Safeguards Phase 2 Section 600/Non-assurance Services (NAS) Part 4A International Independence Standards for Audits and Reviews

Transcription

1 Agenda Item 2-F Safeguards Phase 2 Sectin 600/Nn-assurance Services (NAS) (Mark-up frm June 2016 IESBA Discussin) Part 4A Internatinal Independence Standards fr Audits and Reviews. Sectin 600 Prvisin f Nn-assurance Services t an Audit Client Intrductin Firms and netwrk firms might prvide a range f nn-assurance services t their audit clients, cnsistent with their skills and expertise. Prviding nn-assurance services t audit clients might create threats t independence in additin t threats that might be created t cmpliance with the fundamental principles. Reference t threats in this sectin means threats t cmpliance with the fundamental principles set ut in Sectin 100, and threats t independence Sectin 120 requires prfessinal accuntants t apply the cnceptual framewrk t cmply with the fundamental principles and Internatinal Independence Standards., when perfrming audits r reviews, t be independent, and apply the cnceptual framewrk t threats t independence. Prviding nn-assurance services t audit clients might create threats t cmpliance with the fundamental principles and threats t independence. Sectin 600 sets ut requirements and applicatin material fr firms in the applicatin frelevant t applying the cnceptual framewrk t independence when prviding nn-assurance services t audit clients. Als relevant are, Sectin 300 which describes cnsideratins fr the applicatin f the cnceptual framewrk, and Sectin 400 which addresses independence requirements fr audit and review engagements, including the applicatin f the cnceptual framewrk t independence Subsectins 601 t 611 prvides additinal cnsideratins fr a firm r a netwrk when accepting r prviding certain types f nn-assurance services t audit clients. Requirements and Applicatin Material General Prvisins R600.4 When accepting and prviding a nn-assurance service t an audit client, a firm r a netwrk firm shall apply the cnceptual framewrk set ut in Sectin 120 t identify, evaluate and address threats. Identifying Threats Created by Accepting and Prviding Nn-Assurance Services t Audit Clients A1 The requirements and applicatin material in Sectin 600 assist firms in analyzing certain types f nn-assurance services and the related threats that might be created when a firm r netwrk firm accepts r prvides nn-assurance services t an audit client. Prepared by: Diane Jules (September 2016) Page 1 f 27

2 A21 New business practices, the evlutin f financial markets and changes in infrmatin technlgy, are amngst the develpments that make it impssible t draw up an all-inclusive list f nn-assurance services that might be prvided t an audit client. As a result, this Cde des nt include an exhaustive listing f all nn-assurance services that might be prvided t an audit client A3 A2 Subsectins set ut The requirements and applicatin material in Sectin 600 assists firms analyze certain types f relevant t prviding specific nn-assurance services and the related threats created t determine whether the service is permissible, r whether certain actins can be taken t address such threats in accrdance with paragraph R Subsectin sets ut examples f nn-assurance services that in certain situatins firms r netwrk firms are either: Expressly prhibited t accept r prvide. In sme cases, these subsectins expressly prhibit a firm r netwrk firm frm prviding certain services t an audit client because there can be n safeguards t eliminate the threats created r reduce the assciated threats created them t an acceptable level; r Required t apply the relevant. The subsectins als set ut requirements and applicatin material in Subsectins inrelevant t applying the cnceptual framewrk t identify, evaluate and address threats created by prviding nn-assurance services. Situatins When There are N Safeguards A3 Within subsectins are examples f situatins in which the applicatin f the cnceptual framewrk requires a firm r a netwrk firm t: Eliminate the circumstances, including interest, r relatinships that is creating the threat; r Decline r discntinue the specific prfessinal activity r service invlved because there can be n safeguards t eliminate r reduce the threats created an acceptable level. Evaluating Threats r Prviding Nn-Assurance Services t Audit Clients A4 Factrs that are imprtant t the firm s evaluatin fin evaluating the level f any threatthreats created when accepting andby prviding a nn-assurance service t an audit client include: The nature f the service, and the degree f reliance that will be placed n the utcme f that service as part f the audit. Whether the utcme f the service will affect matters reflected in the financial statements n which the firm will express an pinin, and, if it wills: The extent t which the utcme f the service will have a material effect n the financial statements; The degree f subjectivity invlved in determining the apprpriate amunts r treatment fr thse matters reflected in the financial statements; Page 2 f 27

3 The extent f the audit client s invlvement in determining and apprvingaccepting its respnsibilities fr thse matters where they invlve significant prfessinal judgment. The nature and extent f the impact f the service, if any, n the systems that generate infrmatin that frm a significant part f the client s: Accunting recrds r financial statements n which the firm will express an pinin; and r Internal cntrls ver financial reprting. Whether the audit client is a public interest entity, which. Fr example, prviding a nnassurance service t an audit client that is a public interest entity might increase thebe perceived t result in a higher level f anya threat created.. Materiality in Relatin t an Audit Client s Financial Statements A5 Prfessinal standards require that the audit engagement partner frm cnclusins n matters pertaining t cmpliance with independence requirements. This includes frming a cnclusin abut the materiality level r levels t be applied in rder t determine the impact f the nnassurance service n the financial statements A A6 Reference is made in the Internatinal Independence Standards in C1 and C2 Sectins refers t materiality in relatin t an audit client s financial statements. The cncept f materiality is addressed in ISA 320, Materiality in Planning and Perfrming an Audit. The firm s determinatin f materiality invlves the exercise f prfessinal judgement and is impacted by bth quantitative and qualitative factrs. It is als affected by perceptins f the financial infrmatin needs f users. Cnsideratins fr When a Firm r Netwrk Firm Prvides Multiple Nn-assurance Services t an Audit Client A1A7 In evaluating threats created by accepting anda firm r netwrk firm might prvide multiple nn-assurance services t an audit client. When prviding an additinala nn-assurance service t an audit client, the applicatin f the cnceptual framewrk requires that the firm als cnsider any threat thatcmbined effect f threats created by the audit team has reasn t believe is created by accepting and prviding ther related nn-assurance services prvided t the audit client. Cnsideratins fr When a Firm Prvides Nn-assurance Services t Certain Related Entities f an Audit Client R600.5 As an exceptin t the prvisins f Subsectins 600 t 699 a firm r netwrk firm may prvide nn-assurance services that wuld therwise be restricted by Subsectins 601 t 699 t the 1 See ISA 220, paragraph 11 Page 3 f 27

4 fllwing related entities f the audit clientclient n whse financial statements the firm will express an pinin: An entity, which is nt an audit client f the firm, that has direct r indirect cntrl ver the audit client; An entity, which is nt an audit client f the firm, that has a direct financial interest in the client if that entity has significant influence ver the client and the interest in the client is material t such entity; r (c) An entity, which is nt an audit client f the firm, that is under cmmn cntrl with the audit client, if it prvided the fllwing cnditins are met: (i) (ii) The firm, r a netwrk firm, des nt express an pinin n the financial statements f the related entity; and It is reasnable t cnclude that: the a. The services d nt create a self-review threat because the results f the services will nt be subject t audit prcedures; and the firm, applies the cnceptual framewrk t address any ther threats created by accepting and prviding the nn-assurance service. b. The firm applies the cnceptual framewrk t eliminate any ther threats created by prviding the nn-assurance service r reduce them t an acceptable level. Cnsideratins fr When a Firm Prvides Nn-assuranceAssurance Services t an Audit Client that Later Becmes a Public Interest Entity R600.6 As an exceptin t Sectinssubsectins 601 t 699 if a firm r a netwrk firm prvides a nnassurance service t an audit client that later becmes a public interest entity, the independence f the firm is nt cmprmised if: The previus nn-assurance service cmplies with the prvisins f Sectins 601 t 699 that relate t audit clients that are nt public interest entities; (c) Services that are nt permitted under Sectins 601 t 699 fr audit clients that are public interest entities are terminated befre, r as sn as practicable after, the client becmes a public interest entity; and The firm applies the cnceptual framewrk t addresseliminate any threats that are created r reduce them t an acceptable level. [Paragraphs t intentinally left blank fr the purpse f the September 2016 meetings.] Subsectin 601 Cnsideratins fr Aviding the Assumptin f Management Respnsibilities Intrductin 601.1R A firm r a netwrk firm shall nt assume a management respnsibility fr an audit client A1 Management respnsibilities invlve cntrlling, leading and directing an entity, including Page 4 f 27

5 making decisins regarding the acquisitin, deplyment and cntrl f human, financial, technlgical, physical and intangible resurces A2 Determining whether an activity is a management respnsibility depends n the circumstances and requires the exercise f judgment. Examples f activities that wuld be cnsidered a management respnsibility include: Setting plicies and strategic directin. Hiring r dismissing emplyees. Directing and taking respnsibility fr the actins f emplyees in relatin t the emplyees wrk fr the entity. Authrizing transactins Cntrlling r managing f bank accunts r investments. Deciding which recmmendatins f the firm r ther third parties t implement. Reprting t thse charged with gvernance n behalf f management. Taking respnsibility: Fr the preparatin and fair presentatin f the financial statements in accrdance with the applicable financial reprting framewrk; Fr designing, implementing, mnitring and maintaining internal cntrl. Requirements and Applicatin Material R601.3 A firm r a netwrk firm shall nt assume a management respnsibility fr an audit client. Identifying Threats A1 Accepting and prvidingprviding a nn-assurance service t an audit client creates selfreview and self-interest threats if the firm assumes a management respnsibility. Assuming a management respnsibility als creates a familiarity threat because the firm becmes t clsely aligned with the views and interests f management. Prviding Advice and Recmmendatins t Assist the Management f an Audit Client A2 Subject t cmpliance with paragraph R601.3R600.10, prviding advice and recmmendatins t assist the management f an audit client in discharging its respnsibilities is nt assuming a management respnsibility. R601.4R T avid the risk f assuming management respnsibility when prviding nn-assurance services t an audit client, the firm r a netwrk firm shall be satisfied that client management makes all judgments and decisins that are the prper respnsibility f management. This includes ensuring that the client s management: Designates an individual wh pssesses suitable skill, knwledge and experience t be respnsible at all times fr the client s decisins and t versee the services. Such an individual, preferably within senir management, wuld understand: Page 5 f 27

6 (i) (ii) The bjectives, nature and results f the services; and The respective client and firm respnsibilities. Hwever, the individual is nt required t pssess the expertise t perfrm r re-perfrm the services. (c) Prvides versight f the services and evaluates the adequacy f the results f the service perfrmed fr the client s purpse; and Accepts respnsibility fr the actins, if any, t be taken arising frm the results f the services. [Subsectin 601 intentinally mitted fr purpses f September 2016 meetings.] Subsectin 602 Administrative Services Intrductin Administrative services invlve assisting clients with their rutine r mechanical tasks within the nrmal curse f peratins. Such services require little t n prfessinal judgement and are clerical in nature Examples f administrative services include: Wrd prcessing services; Preparing administrative r statutry frms fr client apprval; (c) Submitting such frms as instructed by the client; and (d) Mnitring statutry filing dates, and advising an audit client f thse dates. Applicatin Material A1 Prviding administrative services t an audit client d nt generally create a threat. t independence. Hwever, The requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin.f the cnceptual framewrk requires that the firm evaluate the level f any threat created and address such threat s that it is eliminated r reduced t an acceptable level (see paragraph R600.4). Subsectin 603 Accunting and Bkkeeping Services, Including Preparing Accunting Recrds and Financial Statements Intrductin Prviding accunting and bkkeeping services t an audit client might create a self-review threat Management is respnsible fr the preparatin and fair presentatin f the financial statements Page 6 f 27

7 in accrdance with the applicable financial reprting framewrk. These respnsibilities include: Determining accunting plicies and the accunting treatment withinin accrdance with thse plicies. Preparing r changing surce dcuments r riginating data, in electrnic r ther frm, evidencing the ccurrence f a transactin. Examples include: Purchase rders; Payrll time recrds; and Custmer rders. Originating r changing jurnal entries, r determining the accunt classificatins f transactins The audit prcess, hwever, necessitates dialgue between the firm and management f the audit client, which might invlve: Applying accunting standards r plicies and financial statement disclsure requirements; Assessing the apprpriateness f financial and accunting cntrl and the methds used in determining the stated amunts f assets and liabilities; r Prpsing adjusting jurnal entries. These activities are cnsidered t be a nrmal part f the audit prcess and d nt usually create threats s lng as the client is respnsible fr making decisins in the preparatin f accunting recrds and financial statements Similarly, the client might request technical assistance n matters such as reslving accunt recnciliatin prblems r analyzing and accumulating infrmatin fr regulatry reprting. In additin, the client might request technical advice n accunting issues such as the cnversin f existing financial statements frm ne financial reprting framewrk t anther. Examples include: Cmplying with grup accunting plicies: r Transitining t a different financial reprting framewrk such as Internatinal Financial Reprting Standards. Such services d nt usually create threats prvided the firm des nt assume a management respnsibility fr the client Subsectin 603 sets ut Hwever, there are sme circumstances in which prviding accunting and bkkeeping services t an audit client is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding an accunting r bkkeeping service is nt prhibited, the requirements and applicatin material nset ut in Sectin 600 are relevant t this subsectin. Subsectin 603 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk set ut in Sectin 120 when prviding an audit client with accunting and bkkeeping services, such as preparing accunting recrds r financial statements. Page 7 f 27

8 Requirements and Applicatin Material Audit Clients that Are Public Interest Entities Audit Clients that Are Nt Public Interest Entities General Prvisins A A1Nn-assurance services that are rutine r mechanical in nature require little r n prfessinal judgment frmby the prfessinal accuntant. Sme examples f these services are: Preparing payrll calculatins r reprts based n client-riginated data fr apprval and payment by the client; Recrding recurring transactins fr which amunts are easily determinable frm surce dcuments r riginating data, such as a utility bill where the client has determined r apprved the apprpriate accunt classificatin; Calculating depreciatin n fixed assets when the client determines the accunting plicy and estimates f useful life and residual values. Psting transactins cded by the client t the general ledger; Psting client-apprved entries t the trial balance; and Preparing financial statements based n infrmatin in the client-apprved trial balance and preparing related ntes based n client-apprved recrds. Addressing Threats Created When Accepting r Prviding Accunting and Bkkeeping Services A36 A2 Examples f actins that in certain circumstances might be safeguards in addressingt address the self-review threats created when accepting r prviding accunting and bkkeeping services t an audit client that is nt a public interest entity include: Using services prfessinals wh are nt: Members f the audit team members t perfrm the accunting and bkkeeping service; r Members f the audit team t perfrm the service. Hiring an accunting and bkkeeping service prfessinal external t the firm t review the service. If such services are perfrmed by an audit team member, using a partner r senir member f persnnel with apprpriate expertise prfessinals wh is nt an audit team member, with apprpriate expertise t review, and challenge as apprpriate the wrk perfrmed. Audit Clients that Are Nt Public Interest Entities R603.7 A firm r a netwrk firm shall nt prvide t an audit client that is nt a public interest entity, services related t accunting and bkkeeping services, including payrll services, nr Page 8 f 27

9 prepare financial statements n which the firm will express an pinin r financial infrmatin which frms the basis f the financial statements unless: The services are f a rutine r mechanical nature; and The firm applies the cnceptual framewrk t addresses any self-review r familiarity threat created A1 Paragraph R603.7 precludes a firm r a netwrk firm frm prviding nn-assurance services related t the preparatin f accunting recrds and financial statements t an audit client that is nt a public interest entity in certain circumstances. Even in circumstances where such services are nt precluded, a self-review threat might still be created. Rutine r Mechanical Services A1A2 The A firm r netwrk firm may accept r prvide nn-assurance services related t the preparatin f accunting recrds and financial statements t an audit client that is nt a public interest entity where the services are f a rutine and mechanical nature s as lng as any self-review threat created is reduced t an acceptable level. Audit Clients that Are Public Interest Entities R A firm r a netwrk firm shall nt accept r prvide t an audit client that is a public interest entity accunting and bkkeeping services, including payrll services, nr prepare financial statements n which the firm will express an pinin r financial infrmatin which frms the basis f the financial statements. R As an exceptin t paragraph R603.58, a firm may prvide accunting and bkkeeping services, including payrll services and the preparatin f financial statements r ther financial infrmatin, f a rutine r mechanical nature fr divisins r related entities f an audit client that is a public interest entity if the persnnel prviding the services are nt members f the audit team members and: The divisins r related entities fr which the service is prvided are cllectively immaterial t the financial statements n which the firm will express an pinin; r The services relate t matters that are cllectively immaterial t the financial statements f the divisin r related entity A1 Examples f accunting and bkkeeping services that are rutine r mechanical in nature are included in paragraph A1. Subsectin 604 Valuatin Services Intrductin A valuatin cmprises the making f assumptins with regard t future develpments, the applicatin f apprpriate methdlgies and techniques, and the cmbinatin f bth t cmpute a certain value, r range f values, fr an asset, a liability r fr a business as a whle Subsectin 604 sets utprviding valuatin services t an audit client might create a selfreview threat. Page 9 f 27

10 604.3 In sme circumstances, prviding certain valuatins services t an audit client is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding a valuatin service is nt prhibited, the requirements and applicatin material n set ut in Sectin 600 are relevant t this subsectin. Subsectin 604 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk set ut in Sectin 120 when prviding a valuatin services t an audit client. Requirements and Applicatin Material Audit Clients that Are Public Interest Entities Audit Clients that Are Nt Public Interest Entities General Prvisins Evaluating Threats Created When Accepting r Prviding Valuatin Services A2 A1 Certain valuatins d nt invlve a significant degree f subjectivity. This is likely t happen wherebe the case when the underlying assumptins are either established by law r regulatin, r are widely accepted and when the techniques and methdlgies t be used are based n generally accepted standards r prescribed by law r regulatin. In such circumstances, the results f a valuatin perfrmed by tw r mre parties are nt likely t be materially different A3A2 If a firm is requested t perfrm a valuatin t assist an audit client with its tax reprting bligatins r fr tax planning purpses and the results f the valuatin will nt have a direct effect n the financial statements, the prvisinsapplicatin material set ut in paragraphparagraphs A A4, relating t such services apply A31 Prviding valuatin services t an audit client might create a self-review threat. Factrs that are imprtant t the firm sin evaluatingn f the level f any threat created when accepting andby prviding valuatin services t an audit client include: The extent f the client s invlvement in determining and apprving the valuatin methdlgy and ther significant matters f judgment. The degree f subjectivity inherent in the item fr valuatins invlving standard r established methdlgies. Whether the valuatin will have a material effect n the financial statements. The extent and clarity f the disclsures related t the valuatin in the financial statements. The degree f dependence n future events f a nature that culd create significant vlatility inherent in the amunts invlved. Addressing Threats Created When Accepting r Prviding Valuatin Services 6 A A4 Examples f actins that that in certain circumstances might be safeguards in addressingt address the self-review threats created when accepting r prviding valuatin services t an audit client include: Page 10 f 27

11 Using prfessinals wh are nt audit team members f the audit team t perfrm the valuatin services service; r Having a prfessinal wh was nt invlved in prviding the valuatin service review the audit r valuatin wrk perfrmed; r. Audit Clients that Are Nt Public Interest Entities R A firm r a netwrk firm shall nt accept r prvide a valuatin service t an audit client that is nt a public interest entity if: The valuatin has will have a material effect n the financial statements n which the firm will express an pinin; and The valuatin invlves a significant degree f subjectivity. Audit Clients that Are Public Interest Entities R A firm r a netwrk firm shall nt accept r prvide valuatin services t an audit client that is a public interest entity if the valuatin services wuld have a material effect, separately r in the aggregate, n the financial statements n which the firm will express an pinin, regardless f the degree f subjectivity invlved. Subsectin 605 Taxatin Services Intrductin Taxatin services cmprise a brad range f services, including: Tax return preparatin; Tax calculatins fr the purpse f preparing the accunting entries; Tax planning and ther tax advisry services; and Assistance in the reslutin f tax disputes. While this subsectin deals with different types f taxatin services described abve separately under separate headings, in practice, the activities invlved in prviding taxatin services are ften interrelated Prviding taxatin services t an audit client might create a self-review r advcacy threat. Subsectin 605 sets ut requirements and applicatin material n applying the cnceptual framewrk set ut in Sectin 120 when prviding taxatin services t an audit client. While this subsectin deals with different types f taxatin services described abve separately under separate headings, in practice, the activities invlved in prviding taxatin services are ften interrelated In sme circumstances, prviding certain taxatin services t an audit client is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding a taxatin service is nt prhibited, the requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 605 sets ut specific requirements and applicatin material relevant t applying the cnceptual Page 11 f 27

12 framewrk when prviding a taxatin service t an audit client. Requirements and Applicatin Material Evaluating Threats Created When Accepting r Prviding Taxatin Services t Audit Clients A1 Accepting and prviding taxatin services t an audit client might create a self-review r advcacy threat. Factrs that are imprtant t the firm s evaluatin fin evaluating the level f any threat created when perfrming certainby prviding all taxatin services frt audit clients include: The particular characteristics f the engagement; The level f tax expertise f the client s emplyees; The system by which the tax authrities assess and administer the tax in questin and the rle f the firm in that prcess; and The cmplexity f the relevant tax regime and the degree f judgment necessary in applying it. Tax Return Preparatin A1 Tax return preparatin services invlve assisting clients with their tax reprting bligatins by drafting and cmpiling infrmatin, including the amunt f tax due (usually n standardized frms) required t be submitted t the applicable tax authrities. Such services als include advising n the tax return treatment f past transactins and respnding n behalf f the audit client t the tax authrities requests fr additinal infrmatin and analysis (fr example, including prviding explanatins f and technical supprt fr the apprach being taken) A2 Tax return preparatin services are usually based n histrical infrmatin and principally invlve analysis and presentatin f such histrical infrmatin under existing tax law, including precedents and established practice. Further, the tax returns are subject t whatever review r apprval prcess the tax authrity cnsiders apprpriate. Accrdingly,Paragraph R precludes a firm r netwrk firm frm assuming a management respnsibility when prviding suchtax return preparatin services des. Prviding tax return preparatin services d nt usually create a threat t independence if management takes respnsibility fr the returns including any significant judgments made. Hwever, applicatin f the cnceptual framewrk requires that the firm evaluate the level f any threat created and address such threat s that it is eliminated r reduced t an acceptable level (see paragraph R600.4). Tax Calculatins fr the Purpse f Preparing Accunting Entries Audit clients that are public interest entities Audit clients that are nt public interest entities General Prvisins A1 Preparing calculatins f current and deferred tax liabilities (r assets) fr an audit client fr the purpse f preparing accunting entries that will be subsequently audited by the firm creates a self-review threat. Page 12 f 27

13 A2 Factrs that are imprtant t the firm s evaluatin fin evaluating the level f any threat created whenby preparing tax calculatins fr the purpse f preparing accunting entries fr an audit client that is nt a public interest entity include: The cmplexity f the relevant tax law and regulatin and the degree f judgment necessary in applying them; The level f tax expertise f the client s persnnel; and The materiality f the amunts t the financial statements. Addressing Threats Created When Accepting r Prviding Tax Calculatins A3 Examples f actins that in certain circumstances might be safeguards in addressingt address self-review r advcacy threats created when accepting r prviding tax calculatins fr the purpse f preparing accunting entries fr an audit client that is nt a public interest entity include: Using tax prfessinals wh are nt members f the audit team members t perfrm the tax service; r If the service is perfrmed by an audit team member, using a partner r senir member f persnnel with apprpriate expertise prfessinal wh is nt an audit team member, with apprpriate expertise t reviewchallenge as apprpriate, the tax calculatins. Obtaining advice n the service frm a prfessinal. Audit Clients that are Public Interest Entities R A firm r a netwrk firm shall nt prepare tax calculatins f current and deferred tax liabilities (r assets) fr an audit client that is a public interest entity fr the purpse f preparing accunting entries that are material t the financial statements n which the firm will express an pinin. Tax Planning and Other Tax Advisry Services General Prvisins A1 Tax planning r ther tax advisry services cmprise a brad range f services, such as advising the client hw t structure its affairs in a tax efficient manner r advising n the applicatin f a new tax law r regulatin. Evaluating Threats Created When Accepting r Prviding Tax Planning and Other Tax Advisry Services A1A2 A self-review threat might be created where the tax advice will affect matters t be reflected in the financial statements A2A3 Factrs that are imprtant t the firm s evaluatin fin evaluating the level f any threat created when acceptingby prviding tax advice t audit clients include: The level f tax expertise f the client s emplyees; The degree f subjectivity invlved in determining the apprpriate treatment fr the tax advice in the financial statements; Page 13 f 27

14 Whether the tax treatment is supprted by a private ruling r has therwise been cleared by the tax authrity befre the preparatin f the financial statements; Fr example, prvidingwhether the advice prvided as a result f the tax planning and ther tax advisry services where the advice is clearlyis: Clearly supprted by tax authrity r ther precedent, established Established practice, r has Has a basis in tax law that is likely t prevail des nt usually create a threat t independence.. The extent t which the advice is supprted by tax law r regulatin, ther precedent r established practice; The extent t which the utcme f the tax advice will have a material effect n the financial statements; and Whether the effectiveness f the tax advice depends n the accunting treatment r presentatin in the financial statements and there is dubt as t the apprpriateness f the accunting treatment r presentatin under the relevant financial reprting framewrk. Addressing Threats Created When Accepting r Prviding Tax Planning and Other Tax Advisry Services, Including Safeguards A18 A4 Examples f actins that in certain circumstances might be safeguards in addressingt address self-review threats created when accepting r prviding tax planning and ther tax advisry services include: Using tax prfessinals wh are nt members f the audit team members t perfrm the tax service; Having a prfessinal, wh was nt invlved in prviding the tax service, advise the audit team n the service and review the financial statement treatment; Obtaining advice n the service frm a prfessinal external t the firm; r Obtaining pre-clearance r advice frm the tax authrities. R A firm r a netwrk firm shall nt accept r prvide taxatin advisry services t an audit client when the effectiveness f the tax advice depends n a particular accunting treatment r presentatin in the financial statements and: The audit team has reasnable dubt as t the apprpriateness f the related accunting treatment r presentatin under the relevant financial reprting framewrk; and The utcme r cnsequences f the tax advice will have a material effect n the financial statements n which the firm will express an pinin. Page 14 f 27

15 Taxatin Services Invlving Valuatins A1 If a firm perfrms a valuatin t assist an audit client with its tax reprting bligatins r fr tax planning purpses where the result f the valuatin will have a direct effect n the financial statements, the prvisins set ut in Subsectin 604 relating t valuatin services apply A2 A valuatin might be perfrmed fr tax purpses nly where the result f the valuatin will nt have a direct effect n the financial statements (that is, the financial statements are nly affected thrugh accunting entries related t tax). This wuld nt usually create threats if the effect n the financial statements is immaterial r the valuatin is subject t external review by a tax authrity r similar regulatry authrity. Evaluating Threats Created When Accepting r Prviding Taxatin Services Invlving Valuatins A3 If the valuatin that is perfrmed fr tax purpses is nt subject t such an external review and the effect is material t the financial statements, the fllwing factrs are imprtant t the firm s evaluatin fevaluating the level f any threat created frm the prvisinby prviding thse services t an audit client : The extent t which the valuatin methdlgy is supprted by tax law r regulatin, ther precedent r established practice; The degree f subjectivity inherent in the valuatin; andr The reliability and extent f the underlying data. Addressing Threats Created When Accepting r Prviding Taxatin Services Invlving Valuatins A4 Examples f actins that in certain circumstances might be safeguards in addressingt address self-review r advcacy threats when accepting r prviding taxatin services invlving valuatins include: Using tax prfessinals wh are nt members f the audit team members t perfrm the service; Having a prfessinal review the audit wrk r the result f the tax service; r Obtaining pre-clearance r advice frm the tax authrities. Assistance in the Reslutin f Tax Disputes A1111 A1 A tax dispute arises may reach a pint when the tax authrities have ntified an audit client that arguments n a particular issue have been rejected and either the tax authrity r the client refers the matter fr determinatin in a frmal prceeding, fr example befre a tribunal r curt. An advcacy r self-review threat might be created when the firm r the netwrk firm represents an audit client in the reslutin f such a tax dispute. R A firm r a netwrk firm shall nt accept r prvide taxatin services that invlve prviding assistance in the reslutin f tax disputes t an audit client if: The services invlve acting as an advcate fr the audit client befre a public tribunal r curt in the reslutin f a tax matter; and Page 15 f 27

16 The amunts invlved are material t the financial statements n which the firm will express an pinin A1 What cnstitutes a public tribunal r curt depends n hw tax prceedings are heard in the particular jurisdictin. Cntinuing Advisry Rles in the Reslutin f Tax Disputes A2 Paragraph R des nt preclude a firm frm having a cntinuing advisry rle in relatin t the matter that is being heard befre a public tribunal r curt, fr example: (c) Respnding t specific requests fr infrmatin; Prviding factual accunts r testimny abut the wrk perfrmed; r Assisting the client in analyzing the tax issues fr the audit client in relatin t the matter that is being heard befre a public tribunal r curt. Evaluating Threats Created by Having a Cntinuing Advisry Rle in the Reslutin f Tax Disputes A3 Factrs that are imprtant t the firm s evaluatin fin evaluating the level f any threat created by having a cntinuing advisry rle in the reslutin f tax disputes fhaving reached the level f a frmal prceeding fr an audit client include: The rle management plays in the reslutin f the dispute; The extent t which the utcme f the dispute will have a material effect n the financial statements n which the firm will express an pinin; Whether the advice which is the subject f the tax dispute has been prvided by either the firm r netwrk firm; The extent t which the matter is supprted by tax law r regulatin, ther precedent, r established practice; and Whether the prceedings are cnducted in public. Addressing Threats Created by Having a Cntinuing Advisry Rle in the Reslutin f Tax Disputes A4 Examples f actins that in certain circumstances might be safeguards in addressingt address self-review r advcacy threats created by having a cntinuing advisry rle in the reslutin f tax disputes include: Using tax prfessinals wh are nt members f the audit team members t perfrm the service; Having a prfessinal, wh was nt invlved in prviding the tax service, advise the audit team n the service and review the financial statement treatment; r Obtaining advice n the service frm an externala tax prfessinal. Page 16 f 27

17 Subsectin 606 Internal Audit Services Intrductin Internal audit services invlve assisting the audit client in the perfrmance f its internal audit activities. Internal audit activities might include: Mnitring f internal cntrl reviewing cntrls, mnitring their peratin and recmmending imprvements t them; Examining financial and perating infrmatin by: Reviewing the means used t identify, measure, classify and reprt financial and perating infrmatin; and Inquiring specifically int individual items including detailed testing f transactins, balances and prcedures; Reviewing the ecnmy, efficiency and effectiveness f perating activities including nn-financial activities f an entity; and Reviewing cmpliance with: Laws, regulatins and ther external requirements, and Management plicies and directives and ther internal requirements The scpe and bjectives f internal audit activities vary widely and depend n the size and structure f the entity and the requirements f management and thse charged with gvernance A The prvisin f internal audit services t an audit client creates a self-review threat t independence if the firm uses the internal audit wrk in the curse f a subsequent external audit In sme circumstances, prviding certain internal audit services is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding an internal audit service is nt prhibited, the requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 606 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an internal audit service t an audit client Subsectin 606 sets ut requirements and applicatin material n applying the cnceptual framewrk set ut in Sectin 120 when prviding internal audit services t an audit client. Requirements and Applicatin Material Audit Clients that Are Public Interest Entities General Prvisins R Paragraph R601.3R precludes a firm r a netwrk firm frm assuming a management respnsibility frwhen prviding an internal audit service t an audit client. If the firm s persnnel assume a management respnsibility whenwhen prviding an internal audit Page 17 f 27

18 services t an audit client, the firm shall be satisfied that: threat created wuld be s significant that n safeguards culd reduce the threat t an acceptable level. The client designates an apprpriate and cmpetent resurce, preferably within senir management, t: (i) (ii) Be respnsible at all times fr internal audit activities; and Acknwledge respnsibility fr designing, implementing, and maintaining internal cntrl; (c) (d) (e) The client s management r thse charged with gvernance reviews, assesses and apprves the scpe, risk and frequency f the internal audit services; The client s management evaluates the adequacy f the internal audit services and the findings resulting frm their perfrmance; The client s management evaluates and determines which recmmendatins resulting frm internal audit services t implement and manages the implementatin prcess; and The client s management reprts t thse charged with gvernance the significant findings and recmmendatins resulting frm the internal audit services A1 The prvisin f internal audit services t an audit client creates a self-review threat t independence if the firm uses the internal audit wrk in the curse f a subsequent external audit. Perfrming a significant part f the client s internal audit activities increases the pssibility that firm persnnel prviding internal audit services will assume a management respnsibility. Paragraph R601.3 precludes a firm frm assuming a management respnsibility fr an audit client. If the firm s persnnel assume a management respnsibility when prviding internal audit services t an audit client, the threat created wuld be s significant that n cannt be eliminated r reduced t an acceptable level by applying a safeguards culd reduce the threat t an acceptable level A2 Examples f internal audit services that invlve assuming management respnsibilities include: Setting internal audit plicies r the strategic directin f internal audit activities; Directing and taking respnsibility fr the actins f the entity s internal audit emplyees; Deciding which recmmendatins resulting frm internal audit activities t implement; Reprting the results f the internal audit activities t thse charged with gvernance n behalf f management; Perfrming prcedures that frm part f the internal cntrl, such as reviewing and apprving changes t emplyee data access privileges; Taking respnsibility fr designing, implementing, mnitring and maintaining internal cntrl; and Perfrming utsurced internal audit services, cmprising all r a substantial prtin f the internal audit functin, where the firm: Is respnsible fr determining the scpe f the internal audit wrk; and Page 18 f 27

19 Might have respnsibility fr ne r mre f the matters nted abve. Identifying Threats Created by Accepting and Prviding Internal Audit Services t an Audit Client A1 Prviding internal audit services fr an audit client might create a self-review threat. Evaluating Threats Created by Accepting r Prviding Internal Audit Services t an Audit Client A13 Factrs that are imprtant t in the firm s evaluating n f the level f any threat created by accepting r prviding internal audit services t an audit client include: The materiality f the related financial statement amunts; The risk f misstatement f the assertins related t thse financial statement amunts; and The degree f reliance that will be placed n the internal audit service A2 A4 When a firm uses the wrk f an internal audit functin in an audit engagement, Internatinal Standards n Auditing require the perfrmance f prcedures t evaluate the adequacy f that audit wrk. When a firm accepts an engagement t prvide internal audit services t an audit client, the results f thse services might be used in cnducting the external audit. This creates a self-review threat because it is pssible that the audit team will use the results f the internal audit service fr purpses f the audit engagement withut: Apprpriately evaluating thse results; r Exercising the same level f prfessinal skepticism as wuld be exercised when the internal audit wrk is perfrmed by individuals wh are nt members f the firm. Addressing Threats Created by Accepting r Prviding Internal Audit Services t an Audit Client A1 An Eexamples f an actins that in certain circumstances might be a safeguards in t addressing self-review threats created when accepting r by prviding internal audit services t an audit client isinclude: Uusing internal audit prfessinals wh are nt members f the audit team members t perfrm the internal audit service; r Having a prfessinal external t the firm t review the internal audit service. Audit Clients that Are Public Interest Entities R A firm r a netwrk firm shall nt accept r prvide internal audit services t an audit client that is a public interest entity, if the services relate t: (c) A significant part f the internal cntrls ver financial reprting; Financial accunting systems that generate infrmatin that is, separately r in the aggregate, material t the client s accunting recrds r financial statements n which the firm will express an pinin; r Amunts r disclsures that are, separately r in the aggregate, material t the financial statements n which the firm will express an pinin. Page 19 f 27

20 Subsectin 607 Infrmatin Technlgy Systems Services Intrductin Services related t infrmatin technlgy (IT) systems include the design r implementatin f hardware r sftware systems. The IT systems might: (c) Aggregate surce data; Frm part f the internal cntrl ver financial reprting; r Generate infrmatin that affects the accunting recrds r financial statements, including related disclsures. Hwever, the IT systems might als invlve matters that are unrelated t the audit client s accunting recrds r the internal cntrl ver financial reprting r financial statements Subsectin 607 sets ut requirements and applicatin material n applying the cnceptual framewrk set ut in Sectin 120 when prviding IT system services t an audit client. Prviding IT systems services t an audit client might create a self-review threat depending n the nature f the services and the IT systems In sme circumstances, prviding certain IT services is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding an IT service is nt prhibited, the requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 607 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an IT service t an audit client. Requirements and Applicatin Material Audit Clients that Are Public Interest Entities Audit Clients that Are Nt Public Interest Entities General Prvisins A2A1 Paragraph R precludes a firm r a netwrk firm shall nt accept r prvide frm assuming a management respnsibility when prviding an IT t an audit client. Prviding the The fllwing IT systems services dt an audit client desd nt usually create a threat t independence as lng as persnnel f the firm r netwrk firm d nt assume a management respnsibility: (c) Designing r implementing IT systems that are unrelated t internal cntrl ver financial reprting; Designing r implementing IT systems that d nt generate infrmatin frming a significant part f the accunting recrds r financial statements; Implementing ff-the-shelf accunting r financial infrmatin reprting sftware that was nt develped by the firm, if the custmizatin required t meet the client s needs is nt significant; and Page 20 f 27

21 (d) Evaluating and making recmmendatins with respect t a system designed, implemented r perated by anther service prvider r the client. R If a firm r netwrk firm determines that it is permitted by paragraph R607.6 t prvide an IT systems service t an audit client, the firm r the netwrk firm shall determine whether t prvide that service nly with persnnel wh are nt members f audit team members and wh have different reprting lines frm the members f audit team members A1 The determinatin t be made in paragraph R depends n the degree f reliance that will be placed n the particular IT systems as part f the audit A2 An Eexamples f an actins that in certain circumstances might be a safeguards t in addressing self-review threats created when by accepting r prviding IT systems services t an audit client include:is using IT prfessinals wh are nt members f the audit team members t perfrm the service. Hiring a prfessinal external t the firm t review the IT service Audit Clients that Are Nt Public Interest Entities R A firm r a netwrk firm shall nt accept r prvide an IT systems service t an audit client that is nt a public interest entity if the service invlves the design r implementatin f IT systems that: Frm a significant part f the internal cntrl ver financial reprting; r Generate infrmatin that is significant t the client s accunting recrds r financial statements n which the firm will express an pinin, unless apprpriate plicies and prcedures are put in place ensuring that: (i) (ii) The client acknwledges its respnsibility fr establishing and mnitring a system f internal cntrls; The client assigns the respnsibility t make all management decisins with respect t the design and implementatin f the hardware r sftware system t a cmpetent emplyee, preferably within senir management; (iii) The client makes all management decisins with respect t the design and implementatin prcess; (iv) The client evaluates the adequacy and results f the design and implementatin f the system; and (v) The client is respnsible fr perating the system (hardware r sftware) and fr the data it uses r generates. Audit Clients that Are Public Interest Entities R A firm r a netwrk firm shall nt prvide IT systems services t an audit client that is a public interest entity if the services invlve designing r implementing IT systems that: Frm a significant part f the internal cntrl ver financial reprting; r Page 21 f 27