Agenda Item C-5 Safeguards Phase 2 Sectin 600/Nn-assurance Services (NAS) Nte: Text that is shaded in gray has been develped in cnjunctin with, and will be presented by the Structure TF. Part 4A Internatinal Independence Standards fr Audits and Reviews. Sectin 600 Prvisin f Nn-assurance Services t an Audit Client Intrductin 600.1 Firms and netwrk firms might prvide a range f nn-assurance services t their audit clients, cnsistent with their skills and expertise. 600.2 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. 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 relevant t applying the cnceptual framewrk t independence when prviding nn-assurance services t audit clients. Requirements and Applicatin Material General Prvisins 600.3 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. 600.3 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. 600.3 A3 Subsectins 601-699 set ut requirements and applicatin material relevant t prviding specific nn-assurance services. 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 them t an acceptable level. The subsectins als set ut requirements and applicatin material relevant t applying the cnceptual framewrk t identify, evaluate and address threats created by prviding nnassurance services. 600.3 A4 Factrs that are imprtant in evaluating the level f any threats created by prviding a nnassurance service t an audit client include: Prepared by: Diane Jules (August 2016) Page 1 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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 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; 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. Materiality in Relatin t an Audit Client s Financial Statements 600.3 A5 Sectins 600 699 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. Cnsideratins fr When a Firm r Netwrk Firm Prvides Multiple Nn-assurance Services t an Audit Client 600.4 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 f the cnceptual framewrk requires that the firm cnsider any cmbined effect f threats created by the ther nn-assurance services prvided t the audit client. Cnsideratins fr When a Firm Prvides Nn-assurance Services t Certain Related Entities 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 fllwing related entities f the client n whse financial statements the firm will express an pinin: An entity that has direct r indirect cntrl ver the client; Page 2 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS (c) An entity 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 An entity that is under cmmn cntrl with the client, 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: a. The services d nt create a self-review threat because the results f the services will nt be subject t audit prcedures; and 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-Assurance Services t an Audit Client that Later Becmes a Public Interest Entity R600.6 As an exceptin t subsectins 601 t 699 if a firm r a netwrk firm prvides a nn-assurance 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 eliminate any threats that are created r reduce them t an acceptable level. [Paragraphs 600.7 t 600.9 intentinally left blank fr the purpse f the September 2016 meetings.] Cnsideratins fr Aviding the Assumptin f Management Respnsibilities R600.10 A firm r a netwrk firm shall nt assume a management respnsibility fr an audit client. 600.10 A1 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. 600.10 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. Page 3 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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. 600.11 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. 600.11 A2 Subject t cmpliance with paragraph R600.10, prviding advice and recmmendatins t assist the management f an audit client in discharging its respnsibilities is nt assuming a management respnsibility. R600.11 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: (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 602.1 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. Page 4 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 602.2 Examples f administrative services include: 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. 602.3 Prviding administrative services t an audit client d nt generally create a threat. 602.4 The requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 603 Accunting and Bkkeeping Services, Including Preparing Accunting Recrds and Financial Statements Intrductin 603.1 Prviding accunting and bkkeeping services t an audit client might create a self-review threat. 603.2 Management is respnsible fr the preparatin and fair presentatin f the financial statements in accrdance with the applicable financial reprting framewrk. These respnsibilities include: 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. 603.3 The audit prcess 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. Page 5 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 603.4 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. 603.5 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 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. Requirements and Applicatin Material General Prvisins 603.6 A1 Nn-assurance services that are rutine r mechanical in nature require little r n prfessinal judgment by 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. 603.6 A2 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: Using prfessinals wh are nt audit team members t perfrm the accunting and bkkeeping service; r Page 6 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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 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 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 addresses any self-review r familiarity threat created. 603.7 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. 603.7 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 R603.8 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 statements n which the firm will express an pinin r financial infrmatin which frms the basis f the financial statements. R603.9 As an exceptin t paragraph R603.8, 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 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. 603.9 A1 Examples f accunting and bkkeeping services that are rutine r mechanical in nature are included in paragraph 603.6 A1. Page 7 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS Subsectin 604 Valuatin Services Intrductin 604.1 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. 604.2 Prviding valuatin services t an audit client might create a self-review threat. 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 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 604.4 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. 604.4 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 605.10A1 605.10 A4, relating t such services apply. 604.4 A3 Factrs that are imprtant in evaluating the level f any threat created by 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. 604.4 A4 Examples f actins that might be safeguards t address the self-review threats created when prviding valuatin services t an audit client include: Using prfessinals wh are nt audit team members t perfrm the valuatin services service; r Page 8 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS Having a prfessinal wh was nt invlved in prviding the valuatin service review the audit r valuatin wrk perfrmed. Audit Clients that Are Nt Public Interest Entities R604.5 A firm r a netwrk firm shall nt prvide a valuatin service t an audit client that is nt a public interest entity if: The valuatin will have a material effect n the financial statements n which the firm will express an pinin; and The valuatin invlve a significant degree f subjectivity. Audit Clients that Are Public Interest Entities R604.6 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. Subsectin 605 Taxatin Services Intrductin 605.1 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. 605.2 Prviding taxatin services t an audit client might create a self-review r advcacy threat. 605.3 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 framewrk when prviding a taxatin service t an audit client. Requirements and Applicatin Material 605.4 A1 Factrs that are imprtant in evaluating the level f any threat created by prviding all taxatin services t audit clients include: The particular characteristics f the engagement; The level f tax expertise f the client s emplyees; Page 9 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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 605.5 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). 605.5 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. Paragraph R600.10 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. Tax Calculatins fr the Purpse f Preparing Accunting Entries General Prvisins 605.6 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. 605.6 A2 Factrs that are imprtant in evaluating the level f any threat created by preparing tax calculatins fr the purpse f preparing accunting entries fr an audit client 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. 605.6 A3 Examples 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: Using tax prfessinals wh are nt audit team members t perfrm the tax service; r If the service is perfrmed by an audit team member, using a prfessinal wh is nt an audit team member, with apprpriate expertise t challenge as apprpriate, the tax calculatins. Obtaining advice n the service frm a prfessinal. Page 10 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS Audit Clients that are Public Interest Entities R605.7 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 605.8 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. 605.8 A2 A self-review threat might be created where the tax advice will affect matters t be reflected in the financial statements. 605.8 A3 Factrs that are imprtant in evaluating the level f any threat created by 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; 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 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 the accunting treatment r presentatin under the relevant financial reprting framewrk. 605.8 A4 Examples f actins that might be safeguards t address self-review threats created when prviding tax planning and ther tax advisry services include: Using tax prfessinals wh are nt audit team members t perfrm the tax service; Page 11 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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; r Obtaining pre-clearance r advice frm the tax authrities. R605.9 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: 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 605.10 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 603 relating t valuatin services apply. 605.10 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. 605.10 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 evaluating the level f any threat created by 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; r The reliability and extent f the underlying data. 605.10 A4 Examples actins that might be safeguards t address self-review r advcacy threats when prviding taxatin services invlving valuatins include: 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. Assistance in the Reslutin f Tax Disputes 605.11 A1 A tax dispute 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 Page 12 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 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. R605.12 A firm r a netwrk firm shall nt 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 The amunts invlved are material t the financial statements n which the firm will express an pinin. 605.12 A1 What cnstitutes a public tribunal r curt depends n hw tax prceedings are heard in the particular jurisdictin. 605.12 A2 Paragraph R605.12 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. 605.12 A3 Factrs that are imprtant in evaluating the level f any threat created by having a rle in the reslutin f tax disputes having 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. 605.12 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: Using prfessinals wh are nt 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 a tax prfessinal. Page 13 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS Subsectin 606 Internal Audit Services Intrductin 606.1 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. 606.2 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. 606.3 The prvisin f internal audit services t an audit client creates a self-review threat if the firm uses the internal audit wrk in the curse f a subsequent external audit. 606.4 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. Requirements and Applicatin Material General Prvisins R606.5 Paragraph R600.10 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: The client designates an apprpriate and cmpetent resurce, preferably within senir management, t: (i) Be respnsible at all times fr internal audit activities; and Page 14 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS (ii) 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. 606.5 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. 606.5 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 Might have respnsibility fr ne r mre f the matters nted abve. 606.5 A3 Factrs that are imprtant in evaluating the level f any threat created by 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. Page 15 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 606.5 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. 606.5 A5 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. Audit Clients that Are Public Interest Entities R606.6 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: (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. Subsectin 607 Infrmatin Technlgy Systems Services Intrductin 607.1 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 als invlve matters that are unrelated t the audit client s accunting recrds r the internal cntrl ver financial reprting r financial statements. 607.2 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. 607.3 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 Page 16 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS applicatin material relevant t applying the cnceptual framewrk when prviding an IT service t an audit client. Requirements and Applicatin Material General Prvisins 607.4 A1 Paragraph R600.10 precludes a firm r a netwrk firm frm assuming a management respnsibility when prviding an IT 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: (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. R607.5 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 whether t prvide that service nly with persnnel wh are nt audit team members and wh have different reprting lines frm the audit team members. 607.5 A1 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. 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 that Are Nt Public Interest Entities R607.6 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: 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) The client acknwledges its respnsibility fr establishing and mnitring a system f internal cntrls; Page 17 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS (ii) 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 R607.7 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 Generate infrmatin that is significant t the client s accunting recrds r financial statements n which the firm will express an pinin. Subsectin 608 Litigatin Supprt Services Intrductin 608.1 Litigatin supprt services might include activities such as: Assisting with dcument management and retrieval; Acting as 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. 608.2 Prviding litigatin supprt services t an audit client might create a self-review r advcacy threat. 608.3 The applicatin material set ut in Sectin 600 are 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. Applicatin Material 608.4 A1 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 604 related t valuatin services apply. Page 18 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS 608.4 A2 A factr that is imprtant in evaluating the level f any threat created by prviding litigatin supprt services t an audit client is the legal and regulatry envirnment in which the service is prvided. Subsectin 609 Legal Services Intrductin 609.1 Legal services are defined as any services fr which the individual prviding the services must either: Be admitted t practice law befre the curts f the jurisdictin in which such services are t be prvided; r Have the required legal training t practice law. Depending n the jurisdictin, legal services might include a wide and diversified range f areas including bth crprate and cmmercial services t clients, such as cntract supprt, litigatin, mergers and acquisitin, legal advice and supprt and assistance t clients internal legal departments. 609.2 Prviding legal services t an audit client might create a self-review r advcacy threat. 609.3 Legal services that supprt an audit client in executing a transactin might create self-review threats. 609.4 Acting in an advcacy rle fr an audit client in reslving a dispute r litigatin when the amunts invlved are nt material t the financial statements n which the firm will express an pinin might create advcacy and self-review threats. 609.5 In sme circumstances, prviding certain legal services is expressly prhibited and there can be n safeguards t eliminate r reduce threats created t an acceptable level. In cases when prviding a legal service is nt prhibited, the 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. Requirements and Applicatin Material 609.6 A1 Examples f legal services that supprt an audit client in executing a transactin might be cntract supprt, legal advice, legal due diligence and restructuring. 609.6 A2 Factrs that are imprtant in evaluating the level f any threats created by prviding legal services t an audit client in executing a transactin (see paragraph 609.6 A1) include: The nature f the service; Whether the service is prvided by an audit team member; and The materiality f any matter in relatin t the client s financial statements. 609.6 A3 Examples f actins that might be safeguards t address self-review and advcacy threats created when prviding legal services include: Using prfessinals wh are nt audit team members t perfrm the service; r Page 19 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS Having a prfessinal wh was nt invlved in prviding the legal services advise the audit team n the service and review any accunting treatment and any financial statement treatment. R609.7 A firm r a netwrk firm shall nt act in an advcacy rle fr an audit client in reslving a dispute r litigatin when the amunts invlved are material t the financial statements n which the firm will express an pinin. R6098 A partner r emplyee f the firm r the netwrk firm shall nt accept an appintment as General Cunsel fr legal affairs f an audit client. 609.8 A1 The psitin f General Cunsel is usually a senir management psitin with brad respnsibility fr the legal affairs f a cmpany. Subsectin 610 Recruiting Services Intrductin 610.1 Prviding recruiting services t an audit client might create a self-interest, familiarity r intimidatin threat. 610.2 In sme circumstances prviding recruiting 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 recruiting service is nt prhibited, the requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 610 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding recruiting services t an audit client. Requirements and Applicatin Material 610.4 A1 Factrs that are imprtant in evaluating the level f any threat created by prviding recruiting services t an audit client include: The nature f the requested assistance; and The rle f the individual t be recruited. 610.4 A2 Examples actins that might be safeguards t address self-interest, familiarity r intimidatin threats created by prviding recruiting services include: Using prfessinals wh are nt audit team members t perfrm the service; r Having a recruiting services prfessinal nt invlved in perfrming the service review the service. R610.5 A firm r a netwrk firm shall nt prvide a recruiting service t an audit client with respect t a directr r fficer f the entity r senir management in a psitin t exert significant influence ver the preparatin f the client s accunting recrds r the financial statements n which the firm will express an pinin if the service invlves: Searching fr r seeking ut candidates fr such psitins; and Undertaking reference checks f prspective candidates fr such psitins. Page 20 f 22
Safeguards Phase 2 Prpsed Sectin 600/NAS R610.6 Paragraph R600.10 precludes a firm r a netwrk firm frm assuming a management respnsibility when prviding a recruiting service t an audit client. When prviding recruiting services t an audit client, the firm r the netwrk firm shall nt act as a negtiatr n the client s behalf, and the hiring decisin shall be made by the client. 610.6 A1 Prviding the fllwing services des nt usually create threats: Reviewing the prfessinal qualificatins f a number f applicants and prviding advice n their suitability fr the pst; r Interviewing candidates and advising n a candidate s cmpetence fr financial accunting, administrative r cntrl psitins. Subsectin 611 Crprate Finance Services Intrductin 611.1 Prviding crprate finance services t an audit client might create an advcacy r self-review threat. 611.2 In sme circumstances prviding crprate finance 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 crprate finance service is nt prhibited, the requirements and applicatin material set ut in Sectin 600 are relevant t this subsectin. Subsectin 611 sets ut specific requirements and applicatin material relevant t applying the cnceptual framewrk when prviding a crprate finance services t an audit client. Requirements and Applicatin Material 611.3 A1 Examples f crprate finance services that might create a threat include: Assisting an audit client in develping crprate strategies; Identifying pssible targets fr the audit client t acquire; Advising n dispsal transactins; Assisting finance raising transactins; Prviding structuring advice; and Prviding advice n the structuring f a crprate finance transactin r n financing arrangements that will directly affect amunts that will be reprted in the financial statements n which the firm will express an pinin. 611.3 A2 Factrs that are imprtant in evaluating the level f any threat created by prviding crprate finance services t an audit client include: The degree f subjectivity invlved in determining the apprpriate treatment fr the utcme r cnsequences f the crprate finance advice in the financial statements; The extent t which: The utcme f the crprate finance advice will directly affect amunts recrded in the financial statements; and Page 21 f 22