Code of Ethics Part B Section 290, 291

Code of
Ethics_Part B
Section 290, 291 Wasantha Nandasiri
Independence Requirements & ACA, ACMA (UK), CGMA, BBA (Special)
Applications
• 290: Independence requirements for audit and review engagements
• 291: Independence Requirements for other assurance services
• Mostly requirements and contents are same but there are more stringent requirements for audit and review
engagements
• Essence/approach of section 290/291
 PA should maintain “independence” from client

 PA includes “the firm”, “members of the engagement team”, immediate family members and close
family members of the engagement team
• Examination Focus:
• Scenario: Story…….
• Steps to be followed;
Conceptual • Fundamental principles involved
approach for • Issues….threats…to comply with fundamental principle
ethical • Conclusion…….compulsory requirement…..(apply the section in the code of ethics..mostly for public
conflict interest entities (PIE)
resolution • For other cases, assess the significance of threats… if no…do nothing.. If yes…safeguards should be
applied to reduce the threats to acceptable low level ….
Section 290 (Audit & Review) and 291 (Other Assurance Engagements)……………
Focus Area Fundamental Threats Involved & Evaluation Safeguards/Action Plan
Principles Involved
Engagement Period; Independence Financial or business relationships before • If threats are so significant, do not accept the
From the date of accepting audit engagement and other audit engagement
commencement to date previous non assurance services (NAS) • If threats can be reduced to acceptable low
report is issued/the date level by below actions, ok to accept;
professional relationship Covered as part of client acceptance - Not include personnel involved with previous
is terminated service or relationships
- Independent accountant or firm to review the
work
Mergers & Acquisitions; Independence, Evaluate all threats for; • Should terminate all such significant
Due to M&A, entity Objectivity • Nature and significance of relationships and interests to continue the
becomes related entity relationship/interest engagement
and arise • Reasonable time to terminate the • If can’t be terminated, inform TCWG (AC)and
relationships/interests relationship/interest get their approval and continue engagement
subject to;
- Within 6 months those can be terminated
- People with such relationships/interest are not
members of engagement
- Engage another PA within the organization,
another independent external PA to review the
work
Principles
Involved
Direct or Indirect financial Independence, • Self interest threat • None of members of engagement team
interests in audit clients Objectivity • Significance of threat depends on; members, their immediate family members
- Role of person holding interest and firm cant have any direct or material
- Whether interest direct (control) or indirect indirect financial interest with an audit client
- Materiality of interest • If close family member having such interest,
significance to be reduced through below
safeguards;
- Asking close family member to dispose the
relationship to nonmaterial level
- Engage another PA to review the work
- Remove such engagement member
• If immediate family members receives ESOP,
independence deemed not compromised, if
adequate safeguards are implemented and
such shares are disposed when rights are
available
• Other applications where PA , client and
Director/CEO of the client has common
investment in another entity, trustee, interest
received from inheritance/gift
Focus Area Fundamental Principles Threats Involved & Safeguards/Action Plan
Involved Evaluation
Loans and Guarantees to Independence Self interest • If loans and guarantees are made not under normal lending
members of engagement process, terms and conditions, such are not allowed
team and immediate • If financial institution offering such loans/guarantees under
family members normal conditions, OK with safeguards
• If client is financial institution and loan/guarantee is given
under normal lending conditions, OK
• If the client is not a financial institution, cant not get any
loan/guarantee unless it is immaterial for
firm/members/immediate family members and client
• If deposits are held, not a threat if deposits are made under
normal conditions
Business relationships; Independence Self interest, Intimidation • For the firm and members, NO unless immaterial and
Close business or insignificant
common financial • For immediate family members, OK if safeguards can
interests between client, reduce the significance
members, immediate • Purchasing goods or services from client under normal
family members and business terms are OK. However, if significant threats are
management of client created, need to apply safeguards such as reduction of
E.G. transaction or remove the member
• JV arrangements
• Combine
products/services and
joint marketing
arrangements
Principles
Involved
Family and personnel Independence • Self interest, familiarity, , • When relationship is between member vs director or any position
relationships; intimidation could influence financial reporting process, only one safeguard
Between members, • Significance depends of role, which is to remove the member from engagement team
officers and certain relationship and closeness • Immediate family members, close family member or any other
employees of client relationship are in a position which could influence financial
(depending on the reporting should be evaluated and safeguards such as removing
role). KMP the member, structuring engagement so member would not
interact with such immediate family member
Employment with Independence • familiarity, , intimidation • Not allowed if significant connection remains unless no payments
audit client; • Self interest when member from the firm and no any professional relationships with the firm
Member or partner continuing with a view to take • If no significant connection exits, below safeguards;
becoming as director, employment - Modify the audit plan
officer or employee • Continuing Significant connection - Assign more experience audit staff
who can influence the makes the threat materials based - Having another PA to review the work
financial reporting on factors such as; • When member with a view to take employment, he should
process - Former and new Position inform same to the firm and safeguards such as remove him and
- Involvement with audit team evaluate his judgements
- Lapse time from leaving the firm • For PIE, if engagement partner or managing partner joins audit
client as director or officer which can influence FR process ,
independence will be compromised unless entity had issued
audited financial statements covering a period of not less than
twelve months and the partner was not a member of the audit
team with respect to the audit of those financial statements
Focus Area Fundamental Threats Involved & Safeguards/Action Plan
Principles Involved Evaluation
Temporary staff assignments Independence Self review threat • Ok for short period of time provided no management
(secondments) responsibilities and no any unpermitted non assurance services
(NAS)
• Client responsible to direct and manage such seconded staff
• Safeguards;
- Additional review of work done by seconded staff
- Not include seconded staff as member of audit team
Recent service with audit Independence Self-interest, self- • During the period, director, office or employee joined the firm
client; review or familiarity who could have influenced the FR process should not be
member of the audit team threats assigned to audit team since threats are so significant
has recently served as a • If before the period, threats should be evaluated for role, lapse
director, officer, or employee time, position with the firm and safeguards are required such as
of the audit client independent review of work done by such member
Serving as director or officer Independence Self interest, self • Partner or member serving as director/officer who could
of the client review influence FR process, not allowed due to significance
Advocacy threat when • Performing routine administrative services to support a
acting as company company secretarial function or providing advice in relation to
secretary company secretarial administration matters does not generally
create threats to independence, as long as client management
makes all relevant decisions
Focus Area Fundamental Principles Threats Involved & Evaluation Safeguards/Action Plan
Involved
Long Association of Independence • Familiarity and self-interest threats • Safeguards
Senior Personnel • Significance depends on; - Rotation of senior members of team
(Including Partner - How long with audit firm - Having independent PA to review work
Rotation) with an Audit - Role of the member - Regular internal and external quality review
Client - Nature of audit engagement
- Changes in client and changes to • For PIE, key engagement partner rotation
complexity of client FR process every 7 years with 2 year cooling off period.
One more year if required. Can continue for
more years if regulator permits with applicable
safeguards
• When client become PIE, remaining period till
completion of 7 years should be calculated
Provision on Non Independence self-review, self-interest and advocacy • Threats must be evaluated and if can not be
Assurance (NAS) Services threats reduced to acceptable level, should not accept
to Audit Client to provide NAS
• NAS can be provided to related entities of the
audit client (parent, subsidiary, associate) if
threats can be reduced to acceptable low level
with safeguards
• Cant provide specifically prohibited NAS by
the Code
Involved
Management Independance self-review, familiarity and self-interest • Cant accept any management responsibility
Responsibilities under threats whatsoever
NAS; • Should ensure that management has assigned
Examples of management responsible people to make management
Management responsibilities; decisions, monitor such decisions and
responsibilities involve management accept responsibility for any
controlling, leading and Setting policies and strategic direction. outcome of such decisions
directing an entity,  Hiring or dismissing employees. 
including making Directing and taking responsibility for
decisions regarding the the actions of employees in relation to
acquisition, deployment the employees’ work for the entity. 
and control of human, Authorizing transactions.  Controlling
financial, technological, or managing of bank accounts or
physical and intangible investments.  Deciding which
resources (Running the recommendations of the firm or other
cost) third parties to implement.  Reporting
to those charged with governance on
behalf of management.  Taking
responsibility for the preparation and
fair presentation of financial
statements in accordance with the
applicable financial reporting
framework.  Taking responsibility for
designing, implementing, monitoring or
maintaining internal controls.
Focus Area Fundamental Threats Involved & Safeguards/Action Plan
Principles Evaluation
Involved
Administrative services; • However, the significance of any threat created
shall be evaluated and safeguards applied
Administrative services involve assisting when necessary to eliminate the threat or
clients with their routine or mechanical tasks reduce it to an acceptable level
within the normal course of operations. Such
services require little to no professional
judgment and are clerical in nature. Examples
of administrative services include word
processing services, preparing administrative
or statutory forms for client approval,
submitting such forms as instructed by the
client, monitoring statutory filing dates, and
advising an audit client of those dates.
Providing such services does not generally
create a threat to independence
Example of Non-Assurances Services and Applications………….
Principles
Involved
Preparation of Independence self-review threat • General dialogue, technical assistance and advise on accounting
financial statements between auditor and client for application of AFRF, adjustments
and accounting are generally OK provided management makes the decisions and
records including assumes responsibility
deciding accounting • For Non PIE, routine or mechanical nature services such as
polices payroll calculations, calculating depreciations, recording
transactions, preparing financial statements where decisions are
made by clients are OK with safeguards such as separate teams,
review the work performed by such member by independent PA
• For PIE, not allowed
• For related entities of PIE, can be done if those financial
statements and entities are collectively immaterial to financial
statements of the audit client
Valuation Service Independence • self-review threat • For both PIE and Non PIE, not allowed if such valuation would
• Significance of the threat depends have material impact on the financial statements
on; • In other cases can be done with safeguards such as having
- Material effect on FS separate teams, not assigning the members of valuation teams to
- Extent of management audit team
involvement on assumptions
- Availability of established
methodology
- Reliability of underlying data
- Extent and clarity of disclosures in
FS
Focus Area Fundamental Threats Involved Safeguards/Action Plan
Principles & Evaluation
Involved
Taxation Independence self-review and • Tax return preparations are OK provided management takes the responsibility and they
Services advocacy threats make the judgements because these services are based on existing laws and subject to
review by tax authorities
• Tax calculation for accounting purpose;
- For Non PIE: OK with safeguards such as having separate team, review of work by
member by independent PA, getting involve external tax consultant
- For PIE: Not allowed for tax and deferred tax calculations
• Tax planning and advisory services are Ok where clear rules are available and if no impact
on financial statements but with safeguards such as separate team etc.
• Assistance to resolve tax disputes ok with safeguards such as separate team etc.
However, acting as an advocate for an audit client before a public tribunal or court, not
OK
Internal Audit Independence self-review threat • OK provided no management responsibility for Non PIE
Services • Not allowed for PIE for significant part of controls over financial reporting (ICFR),
significant financial accounting systems for amounts/discourses which would be
material to financial statements
IT Services Independence self-review threat • General IT systems, off the shelf packages which would not form part of FR process are
OK as long as no management responsibility
• For Non PIE: OK with safeguards such as management takes responsibility and makes all
related decisions
• For PIE: Not allowed for any IT services which would form significant part of ICFR or FR
process
Involved
Litigation Support Independence self-review or advocacy threat • For both PIE and Non PIE, not allowed if such
Services; service would have material impact on the
financial statements
acting as an expert • In other cases can be done with safeguards
witness, calculating such as having separate teams, not assigning
estimated damages or the members of support teams to audit team
other amounts that might
become receivable or
payable as the result of
litigation or other legal
dispute, and assistance
with document
management
Legal services; Independence • self-review and advocacy threats • When amounts involved are material to FS,
• Significance depends on; not allowed
any services for which the - Nature of service • Otherwise OK with safeguards such as
person providing the - Service provided by member of separate teams, not assign such members to
services must either be audit team audit team
admitted to practice law - Materiality to financial statement • Getting appointment as “general counsel” of
before the courts of the audit client is not allowed since it would
jurisdiction in which such require to assume “management
services are to be responsibilities”
provided or have the
required legal training to
practice law
Focus Area Fundamenta Threats Involved & Evaluation Safeguards/Action Plan
l Principles
Involved
Recruiting Independen self-interest, familiarity or intimidation • For PIE, not allowed for hiring director/employee who could
services ce threats significantly influence FR process (searching CVs, undertaking
Significance depends on nature of service reference checks prohibited)
and position to be recruited • In other cases OK with safeguards
Corporate Independen advocacy and self-review threats • Not allowed if advise could materially impact the FS
finance services ce • For other cases, OK with safeguards such as separate team,
(M&A, quality review, independent review
valuations, • Promoting, dealing, underwriting of shares of audit client is
strategies) not allowed
Fees: Relative • If fees are significant portion of firm’s • For PIE and if fees from audit client is more than 15% for 2
Size revenue creates self interest and consecutive years, should inform the same to TCWG (AC) to
intimidation threats select either “pre issuance review” (quality review by external
• Significance depends on operating PA/regulator) before issuing the audit report) or “post issuance
structure, age of firm, dependency of review” (quality review by external PA/regulator after issuing
remuneration of partner 2nd year opinion but before issuing 3rd year opinion). If fees are
so higher than 15%, always pre issuance review is required
• Other safeguards to reduce the dependency also should be
undertaken such as internal quality review, reduce fee
dependency etc.
Principles Involved
Fess : Overdue Independence Self interest • having an additional professional accountant who
• fees due from an audit client did not take part in the audit engagement provide
remain unpaid for a long time advice or review the work performed.
• significant part is not paid • determine whether the overdue fees might be
before the issue of the audit regarded as being equivalent to a loan to the client
report for the following year so reappointment of whether continue or not
Fees: Contingent Fees Independence self-interest threat • For audit engagements, not allowed
• For NAS for audit client, not allowed if fee or
are fees calculated on a Profit 500 M -10% service creates material impact to FS. All other
predetermined basis relating Profit 750- 15% cases, OK with safeguards such as separate teams,
to the outcome of a not assign such team members and quality review
transaction or the result of the
services performed by the firm
Compensation & Evaluation Independence self-interest threat • Key audit partner is not allowed to promote such
policies for engagement Significance depends on role, NAS to audit client
members; proportion of incentive to total • In other cases, OK if not significant with safeguards
compensation such as remove such person from audit team and
member of the audit team is quality review
evaluated on or compensated
for selling non-assurance
services to that audit client
Involved
Gifts and Hospitality Independence self-interest and familiarity threats • unless the value is trivial and inconsequential,
firm or a member of the audit team shall not
accept such gifts or hospitality
Actual or Threatened • self-interest and intimidation • Try to reduce the threat by safeguards such as
Litigation threats remove member from audit team, quality
• Significance depends on materiality review
of litigation, litigation for prior • If threat can't be reduced, withdraw from the
period engagement
Special Audi reports • Communicate to intended users clearly
restricting use and • Comply with relevant SLAuS
distribution (SLAuS 800,
805, 810)

Code of Ethics Part B Section 290, 291

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Code of Ethics Part B Section 290, 291

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• Essence/approach of section 290/291

 PA should maintain “independence” from client

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