No. S 130
Accountants Act
(CHAPTER 2)
Accountants
(Public Accountants)
(Amendment) Rules 2021
In exercise of the powers conferred by section 64 of the Accountants Act, the Accounting and Corporate Regulatory Authority, with the approval of the Minister for Finance, makes the following Rules:
Citation and commencement
1.  These Rules are the Accountants (Public Accountants) (Amendment) Rules 2021 and come into operation on 1 March 2021.
Amendment of rule 4
2.  Rule 4(3) of the Accountants (Public Accountants) Rules (R 1) is amended by deleting the word “Definitions” in the definition of “listed entity” and substituting the word “Glossary”.
Deletion and substitution of Fourth Schedule
3.  The Fourth Schedule to the Accountants (Public Accountants) Rules is deleted and the following Schedule substituted therefor:
FOURTH SCHEDULE
Rules 2, 4(3) and 9(2)
CODE OF PROFESSIONAL CONDUCT AND ETHICS
FOR PUBLIC ACCOUNTANTS AND
ACCOUNTING ENTITIES
TABLE OF CONTENTS
010
Scope
PART 1 — COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK
100
Complying with the Code
110
The Fundamental Principles
 
111 — Integrity
 
112 — Objectivity
 
113 — Professional Competence and Due Care
 
114 — Confidentiality
 
115 — Professional Behaviour
120
The Conceptual Framework
PART 2 — INTENTIONALLY LEFT BLANK
PART 3 — PUBLIC ACCOUNTANTS
300
Applying the Conceptual Framework — Public Accountants
310
Conflicts of Interest
320
Professional Appointments
321
Second Opinions
330
Fees and Other Types of Remuneration
340
Inducements, Including Gifts and Hospitality
350
Custody of Client Assets
360
Responding to Non‑compliance with Laws and Regulations
INDEPENDENCE STANDARDS (PARTS 4A AND 4B)
PART 4A — INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS
400
Applying the Conceptual Framework to Independence for Audit and Review Engagements
410
Fees
411
Compensation and Evaluation Policies
420
Gifts and Hospitality
430
Actual or Threatened Litigation
510
Financial Interests
511
Loans and Guarantees
520
Business Relationships
521
Family and Personal Relationships
522
Recent Service with an Audit Client
523
Serving as a Director or Officer of an Audit Client
524
Employment with an Audit Client
525
Temporary Personnel Assignments
540
Long Association of Personnel (Including Partner Rotation) with an Audit Client
600
Provision of Non‑Assurance Services to an Audit Client
 
601 — Accounting and Bookkeeping Services
 
602 — Administrative Services
 
603 — Valuation Services
 
604 — Tax Services
 
605 — Internal Audit Services
 
606 — Information Technology Systems Services
 
607 — Litigation Support Services
 
608 — Legal Services
 
609 — Recruiting Services
 
610 — Corporate Finance Services
800
Reports on Special Purpose Financial Statements that Include a Restriction on Use and Distribution (Audit and Review Engagements)
PART 4B — INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUDIT AND REVIEW ENGAGEMENTS
900
Applying the Conceptual Framework to Independence for Assurance Engagements Other than Audit and Review Engagements
905
Fees
906
Gifts and Hospitality
907
Actual or Threatened Litigation
910
Financial Interests
911
Loans and Guarantees
920
Business Relationships
921
Family and Personal Relationships
922
Recent Service with an Assurance Client
923
Serving as a Director or Officer of an Assurance Client
924
Employment with an Assurance Client
940
Long Association of Personnel with an Assurance Client
950
Provision of Non‑assurance Services to Assurance Clients Other than Audit and Review Engagement Clients
990
Reports that Include a Restriction on Use and Distribution (Assurance Engagements Other than Audit and Review Engagements)
GLOSSARY, INCLUDING LISTS OF ABBREVIATIONS
SCOPE
SG010.1
This Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities (Code) establishes ethical requirements for public accountants, accounting firms, accounting corporations and accounting LLPs. Compliance with this Code is mandatory for all public accountants, accounting firms, accounting corporations and accounting LLPs and failure to observe the Code may result in disciplinary action.
SG010.2
This Code applies to the provision of public accountancy services by public accountants, accounting firms, accounting corporations and accounting LLPs. Under the Accountants Act (Cap. 2), public accountancy services means the audit and reporting on financial statements and the doing of such other acts that are required by any written law to be done by a public accountant. For non-public accountancy services, public accountants should refer to the code of ethics of their professional body.
PART 1 — COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK
Section 100
Complying with the Code
Section 110
The Fundamental Principles
 Subsection 111 — Integrity
 Subsection 112 — Objectivity
 Subsection 113 — Professional Competence and Due Care
 Subsection 114 — Confidentiality
 Subsection 115 — Professional Behaviour
Section 120
The Conceptual Framework
PART 1 — COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK
SECTION 100
COMPLYING WITH THE CODE
General
100.1 A1
A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. A public accountant’s responsibility is not exclusively to satisfy the needs of an individual client. Therefore, the Code contains requirements and application material to enable public accountants to meet their responsibility to act in the public interest.
100.2 A1
The requirements in the Code, designated with the letter “R”, impose obligations.
100.2 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 a public accountant 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.
R100.3
A public accountant shall comply with the Code. There might be circumstances where laws or regulations preclude a public accountant from complying with certain parts of the Code. In such circumstances, those laws and regulations prevail, and the public accountant shall comply with all other parts of the Code.
100.3 A1
The principle of professional behaviour requires a public accountant to comply with relevant laws and regulations. Some jurisdictions might have provisions that differ from or go beyond those set out in the Code. Accountants in those jurisdictions need to be aware of those differences and comply with the more stringent provisions unless prohibited by law or regulation.
100.3 A2
A public accountant might encounter unusual circumstances in which the public accountant believes that the result of applying a specific requirement of the Code would be disproportionate or might not be in the public interest. In those circumstances, the public accountant is encouraged to consult with a professional or regulatory body.
Breaches of the Code
R100.4
Paragraphs R400.80 to R400.89 and R900.50 to R900.55 address a breach of Independence Standards. A public accountant who identifies a breach of any other provision of the Code shall evaluate the significance of the breach and its impact on the public accountant’s ability to comply with the fundamental principles. The public accountant shall also —
(a)Take whatever actions might be available, as soon as possible, to address the consequences of the breach satisfactorily; and
(b)Determine whether to report the breach to the relevant parties.
100.4 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 public accountants —
(a)Integrity — to be straightforward and honest in all professional and business relationships;
(b)Objectivity — not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others;
 
(c)Professional Competence and Due Care —
(i)to attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent professional service, based on current technical and professional standards and relevant legislation; and
(ii)to act diligently and in accordance with applicable technical and professional standards;
 
(d)Confidentiality — to respect the confidentiality of information acquired as a result of professional and business relationships; and
(e)Professional Behaviour — to comply with relevant laws and regulations and avoid any conduct that the public accountant knows or should know might discredit the profession.
R110.2
A public accountant shall comply with each of the fundamental principles.
110.2 A1
The fundamental principles of ethics establish the standard of behaviour expected of a public accountant. The conceptual framework establishes the approach which a public accountant is required to apply to assist 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
A public accountant 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 public accountant might consider consulting, on an anonymous basis if necessary, with —
(a)Others within the firm;
(b)Those charged with governance;
(c)A professional body;
 
(d)A regulatory body;
(e)Legal counsel.
However, such consultation does not relieve the public accountant from the responsibility to exercise professional judgment 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 public accountant 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
A public accountant shall comply with the principle of integrity, which requires a public accountant to be straightforward and honest in all professional and business relationships.
111.1 A1
Integrity implies fair dealing and truthfulness.
R111.2
A public accountant shall not knowingly be associated with reports, returns, communications or other information where the public accountant believes that the information —
(a)Contains a materially false or misleading statement;
(b)Contains statements or information provided recklessly; or
(c)Omits or obscures required information where such omission or obscurity would be misleading.
111.2 A1
If a public accountant provides a modified report in respect of such a report, return, communication or other information, the public accountant is not in breach of paragraph R111.2.
R111.3
When a public accountant becomes aware of having been associated with information described in paragraph R111.2, the public accountant shall take steps to be disassociated from that information.
SUBSECTION 112 — OBJECTIVITY
R112.1
A public accountant shall comply with the principle of objectivity, which requires a public accountant not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others.
R112.2
A public accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the public accountant’s professional judgment regarding that activity.
SUBSECTION 113 — PROFESSIONAL COMPETENCE AND DUE CARE
R113.1
A public accountant shall comply with the principle of professional competence and due care, which requires a public accountant to —
(a)Attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent professional service, based on current technical and professional standards and relevant legislation; and
(b)Act diligently and in accordance with applicable technical and professional standards.
113.1 A1
Serving clients with professional competence requires the exercise of sound judgment 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 and business developments. Continuing professional development enables a public accountant to develop and maintain the capabilities to perform competently within the professional 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, a public accountant shall take reasonable steps to ensure that those working in a professional capacity under the public accountant’s authority have appropriate training and supervision.
R113.3
Where appropriate, a public accountant shall make clients, or other users of the public accountant’s professional services or activities, aware of the limitations inherent in the services or activities.
SUBSECTION 114 — CONFIDENTIALITY
R114.1
A public accountant shall comply with the principle of confidentiality, which requires a public accountant to respect the confidentiality of information acquired as a result of professional and business relationships. A public accountant shall —
(a)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;
 
(b)Maintain confidentiality of information within the firm;
 
(c)Maintain confidentiality of information disclosed by a prospective client;
 
(d)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;
 
(e)Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the public accountant or for the advantage of a third party;
 
(f)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
 
(g)Take reasonable steps to ensure that personnel under the public accountant’s control, and individuals from whom advice and assistance are obtained, respect the public accountant’s duty of confidentiality.
114.1 A1
Confidentiality serves the public interest because it facilitates the free flow of information from the public accountant’s client to the public accountant in the knowledge that the information will not be disclosed to a third party. Nevertheless, the following are circumstances where public accountants are or might be required to disclose confidential information or when such disclosure might be appropriate:
 
(a)Disclosure is required by law, for example —
(i)Production of documents or other provision of evidence in the course of legal proceedings; or
(ii)Disclosure to the appropriate public authorities of infringements of the law that come to light;
 
(b)Disclosure is permitted by law and is authorised by the client; and
 
(c)There is a professional duty or right to disclose, when not prohibited by law —
(i)To comply with the quality review of a professional body;
(ii)To respond to an inquiry or investigation by a professional or regulatory body;
(iii)To protect the professional interests of a public accountant in legal proceedings; or
(iv)To comply with technical and professional standards, including ethics requirements.
114.1 A2
In deciding whether to disclose confidential information, factors to consider, depending on the circumstances, include —
 
(a)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 public accountant;
 
(b)Whether all the relevant information is known and substantiated, to the extent practicable. Factors affecting the decision to disclose include —
(i)Unsubstantiated facts;
(ii)Incomplete information; and
(iii)Unsubstantiated conclusions;
 
(c)The proposed type of communication, and to whom it is addressed; and
 
(d)Whether the parties to whom the communication is addressed are appropriate recipients.
R114.2
A public accountant shall continue to comply with the principle of confidentiality even after the end of the relationship between the public accountant and a client. When changing employment or acquiring a new client, the public accountant 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
A public accountant shall comply with the principle of professional behaviour, which requires a public accountant to comply with relevant laws and regulations and avoid any conduct that the public accountant knows or should know might discredit the profession. A public accountant 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 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, a public accountant shall not bring the profession into disrepute. A public accountant shall be honest and truthful and shall not make —
(a)Exaggerated claims for the services offered by, or the qualifications or experience of, the public accountant; or
(b)Disparaging references or unsubstantiated comparisons to the work of others.
115.2 A1
If a public accountant is in doubt about whether a form of advertising or marketing is appropriate, the public accountant is encouraged to consult with the relevant professional body.
SECTION 120
THE CONCEPTUAL FRAMEWORK
Introduction
120.1
The circumstances in which public accountants operate might create threats to compliance with the fundamental principles. Section 120 sets out requirements and application material, including a conceptual framework, to assist public accountants 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 public accountants 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 a public accountant to —
(a)Identify threats to compliance with the fundamental principles;
(b)Evaluate the threats identified; and
(c)Address the threats by eliminating or reducing them to an acceptable level.
Requirements and Application Material
General
R120.3
The public accountant 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 —
(a)Part 3 — Public accountants; and
 
(b)Independence Standards, as follows:
(i)Part 4A — Independence for Audit and Review Engagements; and
(ii)Part 4B — Independence for Assurance Engagements Other than Audit and Review Engagements.
R120.4
When dealing with an ethics issue, the public accountant shall consider the context in which the issue has arisen or might arise.
R120.5
When applying the conceptual framework, the public accountant shall —
(a)Exercise professional judgment;
(b)Remain alert for new information and to changes in facts and circumstances; and
(c)Use the reasonable and informed third party test described in paragraph 120.5 A4.
Exercise of Professional Judgment
120.5 A1
Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, including the nature and scope of the particular professional activities, and the interests and relationships involved. In relation to undertaking professional activities, the exercise of professional judgment is required when the public accountant 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.
120.5 A2
An understanding of known facts and circumstances is a prerequisite to the proper application of the conceptual framework. Determining the actions necessary to obtain this understanding and coming to a conclusion about whether the fundamental principles have been complied with also require the exercise of professional judgment.
120.5 A3
In exercising professional judgment to obtain this understanding, the public accountant might consider, among other matters, whether —
(a)There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the public accountant;
 
(b)There is an inconsistency between the known facts and circumstances and the public accountant’s expectations;
 
(c)The public accountant’s expertise and experience are sufficient to reach a conclusion;
 
(d)There is a need to consult with others with relevant expertise or experience;
 
(e)The information provides a reasonable basis on which to reach a conclusion;
 
(f)The public accountant’s own preconception or bias might be affecting the public accountant’s exercise of professional judgment; and
 
(g)There might be other reasonable conclusions that could be reached from the available information.
Reasonable and Informed Third Party
120.5 A4
The reasonable and informed third party test is a consideration by the public accountant 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 public accountant 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 a public accountant, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the public accountant’s conclusions in an impartial manner.
Identifying Threats
R120.6
The public accountant 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 public accountant’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 public accountant 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 and work assignments 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:
(a)Self‑interest threat — the threat that a financial or other interest will inappropriately influence a public accountant’s judgment or behaviour;
 
(b)Self‑review threat — the threat that a public accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the public accountant, or by another individual within the public accountant’s firm, on which the public accountant will rely when forming a judgment as part of performing a current activity;
 
(c)Advocacy threat — the threat that a public accountant will promote a client’s position to the point that the public accountant’s objectivity is compromised;
 
(d)Familiarity threat — the threat that due to a long or close relationship with a client, a public accountant will be too sympathetic to their interests or too accepting of their work;
 
(e)Intimidation threat — the threat that a public accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the public accountant.
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 public accountant identifies a threat to compliance with the fundamental principles, the public accountant shall evaluate whether such a threat is at an acceptable level.
Acceptable Level
120.7 A1
An acceptable level is a level at which a public accountant using the reasonable and informed third party test would likely conclude that the public accountant 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 public accountant’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 —
(a)Corporate governance requirements;
(b)Educational, training and experience requirements for the profession;
(c)Effective complaint systems which enable the public accountant and the general public to draw attention to unethical behaviour;
(d)An explicitly stated duty to report breaches of ethics requirements; and
(e)Professional or regulatory monitoring and disciplinary procedures.
Consideration of New Information or Changes in Facts and Circumstances
R120.9
If the public accountant 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 public accountant shall re‑evaluate and address that threat accordingly.
120.9 A1
Remaining alert throughout the professional activity assists the public accountant in determining whether new information has emerged or changes in facts and circumstances have occurred that —
(a)Impact the level of a threat; or
(b)Affect the public accountant’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 public accountant is required to evaluate and, as appropriate, address this threat. (Ref: paragraphs R120.7 and R120.10).
Addressing Threats
R120.10
If the public accountant determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the public accountant shall address the threats by eliminating them or reducing them to an acceptable level. The public accountant shall do so by —
(a)Eliminating the circumstances, including interests or relationships, that are creating the threats;
(b)Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or
(c)Declining or ending the specific professional activity.
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 public accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.
Consideration of Significant Judgments Made and Overall Conclusions Reached
R120.11
The public accountant shall form an overall conclusion about whether the actions that the public accountant 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 public accountant shall —
(a)Review any significant judgments made or conclusions reached; and
(b)Use the reasonable and informed third party test.
Considerations for Audits, Reviews and Other Assurance Engagements
Independence
120.12 A1
Public accountants are required by Independence Standards to be independent when performing audits, reviews, or other assurance engagements. Independence is linked to the fundamental principles of objectivity and integrity. It comprises —
(a)Independence of mind — the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism;
 
(b)Independence in appearance — the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s or an audit or assurance team member’s integrity, objectivity or professional scepticism has been compromised.
120.12 A2
Independence Standards set out requirements and application material on how to apply the conceptual framework to maintain independence when performing audits, reviews or other assurance engagements. Public accountants 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.
Professional Scepticism
120.13 A1
Under auditing, review and other assurance standards, including those issued by the Institute of Singapore Chartered Accountants, public accountants 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.
120.13 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:
 
(a)Integrity requires the public accountant to be straightforward and honest. For example, the public accountant complies with the principle of integrity by —
(i)Being straightforward and honest when raising concerns about a position taken by a client; and
 
(ii)Pursuing inquiries 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.
 In doing so, the public accountant demonstrates the critical assessment of audit evidence that contributes to the exercise of professional scepticism;
 
(b)Objectivity requires the public accountant not to compromise professional or business judgment because of bias, conflict of interest or the undue influence of others. For example, the public accountant complies with the principle of objectivity by —
 
(i)Recognising circumstances or relationships such as familiarity with the client, that might compromise the public accountant’s professional or business judgment; and
 
(ii)Considering the impact of such circumstances and relationships on the public accountant’s judgment when evaluating the sufficiency and appropriateness of audit evidence related to a matter material to the client’s financial statements.
 In doing so, the public accountant behaves in a manner that contributes to the exercise of professional scepticism;
 
(c)Professional competence and due care requires the public accountant 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 public accountant complies with the principle of professional competence and due care by —
 
(i)Applying knowledge that is relevant to a particular client’s industry and business activities in order to properly identify risks of material misstatement;
(ii)Designing and performing appropriate audit procedures; and
 
(iii)Applying relevant knowledge when critically assessing whether audit evidence is sufficient and appropriate in the circumstances.
 In doing so, the public accountant behaves in a manner that contributes to the exercise of professional scepticism.
PART 2 — INTENTIONALLY LEFT BLANK
PART 3 — PUBLIC ACCOUNTANTS
Section 300
Applying the Conceptual Framework — Public Accountants
Section 310
Conflicts of Interest
Section 320
Professional Appointments
Section 321
Second Opinions
Section 330
Fees and Other Types of Remuneration
Section 340
Inducements, Including Gifts and Hospitality
Section 350
Custody of Client Assets
Section 360
Responding to Non‑compliance with Laws and Regulations
PART 3 — PUBLIC ACCOUNTANTS
SECTION 300
APPLYING THE CONCEPTUAL FRAMEWORK — PUBLIC ACCOUNTANTS
Introduction
300.1
This Part of the Code sets out requirements and application material for public accountants 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 public accountants, which create or might create threats to compliance with the fundamental principles. Therefore, the conceptual framework requires public accountants to be alert for such facts and circumstances.
300.2
The requirements and application material that apply to public accountants are set out in —
(a)Part 3 — Public accountants, Sections 300 to 399, which applies to all public accountants, whether they provide assurance services or not; and
 
(b)Independence Standards as follows:
(i)Part 4A — Independence for Audit and Review Engagements, Sections 400 to 899, which applies to public accountants when performing audit and review engagements; and
(ii)Part 4B — Independence for Assurance Engagements Other than Audit and Review Engagements, Sections 900 to 999, which applies to public accountants when performing assurance engagements other than audit or review engagements.
300.3
In this Part, the term “public accountant” refers to individual public accountants and their firms.
Requirements and Application Material
General
R300.4
A public accountant 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 public accountant shall consider the context in which the issue has arisen or might arise.
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 a public accountant when undertaking a professional service:
 
(a)Self‑interest Threats —
(i)A public accountant having a direct financial interest in a client;
(ii)A public accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price;
(iii)A public accountant having a close business relationship with a client;
 
(iv)A public accountant having access to confidential information that might be used for personal gain; and
 
(v)A public accountant discovering a significant error when evaluating the results of a previous professional service performed by a member of the public accountant’s firm;
 
(b)Self‑review Threats —
(i)A public accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems; and
(ii)A public accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement;
 
(c)Advocacy Threats —
(i)A public accountant promoting the interests of, or shares in, a client;
(ii)A public accountant acting as an advocate on behalf of a client in litigation or disputes with third parties; and
(iii)A public accountant lobbying in favour of legislation on behalf of a client;
 
(d)Familiarity Threats —
(i)A public accountant having a close or immediate family member who is a director or officer of the client;
(ii)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; and
(iii)An audit team member having a long association with the audit client;
 
(e)Intimidation Threats —
(i)A public accountant being threatened with dismissal from a client engagement or the firm because of a disagreement about a professional matter;
(ii)A public accountant feeling pressured to agree with the judgment of a client because the client has more expertise on the matter in question;
 
(iii)A public accountant being informed that a planned promotion will not occur unless the public accountant agrees with an inappropriate accounting treatment; and
(iv)A public accountant 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 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. Such conditions, policies and procedures might relate to —
(a)The client and its operating environment; and
(b)The firm and its operating environment.
300.7 A2
The public accountant’s evaluation of the level of a threat is also impacted by the nature and scope of the professional service.
The Client and its Operating Environment
300.7 A3
The public accountant’s evaluation of the level of a threat might be impacted by whether the client is —
(a)An audit client and whether the audit client is a public interest entity;
(b)An assurance client that is not an audit client; or
(c)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, a public accountant’s evaluation of the level of a threat might also be impacted by a client’s operating environment. For example —
 
(a)The client requires appropriate individuals other than management to ratify or approve the appointment of a firm to perform an engagement;
(b)The client has competent employees with experience and seniority to make managerial decisions;
 
(c)The client has implemented internal procedures that facilitate objective choices in tendering non-assurance engagements; and
(d)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
A public accountant’s evaluation of the level of a threat might be impacted by the work environment within the public accountant’s firm and its operating environment. For example —
 
(a)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;
 
(b)Policies or procedures for establishing and monitoring compliance with the fundamental principles by all personnel;
 
(c)Compensation, performance appraisal and disciplinary policies and procedures that promote compliance with the fundamental principles;
 
(d)Management of the reliance on revenue received from a single client;
 
(e)The engagement partner having authority within the firm for decisions concerning compliance with the fundamental principles, including decisions about accepting or providing services to a client;
 
(f)Educational, training and experience requirements; and
(g)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 —
 
(a)Impact the level of a threat; or
(b)Affect the public accountant’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 public accountant re‑evaluate and address the threats accordingly. (Ref: paragraphs 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 —
 
(a)When the scope of a professional service is expanded;
(b)When the client becomes a listed entity or acquires another business unit;
(c)When the firm merges with another firm;
 
(d)When the public accountant is jointly engaged by two clients and a dispute emerges between the two clients; and
(e)When there is a change in the public accountant’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 —
 
(a)Assigning additional time and qualified personnel to required tasks when an engagement has been accepted might address a self-interest threat;
(b)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;
 
(c)Using different partners and engagement teams with separate reporting lines for the provision of non‑assurance services to an assurance client might address self-review, advocacy or familiarity threats;
 
(d)Involving another firm to perform or re‑perform part of the engagement might address self‑interest, self‑review, advocacy, familiarity or intimidation threats;
 
(e)Disclosing to clients any referral fees or commission arrangements received for recommending services or products might address a self-interest threat; and
(f)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 Independence Standards describe certain threats that might arise during the course of performing professional 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 a professional accountant.
Communicating with Those Charged with Governance
R300.9
When communicating with those charged with governance in accordance with the Code, a public accountant shall determine the appropriate individual(s) within the entity’s governance structure with whom to communicate. If the public accountant communicates with a subgroup of those charged with governance, the public accountant 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, a public accountant might consider —
(a)The nature and importance of the circumstances; and
(b)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 a public accountant communicates with individuals who have management responsibilities as well as governance responsibilities, the public accountant shall be satisfied that communication with those individuals adequately informs all of those in a governance role with whom the public accountant 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 public accountant has satisfied the requirement to communicate with those charged with governance.
SECTION 310
CONFLICTS OF INTEREST
Introduction
310.1
Public accountants 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 —
(a)A public accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict; or
(b)The interests of a public accountant with respect to a particular matter and the interests of the client for whom the public accountant 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 a public accountant provides an audit, review or other assurance service, independence is also required in accordance with Independence Standards.
Requirements and Application Material
General
R310.4
A public accountant shall not allow a conflict of interest to compromise professional or business judgment.
310.4 A1
Examples of circumstances that might create a conflict of interest include —
 
(a)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;
 
(b)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;
 
(c)Providing services to a seller and a buyer in relation to the same transaction;
(d)Preparing valuations of assets for two parties who are in an adversarial position with respect to the assets;
 
(e)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;
 
(f)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;
 
(g)Advising a client to invest in a business in which, for example, the spouse of the public accountant has a financial interest;
 
(h)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;
 
(i)Advising a client on acquiring a business which the firm is also interested in acquiring; and
(j)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, a public accountant 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 —
(a)The nature of the relevant interests and relationships between the parties involved; and
(b)The service and its implication for relevant parties.
310.5 A1
An effective conflict identification process assists a public accountant 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 public accountant 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 —
(a)The nature of the professional services provided;
(b)The size of the firm;
(c)The size and nature of the client base; and
(d)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
A public accountant shall remain alert to changes over time in the nature of services, interests and relationships that might create a conflict of interest while performing an engagement.
310.6 A1
The nature of services, interests and relationships might change during the engagement. This is particularly true when a public accountant is asked to conduct an engagement in a situation that might become adversarial, even though the parties who engage the public accountant initially might not be involved in a dispute.
Network Firms
R310.7
If the firm is a member of a network, a public accountant shall consider conflicts of interest that the public accountant 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 —
(a)The nature of the professional services provided;
(b)The clients served by the network; and
(c)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 —
 
(a)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;
 
(b)Policies and procedures to limit access to client files;
(c)Confidentiality agreements signed by personnel and partners of the firm;
 
(d)Separation of confidential information physically and electronically; and
(e)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 —
(a)Having separate engagement teams who are provided with clear policies and procedures on maintaining confidentiality; and
 
(b)Having an appropriate reviewer, who is not involved in providing the service or otherwise affected by the conflict, review the work performed to assess whether the key judgments and conclusions are appropriate.
Disclosure and Consent
General
R310.9
A public accountant shall exercise professional judgment to determine whether the nature and significance of a conflict of interest are such that specific disclosure and explicit consent are necessary when addressing the threat created by the conflict of interest.
310.9 A1
Factors to consider when determining whether specific disclosure and explicit consent are necessary include —
(a)The circumstances creating the conflict of interest;
(b)The parties that might be affected;
(c)The nature of the issues that might arise; and
(d)The potential for the particular matter to develop in an unexpected manner.
310.9 A2
Disclosure and consent might take different forms, for example —
 
(a)General disclosure to clients of circumstances where, as is common commercial practice, the public accountant does not provide professional services exclusively to any one client (for example, in a particular professional service and market sector). This enables the client to provide general consent accordingly. For example, a public accountant might make general disclosure in the standard terms and conditions for the engagement;
 
(b)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; and
 
(c)Consent might be implied by clients’ conduct in circumstances where the public accountant 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
It is generally necessary —
(a)To disclose the nature of the conflict of interest and how any threats created were addressed to clients affected by a conflict of interest; and
(b)To obtain consent of the affected clients to perform the professional services when safeguards are applied to address the threat.
310.9 A4
If such disclosure or consent is not in writing, the public accountant is encouraged to document —
(a)The nature of the circumstances giving rise to the conflict of interest;
(b)The safeguards applied to address the threats when applicable; and
(c)The consent obtained.
When Explicit Consent is Refused
R310.10
If a public accountant has determined that explicit consent is necessary in accordance with paragraph R310.9 and the client has refused to provide consent, the public accountant shall either —
(a)End or decline to perform professional services that would result in the conflict of interest; or
(b)End relevant relationships or dispose of relevant interests to eliminate the threat or reduce it to an acceptable level.
Confidentiality
General
R310.11
A public accountant shall remain alert to the principle of confidentiality, including when making disclosures or sharing information within the firm or network and seeking guidance from third parties.
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
When making specific disclosure for the purpose of obtaining explicit consent would result in a breach of confidentiality, and such consent cannot therefore be obtained, the firm shall only accept or continue an engagement if —
 
(a)The firm does not act in an advocacy role for one client in an adversarial position against another client in the same matter;
 
(b)Specific measures are in place to prevent disclosure of confidential information between the engagement teams serving the two clients; and
 
(c)The firm is satisfied that a reasonable and informed third party would be likely to conclude that it is appropriate for the firm to accept or continue the engagement because a restriction on the firm’s ability to provide the professional service would produce a disproportionate adverse outcome for the clients or other relevant third parties.
310.12 A1
A breach of confidentiality might arise, for example, when seeking consent to perform —
(a)A transaction-related service for a client in a hostile takeover of another client of the firm;
 
(b)A forensic investigation for a client regarding a suspected fraud, where the firm has confidential information from its work for another client who might be involved in the fraud.
Documentation
R310.13
In the circumstances set out in paragraph R310.12, the public accountant shall document —
(a)The nature of the circumstances, including the role that the public accountant is to undertake;
 
(b)The specific measures in place to prevent disclosure of information between the engagement teams serving the two clients; and
(c)Why it is appropriate to accept or continue the engagement.
SECTION 320
PROFESSIONAL APPOINTMENTS
Introduction
320.1
Public accountants 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 —
(a)Knowledge and understanding of the client, its owners, management and those charged with governance and business activities; and
(b)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 engagement 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 —
 
(a)An appropriate understanding of —
(i)The nature of the client’s business;
(ii)The complexity of its operations;
(iii)The requirements of the engagement; and
(iv)The purpose, nature and scope of the work to be performed;
 
(b)Knowledge of relevant industries or subject matter;
(c)Experience with relevant regulatory or reporting requirements; and
 
(d)The existence of quality control policies and procedures designed to provide reasonable assurance that engagements are accepted only when they can be performed competently.
320.3 A5
Examples of actions that might be safeguards to address a self‑interest threat include —
(a)Assigning sufficient engagement personnel with the necessary competencies;
 
(b)Agreeing on a realistic time frame for the performance of the engagement; and
(c)Using experts where necessary.
Changes in a Professional Appointment
General
R320.4
A public accountant shall determine whether there are any reasons for not accepting an engagement when the public accountant —
 
(a)Is asked by a potential client to replace another public accountant;
 
(b)Considers tendering for an engagement held by another public accountant; or
 
(c)Considers undertaking work that is complementary or additional to that of another public accountant.
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 a public accountant accepts the engagement before knowing all the relevant facts.
320.4 A2
If a public accountant is asked to undertake work that is complementary or additional to the work of an existing or predecessor accountant, 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 accountant will be requested. This contact gives the proposed public accountant the opportunity to inquire 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 —
 
(a)Asking the existing or predecessor accountant to provide any known information of which, in the existing or predecessor accountant’s opinion, the proposed public accountant needs to be aware before deciding whether to accept the engagement. For example, inquiry might reveal previously undisclosed pertinent facts and might indicate disagreements with the existing or predecessor accountant that might influence the decision to accept the appointment; and
 
(b)Obtaining information from other sources such as through inquiries of third parties or background investigations regarding senior management or those charged with governance of the client.
Communicating with the Existing or Predecessor Accountant
320.5 A1
A proposed public accountant will usually need the client’s permission, preferably in writing, to initiate discussions with the existing or predecessor accountant.
R320.6
If unable to communicate with the existing or predecessor accountant, the proposed public accountant shall take other reasonable steps to obtain information about any possible threats.
Communicating with the Proposed Public Accountant
R320.7
When an existing or predecessor accountant is asked to respond to a communication from a proposed public accountant, the existing or predecessor accountant shall —
(a)Comply with relevant laws and regulations governing the request; and
(b)Provide any information honestly and unambiguously.
320.7 A1
An existing or predecessor accountant is bound by confidentiality. Whether the existing or predecessor accountant is permitted or required to discuss the affairs of a client with a proposed public accountant will depend on the nature of the engagement and —
 
(a)Whether the existing or predecessor accountant has permission from the client for the discussion; and
 
(b)The legal and ethics requirements relating to such communications and disclosure, which might vary by jurisdiction.
320.7 A2
Circumstances where a public accountant 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, a public accountant shall request the existing or predecessor accountant to provide known information regarding any facts or other information of which, in the existing or predecessor accountant’s opinion, the proposed public accountant 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 —
 
(a)If the client consents to the existing or predecessor accountant disclosing any such facts or other information, the existing or predecessor accountant shall provide the information honestly and unambiguously; and
 
(b)If the client fails or refuses to grant the existing or predecessor accountant permission to discuss the client’s affairs with the proposed public accountant, the existing or predecessor accountant shall disclose this fact to the proposed public accountant, who shall carefully consider such failure or refusal when determining whether to accept the appointment.
SG320.8A
The existing or predecessor accountant shall, on receipt of any request referred to in paragraph R320.8, reply to the proposed public accountant in writing within a reasonable time.
SG320.8B
If the proposed public accountant does not receive a reply from the existing or predecessor accountant to his or her request within a reasonable time and the proposed public accountant has no reason to believe that there are any exceptional circumstances surrounding the proposed change, the proposed public accountant shall use such other reasonable means to communicate with the existing or predecessor accountant.
SG320.8C
If the proposed public accountant is unable to obtain a satisfactory outcome pursuant to paragraph SG320.8B, the proposed public accountant shall send a final letter by registered post to the existing or predecessor accountant, stating that he or she assumes there is no professional or other reason why he or she should not accept the appointment and that he or she intends to do so. The proposed public accountant may accept the engagement if he or she is satisfied that there are no professional or other reasons for the proposed change after taking into account guidance set out in paragraphs R320.4 to R320.8.
Client and Engagement Continuance
R320.9
For a recurring client engagement, a public accountant 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 public accountant 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 a public accountant intends to use the work of an expert, the public accountant shall determine whether the use is warranted.
320.10 A1
Factors to consider when a public accountant 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
Public accountants are required to comply with the fundamental principles and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats.
321.2
Providing a second opinion to an entity that is not an existing client might create a self-interest or other threat to compliance with one or more of the fundamental principles. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
321.3 A1
A public accountant might be asked to provide a second opinion on the application of accounting, auditing, reporting or other standards or principles to (a) specific circumstances, or (b) transactions by or on behalf of a company or an entity that is not an existing client. A threat, for example, a self-interest threat to compliance with the principle of professional competence and due care, might be created if the second opinion is not based on the same facts that the existing or predecessor accountant had, or is based on inadequate evidence.
321.3 A2
A factor that is relevant in evaluating the level of such a self-interest threat is the circumstances of the request and all the other available facts and assumptions relevant to the expression of a professional judgment.
321.3 A3
Examples of actions that might be safeguards to address such a self-interest threat include —
(a)With the client’s permission, obtaining information from the existing or predecessor accountant;
 
(b)Describing the limitations surrounding any opinion in communications with the client; and
 
(c)Providing the existing or predecessor accountant with a copy of the opinion.
When Permission to Communicate is Not Provided
R321.4
If an entity seeking a second opinion from a public accountant will not permit the public accountant to communicate with the existing or predecessor accountant, the public accountant shall determine whether the public accountant may provide the second opinion sought.
SECTION 330
FEES AND OTHER TYPES OF REMUNERATION
Introduction
330.1
Public accountants 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 a public accountant’s ability to perform professional services in accordance with professional standards.
330.3 A2
A public accountant might quote whatever fee is considered appropriate. Quoting a fee lower than another public accountant 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 applicable technical and professional standards.
330.3 A3
Factors that are relevant in evaluating the level of such a threat include —
 
(a)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; and
 
(b)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 —
(a)Adjusting the level of fees or the scope of the engagement; and
(b)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 —
 
(a)The nature of the engagement;
(b)The range of possible fee amounts;
(c)The basis for determining the fee;
 
(d)Disclosure to intended users of the work performed by the public accountant and the basis of remuneration;
(e)Quality control policies and procedures;
 
(f)Whether an independent third party is to review the outcome or result of the transaction; and
(g)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 —
(a)Having an appropriate reviewer who was not involved in performing the non-assurance service review the work performed by the public accountant; and
(b)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 Independence Standards.
Referral Fees or Commissions
330.5 A1
A self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if a public accountant pays or receives a referral fee or receives a commission relating to a client. Such referral fees or commissions include, for example —
 
(a)A fee paid to another public accountant for the purposes of obtaining new client work when the client continues as a client of the existing accountant but requires specialist services not offered by that public accountant;
 
(b)A fee received for referring a continuing client to another public accountant or other expert where the existing accountant does not provide the specific professional service required by the client; and
 
(c)A commission received from a third party (for example, a software vendor) in connection with the sale of goods or services to a client.
330.5 A2
Examples of actions that might be safeguards to address such a self-interest threat include —
 
(a)Obtaining an advance agreement from the client for commission arrangements in connection with the sale by another party of goods or services to the client might address a self-interest threat; and
 
(b)Disclosing to clients any referral fees or commission arrangements paid to, or received from, another public accountant or third party for recommending services or products might address a self-interest threat.
Purchase or Sale of a Firm
330.6 A1
A public accountant 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
Public accountants 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 a public accountant 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 public accountants 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 —
 
(a)Gifts;
(b)Hospitality;
(c)Entertainment;
(d)Political or charitable donations;
 
(e)Appeals to friendship and loyalty;
(f)Employment or other commercial opportunities; and
(g)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 public accountant shall obtain an understanding of relevant laws and regulations and comply with them when the public accountant 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
A public accountant shall not offer, or encourage others to offer, any inducement that is made, or which the public accountant 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
A public accountant shall not accept, or encourage others to accept, any inducement that the public accountant 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 a public accountant in considering what constitutes unethical behaviour on the part of the public accountant and, if necessary by analogy, other individuals.
340.9 A2
A breach of the fundamental principle of integrity arises when a public accountant 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 —
 
(a)The nature, frequency, value and cumulative effect of the inducement;
(b)Timing of when the inducement is offered relative to any action or decision that it might influence;
 
(c)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;
 
(d)Whether the inducement is an ancillary part of a professional service, for example, offering or accepting lunch in connection with a business meeting;
 
(e)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;
 
(f)The roles and positions of the individuals at the firm or the client offering or being offered the inducement;
 
(g)Whether the public accountant knows, or has reason to believe, that accepting the inducement would breach the policies and procedures of the client;
(h)The degree of transparency with which the inducement is offered;
 
(i)Whether the inducement was required or requested by the recipient; and
(j)The known previous behaviour or reputation of the offeror.
Consideration of Further Actions
340.10 A1
If the public accountant 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 —
(a)Informing senior management of the firm or those charged with governance of the client regarding the offer; and
(b)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 a public accountant 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 public accountant has concluded there is no actual or perceived intent to improperly influence behaviour include —
 
(a)Self-interest threats — A public accountant is offered hospitality from the prospective acquirer of a client while providing corporate finance services to the client;
 
(b)Familiarity threats — A public accountant regularly takes an existing or prospective client to sporting events; and
 
(c)Intimidation threats — A public accountant 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 —
(a)Declining or not offering the inducement; and
(b)Transferring responsibility for the provision of any professional services to the client to another individual who the public accountant 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 —
 
(a)Being transparent with senior management of the firm or of the client about offering or accepting an inducement;
 
(b)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;
 
(c)Having an appropriate reviewer, who is not otherwise involved in providing the professional service, review any work performed or decisions made by the public accountant with respect to the client from which the public accountant accepted the inducement;
 
(d)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;
 
(e)Reimbursing the cost of the inducement, such as hospitality, received; and
(f)As soon as possible, returning the inducement, such as a gift, after it was initially accepted.
Immediate or Close Family Members
R340.12
A public accountant shall remain alert to potential threats to the public accountant’s compliance with the fundamental principles created by the offering of an inducement —
 
(a)By an immediate or close family member of the public accountant to an existing or prospective client of the public accountant;
 
(b)To an immediate or close family member of the public accountant by an existing or prospective client of the public accountant.
R340.13
Where the public accountant 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 public accountant or of an existing or prospective client of the public accountant, or considers a reasonable and informed third party would be likely to conclude such intent exists, the public accountant 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 public accountant or of the existing or prospective client. Another factor that is relevant is the nature or closeness of the relationship, between —
 
(a)The public accountant and the immediate or close family member;
(b)The immediate or close family member and the existing or prospective client; and
(c)The public accountant and the existing or prospective client.
 
For example, the offer of employment, outside of the normal recruitment process, to the spouse of the public accountant by a client for whom the public accountant 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 public accountant, 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 public accountant 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 —
 
(a)The immediate or close family member offers or accepts the inducement contrary to the advice of the public accountant pursuant to paragraph R340.13; or
 
(b)The public accountant does not have reason to believe an actual or perceived intent to improperly influence the behaviour of the public accountant 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 a public accountant 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 team member is being offered gifts or hospitality from an audit 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
Public accountants 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
A public accountant shall not assume custody of client money or other assets unless permitted to do so by law and in accordance with any conditions under which such custody may be taken.
SG350.3A
A public accountant may hold non-assurance client money or other assets for the purpose of providing accounting-related, corporate secretarial and regulated financial services, provided that such money or other assets are held in accordance with this section and other relevant sections of this Code and all relevant laws and regulations relevant to the holding of and accounting for such assets.
R350.4
As part of client and engagement acceptance procedures related to assuming custody of client money or assets, a public accountant shall —
(a)Make inquiries about the source of the assets; and
(b)Consider related legal and regulatory obligations.
350.4 A1
Inquiries 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
A public accountant entrusted with money or other assets belonging to others shall —
 
(a)Comply with the laws and regulations relevant to holding and accounting for the assets;
(b)Keep the assets separately from personal or firm assets;
 
(c)Use the assets only for the purpose for which they are intended; and
(d)Be ready at all times to account for the assets and any income, dividends, or gains generated, to any individuals entitled to that accounting.
SECTION 360
RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS
Introduction
360.1
Public accountants 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 a public accountant becomes aware of non-compliance or suspected non-compliance with laws and regulations.
360.3
A public accountant 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 public accountant in assessing the implications of the matter and the possible courses of action when responding to non-compliance or suspected non‑compliance with —
 
(a)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
 
(b)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 Public Accountant 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 public accountant are —
 
(a)To comply with the principles of integrity and professional behaviour;
 
(b)By alerting management or, where appropriate, those charged with governance of the client, to seek to —
(i)Enable them to rectify, remediate or mitigate the consequences of the identified or suspected non‑compliance; or
(ii)Deter the commission of the non-compliance where it has not yet occurred; and
 
(c)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:
 
(a)A client;
(b)Those charged with governance of a client;
(c)Management of a client; or
(d)Other individuals working for or under the direction of a client.
360.5 A2
Examples of laws and regulations which this section addresses include those that deal with —
 
(a)Fraud, corruption and bribery;
(b)Money laundering, terrorist financing and proceeds of crime;
 
(c)Securities markets and trading;
(d)Banking and other financial products and services;
(e)Data protection;
 
(f)Tax and pension liabilities and payments;
(g)Environmental protection; and
(h)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 jurisdictions, there are legal or regulatory provisions governing how public accountants 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 public accountant shall obtain an understanding of those legal or regulatory provisions and comply with them, including —
 
(a)Any requirement to report the matter to an appropriate authority; and
(b)Any prohibition on alerting the client.
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
A public accountant 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 —
(a)Personal misconduct unrelated to the business activities of the client; and
 
(b)Non-compliance by parties other than those specified in paragraph 360.5 A1. This includes, for example, circumstances where a public accountant 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 public accountant 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 —
 
(a)The client;
(b)An individual charged with governance of the entity;
 
(c)A member of management; or
(d)Other individuals working for or under the direction of the client.
Responsibilities of All Public Accountants
R360.9
Where a public accountant becomes aware of a matter to which this section applies, the steps that the public accountant takes to comply with this section shall be taken on a timely basis. In taking timely steps, the public accountant shall have regard to the nature of the matter and the potential harm to the interests of the entity, investors, creditors, employees or the general public.
Audits of Financial Statements
Obtaining an Understanding of the Matter
R360.10
If a public accountant engaged to perform an audit of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the public accountant 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 public accountant 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 public accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the public accountant 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 public accountant 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 public accountant identifies or suspects that non‑compliance has occurred or might occur, the public accountant 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 public accountant’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 judgment. Relevant factors to consider include —
 
(a)The nature and circumstances of the matter;
(b)The individuals actually or potentially involved;
(c)The likelihood of collusion;
 
(d)The potential consequences of the matter; and
(e)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 public accountant might also consider discussing the matter with internal auditors, where applicable.
R360.12
If the public accountant believes that management is involved in the non-compliance or suspected non‑compliance, the public accountant 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 public accountant shall advise them to take appropriate and timely actions, if they have not already done so, to —
 
(a)Rectify, remediate or mitigate the consequences of the non-compliance;
(b)Deter the commission of the non-compliance where it has not yet occurred; or
 
(c)Disclose the matter to an appropriate authority where required by law or regulation or where considered necessary in the public interest.
R360.14
The public accountant 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 public accountant might suggest appropriate sources of information or recommend that they obtain legal advice.
R360.15
The public accountant shall comply with applicable —
 
(a)Laws and regulations, including legal or regulatory provisions governing the reporting of non-compliance or suspected non-compliance to an appropriate authority; and
 
(b)Requirements under auditing standards, including those relating to —
 
(i)Identifying and responding to non-compliance, including fraud;
(ii)Communicating with those charged with governance; and
(iii)Considering the implications of the non‑compliance or suspected non-compliance for the auditor’s 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
Where a public accountant becomes aware of non‑compliance or suspected non-compliance in relation to a component of a group in either of the following two situations, the public accountant shall communicate the matter to the group engagement partner unless prohibited from doing so by law or regulation:
 
(a)The public accountant is, for purposes of an audit of the group financial statements, requested by the group engagement team to perform work on financial information related to the component; or
 
(b)The public accountant is engaged to perform an audit of the component’s financial statements for purposes other than the group audit, 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
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, whether and, if so, how to address it in accordance with the provisions in this section. The communication requirement in paragraph R360.16 applies regardless of whether the group engagement partner’s firm or network is the same as or different from the public accountant’s firm or network.
R360.17
Where the group engagement partner becomes aware of non-compliance or suspected non-compliance in the course of an audit of group financial statements, the group engagement partner shall consider whether the matter might be relevant to one or more components —
 
(a)Whose financial information is subject to work for purposes of the audit of the group financial statements; or
 
(b)Whose financial statements are subject to audit 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
If the non-compliance or suspected non-compliance might be relevant to one or more of the components specified in paragraph R360.17(a) and (b), the group engagement partner shall take steps to have the matter communicated to those performing work at the components, unless prohibited from doing so by law or regulation. If necessary, the group engagement partner shall arrange for appropriate inquiries to be made (either of management or from publicly available information) as to whether the relevant component(s) specified in paragraph R360.17(b) is subject to audit and, if so, to ascertain to the extent practicable the identity of the auditor.
360.18 A1
The purpose of the communication is to enable those responsible for work at the components 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 work at the components.
Determining Whether Further Action is Needed
R360.19
The public accountant 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 —
 
(a)The response is timely;
(b)The non-compliance or suspected non-compliance has been adequately investigated;
 
(c)Action has been, or is being, taken to rectify, remediate or mitigate the consequences of any non‑compliance;
(d)Action has been, or is being, taken to deter the commission of any non-compliance where it has not yet occurred;
 
(e)Appropriate steps have been, or are being, taken to reduce the risk of re-occurrence, for example, additional controls or training; and
 
(f)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 public accountant 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 —
 
(a)The legal and regulatory framework;
(b)The urgency of the situation;
(c)The pervasiveness of the matter throughout the client;
 
(d)Whether the public accountant continues to have confidence in the integrity of management and, where applicable, those charged with governance;
(e)Whether the non-compliance or suspected non‑compliance is likely to recur; and
 
(f)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 public accountant no longer to have confidence in the integrity of management and, where applicable, those charged with governance include situations where —
 
(a)The public accountant suspects or has evidence of their involvement or intended involvement in any non‑compliance; or
 
(b)The public accountant 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 public accountant shall exercise professional judgment in determining the need for, and nature and extent of, further action. In making this determination, the public accountant shall take into account whether a reasonable and informed third party would be likely to conclude that the public accountant has acted appropriately in the public interest.
360.21 A1
Further action that the public accountant might take includes —
(a)Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so;
(b)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 public accountant’s objectives under this section. In some jurisdictions, however, there might be limitations as to the further actions available to the public accountant. In such circumstances, withdrawal might be the only available course of action.
R360.22
Where the public accountant has withdrawn from the professional relationship pursuant to paragraphs R360.20 and 360.21 A1, the public accountant shall, on request by the proposed public accountant pursuant to paragraph R320.8, provide all relevant facts and other information concerning the identified or suspected non‑compliance to the proposed public accountant. The predecessor accountant shall do so, even in the circumstances addressed in paragraph R320.8(b) where the client fails or refuses to grant the predecessor accountant permission to discuss the client’s affairs with the proposed public accountant, unless prohibited by law or regulation.
360.22 A1
The facts and other information to be provided are those that, in the predecessor accountant’s opinion, the proposed public accountant needs to be aware of before deciding whether to accept the audit appointment. Section 320 addresses communications from proposed public accountants.
R360.23
If the proposed public accountant is unable to communicate with the predecessor accountant, the proposed public accountant 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 inquiries 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 judgments, the public accountant might consider —
(a)Consulting internally;
 
(b)Obtaining legal advice to understand the public accountant’s options and the professional or legal implications of taking any particular course of action;
 
(c)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 public accountant might determine that disclosure of the matter to an appropriate authority is an appropriate course of action if —
 
(a)The entity is engaged in bribery (for example, of local or foreign government officials for purposes of securing large contracts);
 
(b)The entity is regulated and the matter is of such significance as to threaten its license to operate;
 
(c)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;
 
(d)It is likely that the entity would sell products that are harmful to public health or safety; or
(e)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 —
 
(a)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;
 
(b)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; and
 
(c)Whether there are actual or potential threats to the physical safety of the public accountant or other individuals.
R360.26
If the public accountant 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 public accountant shall act in good faith and exercise caution when making statements and assertions. The public accountant shall also consider whether it is appropriate to inform the client of the public accountant’s intentions before disclosing the matter.
Imminent Breach
R360.27
In exceptional circumstances, the public accountant might become aware of actual or intended conduct that the public accountant 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 public accountant shall exercise professional judgment 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 public accountant shall document —
 
(a)How management and, where applicable, those charged with governance have responded to the matter;
 
(b)The courses of action the public accountant considered, the judgments made and the decisions that were taken, having regard to the reasonable and informed third party test; and
 
(c)How the public accountant is satisfied that the public accountant has fulfilled the responsibility set out in paragraph R360.20.
360.28 A1
This documentation is in addition to complying with the documentation requirements under applicable auditing standards. Singapore Standards on Auditing (SSAs), for example, require a public accountant performing an audit of financial statements to —
 
(a)Prepare documentation sufficient to enable an understanding of significant matters arising during the audit, the conclusions reached, and significant professional judgments made in reaching those conclusions;
 
(b)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
 
(c)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.
Professional Services Other than Audits of Financial Statements
Obtaining an Understanding of the Matter and Addressing It with Management and Those Charged with Governance
R360.29
If a public accountant engaged to provide a professional service other than an audit of financial statements becomes aware of information concerning non-compliance or suspected non-compliance, the public accountant 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 public accountant is expected to apply knowledge and expertise, and exercise professional judgment. However, the public accountant 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 public accountant 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 public accountant 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 public accountant identifies or suspects that non‑compliance has occurred or might occur, the public accountant shall discuss the matter with the appropriate level of management. If the public accountant has access to those charged with governance, the public accountant shall also discuss the matter with them where appropriate.
360.30 A1
The purpose of the discussion is to clarify the public accountant’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 judgment. Relevant factors to consider include —
 
(a)The nature and circumstances of the matter;
(b)The individuals actually or potentially involved;
(c)The likelihood of collusion;
 
(d)The potential consequences of the matter; and
(e)Whether that level of management is able to investigate the matter and take appropriate action.
Communicating the Matter to the Entity’s External Auditor
R360.31
If the public accountant is performing a non-audit service for —
(a)An audit client of the firm; or
 
(b)A component of an audit client of the firm,
the public accountant 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 engagement partner.
R360.32
If the public accountant is performing a non-audit service for —
(a)An audit client of a network firm; or
 
(b)A component of an audit client of a network firm,
the public accountant 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 engagement partner.
R360.33
If the public accountant is performing a non-audit service for a client that is not —
(a)An audit client of the firm or a network firm; or
 
(b)A component of an audit client of the firm or a network firm,
the public accountant shall consider whether to communicate the non-compliance or suspected non‑compliance to the firm that is the client’s external auditor, 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 —
(a)Whether doing so would be contrary to law or regulation;
 
(b)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;
 
(c)Whether the purpose of the engagement is to investigate potential non-compliance within the entity to enable it to take appropriate action;
 
(d)Whether management or those charged with governance have already informed the entity’s external auditor about the matter; and
 
(e)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 public accountant 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 —
(a)The legal and regulatory framework;
 
(b)The appropriateness and timeliness of the response of management and, where applicable, those charged with governance;
 
(c)The urgency of the situation;
(d)The involvement of management or those charged with governance in the matter; and
 
(e)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 public accountant might include —
(a)Disclosing the matter to an appropriate authority even when there is no legal or regulatory requirement to do so;
(b)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 —
(a)Whether doing so would be contrary to law or regulation;
 
(b)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; and
 
(c)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 public accountant 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 public accountant shall act in good faith and exercise caution when making statements and assertions. The public accountant shall also consider whether it is appropriate to inform the client of the public accountant’s intentions before disclosing the matter.
Imminent Breach
R360.38
In exceptional circumstances, the public accountant might become aware of actual or intended conduct that the public accountant 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 public accountant shall exercise professional judgment 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 public accountant might consider —
(a)Consulting internally;
(b)Obtaining legal advice to understand the professional or legal implications of taking any particular course of action;
(c)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 public accountant is encouraged to document —
(a)The matter;
 
(b)The results of discussion with management and, where applicable, those charged with governance and other parties;
 
(c)How management and, where applicable, those charged with governance have responded to the matter;
 
(d)The courses of action the public accountant considered, the judgments made and the decisions that were taken; and
 
(e)How the public accountant is satisfied that the public accountant has fulfilled the responsibility set out in paragraph R360.36.
PART 4A — INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS
Section 400
Applying the Conceptual Framework to Independence for Audit and Review Engagements
Section 410
Fees
Section 411
Compensation and Evaluation Policies
Section 420
Gifts and Hospitality
Section 430
Actual or Threatened Litigation
Section 510
Financial Interests
Section 511
Loans and Guarantees
Section 520
Business Relationships
Section 521
Family and Personal Relationships
Section 522
Recent Service with an Audit Client
Section 523
Serving as a Director or Officer of an Audit Client
Section 524
Employment with an Audit Client
Section 525
Temporary Personnel Assignments
Section 540
Long Association of Personnel (Including Partner Rotation) with an Audit Client
Section 600
Provision of Non-assurance Services to an Audit Client
 Subsection 601 — Accounting and Bookkeeping Services
 Subsection 602 — Administrative Services
 Subsection 603 — Valuation Services
 Subsection 604 — Tax Services
 Subsection 605 — Internal Audit Services
 Subsection 606 — Information Technology Systems Services
 Subsection 607 — Litigation Support Services
 Subsection 608 — Legal Services
 Subsection 609 — Recruiting Services
 Subsection 610 — Corporate Finance Services
Section 800
Reports on Special Purpose Financial Statements that Include a Restriction on Use and Distribution (Audit and Review Engagements)
INDEPENDENCE STANDARDS
(PARTS 4A AND 4B)
PART 4A — INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS
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 public accountants be independent when performing audit or review engagements.
400.2
This Part applies to both audit and review engagements. The terms “audit”, “audit team”, “audit engagement”, “audit client” and “audit report” apply equally to review, review team, review engagement, review client, and review engagement report.
400.3
In this Part, the term “public accountant” refers to individual public accountants and their firms.
400.4
Singapore Standards on Quality Control (SSQC 1) requires a firm to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel), maintain independence where required by relevant ethics requirements. SSAs and Singapore Standards on Review Engagements (SSREs) 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. Firms assign responsibility for a particular action to an individual or a group of individuals (such as an audit team), in accordance with SSQC 1. In addition, an individual public accountant remains responsible for compliance with any provisions that apply to that public accountant’s activities, interests or relationships.
400.5
Independence is linked to the principles of objectivity and integrity. It comprises —
 
(a)Independence of mind — the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism;
 
(b)Independence in appearance — the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit team member’s, integrity, objectivity or professional 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.
400.7
This Part describes —
(a)Facts and circumstances, including professional activities, interests and relationships, that create or might create threats to independence;
 
(b)Potential actions, including safeguards, that might be appropriate to address any such threats; and
 
(c)Some situations where the threats cannot be eliminated or there can be no safeguards to reduce them to an acceptable level.
Public Interest Entities
400.8
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 —
 
(a)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;
 
(b)Size; and
(c)Number of employees.
Reports that Include a Restriction on Use and Distribution
400.9
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
400.10
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
R400.11
A firm performing an audit engagement shall be independent.
R400.12
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.
[Paragraphs 400.13 to 400.19 are intentionally left blank]
Related Entities
R400.20
As defined, an audit client that is a listed entity 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 —
(a)The engagement period; and
(b)The period covered by the financial statements.
400.30 A1
The engagement period starts when the audit 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 —
(a)Financial or business relationships with the audit client during or after the period covered by the financial statements but before accepting the audit engagement; or
(b)Previous services provided to the audit client by the firm or a network firm.
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 audit team begins to perform the audit, and the service would not be permitted during the engagement period.
400.31 A2
Examples of actions that might be safeguards to address such threats include —
 
(a)Using professionals who are not audit team members to perform the service;
(b)Having an appropriate reviewer review the audit and non-assurance work as appropriate; and
 
(c)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.
[Paragraphs 400.32 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 —
 
(a)Consider the firm’s judgments in identifying and evaluating threats;
(b)Consider how threats have been addressed including the appropriateness of safeguards when they are available and capable of being applied; and
 
(c)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 professional 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 —
(a)Exercise professional judgment to determine whether a network is created by such a larger structure;
 
(b)Consider whether a reasonable and informed third party would be likely to conclude that the other firms and entities in the larger structure are associated in such a way that a network exists; and
 
(c)Apply such judgment consistently throughout such a larger structure.
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 —
 
(a)It is clearly aimed at profit or cost sharing among the entities within the structure. (Ref: paragraph 400.53 A2);
 
(b)The entities within the structure share common ownership, control or management. (Ref: paragraph 400.53 A3);
 
(c)The entities within the structure share common quality control policies and procedures. (Ref: paragraph 400.53 A4);
 
(d)The entities within the structure share a common business strategy. (Ref: paragraph 400.53 A5);
 
(e)The entities within the structure share the use of a common brand name. (Ref: paragraphs 400.53 A6, 400.53 A7); or
 
(f)The entities within the structure share a significant part of professional resources. (Ref: paragraphs 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: paragraph R400.53(a)).
400.53 A3
Common ownership, control or management might be achieved by contract or other means. (Ref: paragraph R400.53(b)).
400.53 A4
Common quality control policies and procedures are those designed, implemented and monitored across the larger structure. (Ref: paragraph 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 a professional service. (Ref: paragraph 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: paragraph 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: paragraph R400.53(e)).
400.53 A8
Professional resources include —
(a)Common systems that enable firms to exchange information such as client data, billing and time records;
 
(b)Partners and other personnel;
(c)Technical departments that consult on technical or industry specific issues, transactions or events for assurance engagements;
 
(d)Audit methodology or audit manuals; and
(e)Training courses and facilities. (Ref: paragraph R400.53(f)).
400.53 A9
Whether the shared professional resources are significant depends on the circumstances. For example —
 
(a)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;
 
(b)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: paragraph 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 —
(a)When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and
 
(b)When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion.
400.60 A1
Documentation provides evidence of the firm’s judgments 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 —
(a)The firm shall identify and evaluate previous and current interests and relationships with the related entity that, taking into account any actions taken to address the threat, might affect its independence and therefore its ability to continue the audit engagement after the effective date of the merger or acquisition; and
 
(b)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 —
(a)Evaluate the threat that is created by the interest or relationship; and
(b)Discuss with those charged with governance the reasons why the interest or relationship cannot reasonably be ended by the effective date and the evaluation of the level of the threat.
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 —
(a)The nature and significance of the interest or relationship;
 
(b)The nature and significance of the related entity relationship (for example, whether the related entity is a subsidiary or parent); and
(c)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 auditor, the firm shall do so only if —
 
(a)The interest or relationship will be ended as soon as reasonably possible but no later than six months after the effective date of the merger or acquisition;
 
(b)Any individual who has such an interest or relationship, including one that has arisen through performing a non-assurance service that would not be permitted by Section 600 and its subsections, will not be a member of the engagement team for the audit or the individual responsible for the engagement quality control review; and
 
(c)Transitional measures will be applied, as necessary, and discussed with those charged with governance.
400.73 A1
Examples of such transitional measures include —
(a)Having a professional accountant review the audit or non‑assurance work as appropriate;
 
(b)Having a professional accountant, who is not a member of the firm expressing the opinion on the financial statements, perform a review that is equivalent to an engagement quality control review; and
 
(c)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 —
 
(a)Has evaluated the level of the threat and discussed the results with those charged with governance;
(b)Complies with the requirements of paragraph R400.73(a) to (c); and
(c)Ceases to be the auditor 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 auditor.
Documentation
R400.76
The firm shall document —
(a)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;
 
(b)The transitional measures applied;
(c)The results of the discussion with those charged with governance; and
 
(d)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 —
(a)End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;
 
(b)Consider whether any legal or regulatory requirements apply to the breach and, if so —
(i)Comply with those requirements; and
 
(ii)Consider reporting the breach to a professional or regulatory body or oversight authority if such reporting is common practice or expected in the relevant jurisdiction;
 
(c)Promptly communicate the breach in accordance with its policies and procedures to —
 
(i)The engagement partner;
(ii)Those with responsibility for the policies and procedures relating to independence;
 
(iii)Other relevant personnel in the firm and, where appropriate, the network; and
(iv)Those subject to the independence requirements in Part 4A who need to take appropriate action;
 
(d)Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue an audit report; and
 
(e)Depending on the significance of the breach, determine —
(i)Whether to end the audit engagement; or
(ii)Whether it is possible to take action that satisfactorily addresses the consequences of the breach and whether such action can be taken and is appropriate in the circumstances.
 
In making this determination, the firm shall exercise professional judgment 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 policies and procedures designed to provide it with reasonable assurance that independence is maintained. 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 —
(a)The nature and duration of the breach;
 
(b)The number and nature of any previous breaches with respect to the current audit engagement;
(c)Whether an audit team member had knowledge of the interest or relationship that created the breach;
 
(d)Whether the individual who created the breach is an audit team member or another individual for whom there are independence requirements;
(e)If the breach relates to an audit team member, the role of that individual;
 
(f)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; and
 
(g)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 —
 
(a)Removing the relevant individual from the audit team;
 
(b)Using different individuals to conduct an additional review of the affected audit work or to re-perform that work to the extent necessary;
 
(c)Recommending that the audit client engage another firm to review or re-perform the affected audit work to the extent necessary; and
 
(d)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 —
 
(a)The significance of the breach, including its nature and duration;
 
(b)How the breach occurred and how it was identified;
(c)The action proposed or taken and why the action will satisfactorily address the consequences of the breach and enable the firm to issue an audit report;
 
(d)The conclusion that, in the firm’s professional judgment, objectivity has not been compromised and the rationale for that conclusion; and
 
(e)Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches occurring.
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 —
(a)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
 
(b)A description of —
(i)The firm’s policies and procedures relevant to the breach designed to provide it with reasonable assurance that independence is maintained; and
(ii)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 —
(a)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
(b)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 —
 
(a)The breach;
(b)The actions taken;
(c)The key decisions made;
 
(d)All the matters discussed with those charged with governance; and
(e)Any discussions with a professional or regulatory body or oversight authority.
R400.89
If the firm continues with the audit engagement, it shall document —
(a)The conclusion that, in the firm’s professional judgment, objectivity has not been compromised; and
(b)The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue an audit report.
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
The nature and level of fees or other types of remuneration 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
Fees — Relative Size
All Audit Clients
410.3 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 that client and concern about losing the client create a self‑interest or intimidation threat.
410.3 A2
Factors that are relevant in evaluating the level of such threats include —
(a)The operating structure of the firm;
(b)Whether the firm is well established or new; and
(c)The significance of the client qualitatively and/or quantitatively to the firm.
410.3 A3
An example of an action that might be a safeguard to address such a self-interest or intimidation threat is increasing the client base in the firm to reduce dependence on the audit client.
410.3 A4
A self-interest or intimidation threat is also 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.
410.3 A5
Factors that are relevant in evaluating the level of such threats include —
(a)The significance of the client qualitatively and/or quantitatively to the partner or office; and
(b)The extent to which the compensation of the partner, or the partners in the office, is dependent upon the fees generated from the client.
410.3 A6
Examples of actions that might be safeguards to address such self-interest or intimidation threats include —
(a)Increasing the client base of the partner or the office to reduce dependence on the audit client; and
(b)Having an appropriate reviewer who did not take part in the audit engagement review the work.
Audit Clients that are Public Interest Entities
R410.4
Where an audit client is a public interest entity and, for two consecutive years, the total fees from the client and its related entities represent more than 15% of the total fees received by the firm expressing the opinion on the financial statements of the client, the firm shall —
 
(a)Disclose to those charged with governance of the audit client the fact that the total of such fees represents more than 15% of the total fees received by the firm; and
 
(b)Discuss whether either of the following actions might be a safeguard to address the threat created by the total fees received by the firm from the client, and if so, apply it —
 
(i)Prior to the audit opinion being issued on the second year’s financial statements, a public accountant, who is not a member of the firm expressing the opinion on the financial statements, performs an engagement quality control review of that engagement; or a professional body performs a review of that engagement that is equivalent to an engagement quality control review (“a pre‑issuance review”); or
 
(ii)After the audit opinion on the second year’s financial statements has been issued, and before the audit opinion being issued on the third year’s financial statements, a public accountant, who is not a member of the firm expressing the opinion on the financial statements, or a professional body performs a review of the second year’s audit that is equivalent to an engagement quality control review (“a post‑issuance review”).
R410.5
When the total fees described in paragraph R410.4 significantly exceed 15%, the firm shall determine whether the level of the threat is such that a post‑issuance review would not reduce the threat to an acceptable level. If so, the firm shall have a pre‑issuance review performed.
R410.6
If the fees described in paragraph R410.4 continue to exceed 15%, the firm shall each year —
(a)Disclose to and discuss with those charged with governance the matters set out in paragraph R410.4; and
(b)Comply with paragraphs R410.4(b) and R410.5.
Audit Clients that are Listed Entities or Public Companies
SG410.4A
Where an audit client is a listed entity or a public company and the amount of annual fees received for non‑audit services compared to the total annual audit fees from the audit client is 50% or more, the firm shall disclose to those charged with governance of the audit client the fact that the total of such fees represent 50% or more of total annual audit fees received by the firm and discuss the safeguards it will apply to reduce the threat to an acceptable level. Examples of safeguards that could be considered and applied include —
 
(a)Independent internal or external quality control reviews of the engagement; and
(b)Consulting a third party, such as a professional regulatory body or other professional accountant, on key audit judgments.
Fees — Overdue
410.7 A1
A self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued. It is generally expected that the firm will require payment of such fees before such audit report is issued. The requirements and application material set out in Section 511 with respect to loans and guarantees might also apply to situations where such unpaid fees exist.
410.7 A2
Examples of actions that might be safeguards to address such a self-interest threat include —
(a)Obtaining partial payment of overdue fees; and
(b)Having an appropriate reviewer who did not take part in the audit engagement review the work performed.
R410.8
When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine —
(a)Whether the overdue fees might be equivalent to a loan to the client; and
(b)Whether it is appropriate for the firm to be re‑appointed or continue the audit engagement.
Contingent Fees
410.9 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.
R410.10
A firm shall not charge directly or indirectly a contingent fee for an audit engagement.
R410.11
A firm or network firm shall not charge directly or indirectly a contingent fee for a non-assurance service provided to an audit client, if —
 
(a)The fee is charged by the firm expressing the opinion on the financial statements and the fee is material or expected to be material to that firm;
 
(b)The fee is charged by a network firm that participates in a significant part of the audit and the fee is material or expected to be material to that firm; or
 
(c)The outcome of the non-assurance service, and therefore the amount of the fee, is dependent on a future or contemporary judgment related to the audit of a material amount in the financial statements.
410.12 A1
Paragraphs R410.10 and R410.11 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, a self‑interest threat might still be created.
410.12 A2
Factors that are relevant in evaluating the level of such a threat include —
(a)The range of possible fee amounts;
(b)Whether an appropriate authority determines the outcome on which the contingent fee depends;
 
(c)Disclosure to intended users of the work performed by the firm and the basis of remuneration;
(d)The nature of the service; and
(e)The effect of the event or transaction on the financial statements.
410.12 A3
Examples of actions that might be safeguards to address such a self-interest threat include —
(a)Having an appropriate reviewer who was not involved in performing the non‑assurance service review the work performed by the firm; and
(b)Obtaining an advance written agreement with the client on the basis of remuneration.
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 team member for a particular audit client is evaluated on or compensated for selling non‑assurance services to that audit client, the level of the self‑interest threat will depend on —
(a)What proportion of the compensation or evaluation is based on the sale of such services;
(b)The role of the individual on the audit team; and
(c)Whether the sale of such non-assurance services influences promotion decisions.
411.3 A2
Examples of actions that might eliminate such a self‑interest threat include —
(a)Revising the compensation plan or evaluation process for that individual; and
(b)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 —
(a)The materiality of the litigation; and
(b)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 —
(a)The role of the individual holding the financial interest;
(b)Whether the financial interest is direct or indirect; and
(c)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 —
(a)The firm or a network firm;
(b)An audit team member, or any of that individual’s immediate family;
 
(c)Any other partner in the office in which an engagement partner practices in connection with the audit engagement, or any of that other partner’s immediate family; or
 
(d)Any other partner or managerial employee who provides non-audit services to the audit client, except for any whose involvement is minimal, or any of that individual’s immediate family.
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 audit team members, professional judgment 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 paragraph R510.4(c) or (d) may hold a direct or material indirect financial interest in an audit client, provided that —
 
(a)The family member received the financial interest because of employment rights, for example through pension or share option plans, and, when necessary, the firm addresses the threat created by the financial interest; and
 
(b)The family member disposes of or forfeits the financial interest as soon as practicable when the family member has or obtains the right to do so, or in the case of a stock option, when the family member obtains the right to exercise the option.
Financial Interests 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 —
 
(a)None of the following is a beneficiary of the trust: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm;
 
(b)The interest in the audit client held by the trust is not material to the trust;
(c)The trust is not able to exercise significant influence over the audit client; and
 
(d)None of the following can significantly influence any investment decision involving a financial interest in the audit client: the trustee, the audit team member or any of that individual’s immediate family, the firm or a network firm.
Financial Interests in Common with the Audit Client
R510.8
(a)A firm, or a network firm, or an audit team member, or any of that individual’s immediate family shall not hold a financial interest in an entity when an audit client also has a financial interest in that entity, unless —
 
(i)The financial interests are immaterial to the firm, the network firm, the audit team member and that individual’s immediate family member and the audit client, as applicable; or
(ii)The audit client cannot exercise significant influence over the entity.
 
(b)Before an individual who has a financial interest described in paragraph R510.8(a) can become an audit team member, the individual or that individual’s immediate family member shall either —
(i)Dispose of the interest; or
(ii)Dispose of enough of the interest so that the remaining interest is no longer material.
Financial Interests Received Unintentionally
R510.9
If a firm, a network firm or a partner or employee of the firm or a network firm, or any of that individual’s immediate family, receives a direct financial interest or a material indirect financial interest in an audit client by way of an inheritance, gift, as a result of a merger or in similar circumstances and the interest would not otherwise be permitted to be held under this section, then —
 
(a)If the interest is received by the firm or a network firm, or an audit team member or any of that individual’s immediate family, the financial interest shall be disposed of immediately, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; or
 
(b)
(i)If the interest is received by an individual who is not an audit team member, or by any of that individual’s immediate family, the financial interest shall be disposed of as soon as possible, or enough of an indirect financial interest shall be disposed of so that the remaining interest is no longer material; and
 
 
(ii)Pending the disposal of the financial interest, when necessary the firm shall address the threat created.
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 —
(a)The role of the individual on the audit team;
(b)Whether ownership of the entity is closely or widely held;
 
(c)Whether the interest allows the investor to control or significantly influence the entity; and
(d)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 —
(a)The nature of the relationship between the audit team member and the close family member;
(b)Whether the financial interest is direct or indirect; and
(c)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 —
(a)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; and
(b)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 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 —
(a)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; and
(b)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 —
(a)The firm’s organisational, operating and reporting structure; and
(b)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 —
(a)Excluding the audit team member from any significant decision-making concerning the audit engagement; and
(b)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 —
(a)The firm, the network firm or the individual making the loan or guarantee, as applicable; and
(b)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 —
(a)The firm, the network firm, or the individual receiving the loan or guarantee, as applicable; and
(b)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 —
 
(a)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;
 
(b)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; and
 
(c)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 —
 
(a)The business relationship is insignificant to the firm, the network firm, or the individual as applicable, and the client;
(b)The financial interest is immaterial to the investor or group of investors; and
 
(c)The financial interest does not give the investor, or group of investors, the ability to control the closely‑held entity.
Buying Goods or Services
520.6 A1
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 —
(a)Eliminating or reducing the magnitude of the transaction; and
(b)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 —
(a)The individual’s responsibilities on the audit team; and
(b)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 —
(a)The position held by the immediate family member; and
(b)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 —
(a)Is a director or officer of the audit client;
 
(b)Is an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion; or
 
(c)Was in such position during any period covered by the engagement or the financial statements.
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 —
(a)A director or officer of the audit client; or
(b)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
521.6 A2
Factors that are relevant in evaluating the level of such threats include —
(a)The nature of the relationship between the audit team member and the close family member;
(b)The position held by the close family member; and
(c)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 —
(a)A director or officer of the audit client; or
(b)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
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 —
(a)The nature of the relationship between the individual and the audit team member;
(b)The position the individual holds with the client; and
(c)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 —
(a)A partner or employee of the firm or network firm who is not an audit team member; and
(b)A director or officer of the audit client or an employee of the audit client in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
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 —
(a)The nature of the relationship between the partner or employee of the firm and the director or officer or employee of the client;
(b)The degree of interaction of the partner or employee of the firm with the audit team;
(c)The position of the partner or employee within the firm; and
(d)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 —
(a)Structuring the partner’s or employee’s responsibilities to reduce any potential influence over the audit engagement; and
(b)Having an appropriate reviewer review the relevant audit 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 —
(a)Had served as a director or officer of the audit client; or
(b)Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
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 —
(a)Had served as a director or officer of the audit client; or
 
(b)Was an employee in a position to exert significant influence over the preparation of the client’s accounting records or 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 —
(a)The position the individual held with the client;
(b)The length of time since the individual left the client; and
(c)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
A partner or employee of the firm or a network firm shall not serve as a director or officer of an audit client of the firm.
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 —
(a)This practice is specifically permitted under local law, professional rules or practice;
 
(b)Management makes all relevant decisions; and
(c)The duties and activities performed are limited to those of a routine and administrative nature, such as preparing minutes and maintaining statutory returns.
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 fundamental principles, be independent and apply the conceptual framework set out in Section 120 to identify, evaluate and address threats to independence.
524.2
Employment relationships with an audit client 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
All Audit Clients
524.3 A1
A familiarity or intimidation threat might be created if any of the following individuals have been an audit team member or partner of the firm or a network firm:
(a)A director or officer of the audit client;
(b)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
Former Partner or Audit Team Member Restrictions
R524.4
The firm shall ensure that no significant connection remains between the firm or a network firm and —
(a)A former partner who has joined an audit client of the firm; or
 
(b)A former audit team member who has joined the audit client,
 
if either has joined the audit client as —
(i)A director or officer; or
(ii)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion.
 
A significant connection remains between the firm or a network firm and the individual, unless —
(a)The individual is not entitled to any benefits or payments from the firm or network firm that are not made in accordance with fixed pre‑determined arrangements;
 
(b)Any amount owed to the individual is not material to the firm or the network firm; and
(c)The individual does not continue to participate or appear to participate in the firm’s or the network firm’s business or professional activities.
524.4 A1
Even if the requirements of paragraph R524.4 are met, a familiarity or intimidation threat might still be created.
524.4 A2
A familiarity or intimidation threat might also be created if a former partner of the firm or network firm has joined an entity in one of the positions described in paragraph 524.3 A1 and the entity subsequently becomes an audit client of the firm.
524.4 A3
Factors that are relevant in evaluating the level of such threats include —
(a)The position the individual has taken at the client;
 
(b)Any involvement the individual will have with the audit team;
(c)The length of time since the individual was an audit team member or partner of the firm or network firm; and
 
(d)The former position of the individual within the audit team, firm or network firm. An example is whether the individual was responsible for maintaining regular contact with the client’s management or those charged with governance.
524.4 A4
Examples of actions that might be safeguards to address such familiarity or intimidation threats include —
(a)Modifying the audit plan;
 
(b)Assigning to the audit team individuals who have sufficient experience relative to the individual who has joined the client; and
(c)Having an appropriate reviewer review the work of the former audit team member.
Audit Team Members Entering Employment with a Client
R524.5
A firm or network firm shall have policies and procedures that require audit team members to notify the firm or network firm when entering employment negotiations with an audit client.
524.5 A1
A self-interest threat is created when an audit team member participates in the audit engagement while knowing that the audit team member will, or might, join the client at some time in the future.
524.5 A2
An example of an action that might eliminate such a self‑interest threat is removing the individual from the audit team.
524.5 A3
An example of an action that might be a safeguard to address such a self-interest threat is having an appropriate reviewer review any significant judgments made by that individual while on the team.
Audit Clients that are Public Interest Entities
Key Audit Partners
R524.6
Subject to paragraph R524.8, if an individual who was a key audit partner with respect to an audit client that is a public interest entity joins the client as —
(a)A director or officer; or
(b)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion,
 
independence is compromised unless, subsequent to the individual ceasing to be a key audit partner —
(i)The audit client has issued audited financial statements covering a period of not less than twelve months; and
 
(ii)The individual was not an audit team member with respect to the audit of those financial statements.
Senior or Managing Partner (Chief Executive or Equivalent) of the Firm
R524.7
Subject to paragraph R524.8, if an individual who was the Senior or Managing Partner (Chief Executive or equivalent) of the firm joins an audit client that is a public interest entity as —
(a)A director or officer; or
(b)An employee in a position to exert significant influence over the preparation of the client’s accounting records or the financial statements on which the firm will express an opinion,
independence is compromised, unless twelve months have passed since the individual was the Senior or Managing Partner (Chief Executive or equivalent) of the firm.
Business Combinations
R524.8
As an exception to paragraphs R524.6 and R524.7, independence is not compromised if the circumstances set out in those paragraphs arise as a result of a business combination and —
(a)The position was not taken in contemplation of the business combination;
 
(b)Any benefits or payments due to the former partner from the firm or a network firm have been settled in full, unless made in accordance with fixed pre‑determined arrangements and any amount owed to the partner is not material to the firm or network firm as applicable;
 
(c)The former partner does not continue to participate or appear to participate in the firm’s or network firm’s business or professional activities; and
(d)The firm discusses the former partner’s position held with the audit client with those charged with governance.
SECTION 525
TEMPORARY PERSONNEL ASSIGNMENTS
Introduction
525.1
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.
525.2
The loan of personnel to an audit client might create a self‑review, advocacy or familiarity threat. This section sets out specific requirements and application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
General
525.3 A1
Examples of actions that might be safeguards to address threats created by the loan of personnel by a firm or a network firm to an audit client include —
(a)Conducting an additional review of the work performed by the loaned personnel might address a self‑review threat;
 
(b)Not including the loaned personnel as an audit team member might address a familiarity or advocacy threat; and
(c)Not giving the loaned personnel audit responsibility for any function or activity that the personnel performed during the loaned personnel assignment might address a self-review threat.
525.3 A2
When familiarity and advocacy threats are created by the loan of personnel by a firm or a network firm to an audit client, such that the firm or the network firm becomes too closely aligned with the views and interests of management, safeguards are often not available.
R525.4
A firm or network firm shall not loan personnel to an audit client unless —
(a)Such assistance is provided only for a short period of time;
(b)The personnel are not involved in providing non-assurance services that would not be permitted under Section 600 and its subsections; and
(c)The personnel do not assume management responsibilities and the audit client is responsible for directing and supervising the activities of the personnel.
SECTION 540
LONG ASSOCIATION OF PERSONNEL (INCLUDING PARTNER ROTATION) WITH AN AUDIT CLIENT
Introduction
540.1
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.
540.2
When an individual is involved in an audit engagement over a long period of time, familiarity and self-interest threats might be created. This section sets out requirements and application material relevant to applying the conceptual framework in such circumstances.
Requirements and Application Material
All Audit Clients
540.3 A1
Although an understanding of an audit client and its environment is fundamental to audit quality, a familiarity threat might be created as a result of an individual’s long association as an audit team member with —
(a)The audit client and its operations;
(b)The audit client’s senior management; or
(c)The financial statements on which the firm will express an opinion or the financial information which forms the basis of the financial statements.
540.3 A2
A self-interest threat might be created as a result of an individual’s concern about losing a longstanding client or an interest in maintaining a close personal relationship with a member of senior management or those charged with governance. Such a threat might influence the individual’s judgment inappropriately.
540.3 A3
Factors that are relevant to evaluating the level of such familiarity or self-interest threats include —
(a)In relation to the individual —
(i)The overall length of the individual’s relationship with the client, including if such relationship existed while the individual was at a prior firm;
(ii)How long the individual has been an engagement team member, and the nature of the roles performed;
 
(iii)The extent to which the work of the individual is directed, reviewed and supervised by more senior personnel;
(iv)The extent to which the individual, due to the individual’s seniority, has the ability to influence the outcome of the audit, for example, by making key decisions or directing the work of other engagement team members;
 
(v)The closeness of the individual’s personal relationship with senior management or those charged with governance; and
(vi)The nature, frequency and extent of the interaction between the individual and senior management or those charged with governance; and
 
(b)In relation to the audit client —
(i)The nature or complexity of the client’s accounting and financial reporting issues and whether they have changed;
 
(ii)Whether there have been any recent changes in senior management or those charged with governance; and
(iii)Whether there have been any structural changes in the client’s organisation which impact the nature, frequency and extent of interactions the individual might have with senior management or those charged with governance.
540.3 A4
The combination of two or more factors might increase or reduce the level of the threats. For example, familiarity threats created over time by the increasingly close relationship between an individual and a member of the client’s senior management would be reduced by the departure of that member of the client’s senior management.
540.3 A5
An example of an action that might eliminate the familiarity and self-interest threats created by an individual being involved in an audit engagement over a long period of time would be rotating the individual off the audit team.
540.3 A6
Examples of actions that might be safeguards to address such familiarity or self-interest threats include —
(a)Changing the role of the individual on the audit team or the nature and extent of the tasks the individual performs;
(b)Having an appropriate reviewer who was not an audit team member review the work of the individual; and
(c)Performing regular independent internal or external quality reviews of the engagement.
R540.4
If a firm decides that the level of the threats created can only be addressed by rotating the individual off the audit team, the firm shall determine an appropriate period during which the individual shall not —
(a)Be a member of the engagement team for the audit engagement;
(b)Provide quality control for the audit engagement; or
(c)Exert direct influence on the outcome of the audit engagement.
The period shall be of sufficient duration to allow the familiarity and self-interest threats to be addressed. In the case of a public interest entity, paragraphs R540.5 to R540.20 also apply.
Audit Clients that are Public Interest Entities
R540.5
Subject to paragraphs R540.7 to R540.9, in respect of an audit of a public interest entity, an individual shall not act in any of the following roles, or a combination of such roles, for a period of more than seven cumulative years (the “time‑on” period):
(a)The engagement partner;
(b)The individual appointed as responsible for the engagement quality control review;
(c)Any other key audit partner role.
After the time-on period, the individual shall serve a “cooling‑off” period in accordance with the provisions in paragraphs R540.11 to R540.19.
R540.6
In calculating the time-on period, the count of years shall not be restarted unless the individual ceases to act in any one of the roles in paragraph R540.5(a) to (c) for a minimum period. This minimum period is a consecutive period equal to at least the cooling-off period determined in accordance with paragraphs R540.11 to R540.13 as applicable to the role in which the individual served in the year immediately before ceasing such involvement.
540.6 A1
For example, an individual who served as engagement partner for four years followed by three years off can only act thereafter as a key audit partner on the same audit engagement for three further years (making a total of seven cumulative years). Thereafter, that individual is required to cool off in accordance with paragraph R540.14.
R540.7
As an exception to paragraph R540.5, key audit partners whose continuity is especially important to audit quality may, in rare cases due to unforeseen circumstances outside the firm’s control, and with the concurrence of those charged with governance, be permitted to serve an additional year as a key audit partner as long as the threat to independence can be eliminated or reduced to an acceptable level.
540.7 A1
For example, a key audit partner may remain in that role on the audit team for up to one additional year in circumstances where, due to unforeseen events, a required rotation was not possible, as might be the case due to serious illness of the intended engagement partner. In such circumstances, this will involve the firm discussing with those charged with governance the reasons why the planned rotation cannot take place and the need for any safeguards to reduce any threat created.
R540.8
If an audit client becomes a public interest entity, a firm shall take into account the length of time an individual has served the audit client as a key audit partner before the client becomes a public interest entity in determining the timing of the rotation. If the individual has served the audit client as a key audit partner for a period of five cumulative years or less when the client becomes a public interest entity, the number of years the individual may continue to serve the client in that capacity before rotating off the engagement is seven years less the number of years already served. As an exception to paragraph R540.5, if the individual has served the audit client as a key audit partner for a period of six or more cumulative years when the client becomes a public interest entity, the individual may continue to serve in that capacity with the concurrence of those charged with governance for a maximum of two additional years before rotating off the engagement.
R540.9
When a firm has only a few people with the necessary knowledge and experience to serve as a key audit partner on the audit of a public interest entity, rotation of key audit partners might not be possible. As an exception to paragraph R540.5, if an independent regulatory body in the relevant jurisdiction has provided an exemption from partner rotation in such circumstances, an individual may remain a key audit partner for more than seven years, in accordance with such exemption. This is provided that the independent regulatory body has specified other requirements which are to be applied, such as the length of time that the key audit partner may be exempted from rotation or a regular independent external review.
Other Considerations Relating to the Time-on Period
R540.10
In evaluating the threats created by an individual’s long association with an audit engagement, a firm shall give particular consideration to the roles undertaken and the length of an individual’s association with the audit engagement prior to the individual becoming a key audit partner.
540.10 A1
There might be situations where the firm, in applying the conceptual framework, concludes that it is not appropriate for an individual who is a key audit partner to continue in that role even though the length of time served as a key audit partner is less than seven years.
Cooling-off Period
R540.11
If the individual acted as the engagement partner for seven cumulative years, the cooling-off period shall be five consecutive years.
R540.12
Where the individual has been appointed as responsible for the engagement quality control review and has acted in that capacity for seven cumulative years, the cooling-off period shall be three consecutive years.
R540.13
If the individual has acted as a key audit partner other than in the capacities set out in paragraphs R540.11 and R540.12 for seven cumulative years, the cooling-off period shall be two consecutive years.
Service in a Combination of Key Audit Partner Roles
R540.14
If the individual acted in a combination of key audit partner roles and served as the engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years.
R540.15
Subject to paragraph R540.16(a), if the individual acted in a combination of key audit partner roles and served as the key audit partner responsible for the engagement quality control review for four or more cumulative years, the cooling‑off period shall be three consecutive years.
R540.16
If an individual has acted in a combination of engagement partner and engagement quality control review roles for four or more cumulative years during the time-on period, the cooling-off period shall —
(a)As an exception to paragraph R540.15, be five consecutive years where the individual has been the engagement partner for three or more years; or
(b)Be three consecutive years in the case of any other combination.
R540.17
If the individual acted in any combination of key audit partner roles other than those addressed in paragraphs R540.14 to R540.16, the cooling‑off period shall be two consecutive years.
Service at a Prior Firm
R540.18
In determining the number of years that an individual has been a key audit partner as set out in paragraph R540.5, the length of the relationship shall, where relevant, include time while the individual was a key audit partner on that engagement at a prior firm.
[Paragraph R540.19 is intentionally left blank]
Restrictions on Activities During the Cooling-off Period
R540.20
For the duration of the relevant cooling-off period, the individual shall not —
(a)Be an engagement team member or provide quality control for the audit engagement;
 
(b)Consult with the engagement team or the client regarding technical or industry-specific issues, transactions or events affecting the audit engagement (other than discussions with the engagement team limited to work undertaken or conclusions reached in the last year of the individual’s time-on period where this remains relevant to the audit);
 
(c)Be responsible for leading or coordinating the professional services provided by the firm or a network firm to the audit client, or overseeing the relationship of the firm or a network firm with the audit client; or
 
(d)Undertake any other role or activity not referred to above with respect to the audit client, including the provision of non-assurance services that would result in the individual —
(i)Having significant or frequent interaction with senior management or those charged with governance; or
(ii)Exerting direct influence on the outcome of the audit engagement.
540.20 A1
The provisions of paragraph R540.20 are not intended to prevent the individual from assuming a leadership role in the firm or a network firm, such as that of the Senior or Managing Partner (Chief Executive or equivalent).
Effective Date and Transitional Provision
540.21
Subject to the transitional provision below, paragraphs 540.1 to 540.20 A1 are effective for audits of financial statements for periods beginning on or after 15 December 2018.
 
For audits of financial statements for periods beginning prior to 15 December 2023, three consecutive years is substituted for the cooling-off period of five consecutive years specified in paragraphs R540.11, R540.14 and R540.16(a) provided that the applicable time‑on period does not exceed seven years.
 
For audits of financial statements for periods beginning on or after 15 December 2023, three consecutive years is substituted for the cooling-off period of five consecutive years specified in paragraphs R540.11, R540.1