Safeguards Phase 2 Proposed Section 600 (Mark-up From September 27 IESBA Meeting Discussion)

Transcription

1 Agenda Item 4-D Safeguards Phase 2 Prpsed Sectin 600 (Mark-up Frm September 27 IESBA Meeting Discussin) Nte t Meeting Participants: A clean versin f Sectin 600 will frm part f Chapter 1 t the Safeguards Phase 2 Expsure Draft (ED). The text f Sectin 600 will nt be repeated in the Structure Phase 2 ED. The Explanatry Memranda t the Safeguards and Structure Phase 2 EDs will draw readers attentin t the fact that the text f Sectin 600 was develped using the new drafting guidelines fr the restructured Cde. Respndents will be encuraged t repeat cmments abut the frmat and structure f Sectin 600 in develping respnses t the Structure Phase 2 ED. An IESBA December 2016 Update will frm part f the January 2017 releases will als alert respndents t the interactin between Structure and Safeguards EDs. Part 4A Internatinal Independence Standards fr Audits and Reviews. Sectin 600 Prvisin f Nn-assurance Services t an Audit Client Intrductin Firms are required t cmply with the fundamental principles and, be independent, and apply the cnceptual framewrk set ut in Sectin 120 t identify, evaluate and address threats t independence. Firms and netwrk firms might prvide a range f nn-assurance services t their audit clients, cnsistent with their skills and expertise Sectin 120 requires prfessinal accuntants t cmply with the fundamental principles and, when perfrming audits r reviews, t be independent, and apply the cnceptual framewrk t threats t independence. Firms and netwrk firms might prvide a range f nn-assurance services t their audit clients, cnsistent with their skills and expertise. Prviding nnassurance 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 relevant t applying the cnceptual framewrk t independence when prviding nnassurance services t audit clients A3 Sectin 600 sets ut requirements and applicatin material relevant t applying the cnceptual framewrk t identify, evaluate and address threats t independence when prviding nnassurance services t audit clients. Subsectins set ut specific requirements and applicatin material relevant t prviding specific nn-assurance services t audit clients and indicate the types f threats that might be created as a result. In sme cases, these subsectins expressly prhibit a firm r netwrk firm frm prviding certain services t an audit client because the threats cannt be eliminated r there can be n safeguards t eliminate the threats created r reduce them t an acceptable level. The subsectins als set ut requirements and applicatin material relevant t applying the cnceptual framewrk t identify, evaluate and Cmmented [DJ1]: New para Cmmented [DJ2]: Cmmented [DJ3]: New para Prepared by: Diane Jules (Nvember 2016) Page 1 f 24

2 address threats created by prviding nn-assurance services. Requirements and Applicatin Material General Prvisins R600.4 Befre a firm r a netwrk firm accepts an engagement t prvide a nn-assurance service t an audit client, the firm shall determine whether prviding such a service wuld create a threat t independence 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 A2 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 A4 Factrs that are imprtantrelevant in evaluating the level f any threats created by prviding a nn-assurance service t an audit client include: Cmmented [DJ4]: Cmmented [DJ5]: Cmmented [DJ6]: Cmmented [DJ7]: New para 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 s: 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.; The extent f the audit client s invlvement in determining and accepting its respnsibilities fr thse matters where they invlve significant matters f judgment. The level f expertise f the client s emplyees with respect t the type f service prvided; 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.; r Internal cntrls ver financial reprting. Whether the audit client is a public interest entity. Fr example, prviding a nn-assurance service t an audit client that is a public interest entity might be perceived t result in a higher level f a threat. Page 2 f 24

3 Subsectins include mre specific factrs that are relevant in evaluating the level f any threats created by prviding certain nn-assurance services. Materiality in Relatin t an Audit Client s Financial Statements A15 SubSsectins 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 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. Cmmented [DJ8]: New para Cnsideratins fr When a Firm r Netwrk Firm Prvides Multiple Nn-assurance Services t an Audit Client A1 A firm r netwrk firm might prvide multiple nn-assurance services t an audit client. When prviding a nn-assurance service t an audit client, the applicatin fapplying the cnceptual framewrk requires that the firm t cnsider any cmbined effect f threats created by the ther nn-assurance services prvided t the audit client. Cmmented [DJ9]: New para Cnsideratins fr Aviding the Assumptin f Management Respnsibilities R A firm r a netwrk firm shall nt assume a management respnsibility fr an audit client. Cmmented [DJ10]: A1 Prviding a nn-assurance service t an audit client creates self-review 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 A21 Management respnsibilities invlve cntrlling, leading and directing an entity, including making decisins regarding the acquisitin, deplyment and cntrl f human, financial, technlgical, physical and intangible resurces A32 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: Cmmented [DJ11]: Cmmented [DJ12]: 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; Page 3 f 24

4 Safeguards Phase 2 Prpsed Sectin 600 (Mark-up) Fr designing, implementing, mnitring and maintaining internal cntrl A42 Subject t cmpliance with paragraph R600.10, pprviding advice and recmmendatins t assist the management f an audit client in discharging its respnsibilities is nt assuming a management respnsibility (see R A3). R 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: Cmmented [DJ13]: Cmmented [DJ14]: 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: (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. Cnsideratins fr When a Firm Prviding es Nn-Assurance Services t an Audit Client that Later Becmes a Public Interest Entity R As an exceptin t subsectins 601 t 699 if a firm r a netwrk firm prvides aa nnassurance service prvided by a firm r a netwrk firm t an audit client des nt cmprmise the firm s independence when the client that later becmes a public interest entity, the independence f the firm is nt cmprmised if: Cmmented [DJ15]: (c) The previus nn-assurance service cmplies with the requirements and applicatin material prvisins f Sectins t 699 that relate t audit clients that are nt public interest entities.; Services that are nt permitted under Sectins 6001 t 699 fr audit clients that are public interest entities are terminated ended befre, r as sn as practicable after, the client becmes a public interest entity; and. The firm applies the cnceptual framewrk t identify, evaluate and address t eliminate any threats that are created r reduce them t an acceptable level. Cnsideratins fr Certain When a Firm Prvides Nn-assurance Services t Certain Related Entities / R As an exceptin t Sectin 600 prhibits the prvisins f assuming management respnsibilities r prviding certain nn-assurance services t audit clients. As an exceptin t thse requirements, a firm r netwrk firm may assume management respnsibilities r prvide nn-assurance services t the a firm r netwrk firm may prvide nn-assurance services that Page 4 f 24

5 wuld therwise be restricted by Subsectins 601 t 699 t the fllwing related entities f the client n whse financial statements the firm will express an pinin: Cmmented [DJ16]: (c) An entity that has direct r indirect cntrl ver the client; An entity that withhas 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 An entity which that is under cmmn cntrl with the client,, if all f the prvided the fllwing cnditins are are met: (i) (ii) (ii) (iii) (iv) The firm, r a netwrk firm, des nt express an pinin n the financial statements f the related entity; and. The firm r a netwrk firm des nt assume a management respnsibility, directly r indirectly, fr the entity n whse financial statements the firm will express an pinin. It is reasnable t cnclude that: 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 eliminate any ther threats created by prviding the nn-assurance service r reduce them t an acceptable level. [Paragraphs t intentinally left blank.] [Subsectin 601 intentinally mitted] Subsectin 6031 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 Subsectin 601 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an audit client with accunting and bkkeeping services. Hwever, Tthere are sme circumstances in which prviding accunting and bkkeeping services t an audit client is expressly prhibited because the threats cannt be eliminated r and there can be n safeguards t eliminate r reduce threats created tthem t an acceptable level. In cases when prviding an accunting r bkkeeping service is nt prhibited, tthe requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 603 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an audit client with accunting and bkkeeping services. Cmmented [DJ17]: Cmmented [DJ18]: New para Requirements and Applicatin Material General A1 Accunting and bkkeeping services cmprise a brad range f services including: Cmmented [DJ19]: New para Preparing accunting recrds and financial statements. Page 5 f 24

6 Bkkeeping and payrll services. Technical assistance n accunting matters A2 Management is respnsible fr the preparatin and fair presentatin f the financial statements in accrdance with the applicable financial reprting framewrk. These respnsibilities include: Cmmented [DJ20]: Determining accunting plicies and the accunting treatment in 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 A3 The audit prcess necessitates dialgue between the firm and management f the audit client, which might invlve: Cmmented [DJ21]: 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 A4 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: Cmmented [DJ22]: General Prvisins 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 A1 Nn-assuranceAccunting and bkkeeping services that are rutine r mechanical in nature require little r n prfessinal judgment by the prfessinal accuntant. Sme examples f these services are: Cmmented [DJ23]: Page 6 f 24

7 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 A1 Examples f actins that might be safeguards t address the self-review threats created when prviding accunting and bkkeeping services t an audit client that is nt a public interest entity include: Cmmented [DJ24]: Using prfessinals wh are nt audit team members t perfrm the accunting and bkkeeping service; r If such services are perfrmed by an audit team member, using a partner r senir 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 R 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 prepare financial statements n which the firm will express an pinin, r financial infrmatin which frms the basis f the financial statements unless: Cmmented [DJ25]: The services are f a rutine r mechanical nature; and The firm addresses any self-review r familiarity threats created by prviding such services 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 A2 A firm r netwrk firm may 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 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 prvide t an audit client that is a public interest entity accunting and bkkeeping services, including payrll services, nr prepare financial Cmmented [DJ26]: Page 7 f 24

8 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 R , 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. The firm may prvide these services if the persnnel prviding the services are nt audit team members and: Cmmented [DJ27]: 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 602 Administrative Services Intrductin Prviding administrative services t an audit client des nt generally usually create a threat Subsectin 602 sets ut specific applicatin material relevant t applying the cnceptual framewrk when prviding administrative services. The requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Cmmented [DJ28]: Cmmented [DJ29]: New para. Applicatin Material A1 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 A2 Examples f administrative services include: Cmmented [DJ30]: Cmmented [DJ31]: Wrd prcessing services; Preparing administrative r statutry frms fr client apprval; Submitting such frms as instructed by the client; Mnitring statutry filing dates, and advising an audit client f thse dates The requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 6043 Valuatin Services Intrductin Prviding valuatin services t an audit client might create a self-review threat Subsectin 6043 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding a valuatin service t an audit client. In sme circumstances, prviding certain valuatins services t an audit client is expressly prhibited Cmmented [DJ32]: Cmmented [DJ33]: New para Page 8 f 24

9 because the threats cannt be eliminated r and there can be n safeguards t eliminate r reduce them threats created t an acceptable level. In cases when prviding a valuatin service is nt prhibited, tthe requirements and applicatin material 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 when prviding a valuatin service t an audit client. Requirements and Applicatin Material General Prvisins A1 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 A2 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 applicatin material set ut in paragraphs A A14, relating t such services apply A31 Factrs that are imprtantrelevant in evaluating the level f any threat created by prviding valuatin services t an audit client include: Cmmented [DJ34]: Cmmented [DJ35]: Cmmented [DJ36]: 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 might create significant vlatility inherent in the amunts invlved A14 Examples f actins that might be safeguards t address the self-review threats created when prviding valuatin services t an audit client include: Cmmented [DJ37]: Using prfessinals wh are nt audit team members 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. Audit Clients Tthat Are Nt Public Interest Entities R A firm r a netwrk firm shall nt prvide a valuatin service t an audit client that is nt a public interest entity if: Cmmented [DJ38]: The valuatin invlves a significant degree f subjectivity; and. The valuatin will have a material effect n the financial statements n which the firm will express an pinin.; and Page 9 f 24

10 A1 Certain valuatins d nt invlve a significant degree f subjectivity. This is likely t be 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. Cmmented [DJ39]: Audit Clients Tthat Are Public Interest Entities R A firm r a netwrk firm shall nt 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. Cmmented [DJ40]: Subsectin 6045 Taxatin Services Intrductin Prviding taxatin services t an audit client might create a self-review r advcacy threat Subsectin 6045 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding a taxatin service t an audit client. In sme circumstances, prviding certain taxatin services t an audit client is expressly prhibited because the threats cannt be eliminated r and there can be n safeguards t eliminate r reduce threats created tthem t an acceptable level. In cases when prviding a taxatin service is nt prhibited, tthe 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 framewrk when prviding a taxatin service t an audit client. Cmmented [DJ41]: Cmmented [DJ42]: New para Requirements and Applicatin Material A1 Taxatin services cmprise a brad range f services, including: Cmmented [DJ43]: 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 A21 Factrs that are imprtantrelevant in evaluating the level f any threat created by prviding all taxatin services t audit clients include: Cmmented [DJ44]: 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 Page 10 f 24

11 Tax Return Preparatin Safeguards Phase 2 Prpsed Sectin 600 (Mark-up) The cmplexity f the relevant tax regime and the degree f judgment necessary in applying it A1 Prviding tax return preparatin services des nt usually create a threat A21 Tax return preparatin services invlve: Cmmented [DJ45]: Cmmented [DJ46]: aassisting 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 aadvising 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) A32 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. Paragraph R precludes a firm r netwrk firm frm assuming a management respnsibility when prviding tax return preparatin services. Prviding tax return preparatin services d nt usually create a threat if management takes respnsibility fr the returns including any significant judgments made. Cmmented [DJ47]: Tax Calculatins fr the Purpse f Preparing Accunting Entries 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. Cmmented [DJ48]: Audit Clients That Are Nt Public Interest Entities A21 In additin t paragraph A2, Ffactrs that are imprtantrelevant in evaluating the level f any threat created by preparing tax calculatins fr the purpse f preparing accunting entries fr an audit client include: Cmmented [DJ49]: The cmplexity f the relevant tax law and regulatin and the degree f judgment necessary in applying them; and The level f tax expertise f the client s persnnel; and The materiality f the amunts t the financial statements A23 Examples f actins that might be safeguards t address self-review r advcacy threats created when prviding tax calculatins fr the purpse f preparing accunting entries fr an audit client that is nt a public interest entity include: Cmmented [DJ50]: Using tax prfessinals wh are nt audit team members t perfrm the tax service; r Page 11 f 24

12 If the service is perfrmed by an audit team member, using a prfessinal whpartner r senir persnnel is nt an audit team member, with apprpriate expertise wh is nt an audit team member t challenge as apprpriate, t review the tax calculatins. Obtaining advice abut the tax calculatins n the service frm anthera tax prfessinal. Audit Clients tthat aare 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. Cmmented [DJ51]: Tax Planning and Other Tax Advisry Services General Prvisins A12 Prviding tax planning and ther tax advisry services might create a A self-review r advcacy threat. might be created where the tax advice will affect matters t be reflected in the financial statements A21 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 A13 In additin t paragraph A2, Ffactrs that are imprtantrelevant in evaluating the level f any threat created by prviding tax advice t audit clients include: Cmmented [DJ52]: Cmmented [DJ53]: Cmmented [DJ54]: 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.; 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, whether the advice prvided as a result f the tax planning and ther tax advisry services is: Clearly supprted by tax authrity r ther precedent;, Established practice,; r (c) Has a basis in tax law that is likely t prevail. 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 Page 12 f 24

13 the accunting treatment r presentatin under the relevant financial reprting framewrk A14 Examples f actins that might be safeguards t address self-review threats created when prviding tax planning and ther tax advisry services include: Cmmented [DJ55]: Using tax prfessinals wh are nt 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 anther tax prfessinal.; r Obtaining pre-clearance r advice frm the tax authrities. R A firm r a netwrk firm shall nt 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: Cmmented [DJ56]: 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. Taxatin Services Invlving Valuatins A1 Prviding tax valuatin services t an audit client might create a self-review threat A2 A firm r a netwrk firm valuatin might be perfrmed a valuatin 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 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, in additin t paragraph A2, the fllwing factrs are imprtantrelevant t evaluating the level f any threat created by prviding thse services t an audit client: Cmmented [DJ57]: New para Cmmented [DJ58]: Cmmented [DJ59]: 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.; r The reliability and extent f the underlying data A14 Examples f actins that might be safeguards t address self-review r advcacy threats when prviding taxatin services invlving valuatins include: Cmmented [DJ60]: Using tax prfessinals wh are nt 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. Page 13 f 24

14 A1 A firm r netwrk firm might als perfrm a tax valuatin 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. In such situatins, the requirements and applicatin materialprvisins set ut in Subsectin 603 relating t valuatin services apply. Cmmented [DJ61]: Assistance in the Reslutin f Tax Disputes A1 Prviding assistance in the reslutin f tax disputes t an audit client might create anan 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 A21 A tax dispute may might 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. R A firm r a netwrk firm shall nt prvide taxatin services that invlve prviding assistance assisting in the reslutin f tax disputes t an audit client if: Cmmented [DJ62]: New para Cmmented [DJ63]: Cmmented [DJ64]: 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 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 A22 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: Cmmented [DJ65]: Cmmented [DJ66]: (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 in the matter. fr the audit client A13 In additin t paragraph A2, Ffactrs that are imprtantrelevant in evaluating the level f any threat created by assisting having a rle in the reslutin f tax disputes having reached the level f a frmal prceeding fr t an audit client include: Cmmented [DJ67]: 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. Page 14 f 24

15 A4 Examples f actins that might be safeguards t address self-review r advcacy threats created by having a rle in the reslutin f tax disputes include: Cmmented [DJ68]: Using prfessinals wh are nt 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.; r Obtaining advice n the service frm a tax prfessinal. Subsectin 6056 Internal Audit Services Intrductin The prvisin f internal audit services t an audit client might creates a self-review threat. if the firm uses the internal audit wrk in the curse f a subsequent external audit Subsectin 6056 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an internal audit service t an audit client. In sme circumstances, prviding certain internal audit services is expressly prhibited and because the threats created cannt be eliminated r there can be n safeguards t eliminate r reduce threats createdthem t an acceptable level. In cases when prviding an internal audit service is nt prhibited, tthe 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. Cmmented [DJ69]: Cmmented [DJ70]: New para Requirements and Applicatin Material General Prvisins A1 Internal audit services invlve assisting the audit client in the perfrmance f its internal audit activities. Internal audit activities might include: Cmmented [DJ71]: , 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. Page 15 f 24

16 A2 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. R Paragraph R precludes a firm r a netwrk firm frm assuming a management respnsibility when prviding an internal audit service t an audit client. When prviding an internal audit service t an audit client, the firm shall be satisfied that: Cmmented [DJ72]: Cmmented [DJ73]: The client designates an apprpriate and cmpetent resurce, preferably within senir management, t: (i) Be respnsible at all times fr internal audit activities; and (ii) Acknwledge respnsibility fr designing, implementing, mnitring 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 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. If the firm s persnnel assume a management respnsibility when prviding internal audit services t an audit client, the threat created cannt be eliminated r reduced t an acceptable level by applying a safeguard A2 Examples f internal audit services that invlve assuming management respnsibilities include: Cmmented [DJ74]: Cmmented [DJ75]: 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 Might have respnsibility fr ne r mre f the matters nted abve. Page 16 f 24

17 A13 Factrs that are imprtantrelevant in evaluating the level f any threat created by prviding internal audit services t an audit client include: Cmmented [DJ76]: 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 the audit team will be placed n the wrk f the internal audit service, including in the curse f a subsequent external audit A15 An example f an actin that might be a safeguard t address self-review threats created by prviding internal audit services is using prfessinals wh are nt audit team members t perfrm the internal audit service. Cmmented [DJ77]: Audit Clients that Are Public Interest Entities R A firm r a netwrk firm shall nt prvide internal audit services t an audit client that is a public interest entity, if the services relate t: Cmmented [DJ78]: (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. Using the Wrk f an Internal Audit Functin in an Audit Engagement A14 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: Cmmented [DJ79]: 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. Subsectin 6076 Infrmatin Technlgy Systems Services Intrductin Prviding infrmatin technlgy (IT) systems services t an audit client might create a selfreview threat. depending n the nature f the services and the IT systems Subsectin 6067 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding an IT service t an audit client. In sme circumstances, prviding certain IT services is expressly prhibited because the threats created cannt be eliminated r and there can be n safeguards t eliminate r reduce threats created them t an acceptable level. In cases when prviding an IT service is nt prhibited, Cmmented [DJ80]: Cmmented [DJ81]: New para. Cmmented [DJ82]: Page 17 f 24

18 tthe 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 General Prvisins A1 Services related t infrmatin technlgy (IT) systems include the design r implementatin f hardware r sftware systems. The IT systems might: Cmmented [DJ83]: (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 A21 Paragraph R precludes a firm r a netwrk firm frm assuming a management respnsibility when prviding an IT service t an audit client. Prviding the fllwing IT systems services t an audit client des nt usually create a threat as lng as persnnel f the firm r netwrk firm d nt assume a management respnsibility: Cmmented [DJ84]: (c) (d) 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 Evaluating and making recmmendatins with respect t a system designed, implemented r perated by anther service prvider r the client A1 Factrs that are relevant in evaluating the level f any threat created by prviding IT systems services t an audit client include: Cmmented [DJ85]: The nature f the services. The nature f IT systems. The determinatin t be made in paragraph R607.5 depends n the degree f reliance that will be placed n the particular IT systems as part f the audit. R607.5 A2 If a firm r netwrk firm determines that it is permitted t prvide an IT systems service t an audit client, the firm r the netwrk firm shall determine An example f an actin that might be a safeguard t address self-review threats created when prviding IT systems services t an audit client is whether t prvide that service nly with using persnnel wh are nt audit team members and wh have different reprting lines within the firm frm the audit team members. Cmmented [DJ86]: Page 18 f 24

19 607.5A2 An example f an actin that might be a safeguard t address self-review threats created when prviding IT systems services t an audit client is using prfessinals wh are nt audit team members t perfrm the service. Audit Clients tthat Are Nt Public Interest Entities R A firm r a netwrk firm shall nt 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: Cmmented [DJ87]: 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: Cmmented [DJ88]: 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. Subsectin 6087 Litigatin Supprt Services Intrductin Prviding litigatin supprt services t an audit client might create a self-review r advcacy threat Subsectin 6078 sets ut specific applicatin material relevant t applying the cnceptual framewrk when prviding a litigatin supprt service t an audit client. The applicatin material set ut in Sectin 600 are is relevant t this subsectin. Subsectin 608 sets ut specific applicatin material relevant t applying the cnceptual framewrk when prviding a litigatin supprt service t an audit client. Cmmented [DJ89]: Cmmented [DJ90]: New para. Page 19 f 24

20 Applicatin Material Safeguards Phase 2 Prpsed Sectin 600 (Mark-up) A1 Litigatin supprt services might include activities such as: Cmmented [DJ91]: Assisting with dcument management and retrieval,; Acting as a fact witness r an expert witness; and. Calculating estimated damages r ther amunts that might becme receivable r payable as the result f litigatin r ther legal dispute A12 A ffactrs that are is imprtantrelevant in evaluating the level f any threat created by prviding litigatin supprt services t an audit client include: Cmmented [DJ92]: is tthe legal and regulatry envirnment in which the service is prvided. Fr example, whether an expert witness is chsen and appinted by a curt. The nature and characteristics f the service. The extent t which the utcme f the litigatin supprt service will have a material effect n the financial statements n which the firm will express an pinin A21 The type and level f the threat created varies based n the type f litigatin supprt service. If a firm r a netwrk firm prvides a litigatin supprt service t an audit client and the service invlves estimating damages r ther amunts that affect the financial statements n which the firm will express an pinin, the requirements and applicatin material set ut in Subsectin 6034 related t valuatin services apply. Cmmented [DJ93]: Subsectin 6089 Legal Services Intrductin Prviding legal services t an audit client might create a self-review r advcacy threat Subsectin 6089 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding a legal service t an audit client. In sme circumstances, prviding certain legal services is expressly prhibited because the threats cannt be eliminated r and there can be n safeguards t eliminate r reduce them threats created t an acceptable level. In cases when prviding a legal service is nt prhibited, tthe requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 609 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding a legal service t an audit client. Cmmented [DJ94]: Cmmented [DJ95]: New para. Requirements and Applicatin Material General A1 Legal services are defined as any services fr which the individual prviding the services must either: Cmmented [DJ96]: Have the required legal training t practice law. Be admitted t practice law befre the curts f the jurisdictin in which such services are t be prvided; r. Page 20 f 24