s superiors, if any, and those charged with governance, the assurance practitioner shall determine if further action is needed in the public interest.

260.17 A1 The determination of whether further action is needed, and the nature and extent of it, will depend on various factors, including:

  • The legal and regulatory framework.

  • The urgency of the situation.

  • The pervasiveness of the matter throughout the employing organisation.

  • Whether the senior assurance practitioner continues to have confidence in the integrity of the assurance practitioner’s superiors and those charged with governance.

  • Whether the non-compliance or suspected non-compliance is likely to recur.

  • Whether there is credible evidence of actual or potential substantial harm to the interests of the employing organisation, investors, creditors, employees or the general public.

260.17 A2 Examples of circumstances that might cause the senior assurance practitioner no longer to have confidence in the integrity of the assurance practitioner’s superiors and those charged with governance include situations where:

  • The assurance practitioner suspects or has evidence of their involvement or intended involvement in any non-compliance.

  • Contrary to legal or regulatory requirements, they have not reported, or authorised the reporting of, the matter to an appropriate authority within a reasonable period.

R260.18 The senior assurance practitioner shall exercise professional judgement in determining the need for, and nature and extent of, further action. In making this determination, the assurance practitioner shall take into account whether a reasonable and informed third party would be likely to conclude that the assurance practitioner has acted appropriately in the public interest.

260.18 A1 Further action that the senior assurance practitioner might take includes:

  • Informing the management of the parent entity of the matter if the employing organisation is a member of a group.

  • Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so.

  • Resigning from the employing organisation.

260.18 A2 Resigning from the employing organisation is not a substitute for taking other actions that might be needed to achieve the senior assurance practitioner’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the assurance practitioner. In such circumstances, resignation might be the only available course of action.

Seeking Advice

260.19 A1 As assessment of the matter might involve complex analysis and judgements, the senior assurance practitioner might consider:

  • Consulting internally.

  • Obtaining legal advice to understand the assurance practitioner’s options and the professional or legal implications of taking any particular course of action.

  • Consulting on a confidential basis with a regulatory or professional body.

Determining Whether to Disclose the Matter to an Appropriate Authority

260.20 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. Otherwise, the purpose of making disclosure is to enable an appropriate authority to cause the matter to be investigated and action to be taken in the public interest.

260.20 A2 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. For example, the senior assurance practitioner might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if:

  • The employing organisation is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts).

  • The employing organisation is regulated and the matter is of such significance as to threaten its license to operate.

  • The employing organisation is listed on a securities exchange and the matter might result in adverse consequences to the fair and orderly market in the employing organisation’s securities or pose a systemic risk to the financial markets.

  • It is likely that the employing organisation would sell products that are harmful to public health or safety.

  • The employing organisation is promoting a scheme to its clients to assist them in evading taxes.

260.20 A3 The determination of whether to make such a disclosure will also depend on external factors such as:

  • Whether there is an appropriate authority that is able to receive the information, and cause the matter to be investigated and action to be taken. The appropriate authority will depend upon the nature of the matter. For example, the appropriate authority would be a securities regulator in the case of fraudulent financial reporting or an environmental protection agency in the case of a breach of environmental laws and regulations.

  • Whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle-blowing legislation or regulation.

  • Whether there are actual or potential threats to the physical safety of the senior assurance practitioner or other individuals.

R260.21 If the senior assurance practitioner determines that disclosure of the matter to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the assurance practitioner shall act in good faith and exercise caution when making statements and assertions.

Imminent Breach

R260.22 In exceptional circumstances, the senior assurance practitioner might become aware of actual or intended conduct that the assurance practitioner has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the employing organisation, the assurance practitioner shall exercise professional judgement and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Documentation

260.23 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the senior assurance practitioner is encouraged to have the following matters documented:

  • The matter.

  • The results of discussions with the assurance practitioner’s superiors, if any, and those charged with governance and other parties.

  • How the assurance practitioner’s superiors, if any, and those charged with governance have responded to the matter.

  • The courses of action the assurance practitioner considered, the judgements made and the decisions that were taken.

  • How the assurance practitioner is satisfied that the assurance practitioner has fulfilled the responsibility set out in paragraph R260.17.

Responsibilities of Assurance Practitioners Other than Senior Assurance Practitioners

R260.24 If, in the course of carrying out professional activities, an assurance practitioner becomes aware of information concerning non-compliance or suspected non- compliance, the assurance practitioner shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non-compliance and the circumstances in which it has occurred or might occur.

260.24A1 The assurance practitioner is expected to apply knowledge and expertise, and exercise professional judgement. However, the assurance practitioner is not expected to have a level of understanding of laws and regulations greater than that which is required for the assurance practitioner’s role within the employing organisation. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

260.24 A2 Depending on the nature and significance of the matter, the assurance practitioner might consult on a confidential basis with others within the employing organisation or a professional body, or with legal counsel.

R260.25 If the assurance practitioner identifies or suspects that non-compliance has occurred or might occur, the assurance practitioner shall, subject to paragraph R260.9, inform an immediate superior to enable the superior to take appropriate action. If the assurance practitioner’s immediate superior appears to be involved in the matter, the assurance practitioner shall inform the next higher level of authority within the employing organisation.

R260.26 In exceptional circumstances, the assurance practitioner may determine that disclosure of the matter to an appropriate authority is an appropriate course of action. If the assurance practitioner does so pursuant to paragraphs 260.20 A2 and A3, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the assurance practitioner shall act in good faith and exercise caution when making statements and assertions.

Documentation

260.27A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the assurance practitioner is encouraged to have the following matters documented:

  • The matter.

  • The results of discussions with the assurance practitioner’s superior, management and, where applicable, those charged with governance and other parties.

  • How the assurance practitioner’s superior has responded to the matter.

  • The courses of action the assurance practitioner considered, the judgements made and the decisions that were taken.

SECTION 270 - PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES

Introduction

270.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

270.2 Pressure exerted on, or by, an assurance practitioner might create an intimidation or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

R270.3 An assurance practitioner shall not:

  1. Allow pressure from others to result in a breach of compliance with the fundamental principles; or

  2. Place pressure on others that the assurance practitioner knows, or has reason to believe, would result in the other individuals breaching the fundamental principles.

270.3 A1 An assurance practitioner might face pressure that creates threats to compliance with the fundamental principles, for example an intimidation threat, when undertaking a professional activity. Pressure might be explicit or implicit and might come from:

  • Within the employing organisation, for example, from a colleague or superior.

  • An external individual or organisation such as a vendor, customer or lender.

  • Internal or external targets and expectations.

270.3 A2 Examples of pressure that might result in threats to compliance with the fundamental principles include:

  • Pressure related to conflicts of interest:

  • Pressure from a family member bidding to act as a vendor to the assurance practitioner’s employing organisation to select the family member over another prospective vendor.

See also Section 210, Conflicts of Interest.

  • Pressure to influence preparation or presentation of information:

  • Pressure to report misleading financial results to meet investor, analyst or lender expectations.

  • Pressure from elected officials on public sector accountants to misrepresent programs or projects to voters.

  • Pressure from colleagues to misstate income, expenditure or rates of return to bias decision-making on capital projects and acquisitions.

  • Pressure from superiors to approve or process expenditures that are not legitimate business expenses.

  • Pressure to suppress internal audit reports containing adverse findings. See also Section 220, Preparation and Presentation of Information.

  • Pressure to act without sufficient expertise or due care:

  • Pressure from superiors to inappropriately reduce the extent of work performed.

  • Pressure from superiors to perform a task without sufficient skills or training or within unrealistic deadlines.

See also Section 230, Acting with Sufficient Expertise.

  • Pressure related to financial interests:

  • Pressure from superiors, colleagues or others, for example, those who might benefit from participation in compensation or incentive arrangements to manipulate performance indicators.

See also Section 240, Financial Interests, Compensation and Incentives Linked to Financial Reporting and Decision Making.

  • Pressure related to inducements:

  • Pressure from others, either internal or external to the employing organisation, to offer inducements to influence inappropriately the judgement or decision making process of an individual or organisation.

  • Pressure from colleagues to accept a bribe or other inducement, for example to accept inappropriate gifts or entertainment from potential vendors in a bidding process.

See also Section 250, Inducements, Including Gifts and Hospitality.

  • Pressure related to non-compliance with laws and regulations:

  • Pressure to structure a transaction to evade tax.

See also Section 260, Responding to Non-compliance with Laws and Regulations.

  • Pressure related to level of fees

  • Pressure exerted by an assurance practitioner on another assurance practitioner to provide assurance services at a fee level that does not allow for sufficient and appropriate resources (including human, technological and intellectual resources) to perform the services in accordance with standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

See also Section 330, Fees and Other Types of Remuneration

270.3 A3 Factors that are relevant in evaluating the level of threats created by pressure include:

  • The intent of the individual who is exerting the pressure and the nature and extent of the pressure.

  • The application of laws, regulations, and professional standards to the circumstances.

  • The culture and leadership of the employing organisation including the extent to which they reflect or emphasise the importance of ethical behaviour and the expectation that employees will act ethically. For example, a corporate culture that tolerates unethical behaviour might increase the likelihood that the pressure would result in a threat to compliance with the fundamental principles.

  • Policies and procedures, if any, that the employing organisation has established, such as ethics or human resources policies that address pressure.

270.3 A4 Discussing the circumstances creating the pressure and consulting with others about those circumstances might assist the assurance practitioner to evaluate the level of the threat. Such discussion and consultation, which requires being alert to the principle of confidentiality, might include:

  • Discussing the matter with the individual who is exerting the pressure to seek to resolve it.

  • Discussing the matter with the assurance practitioner’s superior, if the superior is not the individual exerting the pressure.

  • Escalating the matter within the employing organisation, including when appropriate, explaining any consequential risks to the organisation, for example with:

  • Higher levels of management.

  • Internal or external auditors.

  • Those charged with governance.

  • Disclosing the matter in line with the employing organisation’s policies, including ethics and whistleblowing policies, using any established mechanism, such as a confidential ethics hotline.

  • Consulting with:

  • A colleague, superior, human resources personnel, or another assurance practitioner;

  • Relevant professional or regulatory bodies or industry associations; or

  • Legal counsel.

270.3 A5 An example of an action that might eliminate threats created by pressure is the assurance practitioner’s request for a restructure of, or segregation of, certain responsibilities and duties so that the assurance practitioner is no longer involved with the individual or entity exerting the pressure.

Documentation

270.4 A1 The assurance practitioner is encouraged to document:

  • The facts.

  • The communications and parties with whom these matters were discussed.

  • The courses of action considered.

  • How the matter was addressed.

SECTION 300 - APPLYING THE CONCEPTUAL FRAMEWORK

Introduction

300.1 This Part of the Code sets out requirements and application material for assurance practitioners when applying the conceptual framework set out in Section 120. It does not describe all of the facts and circumstances, including professional activities, interests and relationships, that could be encountered by assurance practitioners, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires assurance practitioners to be alert for such facts and circumstances.

300.2 The requirements and application material that apply to assurance practitioners are set out in:

  • Part 3 – Application of the Code, Fundamental Principles and Conceptual Framework, Sections 300 to 399, which applies to all assurance practitioners when providing assurance services.

  • International Independence Standards (New Zealand) as follows:

  • Part 4A – Independence for Audit and Review Engagements, Sections 400 to 899, which applies to assurance practitioners when performing audit and review engagements.

  • Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements, Sections 900 to 999, which applies to assurance practitioners when performing assurance engagements other than audit or review engagements.

300.3 In this Part, the term “assurance practitioner” refers to individual assurance practitioners and their firms.

Requirements and Application Material General

R300.4 An assurance practitioner shall comply with the fundamental principles set out in Section 110 and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to compliance with the fundamental principles.

R300.5 When dealing with an ethics issue, the assurance practitioner shall consider the context in which the issue has arisen or might arise. Where an individual who is an assurance practitioner is performing professional activities pursuant to the assurance practitioner’s relationship with the firm, whether as a contractor, employee or owner, the individual shall comply with the provisions in Part 2 that apply to these circumstances.

300.5 A1 Examples of situations in which the provisions in Part 2 apply to an assurance practitioner include:

  • Facing a conflict of interest when being responsible for selecting a vendor for the firm when an immediate family member of the assurance practitioner might benefit financially from the contract. The requirements and application material set out in Section 210 apply in these circumstances.

  • Preparing or presenting financial information for the assurance practitioner’s client or firm. The requirements and application material set out in Section 220 apply in these circumstances.

  • Being offered an inducement such as being regularly offered complimentary tickets to attend sporting events by a supplier of the firm. The requirements and application material set out in Section 250 apply in these circumstances.

  • Facing pressure from an engagement partner to report chargeable hours inaccurately for a client engagement. The requirements and application material set out in Section 270 apply in these circumstances.

NZ300.5A1.1

The International Independence Standards (New Zealand) prohibit the firm or a network firm from providing accounting and bookkeeping services including preparing financial statements on which the firm will express an opinion or a conclusion or financial information which forms the basis of such financial statements2, except in limited circumstances as described in paragraph R601.5. Accordingly, the situation described in the second bullet point of paragraph 300.5 A1 in respect of an assurance practitioner’s assurance client would not be permitted.

Identifying Threats

300.6 A1 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. The categories of threats are described in paragraph 120.6 A3. The following are examples of facts and circumstances within each of those categories of threats that might create threats for an assurance practitioner when undertaking an assurance service:

  1. Self-interest threats

    • An assurance practitioner having a direct financial interest in a client.

    • An assurance practitioner quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the assurance service in accordance with standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board for that price.

    • An assurance practitioner having a close business relationship with a client.

    • An assurance practitioner having access to confidential information that might be used for personal gain.

    • An assurance practitioner discovering a significant error when evaluating the results of a previous assurance service performed by a member of the assurance practitioner’s firm.

  2. Self-review Threats

    • An assurance practitioner issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems.

    • An assurance practitioner having prepared the original data used to generate records that are the subject matter of the assurance engagement.

  3. Advocacy Threats

    • An assurance practitioner promoting the interests of, or shares in, a client.

    • An assurance practitioner acting as an advocate on behalf of a client in litigation or disputes with third parties.

    • An assurance practitioner lobbying in favour of legislation on behalf of a client.

  4. Familiarity Threats

    • An assurance practitioner having a close or immediate family member who is a director or officer of the client.

    • A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement, having recently served as the engagement partner.

    • An audit team member having a long association with the audit client.

    • An individual who is being considered to serve as an appropriate reviewer, as a safeguard to address a threat, having a close relationship with an individual who performed the work.

  5. Intimidation Threats

    • An assurance practitioner being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter.

    • An assurance practitioner feeling pressured to agree with the judgement of a client because the client has more expertise on the matter in question.

    • An assurance practitioner being informed that a planned promotion will not occur unless the assurance practitioner agrees with an inappropriate accounting treatment.

    • An assurance practitioner having accepted a significant gift from a client and being threatened that acceptance of this gift will be made public.

 

Evaluating Threats

300.7 A1 The conditions, policies and procedures described in paragraph 120.6 A1 and 120.8 A2 might impact the evaluation of whether a threat to compliance with the fundamental principles is at an acceptable level. Such conditions, policies and procedures might relate to:

  1. The client and its operating environment; and

  2. The firm and its operating environment.

300.7 A2 The assurance practitioner’s evaluation of the level of a threat is also impacted by the nature and scope of the assurance service.

The Client and its Operating Environment

300.7 A3 The assurance practitioner’s evaluation of the level of a threat might be impacted by whether the client is:

  1. An audit client and whether the audit client is a public interest entity;

  2. An assurance client that is not an audit client; or

  3. A non-assurance client.

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 to compliance with the principle of objectivity with respect to the audit.

300.7 A4 The corporate governance structure, including the leadership of a client might promote compliance with the fundamental principles. Accordingly, an assurance practitioner’s evaluation of the level of a threat might also be impacted by a client’s operating environment. For example:

  • The client requires appropriate individuals other than management to ratify or approve the appointment of a firm to perform an engagement.

  • The client has competent employees with experience and seniority to make managerial decisions.

  • The client has implemented internal procedures that facilitate objective choices in tendering non-assurance engagements.

  • The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm’s services.

The Firm and its Operating Environment

300.7 A5 An assurance practitioner’s evaluation of the level of a threat might be impacted by the work environment within the assurance practitioner’s firm and its operating environment. For example:

  • 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.

  • Compensation, performance appraisal and disciplinary policies and procedures that promote compliance with the fundamental principles.

  • Management of the reliance on revenue received from a single client.

  • The engagement partner having authority within the firm for decisions concerning compliance with the fundamental principles, including any decisions about accepting or providing services to a client.

  • Educational, training and experience requirements.

  • Processes to facilitate and address internal and external concerns or complaints.

Consideration of New Information or Changes in Facts and Circumstances

300.7 A6 New information or changes in facts and circumstances might:

  1. Impact the level of a threat; or

  2. Affect the assurance practitioner’s conclusions about whether safeguards applied continue to address identified threats as intended.

In these situations, actions that were already implemented as safeguards might no longer be effective in addressing threats. Accordingly, the application of the conceptual framework requires that the assurance practitioner re-evaluate and address the threats accordingly. (Ref: Paras. R120.9 and R120.10).

300.7 A7 Examples of new information or changes in facts and circumstances that might impact the level of a threat include:

  • When the scope of an assurance service is expanded.

  • When the client becomes a FMC reporting entity considered to have a higher level of public accountability or acquires another business unit.

  • When the firm merges with another firm.

  • When the assurance practitioner is jointly engaged by two clients and a dispute emerges between the two clients.

  • When there is a change in the assurance practitioner’s personal or immediate family relationships.

Addressing Threats

300.8 A1 Paragraphs R120.10 to 120.10 A2 set out requirements and application material for addressing threats that are not at an acceptable level.

Examples of Safeguards

300.8 A2 Safeguards vary depending on the facts and circumstances. Examples of actions that in certain circumstances might be safeguards to address threats include:

  • 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 teams with separate reporting lines for the provision of non-assurance services to an assurance client might address self-review, advocacy or familiarity threats.

  • Involving another firm to perform or re-perform part of the engagement might address self-interest, self-review, advocacy, familiarity or intimidation threats.

  • Disclosing to clients any referral fees or commission arrangements received for recommending services or products might address a self-interest threat.

  • Separating teams when dealing with matters of a confidential nature might address a self-interest threat.

300.8 A3 The remaining sections of Part 3 and International Independence Standards (New Zealand) describe certain threats that might arise during the course of performing assurance services and include examples of actions that might address threats.

Appropriate Reviewer

300.8 A4 An appropriate reviewer is a professional with the necessary knowledge, skills, experience and authority to review, in an objective manner, the relevant work performed or service provided. Such an individual might be an assurance practitioner.

Communicating with Those Charged with Governance

R300.9 When communicating with those charged with governance in accordance with the Code, an assurance practitioner shall determine the appropriate individual(s) within the entity's governance structure with whom to communicate. If the assurance practitioner communicates with a subgroup of those charged with governance, the assurance practitioner shall determine whether communication with all of those charged with governance is also necessary so that they are adequately informed.

300.9 A1 In determining with whom to communicate, an assurance practitioner might consider:

  1. The nature and importance of the circumstances; and

  2. The matter to be communicated.

300.9 A2 Examples of a subgroup of those charged with governance include an audit committee or an individual member of those charged with governance.

R300.10 If an assurance practitioner communicates with individuals who have management responsibilities as well as governance responsibilities, the assurance practitioner shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the assurance practitioner would otherwise communicate.

300.10 A1 In some circumstances, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role. In these cases, if matters are communicated to individual(s) with management responsibilities, and those individual(s) also have governance responsibilities, the assurance practitioner has satisfied the requirement to communicate with those charged with governance.

SECTION 310 - CONFLICTS OF INTEREST

Introduction

310.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

310.2 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:

  1. An assurance practitioner provides a professional service related to a particular matter for two or more assurance clients whose interests with respect to that matter are in conflict; or

  2. The interests of an assurance practitioner with respect to a particular matter and the interests of the assurance client for whom the assurance practitioner provides a professional service related to that matter are in conflict.

310.3 This section sets out specific requirements and application material relevant to applying the conceptual framework to conflicts of interest. When an assurance practitioner provides an audit, review or other assurance service, independence is also required in accordance with International Independence Standards (New Zealand).

Requirements and Application Material

General

R310.4 An assurance practitioner shall not allow a conflict of interest to compromise professional or business judgement.

310.4 A1 Examples of circumstances that might create a conflict of interest include:

  • 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.

  • Preparing valuations of assets for two parties who are in an adversarial position with respect to the assets.

  • Representing two clients in the same matter who are in a legal dispute with each other, such as during divorce proceedings, or the dissolution of a partnership.

  • In relation to a license agreement, providing an assurance report for a licensor on the royalties due while advising the licensee on the amounts payable.

  • Advising a client to invest in a business in which, for example, the spouse of the assurance practitioner has a financial interest.

  • Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a major competitor of the client.

  • Advising a client on acquiring a business which the firm is also interested in acquiring.

  • Advising a client on buying a product or service while having a royalty or commission agreement with a potential seller of that product or service.

Conflict Identification

General

R310.5 Before accepting a new client relationship, engagement, or business relationship, an assurance practitioner shall take reasonable steps to identify circumstances that might create a conflict of interest, and therefore a threat to compliance with one or more of the fundamental principles. Such steps shall include identifying:

  1. The nature of the relevant interests and relationships between the parties involved; and

  2. The service and its implication for relevant parties.

310.5 A1 An effective conflict identification process assists an assurance practitioner when taking reasonable steps to identify interests and relationships that might create an actual or potential conflict of interest, both before determining whether to accept an engagement and throughout the engagement. Such a process includes considering matters identified by external parties, for example clients or potential clients. The earlier an actual or potential conflict of interest is identified, the greater the likelihood of the assurance practitioner being able to address threats created by the conflict of interest.

310.5 A2 An effective process to identify actual or potential conflicts of interest will take into account factors such as:

  • The nature of the assurance services provided.

  • The size of the firm.

  • The size and nature of the client base.

  • The structure of the firm, for example, the number and geographic location of offices.

310.5 A3 More information on client acceptance is set out in Section 320, Professional Appointments.

Changes in Circumstances

R310.6 An assurance practitioner 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.

310.6 A1 The nature of services, interests and relationships might change during the engagement. This is particularly true when an assurance practitioner is asked to conduct an engagement in a situation that might become adversarial, even though the parties who engage the assurance practitioner initially might not be involved in a dispute.

Network Firms

R310.7 If the firm is a member of a network, an assurance practitioner shall consider conflicts of interest that the assurance practitioner has reason to believe might exist or arise due to interests and relationships of a network firm.

310.7 A1 Factors to consider when identifying interests and relationships involving a network firm include:

  • The nature of the assurance services provided.

  • The clients served by the network.

  • The geographic locations of all relevant parties.

Threats Created by Conflicts of Interest

310.8 A1 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.

310.8 A2 Factors that are relevant in evaluating the level of a threat created by a conflict of interest include measures that prevent unauthorised disclosure of confidential information when performing professional services related to a particular matter for two or more clients whose interests with respect to that matter are in conflict. These measures include:

  • The existence of separate practice areas for specialty functions within the firm, which might act as a barrier to the passing of confidential client information between practice areas.

  • Policies and procedures to limit access to client files.

  • Confidentiality agreements signed by personnel and partners of the firm.

  • Separation of confidential information physically and electronically.

  • Specific and dedicated training and communication.

310.8 A3 Examples of actions that might be safeguards to address threats created by a conflict of interest include:

  • Having separate 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 judgements and conclusions are appropriate.

Disclosure and Consent

General

R310.9 An assurance practitioner shall exercise professional judgement 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.

NZR310.9.1 Where an assurance practitioner has a conflict of interest but can apply safeguards to eliminate the threat or reduce it to an acceptable level, the assurance practitioner shall disclose, in writing, the nature of the conflict of interest and related safeguards, if any, to all clients or potential clients affected by the conflict.

NZR310.9.2 When safeguards are required to reduce the threat to an acceptable level, the assurance practitioner shall obtain, in writing, the client’s consent to the assurance practitioner performing the assurance services.

310.9 A1 Factors to consider when determining whether specific disclosure and explicit consent are necessary include:

  • The circumstances creating the conflict of interest.

  • The parties that might be affected.

  • The nature of the issues that might arise.

  • The potential for the particular matter to develop in an unexpected manner.

310.9 A2 Disclosure and consent might take different forms, for example:

  • General disclosure to clients of circumstances where, as is common commercial practice, the assurance practitioner does not provide services exclusively to any one client (for example, in a particular service and market sector). This enables the client to provide general consent accordingly. For example, an assurance practitioner might make general disclosure in the standard terms and conditions for the engagement.

  • Specific disclosure to affected clients of the circumstances of the particular conflict in sufficient detail to enable the client to make an informed decision about the matter and to provide explicit consent accordingly. Such disclosure might include a detailed presentation of the circumstances and a comprehensive explanation of any planned safeguards and the risks involved.

  • Consent might be implied by clients’ conduct in circumstances where the assurance practitioner has sufficient evidence to conclude that clients know the circumstances at the outset and have accepted the conflict of interest if they do not raise an objection to the existence of the conflict.

310.9 A3 [Deleted by the NZAuASB. Refer NZ R310.9.1 and NZ R310.9.2]

310.9 A4 [Deleted by the NZAuASB. Refer NZ R310.9.1 and NZ R310.9.2]

When Explicit Consent is Refused

R310.10 If an assurance practitioner has determined that explicit consent is necessary in accordance with paragraph R310.9 and the client has refused to provide consent, the assurance practitioner shall either:

  1. End or decline to perform professional services that would result in the conflict of interest; or

  2. End relevant relationships or dispose of relevant interests to eliminate the threat or reduce it to an acceptable level.

Confidentiality

General

R310.11 An assurance practitioner 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.

310.11 A1 Subsection 114 sets out requirements and application material relevant to situations that might create a threat to compliance with the principle of confidentiality.

When Disclosure to Obtain Consent would Breach Confidentiality

R310.12 [Deleted by the NZAuASB. Refer to NZ R310.12.1]

NZR310.12.1 In those circumstances where adequate disclosure is not possible by reason of constraints of confidentiality the assurance practitioner shall end or decline the relevant assurance engagement.

310.12 A1 [Deleted by the NZAuASB. Refer to NZ R310.12.1]

Documentation

R310.13 [Deleted by the NZAuASB.]

SECTION 320 - PROFESSIONAL APPOINTMENTS

Introduction

320.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

320.2 Acceptance of a new client relationship or changes in an existing engagement might create a threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Client and Engagement Acceptance
General

320.3 A1 Threats to compliance with the principles of integrity or professional behaviour might be created, for example, from questionable issues associated with the client (its owners, management or activities). Issues that, if known, might create such a threat include client involvement in illegal activities, dishonesty, questionable financial reporting practices or other unethical behaviour.

320.3 A2 Factors that are relevant in evaluating the level of such a threat include:

  • Knowledge and understanding of the client, its owners, management and those charged with governance and business activities.

  • The client’s commitment to address the questionable issues, for example, through improving corporate governance practices or internal controls.

320.3 A3 A self-interest threat to compliance with the principle of professional competence and due care is created if the team does not possess, or cannot acquire, the competencies to perform the professional services.

320.3 A4 Factors that are relevant in evaluating the level of such a threat include:

  • An appropriate understanding of:

  • The nature of the client’s business;

  • The complexity of its operations;

  • The requirements of the engagement; and

  • The purpose, nature and scope of the work to be performed.

  • Knowledge of relevant industries or subject matter.

  • Experience with relevant regulatory or reporting requirements.

  • Policies and procedures that the firm has implemented, as part of a system of quality management in accordance with quality management standards such as Professional and Ethical Standard 3, that respond to quality risks relating to the firm’s ability to perform the engagement in accordance with professional standards and applicable legal and regulatory requirements.

  • The level of fees and the extent to which they have regard to the resources required, taking into account the assurance practitioner’s commercial and market priorities.

320.3 A5 Examples of actions that might be safeguards to address a self-interest threat include:

  • Assigning sufficient engagement personnel with the necessary competencies.

  • Agreeing on a realistic time frame for the performance of the engagement.

  • Using experts where necessary.

Changes in a Professional Appointment

General

R320.4 An assurance practitioner shall determine whether there are any reasons for not accepting an engagement when the assurance practitioner:

  1. Is asked by a potential client to replace another assurance practitioner;

  2. Considers tendering for an engagement held by another assurance practitioner; or

  3. Considers undertaking work that is complementary or additional to that of another assurance practitioner.

320.4 A1 There might be reasons for not accepting an engagement. One such reason might be if a threat created by the facts and circumstances cannot be addressed by applying safeguards. For example, there might be a self-interest threat to compliance with the principle of professional competence and due care if an assurance practitioner accepts the engagement before knowing all the relevant facts.

320.4 A2 If an assurance practitioner is asked to undertake work that is complementary or additional to the work of an existing or predecessor assurance practitioner, a self- interest threat to compliance with the principle of professional competence and due care might be created, for example, as a result of incomplete information.

320.4 A3 A factor that is relevant in evaluating the level of such a threat is whether tenders state that, before accepting the engagement, contact with the existing or predecessor assurance practitioner will be requested. This contact gives the proposed assurance practitioner the opportunity to enquire whether there are any reasons why the engagement should not be accepted.

320.4 A4 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Asking the existing or predecessor assurance practitioner to provide any known information of which, in the existing or predecessor assurance practitioner’s opinion, the proposed assurance practitioner needs to be aware before deciding whether to accept the engagement. For example, enquiry might reveal previously undisclosed pertinent facts and might indicate disagreements with the existing or predecessor assurance practitioner that might influence the decision to accept the appointment.

  • Obtaining information from other sources such as through enquiries of third parties or background investigations regarding senior management or those charged with governance of the client.

Communicating with the Existing or Predecessor Assurance Practitioner

320.5 A1 A proposed assurance practitioner will usually need the client’s permission, preferably in writing, to initiate discussions with the existing or predecessor assurance practitioner.

R320.6 If unable to communicate with the existing or predecessor assurance practitioner, the proposed assurance practitioner shall take other reasonable steps to obtain information about any possible threats.

Communicating with the Proposed Assurance Practitioner

R320.7 When an existing or predecessor assurance practitioner is asked to respond to a communication from a proposed assurance practitioner, the existing or predecessor assurance practitioner shall:

  1. Comply with relevant laws and regulations governing the request; and

  2. Provide any information honestly and unambiguously.

320.7 A1 An existing or predecessor assurance practitioner is bound by confidentiality. Whether the existing or predecessor assurance practitioner is permitted or required to discuss the affairs of a client with a proposed assurance practitioner will depend on the nature of the engagement and:

  1. Whether the existing or predecessor assurance practitioner has permission from the client for the discussion; and

  2. The legal and ethics requirements relating to such communications and disclosure, which might vary by jurisdiction.

320.7 A2 Circumstances where an assurance practitioner is or might be required to disclose confidential information, or when disclosure might be appropriate, are set out in paragraph 114.1 A1 of the Code.

Changes in Audit or Review Appointments

R320.8 In the case of an audit or review of financial statements, an assurance practitioner shall request the existing or predecessor assurance practitioner to provide known information regarding any facts or other information of which, in the existing or predecessor assurance practitioner’s opinion, the proposed assurance practitioner needs to be aware before deciding whether to accept the engagement. Except for the circumstances involving non-compliance or suspected non-compliance with laws and regulations set out in paragraphs R360.21 and R360.22:

  1. If the client consents to the existing or predecessor assurance practitioner disclosing any such facts or other information, the existing or predecessor assurance practitioner shall provide the information honestly and unambiguously; and

  2. If the client fails or refuses to grant the existing or predecessor assurance practitioner permission to discuss the client’s affairs with the proposed assurance practitioner, the existing or predecessor assurance practitioner shall disclose this fact to the proposed assurance practitioner, who shall carefully consider such failure or refusal when determining whether to accept the appointment.

Client and Engagement Continuance

R320.9 For a recurring client engagement, an assurance practitioner shall periodically review whether to continue with the engagement.

320.9 A1 Potential threats to compliance with the fundamental principles might be created after acceptance which, had they been known earlier, would have caused the assurance practitioner to decline the engagement. For example, a self-interest threat to compliance with the principle of integrity might be created by improper earnings management or balance sheet valuations.

Using the Work of an Expert

R320.10 When an assurance practitioner intends to use the work of an expert, the assurance practitioner shall determine whether the use is warranted.

320.10 A1 Factors to consider when an assurance practitioner intends to use the work of an expert include the reputation and expertise of the expert, the resources available to the expert, and the professional and ethics standards applicable to the expert. This information might be gained from prior association with the expert or from consulting others.

SECTION 321 - SECOND OPINIONS

Introduction

321.1 [Deleted.by the NZAuASB]

321.2 [Deleted.by the NZAuASB]

Requirements and Application Material General

321.3 A1 [Deleted.by the NZAuASB]

321.3 A2 [Deleted.by the NZAuASB]

321.3 A3 [Deleted.by the NZAuASB]

When Permission to Communicate is Not Provided

R321.4 [Deleted.by the NZAuASB]

SECTION 325 - OBJECTIVITY OF AN ENGAGEMENT QUALITY REVIEWER AND OTHER APPROPRIATE REVIEWERS

Introduction

325.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

325.2 Appointing an engagement quality reviewer who has involvement in the work being reviewed or close relationships with those responsible for performing that work might create threats to compliance with the principle of objectivity.

325.3 This section sets out specific application material relevant to applying the conceptual framework in relation to the objectivity of an engagement quality reviewer.

325.4 An engagement quality reviewer is also an example of an appropriate reviewer as described in paragraph 300.8 A4. Therefore, the application material in this section might apply in circumstances where an assurance practitioner appoints an appropriate reviewer to review work performed as a safeguard to address identified threats.

Application Material General

325.5 A1 Quality engagements are achieved through planning and performing engagements and reporting on them in accordance with professional standards and applicable legal and regulatory requirements. Professional and Ethical Standard 33 establishes the firm’s responsibilities for its system of quality management and requires the firm to design and implement responses to address quality risks related to engagement performance. Such responses include establishing policies or procedures addressing engagement quality reviews in accordance with Professional and Ethical Standard 44.

325.5 A2 An engagement quality reviewer is a partner, other individual in the firm, or an external individual, appointed by the firm to perform the engagement quality review.

Identifying Threats

325.6 A1 The following are examples of circumstances where threats to the objectivity of an assurance practitioner appointed as an engagement quality reviewer might be created:

  1. Self-interest threat

    • Two engagement partners each serving as an engagement quality reviewer for the other’s engagement.

  2. Self-review threat

    • An assurance practitioner serving as an engagement quality reviewer on an audit engagement after previously serving as the engagement partner.

  3. Familiarity threat

    • An assurance practitioner as an engagement quality reviewer has a close relationship with or is an immediate family member of another individual who is involved in the engagement.

  4. Intimidation threat

    • An assurance practitioner serving as an engagement quality reviewer for an engagement has a direct reporting line to the partner responsible for the engagement.

Evaluating Threats

325.7 A1 Factors that are relevant in evaluating the level of threats to the objectivity of an individual appointed as an engagement quality reviewer include:

  • The role and seniority of the individual.

  • The nature of the individual’s relationship with others involved on the engagement.

  • The length of time the individual was previously involved with the engagement and the individual’s role.

  • When the individual was last involved in the engagement prior to being appointed as engagement quality reviewer and any subsequent relevant changes to the circumstances of the engagement.

  • The nature and complexity of issues that required significant judgement from the individual in any previous involvement in the engagement.

Addressing Threats

325.8 A1 An example of an action that might eliminate an intimidation threat is reassigning reporting responsibilities within the firm.

325.8 A2 An example of an action that might be a safeguard to address a self-review threat is implementing a period of sufficient duration (a cooling-off period) before the individual who was on the engagement is appointed as an engagement quality reviewer.

Cooling-off Period

325.8 A3 Professional and Ethical Standard 4 requires the firm to establish policies or procedures that specify, as a condition for eligibility, a cooling-off period of two years before the engagement partner can assume the role of engagement quality reviewer. This serves to enable compliance with the principle of objectivity and the consistent performance of quality engagements.

325.8 A4 The cooling-off period required by Professional and Ethical Standard 4 is distinct from, and does not modify, the partner rotation requirements in Section 540, which are designed to address threats to independence created by long association with an audit client.

SECTION 330 - FEES AND OTHER TYPES OF REMUNERATION

Introduction

330.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

330.2 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. This section sets out specific application material relevant to applying the conceptual framework in such circumstances.

Application Material

Level of Fees

330.3 A1 The level of fees quoted might impact an assurance practitioner’s ability to perform professional services in accordance with standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

330.3 A2 An assurance practitioner might quote whatever fee is considered appropriate. Quoting a fee lower than another assurance practitioner is not in itself unethical. However, the level of fees quoted creates a self-interest threat to compliance with the principle of professional competence and due care if the fee quoted is so low that it might be difficult to perform the engagement in accordance with the standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

330.3 A3 Factors that are relevant in evaluating the level of such a threat include:

  • Whether the client is aware of the terms of the engagement and, in particular, the basis on which fees are charged and which professional services the quoted fee covers.

  • Whether the level of the fee is set by an independent third party such as a regulatory body.

330.3 A4 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Adjusting the level of fees or the scope of the engagement.

  • Having an appropriate reviewer review the work performed.

Contingent Fees

330.4 A1 Contingent fees are used for certain types of non-assurance services. However, contingent fees might create threats to compliance with the fundamental principles, particularly a self-interest threat to compliance with the principle of objectivity, in certain circumstances.

330.4 A2 Factors that are relevant in evaluating the level of such threats include:

  • The nature of the engagement.

  • The range of possible fee amounts.

  • The basis for determining the fee.

  • Disclosure to intended users of the work performed by the assurance practitioner and the basis of remuneration.

  • Quality management policies and procedures.

  • Whether an independent third party is to review the outcome or result of the transaction.

  • Whether the level of the fee is set by an independent third party such as a regulatory body.

330.4 A3 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Having an appropriate reviewer who was not involved in performing the non- assurance service review the work performed by the assurance practitioner.

  • Obtaining an advance written agreement with the client on the basis of remuneration.

330.4 A4 Requirements and application material related to contingent fees for services provided to audit or review clients and other assurance clients are set out in International Independence Standards (New Zealand).

Referral Fees or Commissions

NZR330.5 An assurance practitioner shall not accept or pay referral fees, commissions or other similar benefits in connection with an assurance engagement.

330.5 A1 [Deleted by the NZAuASB. Refer to NZ R330.5 and NZ 330.5 A1.1]

NZ330.5A1.1 The receipt or payment of referral fees, commissions or other similar benefits in connection with an assurance engagement creates a threat to independence that no safeguards could reduce to an acceptable level.

330.5 A2 [Deleted by the NZAuASB. Refer to NZ R330.5 and NZ 330.5 A1.1]

Purchase or Sale of a Firm

330.6 A1 An assurance practitioner may purchase all or part of another firm on the basis that payments will be made to individuals formerly owning the firm or to their heirs or estates. Such payments are not referral fees or commissions for the purposes of this section.

SECTION 340 - INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY

Introduction

340.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

340.2 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 behaviour.

340.3 This section sets out requirements and application material relevant to applying the conceptual framework in relation to the offering and accepting of inducements when performing professional services that does not constitute non-compliance with laws and regulations. This section also requires an assurance practitioner to comply with relevant laws and regulations when offering or accepting inducements.

Requirements and Application Material General

340.4 A1 An inducement is an object, situation, or action that is used as a means to influence another individual’s behaviour, but not necessarily with the intent to improperly influence that individual’s behaviour. Inducements can range from minor acts of hospitality between assurance practitioners and existing or prospective clients to acts that result in non-compliance with laws and regulations. An inducement can take many different forms, for example:

  • Gifts.

  • Hospitality.

  • Entertainment.

  • Political or charitable donations.

  • Appeals to friendship and loyalty.

  • Employment or other commercial opportunities.

  • Preferential treatment, rights or privileges.

Inducements Prohibited by Laws and Regulations

R340.5 In many jurisdictions, there are laws and regulations, such as those related to bribery and corruption, that prohibit the offering or accepting of inducements in certain circumstances. The assurance practitioner shall obtain an understanding of relevant laws and regulations and comply with them when the assurance practitioner encounters such circumstances.

Inducements Not Prohibited by Laws and Regulations

340.6 A1 The offering or accepting of inducements that is not prohibited by laws and regulations might still create threats to compliance with the fundamental principles.

Inducements with Intent to Improperly Influence Behaviour

R340.7 An assurance practitioner shall not offer, or encourage others to offer, any inducement that is made, or which the assurance practitioner considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.

R340.8 An assurance practitioner shall not accept, or encourage others to accept, any inducement that the assurance practitioner concludes is made, or considers a reasonable and informed third party would be likely to conclude is made, with the intent to improperly influence the behaviour of the recipient or of another individual.

340.9 A1 An inducement is considered as improperly influencing an individual’s behaviour if it causes the individual to act in an unethical manner. Such improper influence can be directed either towards the recipient or towards another individual who has some relationship with the recipient. The fundamental principles are an appropriate frame of reference for an assurance practitioner in considering what constitutes unethical behaviour on the part of the assurance practitioner and, if necessary by analogy, other individuals.

340.9 A2 A breach of the fundamental principle of integrity arises when an assurance practitioner offers or accepts, or encourages others to offer or accept, an inducement where the intent is to improperly influence the behaviour of the recipient or of another individual.

340.9 A3 The determination of whether there is actual or perceived intent to improperly influence behaviour requires the exercise of professional judgment. Relevant factors to consider might include:

  • The nature, frequency, value and cumulative effect of the inducement.

  • Timing of when the inducement is offered relative to any action or decision that it might influence.

  • Whether the inducement is a customary or cultural practice in the circumstances, for example, offering a gift on the occasion of a religious holiday or wedding.

  • Whether the inducement is an ancillary part of a professional service, for example, offering or accepting lunch in connection with a business meeting.

  • Whether the offer of the inducement is limited to an individual recipient or available to a broader group. The broader group might be internal or external to the firm, such as other suppliers to the client.

  • The roles and positions of the individuals at the firm or the client offering or being offered the inducement.

  • Whether the assurance practitioner knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the client.

  • The degree of transparency with which the inducement is offered.

  • Whether the inducement was required or requested by the recipient.

  • The known previous behaviour or reputation of the offeror.

Consideration of Further Actions

340.10 A1 If the assurance practitioner becomes aware of an inducement offered with actual or perceived intent to improperly influence behaviour, threats to compliance with the fundamental principles might still be created even if the requirements in paragraphs R340.7 and R340.8 are met.

340.10 A2 Examples of actions that might be safeguards to address such threats include:

  • Informing senior management of the firm or those charged with governance of the client regarding the offer.

  • Amending or terminating the business relationship with the client.

Inducements with No Intent to Improperly Influence Behaviour

340.11 A1 The requirements and application material set out in the conceptual framework apply when an assurance practitioner has concluded there is no actual or perceived intent to improperly influence the behaviour of the recipient or of another individual.

340.11 A2 If such an inducement is trivial and inconsequential, any threats created will be at an acceptable level.

340.11 A3 Examples of circumstances where offering or accepting such an inducement might create threats even if the assurance practitioner has concluded there is no actual or perceived intent to improperly influence behaviour include:

  • Self-interest threats

    • An assurance practitioner is offered hospitality from the prospective acquirer of a client while providing corporate finance services to the client.

  • Familiarity threats

    • An assurance practitioner regularly takes an existing or prospective client to sporting events.

  • Intimidation threats

    • An assurance practitioner accepts hospitality from a client, the nature of which could be perceived to be inappropriate were it to be publicly disclosed.

340.11 A4 Relevant factors in evaluating the level of such threats created by offering or accepting such an inducement include the same factors set out in paragraph 340.9 A3 for determining intent.

340.11 A5 Examples of actions that might eliminate threats created by offering or accepting such an inducement include:

  • Declining or not offering the inducement.

  • Transferring responsibility for the provision of any professional services to the client to another individual who the assurance practitioner has no reason to believe would be, or would be perceived to be, improperly influenced when providing the services.

340.11 A6 Examples of actions that might be safeguards to address such threats created by offering or accepting such an inducement include:

  • Being transparent with senior management of the firm or of the client about offering or accepting an inducement.

  • Registering the inducement in a log monitored by senior management of the firm or another individual responsible for the firm’s ethics compliance or maintained by the client.

  • Having an appropriate reviewer, who is not otherwise involved in providing the professional service, review any work performed or decisions made by the assurance practitioner with respect to the client from which the assurance practitioner accepted the inducement.

  • Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to a member of senior management of the firm or the individual who offered the 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.

Immediate or Close Family Members

R340.12 An assurance practitioner shall remain alert to potential threats to the assurance practitioner’s compliance with the fundamental principles created by the offering of an inducement:

  1. By an immediate or close family member of the assurance practitioner to an existing or prospective client of the assurance practitioner.

  2. To an immediate or close family member of the assurance practitioner by an existing or prospective client of the assurance practitioner.

R340.13 Where the assurance practitioner becomes aware of an inducement being offered to or made by an immediate or close family member and concludes there is intent to improperly influence the behaviour of the assurance practitioner or of an existing or prospective client of the assurance practitioner, or considers a reasonable and informed third party would be likely to conclude such intent exists, the assurance practitioner shall advise the immediate or close family member not to offer or accept the inducement.

340.13 A1 The factors set out in paragraph 340.9 A3 are relevant in determining whether there is actual or perceived intent to improperly influence the behaviour of the assurance practitioner or of the existing or prospective client. Another factor that is relevant is the nature or closeness of the relationship, between:

  1. The assurance practitioner and the immediate or close family member;

  2. The immediate or close family member and the existing or prospective client; and

  3. The assurance practitioner and the existing or prospective client.

For example, the offer of employment, outside of the normal recruitment process, to the spouse of the assurance practitioner by a client for whom the assurance practitioner is providing a business valuation for a prospective sale might indicate such intent.

340.13 A2 The application material in paragraph 340.10 A2 is also relevant in addressing threats that might be created when there is actual or perceived intent to improperly influence the behaviour of the assurance practitioner, or of the existing or prospective client even if the immediate or close family member has followed the advice given pursuant to paragraph R340.13.

Application of the Conceptual Framework

340.14 A1 Where the assurance practitioner becomes aware of an inducement offered in the circumstances addressed in paragraph R340.12, threats to compliance with the fundamental principles might be created where:

  1. The immediate or close family member offers or accepts the inducement contrary to the advice of the assurance practitioner pursuant to paragraph R340.13; or

  2. The assurance practitioner does not have reason to believe an actual or perceived intent to improperly influence the behaviour of the assurance practitioner or of the existing or prospective client exists.

340.14 A2 The application material in paragraphs 340.11 A1 to 340.11 A6 is relevant for the purposes of identifying, evaluating and addressing such threats. Factors that are relevant in evaluating the level of threats in these circumstances also include the nature or closeness of the relationships set out in paragraph 340.13 A1.

Other Considerations

340.15 A1 If an assurance practitioner encounters or is made aware of inducements that might result in non-compliance or suspected non-compliance with laws and regulations by a client or individuals working for or under the direction of the client, the requirements and application material in Section 360 apply.

340.15 A2 If a firm, network firm or an audit or review team member is being offered gifts or hospitality from an audit or review client, the requirement and application material set out in Section 420 apply.

340.15 A3 If a firm or an assurance team member is being offered gifts or hospitality from an assurance client, the requirement and application material set out in Section 906 apply.

SECTION 350 - CUSTODY OF CLIENT ASSETS

Introduction

350.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

350.2 Holding client assets creates a self-interest or other threat to compliance with the principles of professional behaviour and objectivity. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Before Taking Custody

R350.3 An assurance practitioner 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.

R350.4 As part of client and engagement acceptance procedures related to assuming custody of client money or assets, an assurance practitioner shall:

  1. Make enquiries about the source of the assets; and

  2. Consider related legal and regulatory obligations.

350.4 A1 Enquiries about the source of client assets might reveal, for example, that the assets were derived from illegal activities, such as money laundering. In such circumstances, a threat would be created and the provisions of Section 360 would apply.

After Taking Custody

R350.5 An assurance practitioner entrusted with money or other assets belonging to others shall:

  1. Comply with the laws and regulations relevant to holding and accounting for the assets;

  2. Keep the assets separately from personal or firm assets;

  3. Use the assets only for the purpose for which they are intended; and

  4. Be ready at all times to account for the assets and any income, dividends, or gains generated, to any individuals entitled to that accounting.

SECTION 360 - RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS

Introduction

360.1 Assurance practitioners are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.

360.2 A self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when an assurance practitioner becomes aware of non-compliance or suspected non-compliance with laws and regulations.

360.3 An assurance practitioner might encounter or be made aware of non-compliance or suspected non-compliance in the course of providing a professional service to a client. This section guides the assurance practitioner in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non-compliance with:

  1. Laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the client’s financial statements; and

  2. Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the client’s financial statements, but compliance with which might be fundamental to the operating aspects of the client’s business, to its ability to continue its business, or to avoid material penalties.

Objectives of the Assurance Practitioner in Relation to Non-compliance with Laws and Regulations

360.4 A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. When responding to non-compliance or suspected non-compliance, the objectives of the assurance practitioner are:

  1. To comply with the principles of integrity and professional behaviour;

  2. By alerting management or, where appropriate, those charged with governance of the client, to seek to:

    1. Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non-compliance; or

    2. Deter the commission of the non-compliance where it has not yet occurred; and

  3. To take such further action as appropriate in the public interest.

Requirements and Application Material General

360.5 A1 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:

  1. A client;

  2. Those charged with governance of a client;

  3. Management of a client; or

  4. Other individuals working for or under the direction of a client.

360.5 A2 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.

360.5 A3 Non-compliance might result in fines, litigation or other consequences for the client, potentially materially affecting its financial statements. Importantly, such non- compliance might have wider public interest implications in terms of potentially substantial harm to investors, creditors, employees or the general public. For the purposes of this section, an act that causes substantial harm is one that results in serious adverse consequences to any of these parties in financial or non-financial terms. Examples include the perpetration of a fraud resulting in significant financial losses to investors, and breaches of environmental laws and regulations endangering the health or safety of employees or the public.

R360.6 In some cases, there are legal or regulatory provisions governing how assurance practitioners should address non-compliance or suspected non-compliance. These legal or regulatory provisions might differ from or go beyond the provisions in this section. When encountering such non-compliance or suspected non- compliance, the assurance practitioner shall obtain an understanding of those legal or regulatory provisions and comply with them, including:

  1. Any requirement to report the matter to an appropriate authority; and

  2. Any prohibition on alerting the client.

360.6 A1 A prohibition on alerting the client might arise, for example, pursuant to anti-money laundering legislation.

360.7 A1 This section applies regardless of the nature of the client, including whether or not it is a public interest entity.

360.7 A2 An assurance practitioner who encounters or is made aware of matters that are clearly inconsequential is not required to comply with this section. Whether a matter is clearly inconsequential is to be judged with respect to its nature and its impact, financial or otherwise, on the client, its stakeholders and the general public.

360.7 A3 This section does not address:

  1. Personal misconduct unrelated to the business activities of the client; and

  2. Non-compliance by parties other than those specified in paragraph 360.5 A1. This includes, for example, circumstances where an assurance practitioner has been engaged by a client to perform a due diligence assignment on a third party entity and the identified or suspected non-compliance has been committed by that third-party.

The assurance practitioner might nevertheless find the guidance in this section helpful in considering how to respond in these situations.

Responsibilities of Management and Those Charged with Governance

360.8 A1 Management, with the oversight of those charged with governance, is responsible for ensuring that the client’s business activities are conducted in accordance with laws and regulations. Management and those charged with governance are also responsible for identifying and addressing any non-compliance by:

  1. The client;

  2. An individual charged with governance of the entity;

  3. A member of management; or

  4. Other individuals working for or under the direction of the client.

Responsibilities of All Assurance Practitioners

R360.9 Where an assurance practitioner becomes aware of a matter to which this section applies, the steps that the assurance practitioner takes to comply with this section shall be taken on a timely basis. In taking timely steps, the assurance practitioner 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.

Audits and Reviews of Financial Statements

Obtaining an Understanding of the Matter

R360.10 [Amended by the NZAuASB]

NZR360.10.1 If an assurance practitioner engaged to perform an audit or review of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the assurance practitioner shall obtain an understanding of the matter. This understanding shall include the nature of the non- compliance or suspected non-compliance and the circumstances in which it has occurred or might occur.

360.10 A1 The assurance practitioner might become aware of the non-compliance or suspected non-compliance in the course of performing the engagement or through information provided by other parties.

360.10 A2 The assurance practitioner is expected to apply knowledge and expertise, and exercise professional judgement. However, the assurance practitioner is not expected to have a level of knowledge of laws and regulations greater than that which is required to undertake the engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

360.10 A3 Depending on the nature and significance of the matter, the assurance practitioner might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel.

R360.11 If the assurance practitioner identifies or suspects that non-compliance has occurred or might occur, the assurance practitioner shall discuss the matter with the appropriate level of management and, where appropriate, those charged with governance.

360.11 A1 The purpose of the discussion is to clarify the assurance practitioner’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter.

360.11 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgement. Relevant factors to consider include:

  • The nature and circumstances of the matter.

  • The individuals actually or potentially involved.

  • The likelihood of collusion.

  • The potential consequences of the matter.

  • Whether that level of management is able to investigate the matter and take appropriate action.

360.11 A3 The appropriate level of management is usually at least one level above the individual or individuals involved or potentially involved in the matter. In the context of a group, the appropriate level might be management at an entity that controls the client.

360.11 A4 The assurance practitioner might also consider discussing the matter with internal auditors, where applicable.

R360.12 If the assurance practitioner believes that management is involved in the non- compliance or suspected non-compliance, the assurance practitioner shall discuss the matter with those charged with governance.

Addressing the Matter

R360.13 In discussing the non-compliance or suspected non-compliance with management and, where appropriate, those charged with governance, the assurance practitioner shall advise them to take appropriate and timely actions, if they have not already done so, to:

  1. Rectify, remediate or mitigate the consequences of the non-compliance;

  2. Deter the commission of the non-compliance where it has not yet occurred; or

  3. Disclose the matter to an appropriate authority where required by law or regulation or where considered necessary in the public interest.

R360.14 The assurance practitioner shall consider whether management and those charged with governance understand their legal or regulatory responsibilities with respect to the non-compliance or suspected non-compliance.

360.14 A1 If management and those charged with governance do not understand their legal or regulatory responsibilities with respect to the matter, the assurance practitioner might suggest appropriate sources of information or recommend that they obtain legal advice.

R360.15 [Amended by the NZAuASB]

NZR360.15.1 The assurance practitioner shall comply with applicable:

  1. Laws and regulations, including legal or regulatory provisions governing the reporting of non-compliance or suspected non-compliance to an appropriate authority; and

  2. Requirements under auditing and review engagement standards, including those relating to:

  • Identifying and responding to non-compliance, including fraud.

  • Communicating with those charged with governance.

  • Considering the implications of the non-compliance or suspected non- compliance for the auditor’s report or review report.

360.15 A1 Some laws and regulations might stipulate a period within which reports of non- compliance or suspected non-compliance are to be made to an appropriate authority.

Communication with Respect to Groups

R360.16 [Amended by the NZAuASB]

NZR360.16.1 Where an assurance practitioner becomes aware of non-compliance or suspected non-compliance in either of the following two situations in the context of a group, the assurance practitioner shall communicate the matter to the group engagement partner unless prohibited from doing so by law or regulation:

  1. The assurance practitioner performs audit or review work related to a component for purposes of the group audit or review; or

  2. The assurance practitioner is engaged to perform an audit or review of the financial statements of a legal entity or business unit that is part of a group for purposes other than the group audit or review, for example, a statutory audit.

The communication to the group engagement partner shall be in addition to responding to the matter in accordance with the provisions of this section.

360.16 A1 [Amended by the NZAuASB]

NZ360.16A1 The purpose of the communication is to enable the group engagement partner to be informed about the matter and to determine, in the context of the group audit or review, whether and, if so, how to address it in accordance with the provisions in this section. The communication requirement in paragraph NZ R360.16.1 applies regardless of whether the group engagement partner’s firm or network is the same as or different from the assurance practitioner’s firm or network.

R360.17 [Amended by the NZAuASB]

NZR360.17.1

Where the group engagement partner becomes aware of non-compliance or suspected non-compliance in the course of a group audit or review, the group engagement partner shall consider whether the matter might be relevant to:

  1. One or more components subject to audit or review work for purposes of the group audit or review; or

  2. One or more legal entities or business units that are part of the group and whose financial statements are subject to audit or review for purposes other than the group audit, for example, a statutory audit.

This consideration shall be in addition to responding to the matter in the context of the group audit in accordance with the provisions of this section.

R360.18 [Amended by the NZAuASB]

NZR360.18.1

If the non-compliance or suspected non-compliance might be relevant to one or more of the components specified in paragraph NZ R360.17.1(a) and legal entities or business units specified in paragraph NZ R360.17.1(b), the group engagement partner shall take steps to have the matter communicated to those performing audit or review work at the components, legal entities or business units, unless prohibited from doing so by law or regulation. If necessary, the group engagement partner shall arrange for appropriate enquiries to be made (either of management or from publicly available information) as to whether the relevant legal entities or business units specified in paragraph NZ R360.17.1(b) are subject to audit or review and, if so, to ascertain to the extent practicable the identity of the auditors.

360.18 A1 The purpose of the communication is to enable those responsible for audit or review work at the components, legal entities or business units to be informed about the matter and to determine whether and, if so, how to address it in accordance with the provisions in this section. The communication requirement applies regardless of whether the group engagement partner’s firm or network is the same as or different from the firms or networks of those performing audit or review work at the components, legal entities or business units.

Determining Whether Further Action Is Needed

R360.19 The assurance practitioner shall assess the appropriateness of the response of management and, where applicable, those charged with governance.

360.19 A1 Relevant factors to consider in assessing the appropriateness of the response of management and, where applicable, those charged with governance include whether:

  • The response is timely.

  • The non-compliance or suspected non-compliance has been adequately investigated.

  • Action has been, or is being, taken to rectify, remediate or mitigate the consequences of any non-compliance.

  • Action has been, or is being, taken to deter the commission of any non- compliance where it has not yet occurred.

  • Appropriate steps have been, or are being, taken to reduce the risk of re- occurrence, for example, additional controls or training.

  • The non-compliance or suspected non-compliance has been disclosed to an appropriate authority where appropriate and, if so, whether the disclosure appears adequate.

R360.20 In light of the response of management and, where applicable, those charged with governance, the assurance practitioner shall determine if further action is needed in the public interest.

360.20 A1 The determination of whether further action is needed, and the nature and extent of it, will depend on various factors, including:

  • The legal and regulatory framework.

  • The urgency of the situation.

  • The pervasiveness of the matter throughout the client.

  • Whether the assurance practitioner continues to have confidence in the integrity of management and, where applicable, those charged with governance.

  • Whether the non-compliance or suspected non-compliance is likely to recur.

  • Whether there is credible evidence of actual or potential substantial harm to the interests of the entity, investors, creditors, employees or the general public.

360.20 A2 Examples of circumstances that might cause the assurance practitioner no longer to have confidence in the integrity of management and, where applicable, those charged with governance include situations where:

  • The assurance practitioner suspects or has evidence of their involvement or intended involvement in any non-compliance.

  • The assurance practitioner is aware that they have knowledge of such non- compliance and, contrary to legal or regulatory requirements, have not reported, or authorised the reporting of, the matter to an appropriate authority within a reasonable period.

R360.21 The assurance practitioner shall exercise professional judgement in determining the need for, and nature and extent of, further action. In making this determination, the assurance practitioner shall take into account whether a reasonable and informed third party would be likely to conclude that the assurance practitioner has acted appropriately in the public interest.

360.21 A1 Further action that the assurance practitioner might take includes:

  • Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so.

  • Withdrawing from the engagement and the professional relationship where permitted by law or regulation.

360.21 A2 Withdrawing from the engagement and the professional relationship is not a substitute for taking other actions that might be needed to achieve the assurance practitioner’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the assurance practitioner. In such circumstances, withdrawal might be the only available course of action.

R360.22 Where the assurance practitioner has withdrawn from the professional relationship pursuant to paragraphs R360.20 and 360.21 A1, the assurance practitioner shall, on request by the proposed assurance practitioner pursuant to paragraph R320.8, provide all relevant facts and other information concerning the identified or suspected non-compliance to the proposed assurance practitioner. The predecessor assurance practitioner shall do so, even in the circumstances addressed in paragraph R320.8(b) where the client fails or refuses to grant the predecessor assurance practitioner permission to discuss the client’s affairs with the proposed assurance practitioner, unless prohibited by law or regulation.

360.22 A1 The facts and other information to be provided are those that, in the predecessor assurance practitioner’s opinion, the proposed assurance practitioner needs to be aware of before deciding whether to accept the audit or review appointment. Section 320 addresses communications from proposed assurance practitioners.

R360.23 If the proposed assurance practitioner is unable to communicate with the predecessor assurance practitioner, the proposed assurance practitioner shall take reasonable steps to obtain information about the circumstances of the change of appointment by other means.

360.23 A1 Other means to obtain information about the circumstances of the change of appointment include enquiries of third parties or background investigations of management or those charged with governance.

360.24 A1 As assessment of the matter might involve complex analysis and judgements, the assurance practitioner might consider:

  • Consulting internally.

  • Obtaining legal advice to understand the assurance practitioner’s options and the professional or legal implications of taking any particular course of action.

  • Consulting on a confidential basis with a regulatory or professional body.

Determining Whether to Disclose the Matter to an Appropriate Authority

360.25 A1 Disclosure of the matter to an appropriate authority would be precluded if doing so would be contrary to law or regulation. Otherwise, the purpose of making disclosure is to enable an appropriate authority to cause the matter to be investigated and action to be taken in the public interest.

360.25 A2 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. For example, the assurance practitioner might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if:

  • The entity is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts).

  • The entity is regulated and the matter is of such significance as to threaten its license to operate.

  • The entity is listed on a securities exchange and the matter might result in adverse consequences to the fair and orderly market in the entity’s securities or pose a systemic risk to the financial markets.

  • It is likely that the entity would sell products that are harmful to public health or safety.

  • The entity is promoting a scheme to its clients to assist them in evading taxes.

360.25 A3 The determination of whether to make such a disclosure will also depend on external factors such as:

  • Whether there is an appropriate authority that is able to receive the information, and cause the matter to be investigated and action to be taken. The appropriate authority will depend on the nature of the matter. For example, the appropriate authority would be a securities regulator in the case of fraudulent financial reporting or an environmental protection agency in the case of a breach of environmental laws and regulations.

  • Whether there exists robust and credible protection from civil, criminal or professional liability or retaliation afforded by legislation or regulation, such as under whistle-blowing legislation or regulation.

  • Whether there are actual or potential threats to the physical safety of the assurance practitioner or other individuals.

R360.26 If the assurance practitioner determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the assurance practitioner shall act in good faith and exercise caution when making statements and assertions. The assurance practitioner shall also consider whether it is appropriate to inform the client of the assurance practitioner’s intentions before disclosing the matter.

Imminent Breach

R360.27 In exceptional circumstances, the assurance practitioner might become aware of actual or intended conduct that the assurance practitioner has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the assurance practitioner shall exercise professional judgement and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Documentation

R360.28 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the assurance practitioner shall document:

  • How management and, where applicable, those charged with governance have responded to the matter.

  • The courses of action the assurance practitioner considered, the judgements made and the decisions that were taken, having regard to the reasonable and informed third party test.

  • How the assurance practitioner is satisfied that the assurance practitioner has fulfilled the responsibility set out in paragraph R360.20.

360.28 A1 [Amended by the NZAuASB]

NZ360.28A1.1 This documentation is in addition to complying with the documentation requirements under applicable auditing or review engagement standards. International Standards on Auditing (New Zealand) (ISAs (NZ)), for example, require an assurance practitioner performing an audit of financial statements to:

  • Prepare documentation sufficient to enable an understanding of significant matters arising during the audit, the conclusions reached, and significant professional judgements made in reaching those conclusions;

  • Document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place; and

  • Document identified or suspected non-compliance, and the results of discussion with management and, where applicable, those charged with governance and other parties outside the entity.

Assurance Services Other than Audits and Reviews of Financial Statements

Obtaining an Understanding of the Matter and Addressing It with Management and Those Charged with Governance

R360.29 [Amended by the NZAuASB]

NZR360.29.1 If an assurance practitioner engaged to provide an assurance service other than an audit or review of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the assurance practitioner shall seek to obtain an understanding of the matter. This understanding shall include the nature of the non-compliance or suspected non- compliance and the circumstances in which it has occurred or might be about to occur.

360.29 A1 The assurance practitioner is expected to apply knowledge and expertise, and exercise professional judgement. However, the assurance practitioner is not expected to have a level of understanding of laws and regulations beyond that which is required for the professional service for which the assurance practitioner was engaged. Whether an act constitutes actual non-compliance is ultimately a matter to be determined by a court or other appropriate adjudicative body.

360.29 A2 Depending on the nature and significance of the matter, the assurance practitioner might consult on a confidential basis with others within the firm, a network firm or a professional body, or with legal counsel.

R360.30 If the assurance practitioner identifies or suspects that non-compliance has occurred or might occur, the assurance practitioner shall discuss the matter with the appropriate level of management. If the assurance practitioner has access to those charged with governance, the assurance practitioner shall also discuss the matter with them where appropriate.

360.30 A1 The purpose of the discussion is to clarify the assurance practitioner’s understanding of the facts and circumstances relevant to the matter and its potential consequences. The discussion also might prompt management or those charged with governance to investigate the matter.

360.30 A2 The appropriate level of management with whom to discuss the matter is a question of professional judgement. Relevant factors to consider include:

  • The nature and circumstances of the matter.

  • The individuals actually or potentially involved.

  • The likelihood of collusion.

  • The potential consequences of the matter.

  • Whether that level of management is able to investigate the matter and take appropriate action.

Communicating the Matter to the Entity’s External Auditor or Assurance Practitioner

R360.31 [Amended by the NZAuASB]

NZR360.31.1 If the assurance practitioner is performing an assurance service other than an audit or review for:

  1. An audit or review client of the firm; or

  2. A component of an audit or review client of the firm,

the assurance practitioner shall communicate the non-compliance or suspected non-compliance within the firm, unless prohibited from doing so by law or regulation. The communication shall be made in accordance with the firm’s protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit or review engagement partner.

R360.32 [Amended by the NZAuASB]

NZR360.32.1 If the assurance practitioner is performing an assurance service other than an audit or review for:

  1. An audit or review client of a network firm; or

  2. A component of an audit or review client of a network firm,

the assurance practitioner shall consider whether to communicate the non- compliance or suspected non-compliance to the network firm. Where the communication is made, it shall be made in accordance with the network's protocols or procedures. In the absence of such protocols and procedures, it shall be made directly to the audit or review engagement partner.

R360.33 [Amended by the NZAuASB]

NZR360.33.1 If the assurance practitioner is performing an assurance service other than an audit or review for a client that is not:

  1. An audit or review client of the firm or a network firm; or

  2. A component of an audit or review client of the firm or a network firm,

the assurance practitioner shall consider whether to communicate the non- compliance or suspected non-compliance to the firm that is the client’s external assurance practitioner, if any.

Relevant Factors to Consider

360.34 A1 Factors relevant to considering the communication in accordance with paragraphs R360.31 to R360.33 include:

  • Whether doing so would be contrary to law or regulation.

  • Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non-compliance.

  • Whether the purpose of the engagement is to investigate potential non- compliance within the entity to enable it to take appropriate action.

  • Whether management or those charged with governance have already informed the entity’s external auditor about the matter.

  • The likely materiality of the matter to the audit of the client’s financial statements or, where the matter relates to a component of a group, its likely materiality to the audit of the group financial statements.

Purpose of Communication

360.35 A1 In the circumstances addressed in paragraphs R360.31 to R360.33, the purpose of the communication is to enable the audit engagement partner to be informed about the non- compliance or suspected non-compliance and to determine whether and, if so, how to address it in accordance with the provisions of this section.

Considering Whether Further Action Is Needed

R360.36 The assurance practitioner shall also consider whether further action is needed in the public interest.

360.36 A1 Whether further action is needed, and the nature and extent of it, will depend on factors such as:

  • The legal and regulatory framework.

  • The appropriateness and timeliness of the response of management and, where applicable, those charged with governance.

  • The urgency of the situation.

  • The involvement of management or those charged with governance in the matter.

  • The likelihood of substantial harm to the interests of the client, investors, creditors, employees or the general public.

360.36 A2 Further action by the assurance practitioner might include:

  • Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so.

  • Withdrawing from the engagement and the professional relationship where permitted by law or regulation.

360.36 A3 In considering whether to disclose to an appropriate authority, relevant factors to take into account include:

  • Whether doing so would be contrary to law or regulation.

  • Whether there are restrictions about disclosure imposed by a regulatory agency or prosecutor in an ongoing investigation into the non-compliance or suspected non-compliance.

  • Whether the purpose of the engagement is to investigate potential non- compliance within the entity to enable it to take appropriate action.

R360.37 If the assurance practitioner determines that disclosure of the non-compliance or suspected non-compliance to an appropriate authority is an appropriate course of action in the circumstances, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code. When making such disclosure, the assurance practitioner shall act in good faith and exercise caution when making statements and assertions. The assurance practitioner shall also consider whether it is appropriate to inform the client of the assurance practitioner’s intentions before disclosing the matter.

Imminent Breach

R360.38 In exceptional circumstances, the assurance practitioner might become aware of actual or intended conduct that the assurance practitioner has reason to believe would constitute an imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees or the general public. Having first considered whether it would be appropriate to discuss the matter with management or those charged with governance of the entity, the assurance practitioner shall exercise professional judgement and determine whether to disclose the matter immediately to an appropriate authority in order to prevent or mitigate the consequences of such imminent breach of law or regulation. If disclosure is made, that disclosure is permitted pursuant to paragraph R114.1(d) of the Code.

Seeking Advice

360.39 A1 The assurance practitioner might consider:

  • Consulting internally.

  • Obtaining legal advice to understand the professional or legal implications of taking any particular course of action.

  • Consulting on a confidential basis with a regulatory or professional body.

Documentation

360.40 A1 In relation to non-compliance or suspected non-compliance that falls within the scope of this section, the assurance practitioner is encouraged to document:

  • The matter.

  • The results of discussion with management and, where applicable, those charged with governance and other parties.

  • How management and, where applicable, those charged with governance have responded to the matter.

  • The courses of action the assurance practitioner considered, the judgements made and the decisions that were taken.

  • How the assurance practitioner is satisfied that the assurance practitioner has fulfilled the responsibility set out in paragraph R360.36.

2 See Section 601, paragraphs R601.5 and R601.6

3 Professional and Ethical Standard 3, Quality Management for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance or Related Services Engagements

4 Professional and Ethical Standard 4, Engagement Quality Reviews

SECTION 400 - APPLYING THE CONCEPTUAL FRAMEWORK TO INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS

Introduction

General

400.1 It is in the public interest and required by the Code that assurance practitioners be independent when performing audit or review engagements.

400.2 This Part applies to both audit and review engagements unless otherwise stated. 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.

NZ400.2.1 This Part also applies to engagements where assurance is provided in relation to an offer document of a FMC reporting entity considered to have a higher level of public accountability in respect of historical financial information, prospective or pro-forma financial information, or a combination of these.

400.3 In this Part, the term “assurance practitioner” refers to individual assurance practitioners and their firms.

400.4 Professional and Ethical Standard 35 requires a firm to design, implement and operate a system of quality management for audits or reviews of financial statements performed by the firm. As part of this system of quality management, Professional and Ethical Standard 3 requires the firm to establish quality objectives that address the fulfilment of responsibilities in accordance with relevant ethical requirements including those related to independence. Under Professional and Ethical Standard 3, relevant ethical requirements are those related to the firm, its personnel and, when applicable, others subject to independence the requirements to which the firm and the firm’s engagements are subject. International Standards on Auditing (New Zealand), International Standards on Review Engagements (New Zealand) and New Zealand Standards on Review Engagements establish responsibilities for engagement partners and engagement teams at the level of the engagement for audits and reviews, respectively. The allocation of responsibilities within a firm will depend on its size, structure and organisation. Many of the provisions of this Part do not prescribe the specific responsibility of individuals within the firm for actions related to independence, instead referring to “firm” for ease of reference. A firm assigns operational responsibility for compliance with independence requirements to an individual(s) in accordance with Professional and Ethical Standard 3. In addition, an individual assurance practitioner remains responsible for compliance with any provisions that apply to that assurance practitioner’s activities, interests or relationships.

400.5 Independence is linked to the principles of objectivity and integrity. It comprises:

  1. Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

  2. 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 scepticism has been compromised.

In this Part, references to an individual or firm being “independent” mean that the individual or firm has complied with the provisions of this Part.

400.6 When performing audit engagements, the Code requires firms to comply with the fundamental principles and be independent. This Part sets out specific requirements and application material on how to apply the conceptual framework to maintain independence when performing such engagements. The conceptual framework set out in Section 120 applies to independence as it does to the fundamental principles set out in Section 110. Section 405 sets out specific requirements and application material applicable in a group audit.

400.7 This Part describes:

  1. Facts and circumstances, including professional activities, interests and relationships, that create or might create threats to independence;

  2. Potential actions, including safeguards, that might be appropriate to address any such threats; and

  3. Some situations where the threats cannot be eliminated or there can be no safeguards to reduce them to an acceptable level.

Engagement Team and Audit Team

400.8 This Part applies to all audit team members, including engagement team members.

400.9 An engagement team for an audit engagement includes all partners and staff in the firm who perform audit work on the engagement, and any other individuals who perform audit procedures who are from:

  1. A network firm; or

  2. A firm that is not a network firm, or another service provider.

For example, an individual from a component auditor firm who performs audit procedures on the financial information of a component for purposes of a group audit is a member of the engagement team for the group audit.

400.10 In PES 3, a service provider includes an individual or organisation external to the firm that provides a resource that is used in the performance of engagements. Service providers exclude the firm, a network firm or other structures or organisations in the network.

400.11 An audit engagement might involve experts within, or engaged by, the firm, a network firm, or a component auditor firm outside a group auditor firm’s network, who assist in the engagement. Depending on the role of the individuals, they might be engagement team or audit team members. For example:

  • Individuals with expertise in a specialised area of accounting or auditing who perform audit procedures are engagement team members. These include, for example, individuals with expertise in accounting for income taxes or in analysing complex information produced by automated tools and techniques for the purpose of identifying unusual or unexpected relationships.

  • Individuals within, or engaged by, the firm who have direct influence over the outcome of the audit engagement through consultation regarding technical or industry-specific issues, transactions or events for the engagement are audit team members but not engagement team members.

However, individuals who are external experts are neither engagement team nor audit team members.

400.12 If the audit engagement is subject to an engagement quality review, the engagement quality reviewer and any other individuals performing the engagement quality review are audit team members but not engagement team members.

Public Interest Entities

400.13 Some of the requirements and application material set out in this Part reflect the extent of public interest in certain entities which are defined to be public interest entities. Firms are encouraged to determine whether to treat additional entities, or certain categories of entities, as public interest entities because they 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. Examples might include financial institutions, such as banks and insurance companies, and pension funds.

  • Size.

  • Number of employees.

Reports that Include a Restriction on Use and Distribution

400.14 An audit report might include a restriction on use and distribution. If it does and the conditions set out in Section 800 are met, then the independence requirements in this Part may be modified as provided in Section 800.

Assurance Engagements other than Audit and Review Engagements

400.15 Independence standards for assurance engagements that are not audit or review engagements are set out in Part 4B – Independence for Assurance Engagements Other than Audit and Review Engagements.

Requirements and Application Material General

R400.16 A firm performing an audit engagement shall be independent.

R400.17 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.

NZR400.17.1 Where an assurance practitioner identifies multiple threats to independence, which individually may not be significant, the assurance practitioner shall evaluate the significance of those threats in aggregate and apply safeguards to eliminate or reduce them to an acceptable level in aggregate.

Prohibition on Assuming Management Responsibilities

R400.18 A firm or a network firm shall not assume a management responsibility for an audit client.

400.18 A1 Management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources.

400.18 A2 When a firm or a network firm assumes a management responsibility for an audit client, self-review, self-interest and familiarity threats are created. Assuming a management responsibility might also create an advocacy threat because the firm or network firm becomes too closely aligned with the views and interests of management.

400.18 A3 Determining whether an activity is a management responsibility depends on the circumstances and requires the exercise of professional judgement. Examples of activities that would be considered a management responsibility include:

  • Setting policies and strategic direction.

  • Hiring or dismissing employees.

  • Directing and taking responsibility for the actions of employees in relation to the employees work for the entity.

  • Authorising transactions.

  • Controlling or managing bank accounts or investments.

  • Deciding which recommendations of the firm or network firm or other third parties to implement.

  • Reporting to those charged with governance on behalf of management.

  • Taking responsibility for:

  • The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.

  • Designing, implementing, monitoring or maintaining internal control.

400.18 A4 Subject to compliance with paragraph R400.19, providing advice and recommendations to assist the management of an audit client in discharging its responsibilities is not assuming a management responsibility. The provision of advice and recommendations to an audit client might create a self-review threat and is addressed in Section 600.

R400.19 When performing a professional activity for an audit client, the firm shall be satisfied that client management makes all judgements and decisions that are the proper responsibility of management. This includes ensuring that the client’s management:

  1. Designates an individual who possesses suitable skill, knowledge and experience to be responsible at all times for the client’s decisions and to oversee the activities. Such an individual, preferably within senior management, would understand:

    1. The objectives, nature and results of the activities; and

    2. The respective client and firm or network firm responsibilities.However, the individual is not required to possess the expertise to perform or re-perform the activities.

  2. Provides oversight of the activities and evaluates the adequacy of the results of the activities performed for the client’s purpose.

  3. Accepts responsibility for the actions, if any, to be taken arising from the results of the activities.

Related Entities

R400.20 As defined, an audit client that is a FMC reporting entity considered to have a higher level of public accountability includes all of its related entities. For all other entities, references to an audit client in this Part include related entities over which the client has direct or indirect control. When the audit team knows, or has reason to believe, that a relationship or circumstance involving any other related entity of the client is relevant to the evaluation of the firm’s independence from the client, the audit team shall include that related entity when identifying, evaluating and addressing threats to independence.

[Paragraphs 400.21 to 400.29 are intentionally left blank]

Period During which Independence is Required

R400.30 Independence, as required by this Part, shall be maintained during both:

  1. The engagement period; and

  2. The period covered by the financial statements.

400.30 A1 The engagement period starts when the engagement team begins to perform the audit. The engagement period ends when the audit report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final audit report.

R400.31 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:

  1. 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

  2. Previous services provided to the audit client by the firm or a network firm.

400.31 A1 Threats to independence are created if a non-assurance service was provided to an audit client during, or after the period covered by the financial statements, but before the engagement team begins to perform the audit, and the service would not be permitted during the engagement period.

400.31 A2 A factor to be considered in such circumstances is whether the results of the service provided might form part of or affect the accounting records, the internal controls over financial reporting, or the financial statements on which the firm will express an opinion.

400.31 A3 Examples of actions that might be safeguards to address such threats include:

  • Not assigning professionals who performed the non-assurance service to be members of the engagement team.

  • Having an appropriate reviewer review the audit and non-assurance work as appropriate.

  • Engaging another firm outside of the network to evaluate the results of the non- assurance service or having another firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

400.31 A4 A threat to independence created by the provision of a non-assurance service by a firm or a network firm prior to the audit engagement period or prior to the period covered by the financial statements on which the firm will express an opinion is eliminated or reduced to an acceptable level if the results of such service have been used or implemented in a period audited or reviewed by another firm.

Audit Clients that are Public Interest Entities

R400.32 A firm shall not accept appointment as auditor of a public interest entity to which the firm or the network firm has provided a non-assurance service prior to such appointment that might create a self-review threat in relation to the financial statements on which the firm will express an opinion unless:

  1. The provision of such service ceases before the commencement of the audit engagement period;

  2. The firm takes action to address any threats to its independence; and

  3. The firm determines that, in the view of a reasonable and informed third party, any threats to the firm’s independence have been or will be eliminated or reduced to an acceptable level.

400.32 A1 Actions that might be regarded by a reasonable and informed third party as eliminating or reducing to an acceptable level any threats to independence created by the provision of non-assurance services to a public interest entity prior to appointment as auditor of that entity include:

  • The results of the service had been subject to auditing procedures in the course of the audit of the prior year’s financial statements by a predecessor firm.

  • The firm engages an assurance practitioner, who is not a member of the firm expressing the opinion on the financial statements, to perform a review of the first audit engagement affected by the self-review threat consistent with the objective of an engagement quality review.

  • The public interest entity engages another firm outside of the network to:

  1. Evaluate the results of the non-assurance service; or

  2. Re-perform the service, to the extent necessary to enable the other firm to take responsibility for the result of the service.

 

[Paragraphs 400.33 to 400.39 are intentionally left blank]

Communication with those Charged with Governance

400.40 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with those charged with governance.

400.40 A2 Even when not required by the Code, applicable professional standards, laws or regulations, regular communication is encouraged between a firm and those charged with governance of the client regarding relationships and other matters that might, in the firm’s opinion, reasonably bear on independence. Such communication enables those charged with governance to:

  1. Consider the firm’s judgements in identifying and evaluating threats;

  2. Consider how threats have been addressed including the appropriateness of safeguards when they are available and capable of being applied; and

  3. Take appropriate action.

Such an approach can be particularly helpful with respect to intimidation and familiarity threats.

[Paragraphs 400.41 to 400.49 are intentionally left blank]

Network Firms

400.50 A1 Firms frequently form larger structures with other firms and entities to enhance their ability to provide assurance services. Whether these larger structures create a network depends on the particular facts and circumstances. It does not depend on whether the firms and entities are legally separate and distinct.

R400.51 A network firm shall be independent of the audit clients of the other firms within the network as required by this Part.

400.51 A1 The independence requirements in this Part that apply to a network firm apply to any entity that meets the definition of a network firm. It is not necessary for the entity also to meet the definition of a firm. For example, a consulting practice or professional law practice might be a network firm but not a firm.

R400.52 When associated with a larger structure of other firms and entities, a firm shall:

  1. Exercise professional judgement to determine whether a network is created by such a larger structure;

  2. 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

  3. Apply such judgement consistently throughout such a larger structure.

R400.53 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:

  1. It is clearly aimed at profit or cost sharing among the entities within the structure. (Ref: Para. 400.53 A2);

  2. The entities within the structure share common ownership, control or management. (Ref: Para. 400.53 A3);

  3. The entities within the structure share common quality management policies and procedures. (Ref: Para. 400.53 A4);

  4. The entities within the structure share a common business strategy. (Ref: Para. 400.53 A5);

  5. The entities within the structure share the use of a common brand name. (Ref: Para. 400.53 A6, 400.53 A7); or

  6. The entities within the structure share a significant part of professional resources. (Ref: Para 400.53 A8, 400.53 A9).

400.53 A1 There might be other arrangements between firms and entities within a larger structure that constitute a network, in addition to those arrangements described in paragraph R400.53. However, a larger structure might be aimed only at facilitating the referral of work, which in itself does not meet the criteria necessary to constitute a network.

400.53 A2 The sharing of immaterial costs does not in itself create a network. In addition, if the sharing of costs is limited only to those costs related to the development of audit methodologies, manuals or training courses, this would not in itself create a network. Further, an association between a firm and an otherwise unrelated entity jointly to provide a service or develop a product does not in itself create a network. (Ref: Para. R400.53(a)).

400.53 A3 Common ownership, control or management might be achieved by contract or other means. (Ref: Para. R400.53(b)).

400.53 A4 Common quality management policies and procedures are those designed, implemented and operated across the larger structure. (Ref: Para. R400.53(c)).

400.53 A5 Sharing a common business strategy involves an agreement by the entities to achieve common strategic objectives. An entity is not a network firm merely because it co- operates with another entity solely to respond jointly to a request for a proposal for the provision of an assurance service. (Ref: Para. R400.53(d)).

400.53 A6 A common brand name includes common initials or a common name. A firm is using a common brand name if it includes, for example, the common brand name as part of, or along with, its firm name when a partner of the firm signs an audit report. (Ref: Para. R400.53(e)).

400.53 A7 Even if a firm does not belong to a network and does not use a common brand name as part of its firm name, it might appear to belong to a network if its stationery or promotional materials refer to the firm being a member of an association of firms. Accordingly, if care is not taken in how a firm describes such membership, a perception might be created that the firm belongs to a network. (Ref: Para. R400.53(e)).

400.53 A8 Professional resources include:

  • Common systems that enable firms to exchange information such as client data, billing and time records.

  • Partners and other personnel.

  • Technical departments that consult on technical or industry specific issues, transactions or events for assurance engagements.

  • Audit methodology or audit manuals.

  • Training courses and facilities. (Ref: Para. R400.53(f)).

400.53 A9 Whether the shared professional resources are significant depends on the circumstances. For example:

  • The shared resources might be limited to common audit methodology or audit manuals, with no exchange of personnel or client or market information. In such circumstances, it is unlikely that the shared resources would be significant. The same applies to a common training endeavour.

  • The shared resources might involve the exchange of personnel or information, such as where personnel are drawn from a shared pool, or where a common technical department is created within the larger structure to provide participating firms with technical advice that the firms are required to follow. In such circumstances, a reasonable and informed third party is more likely to conclude that the shared resources are significant. (Ref: Para. R400.53(f)).

R400.54 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.

400.54 A1 The agreement for the sale of a component of a practice might provide that, for a limited period of time, the sold component can continue to use all or part of the name of the firm or the network, even though it is no longer connected to the firm or the network. In such circumstances, while the two entities might be practicing under a common name, the facts are such that they do not belong to a larger structure aimed at cooperation. The two entities are therefore not network firms.

[Paragraphs 400.55 to 400.59 are intentionally left blank]

General Documentation of Independence for Audit and Review Engagements

R400.60 A firm shall document conclusions regarding compliance with this Part, and the substance of any relevant discussions that support those conclusions. In particular:

  1. 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

  2. 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.

400.60 A1 Documentation provides evidence of the firm’s judgements in forming conclusions regarding compliance with this Part. However, a lack of documentation does not determine whether a firm considered a particular matter or whether the firm is independent.

[Paragraphs 400.61 to 400.69 are intentionally left blank] Mergers and Acquisitions

When a Client Merger Creates a Threat

400.70 A1 An entity might become a related entity of an audit client because of a merger or acquisition. A threat to independence and, therefore, to the ability of a firm to continue an audit engagement might be created by previous or current interests or relationships between a firm or network firm and such a related entity.

R400.71 In the circumstances set out in paragraph 400.70 A1,

  1. 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

  2. Subject to paragraph R400.72, 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.

R400.72 As an exception to paragraph R400.71(b), if the interest or relationship cannot reasonably be ended by the effective date of the merger or acquisition, the firm shall:

  1. Evaluate the threat that is created by the interest or relationship; and

  2. 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.

400.72 A1 In some circumstances, it might not be reasonably possible to end an interest or relationship creating a threat by the effective date of the merger or acquisition. This might be because the firm provides a non-assurance service to the related entity, which the entity is not able to transition in an orderly manner to another provider by that date.

400.72 A2 Factors that are relevant in evaluating the level of a threat created by mergers and acquisitions when there are interests and relationships that cannot reasonably be ended include:

  • The nature and significance of the interest or relationship.

  • The nature and significance of the related entity relationship (for example, whether the related entity is a subsidiary or parent).

  • The length of time until the interest or relationship can reasonably be ended.

R400.73 If, following the discussion set out in paragraph R400.72(b), those charged with governance request the firm to continue as the assurance practitioner, the firm shall do so only if:

  1. 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;

  2. 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 review; and

  3. Transitional measures will be applied, as necessary, and discussed with those charged with governance.

400.73 A1 Examples of such transitional measures include:

  • Having an assurance practitioner review the audit or non-assurance work as appropriate.

  • Having an assurance practitioner, who is not a member of the firm expressing the opinion on the financial statements, perform a review that is consistent with the objective of an engagement quality review.

  • Engaging another firm to evaluate the results of the non-assurance service or having another firm re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

R400.74 The firm might have completed a significant amount of work on the audit prior to the effective date of the merger or acquisition and might be able to complete the remaining audit procedures within a short period of time. In such circumstances, if those charged with governance request the firm to complete the audit while continuing with an interest or relationship identified in paragraph 400.70 A1, the firm shall only do so if it:

  1. Has evaluated the level of the threat and discussed the results with those charged with governance;

  2. Complies with the requirements of paragraph R400.73(a) to (c); and

  3. Ceases to be the assurance practitioner no later than the date that the audit report is issued.

If Objectivity Remains Compromised

R400.75 Even if all the requirements of paragraphs R400.71 to R400.74 could be met, the firm shall determine whether the circumstances identified in paragraph 400.70 A1 create a threat that cannot be addressed such that objectivity would be compromised. If so, the firm shall cease to be the assurance practitioner.

Documentation

R400.76 The firm shall document:

  1. Any interests or relationships identified in paragraph 400.70 A1 that will not be ended by the effective date of the merger or acquisition and the reasons why they will not be ended;

  2. The transitional measures applied;

  3. The results of the discussion with those charged with governance; and

  4. The reasons why the previous and current interests and relationships do not create a threat such that objectivity would be compromised.

[Paragraphs 400.77 to 400.79 are intentionally left blank.]

Breach of an Independence Provision for Audit and Review Engagements

When a Firm Identifies a Breach

R400.80 If a firm concludes that a breach of a requirement in this Part has occurred, the firm shall:

  1. End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;

  2. Consider whether any legal or regulatory requirements apply to the breach and, if so:

    1. Comply with those requirements; and

    2. 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;

  3. Promptly communicate the breach in accordance with its policies and procedures to:

    1. The engagement partner;

    2. The individual with operational responsibility for compliance with independence requirements;

    3. Other relevant personnel in the firm and, where appropriate, the network; and

    4. Those subject to the independence requirements in Part 4A who need to take appropriate action;

  4. Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report; and

  5. Depending on the significance of the breach, determine:

    1. Whether to end the audit engagement; or

    2. 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.

In making this determination, the firm shall exercise professional judgement and take into account whether a reasonable and informed third party would be likely to conclude that the firm's objectivity would be compromised, and therefore, the firm would be unable to issue an audit report.

400.80 A1 A breach of a provision of this Part might occur despite the firm having a system of quality management designed to address independence requirements. It might be necessary to end the audit engagement because of the breach.

400.80 A2 The significance and impact of a breach on the firm’s objectivity and ability to issue an audit report will depend on factors such as:

  • The nature and duration of the breach.

  • The number and nature of any previous breaches with respect to the current audit engagement.

  • Whether an audit team member had knowledge of the interest or relationship that created the breach.

  • Whether the individual who created the breach is an audit team member or another individual for whom there are independence requirements.

  • If the breach relates to an audit team member, the role of that individual.

  • If the breach was created by providing a professional service, the impact of that service, if any, on the accounting records or the amounts recorded in the financial statements on which the firm will express an opinion.

  • The extent of the self-interest, advocacy, intimidation or other threats created by the breach.

400.80 A3 Depending upon the significance of the breach, examples of actions that the firm might consider to address the breach satisfactorily include:

  • Removing the relevant individual from the audit team.

  • Using different individuals to conduct an additional review of the affected audit work or to re-perform that work to the extent necessary.

  • Recommending that the audit client engage another firm to review or re-perform the affected audit work to the extent necessary.

  • If the breach relates to a non-assurance service that affects the accounting records or an amount recorded in the financial statements, engaging another firm to evaluate the results of the non-assurance service or having another firm re- perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

R400.81 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.

R400.82 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:

  1. The significance of the breach, including its nature and duration;

  2. How the breach occurred and how it was identified;

  3. 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;

  4. The conclusion that, in the firm’s professional judgement, objectivity has not been compromised and the rationale for that conclusion; and

  5. Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches occurring.

Such discussion shall take place as soon as possible unless an alternative timing is specified by those charged with governance for reporting less significant breaches.

Communication of Breaches to Those Charged with Governance

400.83 A1 Paragraphs R300.9 and R300.10 set out requirements with respect to communicating with those charged with governance.

R400.84 With respect to breaches, the firm shall communicate in writing to those charged with governance:

  1. All matters discussed in accordance with paragraph R400.82 and obtain the concurrence of those charged with governance that action can be, or has been, taken to satisfactorily address the consequences of the breach; and

  2. A description of:

    1. The firm’s policies and procedures relevant to the breach designed to provide it with reasonable assurance that independence is maintained; and

    2. Any steps that the firm has taken, or proposes to take, to reduce or avoid the risk of further breaches occurring.

R400.85 If those charged with governance do not concur that the action proposed by the firm in accordance with paragraph R400.80(e)(ii) satisfactorily addresses the consequences of the breach, the firm shall take the steps necessary to end the audit engagement in accordance with paragraph R400.81.

Breaches Before the Previous Audit Report Was Issued

R400.86 If the breach occurred prior to the issuance of the previous audit report, the firm shall comply with the provisions of Part 4A in evaluating the significance of the breach and its impact on the firm’s objectivity and its ability to issue an audit report in the current period.

R400.87 The firm shall also:

  1. Consider the impact of the breach, if any, on the firm’s objectivity in relation to any previously issued audit reports, and the possibility of withdrawing such audit reports; and

  2. Discuss the matter with those charged with governance.

Documentation

R400.88 In complying with the requirements in paragraphs R400.80 to R400.87, the firm shall document:

  1. The breach;

  2. The actions taken;

  3. The key decisions made;

  4. All the matters discussed with those charged with governance; and

  5. Any discussions with a professional or regulatory body or oversight authority.

R400.89 If the firm continues with the audit engagement, it shall document:

  1. The conclusion that, in the firm’s professional judgement, objectivity has not been compromised; and

  2. The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue an audit report.

SECTION 405 - GROUP AUDITS

Introduction

405.1 Section 400 requires a firm to be independent when performing an audit engagement, and to apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence. This section sets out specific requirements and application material relevant to applying the conceptual framework when performing a group audit engagement.

Requirements and Application Material General

405.2 A1 ISAs (NZ) apply to an audit of group financial statements. ISA (NZ) 600 (Revised) deals with special considerations that apply to an audit of group financial statements, including when component auditors are involved. ISA (NZ) 600 (Revised) requires the group engagement partner to take responsibility for confirming whether the component auditors understand and will comply with the relevant ethical requirements, including those related to independence, that apply to the group audit. The independence requirements referred to in ISA (NZ) 600 (Revised), or other relevant auditing standards applicable to group audits that are equivalent to ISA 600 (NZ) (Revised), are those specified in this section.

405.2 A2 A component auditor firm that participates in a group audit engagement might separately issue an audit opinion on the financial statements of the component audit client. Depending on the circumstances, the component auditor firm might need to comply with different independence requirements when performing audit work for a group audit and separately issuing an audit opinion on the financial statements of the component audit client for statutory, regulatory or other reasons.

Communication Between a Group Auditor Firm and a Component Auditor Firm

R405.3 ISA (NZ) 600 (Revised) requires the group engagement partner to take responsibility to make a component auditor aware of the relevant ethical requirements that are applicable given the nature and the circumstances of the group audit engagement. When making the component auditor firm aware of the relevant ethical requirements, the group auditor firm shall communicate at appropriate times the necessary information to enable the component auditor firm to meet its responsibilities under this section.

405.3 A1 Examples of matters the group auditor firm might communicate include:

  • Whether the group audit client is a public interest entity and the relevant ethical requirements applicable to the group audit engagement.

  • The related entities and other components within the group audit client that are relevant to the independence considerations applicable to the component auditor firm and the group audit team members within, or engaged by, that firm.

  • The period during which the component auditor firm is required to be independent.

  • Whether an audit partner who performs work at the component for purposes of the group audit is a key audit partner for the group audit.

R405.4 ISA (NZ) 600 (Revised) also requires the group engagement partner to request the component auditor to communicate whether the component auditor has complied with the relevant ethical requirements, including those related to independence, that apply to the group audit engagement. For the purposes of this section, such a request shall include the communication of:

  1. Any independence matters that require significant judgement; and

  2. In relation to those matters, the component auditor firm’s conclusion whether the threats to its independence are at an acceptable level, and the rationale for that conclusion.

405.4 A1 If a matter comes to the attention of the group engagement partner that indicates that a threat to independence exists, ISA (NZ) 220 (Revised) requires the group engagement partner to evaluate the threat and take appropriate action.

Independence Considerations Applicable to Individuals

Members of the Group Audit Team Within, or Engaged by, a Group Auditor Firm and Its Network Firms

R405.5 Members of the group audit team within, or engaged by, the group auditor firm and its network firms shall be independent of the group audit client in accordance with the requirements of this Part that are applicable to the audit team.

Other Members of the Group Audit Team

R405.6 Members of the group audit team within, or engaged by, a component auditor firm outside the group auditor firm’s network shall be independent of:

  1. The component audit client;

  2. The entity on whose group financial statements the group auditor firm expresses an opinion; and

  3. Any entity over which the entity in subparagraph (b) has direct or indirect control, provided that such entity has direct or indirect control over the component audit client,

in accordance with the requirements of this Part that are applicable to the audit team.

R405.7 In relation to related entities or components within the group audit client other than those covered in paragraph R405.6, a member of the group audit team within, orengaged by, a component auditor firm outside the group auditor firm’s network shall notify the component auditor firm about any relationship or circumstance the individual knows, or has reason to believe, might create a threat to the individual’s independence in the context of the group audit.

405.7 A1 Examples of relationships or circumstances involving the individual or any of the individual’s immediate family members, as applicable, that are relevant to the individual’s consideration when complying with paragraph R405.7 include:

  • A direct or material indirect financial interest in an entity that has control over the group audit client if the group audit client is material to that entity (see Section 510).

  • A loan or guarantee involving: (see Section 511)

  • An entity that is not a bank or similar institution unless the loan or guarantee is immaterial; or

  • A bank or similar institution unless the loan or guarantee is made under normal lending procedures, terms and conditions.

  • A business relationship that is significant or involves a material financial interest (see Section 520).

  • An immediate family member who is: (see Section 521)

  • A director or officer of an entity; or

  • An employee in a position to exert significant influence over the preparation of an entity’s accounting records or financial statements.

  • The individual serving as, or having recently served as: (see Section 522 and Section 523)

  • A director or officer of an entity; or

  • An employee in a position to exert significant influence over the preparation of an entity’s accounting records or financial statements.

R405.8 Upon receiving the notification as set out in paragraph R405.7, the component auditor firm shall evaluate and address any threats to independence created by the individual’s relationship or circumstance.

Independence Considerations Applicable to a Group Auditor Firm

R405.9 A group auditor firm shall be independent of the group audit client in accordance with the requirements of this Part that are applicable to a firm.

Independence Considerations Applicable to Network Firms of a Group Auditor Firm

R405.10 A network firm of the group auditor firm shall be independent of the group audit client in accordance with the requirements of this Part that are applicable to a network firm.

Independence Considerations Applicable to Component Auditor Firms outside a Group Auditor Firm’s Network

All Group Audit Clients

R405.11 A component auditor firm outside the group auditor firm’s network shall:

  1. Be independent of the component audit client in accordance with the requirements set out in this Part that are applicable to a firm with respect to all audit clients;

  2. Apply the relevant requirements in paragraphs R510.4(a), R510.7 and R510.9 with respect to financial interests in the entity on whose group financial statements the group auditor firm expresses an opinion; and

  3. Apply the relevant requirements in Section 511 with respect to loans and guarantees involving the entity on whose group financial statements the group auditor firm expresses an opinion.

R405.12 When a component auditor firm outside the group auditor firm’s network knows, or has reason to believe, that a relationship or circumstance involving the group audit client, beyond those addressed in paragraph R405.11(b) and (c), is relevant to the evaluation of the component auditor firm’s independence from the component audit client, the component auditor firm shall include that relationship or circumstance when identifying, evaluating and addressing threats to independence.

R405.13 When a component auditor firm outside the group auditor firm’s network knows, or has reason to believe, that a relationship or circumstance of a firm within the component auditor firm’s network with the component audit client or the group audit client creates a threat to the component auditor firm’s independence, the component auditor firm shall evaluate and address any such threat.

Period During which Independence is Required

405.14 A1 The references to the financial statements and the audit report in paragraphs R400.30 and 400.30 A1 mean the group financial statements and the audit report on the group financial statements, respectively, when applied in this section.

Group Audit Clients that are Not Public Interest Entities

R405.15 When the group audit client is not a public interest entity, a component auditor firm outside the group auditor firm’s network shall be independent of the component audit client in accordance with the requirements set out in this Part that are applicable to audit clients that are not public interest entities for the purposes of the group audit.

405.15 A1 Where a component auditor firm outside the group auditor firm’s network also performs an audit engagement for a component audit client that is a public interest entity for reasons other than the group audit, for example, a statutory audit, the independence requirements that are relevant to audit clients that are public interest entities apply to that engagement.

Group Audit Clients that are Public Interest Entities Non-Assurance Services

R405.16 Subject to paragraph R405.17, when the group audit client is a public interest entity, a component auditor firm outside the group auditor firm’s network shall comply with the provisions in Section 600 that are applicable to public interest entities with respect to the provision of non-assurance services to the component audit client.

405.16 A1 Where the group audit client is a public interest entity, a component auditor firm outside the group auditor firm’s network is prohibited from, for example:

  • Providing accounting and bookkeeping services to a component audit client that is not a public interest entity (see Subsection 601).

  • Designing the information technology system, or an aspect of it, for a component audit client that is not a public interest entity where such information technology system generates information for the component audit client’s accounting records or financial statements (see Subsection 606).

  • Acting in an advocacy role for a component audit client that is not a public interest entity in resolving a dispute or litigation before a tribunal or court (see Subsection 608).

405.16 A2 The financial information on which a component auditor firm outside the group auditor firm’s network performs audit procedures is relevant to the evaluation of the self- review threat that might be created by the component auditor firm’s provision of a non- assurance service, and therefore the application of Section 600. For example, if the component auditor firm’s audit procedures are limited to a specific item such as inventory, the results of any non-assurance service that form part of or affect the accounting records or the financial information related to the accounting for, or the internal controls over, inventory are relevant to the evaluation of the self-review threat.

R405.17 As an exception to paragraph R405.16, a component auditor firm outside the group auditor firm’s network may provide a non-assurance service that is not prohibited under Section 600 to a component audit client without communicating information about the proposed non-assurance service to those charged with governance of the group audit client or obtaining their concurrence regarding the provision of that service as addressed by paragraphs R600.21 to R600.24.

Key Audit Partners

R405.18 The group engagement partner shall determine whether an audit partner who performs audit work at a component for purposes of the group audit is a key audit partner for the group audit. If so, the group engagement partner shall:

  1. Communicate that determination to that individual; and

  2. Indicate:

    1. In the case of all group audit clients, that the individual is subject to paragraph R411.4, and

    2. In the case of group audit clients that are public interest entities, that the individual is also subject to paragraphs R524.6, R540.5(c) and R540.20.

405.18 A1 A key audit partner makes key decisions or judgements on significant matters with respect to the audit of the group financial statements on which the group auditor firm expresses an opinion in the group audit.

Changes in Components

All Group Audit Clients

R405.19 When an entity that is not a related entity becomes a component within the group audit client, the group auditor firm shall apply paragraphs R400.71 to R400.76.

Changes in Component Auditor Firms

All Group Audit Clients

405.20 A1 There might be circumstances in which the group auditor firm requests another firm to perform audit work as a component auditor firm during or after the period covered by the group financial statements, for example due to a client merger or acquisition. A threat to the component auditor firm’s independence might be created by:

  1. Financial or business relationships of the component auditor firm with the component audit client during or after the period covered by the group financial statements but before the component auditor firm agrees to perform the audit work; or

  2. Previous services provided to the component audit client by the component auditor firm.

405.20 A2 Paragraphs 400.31 A1 to A3 set out application material that is applicable for a component auditor firm’s assessment of threats to independence if a non-assurance service was provided by the component auditor firm to the component audit client during or after the period covered by the group financial statements, but before the component auditor firm begins to perform the audit work for the purposes of the group audit, and the service would not be permitted during the engagement period.

405.20 A3 Paragraph 400.31 A4 sets out application material that is applicable for a component auditor firm’s assessment of threats to independence if a non-assurance service was provided by the component auditor firm to the component audit client prior to the period covered by the group financial statements.

Group Audit Clients that are Public Interest Entities

405.21 A1 Paragraphs R400.32 and 400.32 A1 are applicable when a component auditor firm agrees to perform audit work for group audit purposes in relation to a group audit client that is a public interest entity if the component auditor firm has previously provided a non-assurance service to the component audit client.

405.21 A2 Paragraphs R600.25 and 600.25 A1 are applicable in relation to a non-assurance service provided, either currently or previously, by a component auditor firm to a component audit client when the group audit client subsequently becomes a public interest entity.

Breach of an Independence Provision at a Component Auditor Firm

405.22 A1 A breach of a provision of this section might occur despite a component auditor firm having a system of quality management designed to address independence requirements. Paragraphs R405.23 to R405.29 are relevant to a group auditor firm’s determination as to whether it would be able to use a component auditor firm’s work if a breach has occurred at the component auditor firm.

405.22 A2 In the case of a breach at a component auditor firm within the group auditor firm’s network, paragraphs R400.80 to R400.89 also apply to the group auditor firm in relation to the group audit, as applicable.

When a Component Auditor Firm Identifies a Breach

R405.23 If a component auditor firm concludes that a breach of this section has occurred, the component auditor firm shall:

  1. End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;

  2. Evaluate the significance of the breach and its impact on the component auditor firm’s objectivity and ability to perform audit work for the purposes of the group audit;

  3. Depending on the significance of the breach, determine 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; and

  4. Promptly communicate in writing the breach to the group engagement partner, including the component auditor firm’s assessment of the significance of the breach and any actions proposed or taken to address the consequences of the breach.

405.23 A1 Paragraphs 400.80 A2 and A3 set out application material relevant to the component auditor firm’s evaluation of the significance and impact of the breach on the component auditor firm's objectivity and ability to issue an opinion or conclusion on the audit work performed at the component for purposes of the group audit, and its consideration of any actions that might be taken to address the consequences of the breach satisfactorily.

R405.24 Upon receipt of the component auditor firm’s communication of the breach, the group engagement partner shall:

  1. Review the component auditor firm’s assessment of the significance of the breach and its impact on the component auditor firm’s objectivity, and any action that can be or has been taken to address the consequences of the breach;

  2. Evaluate the group auditor firm’s ability to use the work of the component auditor firm for the purposes of the group audit; and

  3. Determine the need for any further action.

R405.25 In applying paragraph R405.24, the group engagement partner shall exercise professional judgement and take into account whether a reasonable and informed third party would be likely to conclude that the component auditor firm’s objectivity is compromised, and therefore, the group auditor firm is unable to use the work of the component auditor firm for the purposes of the group audit.

405.25 A1 If the group engagement partner determines that the consequences of the breach have been satisfactorily addressed by the component auditor firm and does not compromise the component auditor firm’s objectivity, the group auditor firm may continue to use the work of the component auditor firm for the group audit. In certain circumstances, the group engagement partner might determine that additional actions are needed to satisfactorily address the breach in order to use the component auditor firm’s work. Examples of such action include the group auditor firm performing specific procedures on the areas impacted by the breach or requesting the component auditor firm to perform appropriate remedial work on the affected areas.

405.25 A2 ISA (NZ) 600 (Revised) sets out that if there has been a breach by a component auditor and the breach has not been satisfactorily addressed, the group auditor cannot use the work of that component auditor. In those circumstances, the group engagement partner might find other means to obtain the necessary audit evidence on the component audit client’s financial information. Examples of such means include the group auditor firm performing the necessary audit work on the component audit client’s financial information or requesting another component auditor firm to perform such audit work.

Discussion with Those Charged with Governance of the Group Audit Client

405.26 A1 With respect to breaches by a component auditor firm within the group auditor firm’s network, paragraph R400.84 applies.

R405.27 With respect to breaches by a component auditor firm outside the group auditor firm’snetwork, the group auditor firm shall discuss with those charged with governance of the group audit client:

  1. The component auditor firm’s assessment of the significance and impact of the breach on the component auditor firm’s objectivity, including the nature and duration of the breach, and the action that can be or has been taken; and

  2. Whether:

    1. The action will satisfactorily address, or has addressed, the consequences of the breach; or

    2. The group auditor firm will use other means to obtain the necessary audit evidence on the component audit client’s financial information.

Such discussion shall take place as soon as possible unless an alternative timing is specified by those charged with governance for reporting less significant breaches.

R405.28 The group auditor firm shall communicate in writing to those charged with governance of the group audit client all matters discussed in accordance with paragraph R405.27 and obtain the concurrence of those charged with governance that the action can be or has been taken to satisfactorily address the consequences of the breach.

R405.29 If those charged with governance do not concur that the action that can be or has been taken would satisfactorily address the consequences of the breach at the component auditor firm, the group auditor firm shall not use the work performed by the component auditor firm for the purposes of the group audit.

SECTION 410 - FEES

Introduction

410.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

410.2 Section 330 sets out application material relevant to applying the conceptual framework where 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. This section sets out specific requirements and application material relevant to applying the conceptual framework to identify, evaluate and address threats to independence arising from fees charged to audit clients.

Requirements and Application Material General

410.3 A1 Fees for assurance services are usually negotiated with and paid by an audit client and might create threats to independence. This practice is generally recognised and accepted by intended users of financial statements.

410.3 A2 When the audit client is a public interest entity, stakeholders have heightened expectations regarding the firm's independence. As transparency can serve to better inform the views and decisions of those charged with governance and a wide range of stakeholders, this section provides for disclosure of fee-related information to both those charged with governance and stakeholders more generally for audit clients that are public interest entities.

410.3 A3 For the purposes of this section, audit fees comprise fees or other types of remuneration for an audit or review of financial statements. Where reference is made to the fee for the audit of the financial statements, this does not include any fee for an audit of special purpose financial statements or a review of financial statements. (Ref: Para. R410.23(a),

410.25 A1 and R410.31(a))

Fees Paid by an Audit Client

410.4 A1 When fees are negotiated with and paid by an audit client, this creates a self-interest threat and might create an intimidation threat to independence.

410.4 A2 The application of the conceptual framework requires that before a firm or network firm accepts an audit or any other engagement for an audit client, the firm determines whether the threats to independence created by the fees proposed to the client are at an acceptable level. The application of the conceptual framework also requires the firm to re-evaluate such threats when facts and circumstances change during the engagement period for the audit.

410.4 A3 Factors that are relevant in evaluating the level of threats created when fees for an audit or any other engagement are paid by the audit client include:

  • The level of the fees and the extent to which they have regard to the resources required, taking into account the firm’s commercial and market priorities.

  • Any linkage between fees for the audit and those for services other than audit and the relative size of both elements.

  • The extent of any dependency between the level of the fee for, and the outcome of, the service.

  • Whether the fee is for services to be provided by the firm or a network firm.

  • The level of the fee in the context of the service to be provided by the firm or a network firm.

  • The operating structure and the compensation arrangements of the firm and network firms.

  • The significance of the client, or a third party referring the client, to the firm, network firm, partner or office.

  • The nature of the client, for example whether the client is a public interest entity.

  • The relationship of the client to the related entities to which the services other than audit are provided, for example when the related entity is a sister entity.

  • The involvement of those charged with governance in appointing the auditor and agreeing fees, and the apparent emphasis they and client management place on the quality of the audit and the overall level of the fees.

  • Whether the level of the fee is set by an independent third party, such as a regulatory body.

  • Whether the quality of the firm’s audit work is subject to the review of an independent third party, such as an oversight body.

410.4 A4 The conditions, policies and procedures described in paragraph 120.15 A3 (particularly a system of quality management designed, implemented and operated by the firm in accordance with quality management standards issued by the New Zealand Auditing and Assurance Standards Board) might also impact the evaluation of whether the threats to independence are at an acceptable level.

410.4 A5 The requirements and application material that follow identify circumstances which might need to be further evaluated when determining whether the threats are at an acceptable level. For those circumstances, application material includes examples of additional factors that might be relevant in evaluating the threats.

Level of Audit Fees

410.5 A1 Determining the fees to be charged to an audit client, whether for audit, review or other services, is a business decision of the firm taking into account the facts and circumstances relevant to that specific engagement, including the requirements of standards issued by the External Reporting Board, the New Zealand Auditing and Assurance Standards Board and the New Zealand Accounting Standards Board.

410.5 A2 Factors that are relevant in evaluating the level of self-interest and intimidation threats created by the level of the audit fee paid by the audit client include:

  • The firm’s commercial rationale for the audit fee.

  • Whether undue pressure has been, or is being, applied by the client to reduce the audit fee.

410.5 A3 Examples of actions that might be safeguards to address such threats include:

  • Having an appropriate reviewer who does not take part in the audit engagement assess the reasonableness of the fee proposed, having regard to the scope and complexity of the engagement.

  • Having an appropriate reviewer who did not take part in the audit engagement review the work performed.

Impact of Other Services Provided to an Audit Client

R410.6 Subject to paragraph R410.7, a firm shall not allow the audit fee to be influenced by the provision of services other than audit to an audit client by the firm or a network firm.

410.6 A1 The audit fee ordinarily reflects a combination of matters, such as those identified in paragraph 410.23 A1. However, the provision of other services to an audit client is not an appropriate consideration in determining the audit fee.

R410.7 As an exception to paragraph R410.6, when determining the audit fee, the firm may take into consideration the cost savings achieved as a result of experience derived from the provision of services other than audit to an audit client.

Contingent Fees

410.8 A1 Contingent fees are fees calculated on a predetermined basis relating to the outcome of a transaction or the result of the services performed. A contingent fee charged through an intermediary is an example of an indirect contingent fee. In this section, a fee is not regarded as being contingent if established by a court or other public authority.

R410.9 A firm shall not charge directly or indirectly a contingent fee for an audit engagement.

R410.10 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:

  1. 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;

  2. 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

  3. The outcome of the non-assurance service, and therefore the amount of the fee, is dependent on a future or contemporary judgement related to the audit of a material amount in the financial statements.

410.10 A1 Paragraphs R410.9 and R410.10 preclude a firm or a network firm from entering into certain contingent fee arrangements with an audit client. Even if a contingent fee arrangement is not precluded when providing a non-assurance service to an audit client, it might still impact the level of the self-interest threat.

410.10 A2 Factors that are relevant in evaluating the level of such a threat include:

  • The range of possible fee amounts.

  • Whether an appropriate authority determines the outcome on which the contingent fee depends.

  • Disclosure to intended users of the work performed by the firm and the basis of remuneration.

  • The nature of the service.

  • The effect of the event or transaction on the financial statements.

410.10 A3 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Having an appropriate reviewer who was not involved in performing the non- assurance service review the work performed.

  • Obtaining an advance written agreement with the client on the basis of remuneration.

Total Fees – Proportion of Fees for Services Other than Audit to Audit Fee

410.11 A1 The level of the self-interest threat might be impacted when a large proportion of fees charged by the firm or network firms to an audit client is generated by providing services other than audit to the client, due to concerns about the potential loss of either the audit engagement or other services. Such circumstances might also create an intimidation threat. A further consideration is a perception that the firm or network firm focuses on the non-audit relationship, which might create a threat to the auditor’s independence.

410.11 A2 Factors that are relevant in evaluating the level of such threats include:

  • The ratio of fees for services other than audit to the audit fee.

  • The length of time during which a large proportion of fees for services other than audit to the audit fee has existed.

  • The nature, scope and purposes of the services other than audit, including:

  • Whether they are recurring services.

  • Whether law or regulation mandates the services to be performed by the firm.

410.11 A3 Examples of actions that might be safeguards to address such self-interest or intimidation threats include:

  • Having an appropriate reviewer who was not involved in the audit or the service other than audit review the relevant audit work.

  • Reducing the extent of services other than audit provided to the audit client.

Total Fees – Overdue Fees

410.12 A1 The level of the self-interest threat might be impacted if fees payable by an audit client for the audit or services other than audit are overdue during the period of the audit engagement.

410.12 A2 It is generally expected that the firm will obtain payment of such fees before the audit report is issued.

410.12 A3 Factors that are relevant in evaluating the level of such a self-interest threat include:

  • The significance of the overdue fees to the firm.

  • The length of time the fees have been overdue.

  • The firm’s assessment of the ability and willingness of the audit client to pay the overdue fees.

410.12 A4 Examples of actions that might be safeguards to address such a threat include:

  • Obtaining partial payment of overdue fees.

  • Having an appropriate reviewer who did not take part in the audit engagement review the audit work.

R410.13 When a significant part of the fees due from an audit client remains unpaid for a long time, the firm shall determine:

  1. Whether the overdue fees might be equivalent to a loan to the client, in which case the requirements and application material set out in section 511 are applicable; and

  2. Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.

Total Fees – Fee Dependency

All Audit Clients

410.14 A1 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, and concern about the potential loss of, fees from audit and other services from that client impact the level of the self-interest threat and create an intimidation threat.

410.14 A2 In calculating the total fees of the firm, the firm might use financial information available from the previous financial year and estimate the proportion based on that information if appropriate.

410.14 A3 Factors that are relevant in evaluating the level of such self-interest and intimidation threats include:

  • The operating structure of the firm.

  • Whether the firm is expected to diversify such that any dependence on the audit client is reduced.

410.14 A4 Examples of actions that might be safeguards to address such threats include:

  • Having an appropriate reviewer who is not a member of the firm review the audit work.

  • Reducing the extent of services other than audit provided to the audit client.

  • Increasing the client base of the firm to reduce dependence on the client.

  • Increasing the extent of services provided to other clients.

410.14 A5 A self-interest or intimidation threat is created when the fees generated by a firm from an audit client represent a large proportion of the revenue of one partner or one office of the firm.

410.14 A6 Factors that are relevant in evaluating the level of such threats include:

  • The qualitative and quantitative significance of the audit client to the partner or office.

  • The extent to which the compensation of the partner, or the partners in the office, is dependent upon the fees generated from the client.

410.14 A7 Examples of actions that might be safeguards to address such self-interest or intimidation threats include:

  • Having an appropriate reviewer who was not involved in the audit engagement review the audit work.

  • Ensuring that the compensation of the partner is not significantly influenced by the fees generated from the client.

  • Reducing the extent of services other than audit provided by the partner or office to the audit client.

  • Increasing the client base of the partner or the office to reduce dependence on the client.

  • Increasing the extent of services provided by the partner or the office to other clients.

Audit Clients that are Not Public Interest Entities

R410.15 When for each of five consecutive years total fees from an audit client that is not a public interest entity represent, or are likely to represent, more than 30% of the total fees received by the firm, the firm shall determine whether either of the following actions might be a safeguard to reduce the threats created to an acceptable level, and if so, apply it:

  1. Prior to the audit opinion being issued on the fifth year’s financial statements, have an assurance practitioner, who is not a member of the firm expressing the opinion on the financial statements, review the fifth year’s audit work; or

  2. After the audit opinion on the fifth year’s financial statements has been issued, and before the audit opinion is issued on the sixth year’s financial statements, have an assurance practitioner, who is not a member of the firm expressing the opinion on the financial statements, or a professional body review the fifth year’s audit work.

R410.16 If the total fees described in paragraph R410.15 continue to exceed 30%, the firm shall each year determine whether either of the actions in paragraph R410.15 applied to the relevant year’s engagement might be a safeguard to address the threats created by the total fees received by the firm from the client, and if so, apply it.

R410.17 When two or more firms are engaged to conduct an audit of the client’s financial statements, the involvement of the other firm in the audit may be regarded each year as an action equivalent to that in paragraph R410.15 (a), if:

  1. The circumstances addressed by paragraph R410.15 apply to only one of the firms expressing the audit opinion; and

  2. Each firm performs sufficient work to take full individual responsibility for the audit opinion.

Audit Clients that are Public Interest Entities

R410.18 When for each of two consecutive years the total fees from an audit client that is a public interest entity represent, or are likely to represent, more than 15% of the total fees received by the firm, the firm shall determine whether, prior to the audit opinion being issued on the second year’s financial statements, a review, consistent with the objective of an engagement quality review, performed by an assurance practitioner who is not a member of the firm expressing the opinion on the financial statements (“pre-issuance review”) might be a safeguard to reduce the threats to an acceptable level, and if so, apply it.

R410.19 When two or more firms are engaged to conduct an audit of the client’s financial statements, the involvement of the other firm in the audit may be regarded each year as an action equivalent to that in paragraph R410.18, if:

  1. The circumstances addressed by paragraph R410.18 apply to only one of the firms expressing the audit opinion; and

  2. Each firm performs sufficient work to take full individual responsibility for the audit opinion.

R410.20 Subject to paragraph R410.21, if the circumstances described in paragraph R410.18 continue for five consecutive years, the firm shall cease to be the auditor after the audit opinion for the fifth year is issued.

R410.21 As an exception to paragraph R410.20, the firm may continue to be the auditor after five consecutive years if there is a compelling reason to do so having regard to the public interest, provided that:

  1. The firm consults with a regulatory or professional body in the relevant jurisdiction and it concurs that having the firm continue as the auditor would be in the public interest; and

  2. Before the audit opinion on the sixth and any subsequent year’s financial statements is issued, the firm engages an assurance practitioner, who is not a member of the firm expressing the opinion on the financial statements, to perform a pre-issuance review.

410.21 A1 A factor which might give rise to a compelling reason is the lack of viable alternative firms to carry out the audit engagement, having regard to the nature and location of the client’s business.

Transparency of Information Regarding Fees for Audit Clients that are Public Interest Entities

Communication About Fee-related Information with Those Charged with Governance

410.22 A1 Communication by the firm of fee-related information (for both audit and services other than audit) with those charged with governance assists in their assessment of the firm’s independence. Effective communication in this regard also allows for a two-way open exchange of views and information about, for example, the expectations that those charged with governance might have regarding the scope and extent of audit work and impact on the audit fee.

Fees for the Audit of the Financial Statements

R410.23 Subject to paragraph R410.24, the firm shall communicate in a timely manner with those charged with governance of an audit client that is a public interest entity:

  1. Fees paid or payable to the firm or network firms for the audit of the financial statements on which the firm expresses an opinion; and

  2. Whether the threats created by the level of those fees are at an acceptable level, and if not, any actions the firm has taken or proposes to take to reduce such threats to an acceptable level.

410.23 A1 The objective of such communication is to provide the background and context to the fees for the audit of the financial statements on which the firm expresses an opinion to enable those charged with governance to consider the independence of the firm. The nature and extent of matters to be communicated will depend on the facts and circumstances and might include for example:

  • Considerations affecting the level of the fees such as:

  • The scale, complexity and geographic spread of the audit client’s operations.

  • The time spent or expected to be spent commensurate with the scope and complexity of the audit.

  • The cost of other resources utilised or expended in performing the audit.

  • The quality of record keeping and processes for financial statements preparation.

  • Adjustments to the fees quoted or charged during the period of the audit, and the reasons for any such adjustments.

  • Changes to laws and regulations and professional standards relevant to the audit that impacted the fees.

410.23 A2 The firm is encouraged to provide such information as soon as practicable and communicate proposed adjustments as appropriate.

R410.24 As an exception to paragraph R410.23, the firm may determine not to communicate the information set out in paragraph R410.23 to those charged with governance of an entity that is (directly or indirectly) wholly-owned by another public interest entity provided that:

  1. The entity is consolidated into group financial statements prepared by that other public interest entity; and

  2. The firm or a network firm expresses an opinion on those group financial statements.

Fees for Other Services

R410.25 Subject to paragraph R410.27, the firm shall communicate in a timely manner with those charged with governance of an audit client that is a public interest entity:

  1. The fees, other than those disclosed under paragraph R410.23 (a), charged to the client for the provision of services by the firm or a network firm during the period covered by the financial statements on which the firm expresses an opinion. For this purpose, such fees shall only include fees charged to the client and its related entities over which the client has direct or indirect control that are consolidated in the financial statements on which the firm will express an opinion; and

  2. As set out in paragraph 410.11 A1, where the firm has identified that there is an impact on the level of the self-interest threat or that there is an intimidation threat to independence created by the proportion of fees for services other than audit relative to the audit fee:

    1. Whether such threats are at an acceptable level; and

    2. If not, any actions that the firm has taken or proposes to take to reduce such threats to an acceptable level.

410.25 A1 The objective of such communication is to provide the background and context to the fees for other services to enable those charged with governance to consider the independence of the firm. The nature and extent of matters to be communicated will depend on the facts and circumstances and might include for example:

  • The amount of fees for other services that are required by law or regulation.

  • The nature of other services provided and their associated fees.

  • Information on the nature of the services provided under a general policy approved by those charged with governance and associated fees.

  • The proportion of fees referred to in paragraph R410.25(a) to the aggregate of the fees charged by the firm and network firms for the audit of the financial statements on which the firm expresses an opinion.

R410.26 The firm shall include in the communication required by paragraph R410.25(a) the fees, other than those disclosed under paragraph R410.23(a), charged to any other related entities over which the audit client has direct or indirect control for the provision of services by the firm or a network firm, when the firm knows, or has reason to believe, that such fees are relevant to the evaluation of the firm’s independence.

410.26 A1 Factors the firm might consider when determining whether the fees, other than those disclosed under paragraph R410.23(a), charged to such other related entities, individually and in the aggregate, for the provision of services by the firm or a network firm are relevant to the evaluation of the firm’s independence include:

  • The extent of the audit client’s involvement in the appointment of the firm or network firm for the provision of such services, including the negotiation of fees.

  • The significance of the fees paid by the other related entities to the firm or a network firm.

  • The proportion of fees from the other related entities to the fees paid by the client.

R410.27 As an exception to paragraph R410.25, the firm may determine not to communicate the information set out in paragraph R410.25 to those charged with governance of an entity that is (directly or indirectly) wholly-owned by another public interest entity provided that:

  1. The entity is consolidated into group financial statements prepared by that other public interest entity; and

  2. The firm or a network firm expresses an opinion on those group financial statements.

Fee Dependency

R410.28 Where the total fees from an audit client that is a public interest entity represent, or are likely to represent, more than 15% of the total fees received by the firm, the firm shall communicate with those charged with governance:

  1. That fact and whether this situation is likely to continue;

  2. The safeguards applied to address the threats created, including, where relevant, the use of a pre-issuance review (Ref: Para R410.18); and

  3. Any proposal to continue as the auditor under paragraph R410.21.

Public Disclosure of Fee-related Information

410.29 A1 In view of the public interest in the audits of public interest entities, it is beneficial for stakeholders to have visibility about the professional relationships between the firm and the audit client which might reasonably be thought to be relevant to the evaluation of the firm’s independence. In a wide number of jurisdictions, there already exist requirements regarding the disclosure of fees by an audit client for both audit and services other than audit paid and payable to the firm and network firms. Such disclosures often require the disaggregation of fees for services other than audit into different categories.

R410.30 If laws and regulations do not require6 an audit client to disclose audit fees, fees for services other than audit paid or payable to the firm and network firms and information about fee dependency, the firm shall discuss with those charged with governance of an audit client that is a public interest entity:

  1. The benefit to the client’s stakeholders of the client making such disclosures that are not required by laws and regulations in a manner deemed appropriate, taking into account the timing and accessibility of the information; and

  2. The information that might enhance the users’ understanding of the fees paid or payable and their impact on the firm’s independence.

410.30 A1 Examples of information relating to fees that might enhance the users’ understanding of the fees paid or payable and their impact on the firm’s independence include:

  • Comparative information of the prior year’s fees for audit and services other than audit.

  • The nature of services and their associated fees as disclosed under paragraph R410.31(b).

  • Safeguards applied when the total fees from the client represent or are likely to represent more than 15% of the total fees received by the firm.

R410.31 After the discussion with those charged with governance as set out in paragraph R410.30, to the extent that the audit client that is a public interest entity does not make the relevant disclosure, subject to paragraph R410.32, the firm shall publicly disclose:

  1. Fees paid or payable to the firm and network firms for the audit of the financial statements on which the firm expresses an opinion;

  2. Fees, other than those disclosed under (a), charged to the client for the provision of services by the firm or a network firm during the period covered by the financial statements on which the firm expresses an opinion. For this purpose, such fees shall only include fees charged to the client and its related entities over which the client has direct or indirect control that are consolidated in the financial statements on which the firm will express an opinion;

  3. Any fees, other than those disclosed under (a) and (b), charged to any other related entities over which the audit client has direct or indirect control for the provision of services by the firm or a network firm when the firm knows, or has reason to believe, that such fees are relevant to the evaluation of the firm’s independence; and

  4. If applicable, the fact that the total fees received by the firm from the audit client represent, or are likely to represent, more than 15% of the total fees received by the firm for two consecutive years, and the year that this situation first arose.

410.31 A1 The firm might also disclose other information relating to fees that will enhance the users’ understanding of the fees paid or payable and the firm’s independence, such as the examples described in paragraph 410.30 A1.

410.31 A2 Factors the firm might consider when making the determination required by paragraph R410.31(c) are set out in paragraph 410.26 A1.

410.31 A3 When disclosing fee-related information in compliance with paragraph R410.31, the firm might disclose the information in a manner deemed appropriate taking into account the timing and accessibility of the information to stakeholders, for example:

  • On the firm’s website.

  • In the firm’s transparency report.

  • In an audit quality report.

  • Through targeted communication to specific stakeholders, for example a letter to the shareholders.

  • In the auditor’s report.

R410.32 As an exception to paragraph R410.31, the firm may determine not to publicly disclose the information set out in paragraph R410.31 relating to:

  1. A parent entity that also prepares group financial statements provided that the firm or a network firm expresses an opinion on the group financial statements; or

  2. An entity (directly or indirectly) wholly-owned by another public interest entity provided that:

    1. The entity is consolidated into group financial statements prepared by that other public interest entity; and

    2. The firm or a network firm expresses an opinion on those group financial statements.

Considerations for Review Clients

R410.33 This section sets out requirements for a firm to communicate fee-related information of an audit client that is a public interest entity and to disclose publicly fee-related information to the extent that the client does not disclose such information. As an exception to those requirements, the firm may determine not to communicate or pursue disclosure of such information where a review client is not also an audit client.

SECTION 411 - COMPENSATION AND EVALUATION POLICIES

Introduction

411.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

411.2 A firm’s evaluation or compensation policies might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

411.3 A1 When an audit or review 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:

  1. What proportion of the compensation or evaluation is based on the sale of such services;

  2. The role of the individual on the audit team; and

  3. Whether the sale of such non-assurance services influences promotion decisions.

411.3 A2 Examples of actions that might eliminate such a self-interest threat include:

  • Revising the compensation plan or evaluation process for that individual.

  • Removing that individual from the audit team.

411.3 A3 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the audit team member.

R411.4 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. This requirement does not preclude normal profit-sharing arrangements between partners of a firm.

SECTION 420 - GIFTS AND HOSPITALITY

Introduction

420.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

420.2 Accepting gifts and hospitality from an audit client might create a self-interest, familiarity or intimidation threat. This section sets out a specific requirement and application material relevant to applying the conceptual framework in such circumstances.

Requirement and Application Material

R420.3 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.

420.3 A1 Where a firm, network firm or audit team member is offering or accepting an inducement to or from an audit client, the requirements and application material set out in Section 340 apply and non-compliance with these requirements might create threats to independence.

420.3 A2 The requirements set out in Section 340 relating to offering or accepting inducements do not allow a firm, network firm or audit team member to accept gifts and hospitality where the intent is to improperly influence behaviour even if the value is trivial and inconsequential.

SECTION 430 - ACTUAL OR THREATENED LITIGATION

Introduction

430.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

430.2 When litigation with an audit client occurs, or appears likely, self-interest and intimidation threats are created. This section sets out specific application material relevant to applying the conceptual framework in such circumstances.

Application Material General

430.3 A1 The relationship between client management and audit team members must be characterised by complete candour and full disclosure regarding all aspects of a client’s operations. Adversarial positions might result from actual or threatened litigation between an audit client and the firm, a network firm or an audit team member. Such adversarial positions might affect management’s willingness to make complete disclosures and create self-interest and intimidation threats.

430.3 A2 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.

430.3 A3 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.

430.3 A4 An example of an action that might be a safeguard to address such self-interest and intimidation threats is to have an appropriate reviewer review the work performed.

SECTION 510 - FINANCIAL INTERESTS

Introduction

510.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

510.2 Holding a financial interest in an audit client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

510.3 A1 A financial interest might be held directly or indirectly through an intermediary such as a collective investment vehicle, an estate or a trust. When a beneficial owner has control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be direct. Conversely, when a beneficial owner has no control over the intermediary or ability to influence its investment decisions, the Code defines that financial interest to be indirect.

510.3 A2 This section contains references to the “materiality” of a financial interest. In determining whether such an interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

510.3 A3 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 Held by the Firm, a Network Firm, Audit Team Members and Others

R510.4 Subject to paragraph R510.5, a direct financial interest or a material indirect financial interest in the audit client shall not be held by:

  1. The firm or a network firm;

  2. An audit team member, or any of that individual’s immediate family;

  3. 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

  4. 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.

510.4 A1 The office in which the engagement partner practices in connection with an audit engagement is not necessarily the office to which that partner is assigned. When the engagement partner is located in a different office from that of the other engagement team members, professional judgement is needed to determine the office in which the partner practices in connection with the engagement.

R510.5 As an exception to paragraph R510.4, an immediate family member identified in subparagraphs R510.4(c) or (d) may hold a direct or material indirect financial interest in an audit client, provided that:

  1. 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

  2. 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 in an Entity Controlling an Audit Client

R510.6 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 Held as Trustee

R510.7 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:

  1. 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;

  2. The interest in the audit client held by the trust is not material to the trust;

  3. The trust is not able to exercise significant influence over the audit client; and

  4. 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 in Common with the Audit Client

R510.8

  1. 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:

    1. 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

    2. The audit client cannot exercise significant influence over the entity.

  2. 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:

    1. Dispose of the interest; or

    2. Dispose of enough of the interest so that the remaining interest is no longer material.

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:

  1. 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

  2. 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

  3. Pending the disposal of the financial interest, when necessary the firm shall address the threat created.

Financial Interests – Other Circumstances

Immediate Family

510.10 A1 A self-interest, familiarity, or intimidation threat might be created if an audit team member, or any of that individual’s immediate family, or the firm or a network firm has a financial interest in an entity when a director or officer or controlling owner of the audit client is also known to have a financial interest in that entity.

510.10 A2 Factors that are relevant in evaluating the level of such threats include:

  • The role of the individual on the audit team.

  • Whether ownership of the entity is closely or widely held.

  • Whether the interest allows the investor to control or significantly influence the entity.

  • The materiality of the financial interest.

510.10 A3 An example of an action that might eliminate such a self-interest, familiarity, or intimidation threat is removing the audit team member with the financial interest from the audit team.

510.10 A4 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the audit team member.

Close Family

510.10 A5 A self-interest threat might be created if an audit team member knows that a close family member has a direct financial interest or a material indirect financial interest in the audit client.

510.10 A6 Factors that are relevant in evaluating the level of such a threat include:

  • The nature of the relationship between the audit team member and the close family member.

  • Whether the financial interest is direct or indirect.

  • The materiality of the financial interest to the close family member.

510.10 A7 Examples of actions that might eliminate such a self-interest threat include:

  • Having the close family member dispose, as soon as practicable, of all of the financial interest or dispose of enough of an indirect financial interest so that the remaining interest is no longer material.

  • Removing the individual from the audit team.

510.10 A8 An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review the work of the audit or review team member.

Other Individuals

510.10 A9 A self-interest threat might be created if an audit team member knows that a financial interest in the audit client is held by individuals such as:

  • Partners and professional employees of the firm or network firm, apart from those who are specifically not permitted to hold such financial interests by paragraph R510.4, or their immediate family members.

  • Individuals with a close personal relationship with an audit team member.

510.10 A10 Factors that are relevant in evaluating the level of such a threat include:

  • The firm’s organisational, operating and reporting structure.

  • The nature of the relationship between the individual and the audit team member.

510.10 A11 An example of an action that might eliminate such a self-interest threat is removing the audit team member with the personal relationship from the audit team.

510.10 A12 Examples of actions that might be safeguards to address such a self-interest threat include:

  • Excluding the audit team member from any significant decision-making concerning the audit engagement.

  • Having an appropriate reviewer review the work of the audit team member.

Retirement Benefit Plan of a Firm or Network Firm

510.10 A13 A self-interest threat might be created if a retirement benefit plan of a firm or a network firm holds a direct or material indirect financial interest in an audit client.

SECTION 511 - LOANS AND GUARANTEES

Introduction

511.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

511.2 A loan or a guarantee of a loan with an audit client might create a self-interest threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

511.3 A1 This section contains references to the “materiality” of a loan or guarantee. In determining whether such a loan or guarantee is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

Loans and Guarantees with an Audit Client

R511.4 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:

  1. The firm, the network firm or the individual making the loan or guarantee, as applicable; and

  2. The client.

Loans and Guarantees with an Audit Client that is a Bank or Similar Institution

R511.5 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.

511.5 A1 Examples of loans include mortgages, bank overdrafts, car loans, and credit card balances.

511.5 A2 Even if a firm or network firm receives a loan from an audit client that is a bank or similar institution under normal lending procedures, terms and conditions, the loan might create a self-interest threat if it is material to the audit client or firm receiving the loan.

511.5 A3 An example of an action that might be a safeguard to address such a self-interest threat is having the work reviewed by an appropriate reviewer, who is not an audit team member, from a network firm that is not a beneficiary of the loan.

Deposits or Brokerage Accounts

R511.6 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 R511.7 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:

  1. The firm, the network firm, or the individual receiving the loan or guarantee, as applicable; and

  2. The client.

SECTION 520 - BUSINESS RELATIONSHIPS

Introduction

520.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

520.2 A close business relationship with an audit client or its management might create a self- interest or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

520.3 A1 This section contains references to the “materiality” of a financial interest and the “significance” of a business relationship. In determining whether such a financial interest is material to an individual, the combined net worth of the individual and the individual’s immediate family members may be taken into account.

520.3 A2 Examples of a close business relationship arising from a commercial relationship or common financial interest include:

  • Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client.

  • Arrangements to combine one or more services or products of the firm or a network firm with one or more services or products of the client and to market the package with reference to both parties.

  • Distribution or marketing arrangements under which the firm or a network firm distributes or markets the client’s products or services, or the client distributes or markets the firm or a network firm's products or services.

Firm, Network Firm, Audit Team Member or Immediate Family Business Relationships 

R520.4 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.

520.4 A1 A self-interest or intimidation threat might be created if there is a close business relationship between the audit client or its management and the immediate family of an audit team member.

Common Interests in Closely-Held Entities

R520.5 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:

  1. The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;

  2. The financial interest is immaterial to the investor or group of investors; and

  3. The financial interest does not give the investor, or group of investors, the ability to control the closely-held entity.

Buying Goods or Services

520.6A1 The purchase of goods and services from an audit client by a firm, a network firm, an audit team member, or any of that individual’s immediate family does not usually create a threat to independence if the transaction is in the normal course of business and at arm’s length. However, such transactions might be of such a nature and magnitude that they create a self-interest threat.

520.6 A2 Examples of actions that might eliminate such a self-interest threat include:

  • Eliminating or reducing the magnitude of the transaction.

  • Removing the individual from the audit team.

SECTION 521 - FAMILY AND PERSONAL RELATIONSHIPS

Introduction

521.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

521.2 Family or personal relationships with client personnel might create a self-interest, familiarity or intimidation threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material General

521.3 A1 A self-interest, familiarity or intimidation threat might be created by family and personal relationships between an audit team member and a director or officer or, depending on their role, certain employees of the audit client.

521.3 A2 Factors that are relevant in evaluating the level of such threats include:

  • The individual’s responsibilities on the audit team.

  • The role of the family member or other individual within the client, and the closeness of the relationship.

Immediate Family of an Audit Team Member

521.4 A1 A self-interest, familiarity or intimidation threat is created when an immediate family member of an audit team member is an employee in a position to exert significant influence over the client’s financial position, financial performance or cash flows.

521.4 A2 Factors that are relevant in evaluating the level of such threats include:

  • The position held by the immediate family member.

  • The role of the audit team member.

521.4 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation threat is removing the individual from the audit team.

521.4 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the immediate family member.

R521.5 An individual shall not participate as an audit team member when any of that individual’s immediate family:

  1. Is a director or officer of the audit client;

  2. 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

  3. Was in such position during any period covered by the engagement or the financial statements.

Close Family of an Audit Team Member

521.6 A1 A self-interest, familiarity or intimidation threat is created when a close family member of an audit team member is:

  1. A director or officer of the audit client; or

  2. 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.

521.6 A2 Factors that are relevant in evaluating the level of such threats include:

  • The nature of the relationship between the audit team member and the close family member.

  • The position held by the close family member.

  • The role of the audit team member.

521.6 A3 An example of an action that might eliminate such a self-interest, familiarity or intimidation threat is removing the individual from the audit team.

521.6 A4 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the close family member.

Other Close Relationships of an Audit Team Member

R521.7 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:

  1. A director or officer of the audit client; or

  2. 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.

521.7 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat created by such a relationship include:

  • The nature of the relationship between the individual and the audit team member.

  • The position the individual holds with the client.

  • The role of the audit team member.

521.7 A2 An example of an action that might eliminate such a self-interest, familiarity or intimidation threat is removing the individual from the audit team.

521.7 A3 An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is structuring the responsibilities of the audit team so that the audit team member does not deal with matters that are within the responsibility of the individual with whom the audit team member has a close relationship.

Relationships of Partners and Employees of the Firm

R521.8 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:

  1. A partner or employee of the firm or network firm who is not an audit team member; and

  2. 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.

521.8 A1 Factors that are relevant in evaluating the level of a self-interest, familiarity or intimidation threat created by such a relationship include:

  • The nature of the relationship between the partner or employee of the firm and the director or officer or employee of the client.

  • The degree of interaction of the partner or employee of the firm with the audit team.

  • The position of the partner or employee within the firm.

  • The position the individual holds with the client.

521.8 A2 Examples of actions that might be safeguards to address such self-interest, familiarity or intimidation threats include:

  • Structuring the partner’s or employee’s responsibilities to reduce any potential influence over the audit engagement.

  • Having an appropriate reviewer review the relevant audit or review work performed.

SECTION 522 - RECENT SERVICE WITH AN AUDIT CLIENT

Introduction

522.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

522.2 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. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material

Service During Period Covered by the Audit Report

R522.3 The audit team shall not include an individual who, during the period covered by the audit report:

  1. Had served as a director or officer of the audit client; or

  2. 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.

Service Prior to Period Covered by the Audit Report

522.4 A1 A self-interest, self-review or familiarity threat might be created if, before the period covered by the audit report, an audit team member:

  1. Had served as a director or officer of the audit client; or

  2. Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or financial statements on which the firm will express an opinion.

For example, a threat would be created if a decision made or work performed by the individual in the prior period, while employed by the client, is to be evaluated in the current period as part of the current audit engagement.

522.4 A2 Factors that are relevant in evaluating the level of such threats include:

  • The position the individual held with the client.

  • The length of time since the individual left the client.

  • The role of the audit team member.

522.4 A3 An example of an action that might be a safeguard to address such a self-interest, self- review or familiarity threat is having an appropriate reviewer review the work performed by the audit team member.

SECTION 523 - SERVING AS A DIRECTOR OR OFFICER OF AN AUDIT CLIENT

Introduction

523.1 Firms are required to comply with the fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.

523.2 Serving as a director or officer of an audit client creates self-review and self-interest threats. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.

Requirements and Application Material Service as Director or Officer

R523.3 [Amended by the NZAuASB. Refer to NZ R523.3.1]

NZR523.3.1 A partner or employee of the firm or a network firm shall not serve as a director, officer, liquidator or receiver of an audit client of the firm.

Service as Company Secretary

R523.4 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:

  1. This practice is specifically permitted under local law, professional rules or practice;

  2. Management makes all relevant decisions; and

  3. The duties and activities performed are limited to those of a routine and administrative nature, such as preparing minutes and maintaining statutory returns.

523.4 A1 The position of Company Secretary has different implications in different jurisdictions. Duties might range from: administrative duties (such as personnel management and the maintenance of company records and registers) to duties as diverse as ensuring that the company complies with regulations or providing advice on corporate governance matters. Usually this position is seen to imply a close association with the entity. Therefore, a threat is created if a partner or employee of the firm or a network firm serves as Company Secretary for an audit client. (More information on providing non- assurance services to an audit client is set out in Section 600, Provision of Non- assurance Services to an Audit Client.)

SECTION 524 - EMPLOYMENT WITH AN AUDIT CLIENT

Introduction

524.1 Firms are required to comply with the