General Provisions

• Definition of independence
• Conceptual framework
• Network firms
• Public interest entities
• Related entities
• Those charged with governance
General Provisions – cont’d
• Documentation
• Engagement period
• Mergers and acquisitions
• Other considerations
Definition of Independence
• Independence of Mind
– The state of mind that permits the expression of a conclusion
without being affected by influences that compromise
professional judgment, thereby allowing an individual to act
with integrity and exercise objectivity and professional
skepticism.

• Independence in Appearance
– The avoidance of facts and circumstances that are so significant
that a reasonable and informed third party would be likely to
conclude, weighing all the specific facts and circumstances, that
a firm’s, of a member of the audit team’s, integrity, objectivity
or professional skepticism has been compromised.
Scope of the Application of Section 290
• Audit and review engagements for purposes of Section
290 include a:
– Complete set of financial statements; and
– Single financial statement.

• Modification of the independence requirements that

apply to audit and review engagements is permitted
where the audit or review report includes a restriction
on use or distribution, provided certain conditions are
met.
Conceptual Framework Approach – Threats and Safeguards
Conceptual Framework – Threats
• Self-interest
– The threat that a financial or other interest will inappropriate influence
the professional accountant’s judgment or behavior.

• Self-review
– The threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service performed
on which the accountant will rely when forming a judgment as part of
providing the current service.

• Advocacy
– The threat that a professional accountant will promote a client’s
position to the point that the accountant’s objectivity is compromised.
Conceptual Framework – Threats – cont’d
• Familiarity
– The threat that due to a long or close relationship with a client, a
professional accountant will be too sympathetic to their interests or
too accepting of their work.

• Intimidation
– The threat that a professional accountant will be deterred from
acting objectively because of actual or perceived pressures,
including attempts to exercise undue influence over the accountant.
Conceptual Framework – Safeguards
• Safeguards fall into two broad categories:
– Those created by the profession, legislation or regulation; and
– Those in the work environment.
Conceptual Framework – Prohibitions

When safeguards are never adequate

Network Firms
• Network firms are required to be independent of audit
clients of other firms within the network
• Network is defined as a larger structure that is:
– Aimed at co-operation; and
– Clearly aimed at profit or cost sharing or shares common
ownership, control or management, common quality control
policies and procedures, common business strategy, the use of
a common brand-name, or a significant part of professional
resources.
Public Interest Entities
• Section 290 includes additional provisions that reflect
the extent of public interest in certain entities
• Public interest entities defined as:
– Listed entities; and
– Entities
• defined by regulation or legislation as a public interest entity, or
• for which the audit is required by regulation or legislation to be
conducted in compliance with the same independence
requirements that apply to the audit of listed entities.
Public Interest Entities
• Firms and member bodies are encouraged to determine
whether to treat other entities as public interest entities
because the entities have a large number and wide
range of stakeholders
• Factors to be considered include:
– The nature of the business, such as the holding of assets in a
fiduciary capacity for a large number of stakeholders;
– Size; and
– Number of employees.
Related Entities
• Related entities of the audit client are defined as:
– An entity that has direct or indirect control over the client if the client is
material to such entity;
– An entity with a direct financial interest in the client if that entity has
significant influence over the client and the interest in the client is material
to such entity;
– An entity over which the client has direct or indirect control;
– An entity in which the client, or an entity over which the client has direct or
indirect control, has a direct financial interest that gives it significant
influence over such entity and the interest is material to the client and its
related entity; and
– An entity which is under common control with the client (a “sister entity”) if
the sister entity and the client are both material to the entity that controls
both the client and the sister entity.
Related Entities
• Listed entities
– References to “audit client” include its related entities
– Independence is required from all related entities.

• Non-listed entities
– Independence is required from related entities over which the
audit client has direct or indirect control.
– When the audit team knows, or has reason to believe, a
relationship or circumstance involving a related entity is relevant
to the evaluation of the firm’s independence, that related entity
shall be included in the evaluation of independence.
Those Charged with Governance
• Regular communication with those charged with
governance is encouraged.
• Communication enables those charged with governance
to:
– Consider the firm’s judgments in identifying and evaluating
threats to independence,
– Consider the appropriateness of safeguards applied, and
– Take appropriate action.
Documentation
• The professional accountant shall document conclusions
regarding compliance with independence requirements
and the substance of relevant discussions supporting
conclusions:
– When safeguards are required, the nature of the threat and
safeguards in place or applied to reduce threat to an acceptable
level shall be documented.
– When a threat required significant analysis to determine
whether safeguards were necessary and the accountant
concluded safeguards were not necessary because the threat
was already at an acceptable level, the nature of the threat and
rationale for the conclusion shall be documented.
Engagement Period
• Independence is required during the engagement period
and the period covered by the financial statements.
• The engagement period starts when the audit team
begins to perform audit services and ends when the
audit report is issued.
• If the engagement is recurring, the period ends at the
later of the notification by either party that the
professional relationship has terminated or the issuance
of the final report.
Mergers and Acquisitions
• When, as a result of merger or acquisition, an entity
becomes a related entity of the audit client, the firm
shall:
– Identify and evaluate previous and current relationships that
could affect independence, and
– Take steps necessary by the effective date of the merger or
acquisition to terminate any current interests or relationships
that are not permitted.
Mergers and Acquisitions
• If the firm cannot reasonably terminate an interest or
relationship by the effective date, the firm shall:
– Evaluate the significance of the threat, and
– Discuss the matter with those charged with governance and if
those charged with governance request the firm to continue as
auditor, the firm shall do so only if:
• The interest or relationship will be terminated as soon as reasonably
possible and in all cases within six months of the effective date;
• Any individual with such an interest or relationship is not a member of
the engagement team or the individual responsible for the engagement
quality control review; and
• Appropriate transitional measures are applied and discussed with those
charged with governance.
Mergers and Acquisitions
• When the firm has completed a significant amount of audit work
before the effective date of the merger or acquisition and can
complete the audit in a short period of time, and those charged with
governance request the firm to complete the audit while continuing
with an interest or relationship that would otherwise be prohibited,
the firm shall do so only if :
– The firm has evaluated the significance of the threats and discussed such
evaluation with those charged with governance;
– The individual with such an interest or relationship is not a member of the
engagement team or the individual responsible for the engagement quality
control review;
– Appropriate transitional measures are applied; and
– The firm ceases to be the auditor no later than the issuance of the audit report.
Mergers and Acquisitions
• In all cases, the firm shall determine whether, even if all the
requirements can be met, the interests or relationships create
threats that would remain so significant that objectivity would be
compromised .
• The firm shall document any prohibited interests or relationships
that will not be terminated by the effective date of the merger or
acquisition, including the:
– Reasons why the interest or relationship was not terminated;
– Transitional measures applied;
– Results of the discussion with those charged with governance; and
– Rationale as to why the threats that remain are not so significant that
objectivity would be compromised.
Other Considerations
• An inadvertent violation of an independence
requirement generally will be deemed not to
compromise independence provided:
– The firm has appropriate quality control policies and
procedures (equivalent to ISCQ 1) in place to maintain
independence; and
– Once discovered, the violation is corrected promptly and any
necessary safeguards are applied to eliminate any threat or
reduce it to an acceptable level.

• The firm shall determine whether to discuss the matter

with those charged with governance.
Key Independence Provisions
• General Provision
• Financial interests
• Loans and guarantees
• Business relationship
• Family and personal relationships
• Employments with an audit client
Key Independence Provisions
• Temporary staff assignments
• Recent service with an audit client
• Serving as a director or officer
• Long association (including partner rotation)
• Provision of non-assurance services
• Fees
Key Independence Provisions – cont’d
• Compensation and evaluation policies
• Gifts and hospitality
• Actual of threatened litigation
• Reports that include a restriction on use or
distribution
General Provision
• The slides that follow cover particular circumstances or
relationships addressed in Section 290 of the Code.
• However, Section 290 does not describe all of the
circumstances or relationships that create or may create
threats to independence.
• The firm and members of the audit team shall evaluate
the implications of similar, but different, circumstances
and relationships and determine whether safeguards can
be applied when necessary to eliminate the threats or
reduce them to an acceptable level.
Financial Interests
• A firm, a member of the audit team, or an immediate
family member shall not have a direct financial interest
or material indirect financial interest in:
– The audit client, or
– An entity that has a controlling interest in the audit client if the
client is material to the controlling entity.
Financial Interests
• Partners, and their immediate family members, shall
not have a direct financial interest or material indirect
financial interest in any audit client served by
engagement partners located in the same office.
• Partners and managerial employees who provide non-
audit services to an audit client, except those whose
involvement is minimal, or their immediate family
members, shall not have a direct financial interest or
material indirect financial interest in such audit client.
Financial Interests
• Financial interests held by immediate family members of:
– Partners in the office of the engagement partner, or
– Partners or managerial employees who provide non-audit services to
the audit client

will not compromise independence if the interest is received

as a result of the family member’s employment rights and
safeguards are applied when necessary.
• When the immediate family member has the right to dispose
of the interest or, in the case of stock options, exercise the
option, the interest shall be disposed of or forfeited as soon
as practicable.
Financial Interests
• Those prohibited from having a direct or material
indirect financial interest in an audit client shall not
hold such interest as trustee unless:
– The trustee, or immediate family member, or the firm are not
beneficiaries of the trust;
– The interest in the audit client is not material to the trust;
– The trust cannot exercise significant influence over the audit
client; and
– The trustee, or immediate family member, or the firm cannot
significantly influence any investment decision involving a
financial interest in the audit client.
Financial Interests – cont’d
• A firm, a member of the audit team, or an immediate
family member shall not have a financial interest in an
entity that the audit client also has an interest in if the
interest is material to any party and the audit client can
exercise significant influence over the entity.
Financial Interests
• If the firm, a partner or employee of the firm, or immediate
family member, receives a financial interest that would not
be permitted, for example by way of an inheritance, gift or
as a result of a merger:
– If received by the firm, a member of the audit team, or immediate
family member, the interest shall be disposed of immediately, or if
the interest is indirect, a sufficient amount shall be disposed of such
that the remaining interest is immaterial
– If received by an individual who is not a member of the audit team,
or immediate family member, the interest shall be disposed of as
soon as possible, or if the interest is indirect, a sufficient amount
shall be disposed of such that the remaining interest is immaterial
Financial Interests
• Threats may be created:
– If a member of audit team knows a close family member, or
other individuals ,such as professionals in the firm or close
personal friends, holds a direct financial interest or material
indirect financial interest in the audit client
– A firm’s retirement benefit plan holds a direct financial
interest or material indirect financial interest in an audit client
– A firm, a member of the audit team, or immediate family
member, has a financial interest in an entity and a director,
officer or controlling owner of the audit client is also known to
have a financial interest in that entity
Loans and Guarantees
• Audit clients that are banks or similar institutions
– A firm, a member of the audit team, or immediate family member,
may not have a loan or guarantee of a loan provided it is made under
normal lending procedures, terms and conditions.
– If a loan to a firm is permitted under the above and is material to the
audit client or the firm, it may be possible to apply safeguards to
reduce the threat to an acceptable level.

• Audit clients that are not banks or similar institutions

– A firm, a member of the audit team, or immediate family member,
may have a loan or guarantee of a loan unless it is immaterial to the
firm or member of the audit team and the immediate family member,
and the client.
Loans and Guarantees
• A firm, a member of the audit team, or an immediate
family member, shall not make or guarantee a loan to
an audit client unless the loan or guarantee is
immaterial to both the firm or member of the audit
team and the immediate family member, and the client.
Business Relationships
• A firm shall not have a business relationship with an audit client
or its management unless any financial interest is immaterial and
the business relationship is insignificant to the firm and the client
or its management.
• If any financial interest from a business relationship between a
member of the audit team and the audit client or its management
is material or the relationship is significant to that member, the
individual should be removed from the audit team.
• If the business relationship is between an immediate family
member of a member of the audit team and the audit client or its
managements, any threat shall be evaluated and safeguards
applied when necessary.
Business Relationships
• The purchase of goods and services from an audit client
by the firm, or a member of the audit team or an
immediate family member, does not generally create
threats to independence if the transaction is in the
normal course of business and at arm’s length.
• If the nature or magnitude of the transactions is such
that a self-interest threat is created, safeguards shall be
applied when necessary.
Family and Personal Relationships
• An individual who has an immediate family member in
one of the following positions at an audit client, or who
was in the position during any period covered by the
engagement or financial statements, shall not be a
member of the audit team:
– A director or officer; or
– An employee in a position to exert significant influence over
the preparation of the accounting records or the financial
statements.
Family and Personal Relationships
• Threats to independence are created when a member of
the audit team has an immediate family member who is
an employee in a position to exert significant influence
over the client’s financial position, financial
performance or cash flows.
• The significance of the threats shall be evaluated and
safeguards applied when necessary.
Family and Personal Relationships
• Threats to independence are created when a member of
the audit team has a close family member in one of the
following positions at an audit client:
– A director or officer; or
– An employee in a position to exert significant influence over
the preparation of the accounting records of the financial
statements.

• The significance of the threats shall be evaluated and

safeguards applied when necessary.
Family and Personal Relationships – cont’d
• Threats to independence are created if a member of the audit
team has a close relationship with other persons in one of the
following positions at an audit client:
– A director or officer; or
– An employee in a position to exert significant influence over the
preparation of the accounting records of the financial statements.

• A member of the audit team who has such a relationship shall

consult in accordance with firm policies and procedures.
• The significance of the threats shall be evaluated and
safeguards applied when necessary.
Employment with an Audit Client
• A former member of audit team or partner of the firm
shall not join an audit client as director or officer or an
employee in a position to exert significant influence
over the accounting records or financial statements
unless:
– The individual is not entitled to any benefits or payments from
the firm, unless made in accordance with fixed pre-determined
arrangements and any amount owed to the individual is not
material to the firm; and
– The individual does not continue to participate, or appear to
participate, in the firm’s business or professional activities.
Employment with an Audit Client
• If no significant connection remains between the firm
and the former member of the audit team or partner, the
significance of the threats shall be evaluated and
safeguards applied when necessary.
• Firm policies and procedures shall require members of
the audit team to notify the firm when entering
employment negotiations with an audit client.
Safeguards shall be applied when necessary.
Employment with an Audit Client – cont’d
• In the case of public interest entities, independence is
compromised if a key audit partner or the firm’s Senior or
Managing Partner joins the audit client as a director or
officer or an employee in a position to exert significant
influence over the accounting records or financial
statements unless a specified period has passed.
• An exception exists if a former key audit partner or the
firm’s Senior or Managing Partner is in such a position as a
result of a business combination, provided certain criteria
are satisfied.
Employment with an Audit Client – cont’d
• Key audit partners include the:
– Engagement partner;
– Individual responsible for the engagement quality control review; and
– Other audit partners on the engagement team who make key decisions
or judgments on significant matters with respect to the audit.

• Specified period
– In the case of key audit partners, the client has 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.
– In the case of the former Senior or Managing Partner, twelve months
have passed since the individual held that role.
 Public Interest Entities

Temporary Staff Assignments

• Such assistance may be given only for a short period of
time.
• Firm personnel shall not:
– Provide a non-assurance service that would not be permitted under
section 290; or
– Assume a management responsibility.

• In all cases the audit client shall be responsible for directing

and supervising the activities of the loaned staff.

• The significance of any threats shall be evaluated and

safeguards applied when necessary.
Serving as a Director or Officer
• A partner or employee of the firm shall not serve as a
director or officer of an audit client.
• A partner or employee may serve as Company
Secretary if:
– The practice is specifically permitted under local laws and
professional rules of practice;
– Management makes all relevant decision;
– The duties are routine and administrative; and
– The significance of the threats are evaluated and safeguards
applied when necessary.
Long Association of Senior Personnel
• Using the same senior personnel on an audit
engagement over a long period of time creates threats
to independence, which should be evaluated and
safeguards applied when necessary.
• In the case of audit clients that are public interest
entities, key audit partners shall rotate after seven years
and shall not be a member of the engagement team or a
key audit partner for the client for two years.
Long Association of Senior Personnel
• Where continuity is especially important to audit quality,
key audit partners may, in rare cases due to unforeseen
circumstances outside of the firm’s control, be permitted
one additional year as long as threats to independence can
be eliminated or reduced to an acceptable level by applying
safeguards.
• The time served as a key audit partner is taken into account
when the audit client becomes a public interest entity.
– An additional year is permitted only when the individual has served
as a key audit partner for six or more years when the audit client
becomes a public interest entity.
Long Association of Senior Personnel
• During the two year “time out” period, the individual
shall not:
– Participate in the audit of the entity;
– Provide quality control for the engagement;
– Consult with the engagement team or the client regarding
technical or industry-specific issues, transactions or events; or
– Otherwise directly influence the outcome of the engagement.
Long Association of Senior Personnel
• Rotation is not required if:
– The firm has only a few people with the necessary knowledge
and experience to serve as a key audit partner;
– An independent regulator has provided an exemption from
rotation in such circumstances;
– The independent regulator has specified alternative safeguards;
and
– The alternative safeguards are applied.
Provision of Non-assurance Services
• Before the firm accepts an engagement to provide a
non-assurance service to an audit client, a
determination shall be made whether providing the
service creates a threat to independence.
• The firm shall not provide the service if the threats
cannot be reduced to an acceptable level by the
application of safeguards.
Provision of Non-assurance Services
• A firm may provide a non-assurance service that would
otherwise be restricted to the following related entities,
provided the results of the services will not be subject to
audit procedures:
– An entity that has direct or indirect control over the audit client;
– An entity with a direct financial interest in the audit client if that
entity has significant influence over the client and the interest in
the client is material to the entity; or
– An entity under common control with the audit client.

• The significance of any threats shall be evaluated and

safeguards applied when necessary.
Provision of Non-assurance Services
• A non-assurance service provided to the audit client
before the client becomes a public interest entity does
not compromise the firm’s independence if:
– The service was permissible for audit clients that are not
public interest entities;
– The service that is not permitted for public interest entities is
terminated before or as soon as practicable after the client
becomes a public interest entity; and
– Safeguards are applied when necessary.
 Non-assurance Services

Management Responsibilities
• A firm shall not assume a management responsibility for
an audit client.
• To avoid the risk of assuming a management
responsibility, the firm shall be satisfied that a member
of management is responsible for:
– Making the significant judgments and decisions that are the
proper responsibility of management;
– Evaluating the results of the service; and
– Accepting responsibility for the actions to be taken from results
of the service.
 Non-assurance Services
Preparing Accounting Records and Financial
Statements
 Audit Clients that are not Public Interest Entities
• The firm may provide services related to the preparation of
accounting records and financial statements where the services are
of a routine or mechanical nature and any threat is evaluated and
safeguards applied when necessary. Examples include:
– Providing payroll services based on client-originated data;
– Recording transactions for which client has determined or approved the
appropriate account classification;
– Posting client-coded transactions to the general ledger;
– Posting client-approved entries to the trial balance; and
– Preparing financial statements based on the trial balance.
 Non-assurance Services
Preparing Accounting Records and Financial Statements – cont’d

 Audit Clients that are Public Interest Entities

• Except in emergency situations, a firm shall not provide
accounting and bookkeeping services, including payroll services ,
to an audit client or prepare financial statements on which the
firm will express an opinion or financial information which forms
the basis of financial statements.
• A firm may provide services of a routine and mechanical nature
for divisions or related entities if the personnel providing the
service are not on the audit team and:
– The divisions or related entities are collectively immaterial; or
– The services relate to matters which are collectively immaterial to the
financial statements of the division or related entity.
 Non-assurance Services
Preparing Accounting Records and Financial Statements – cont’d

 Emergency Situations

• In emergency or other unusual situations when it is

impractical for the audit client to make other
arrangements, accounting and bookkeeping services
that would otherwise be prohibited may be provided if:
– Those who provide the services are not on the audit team;
– The services provided only for a short period of time and are
not expected to recur; and
– The situation is discussed with those charged with governance.
 Non-assurance Services

Valuation Services
 General Provisions
• Valuation services may create a self-review threat, which shall be
evaluated and safeguards applied when necessary.

 Audit Clients that are not Public Interest Entities

• A firm shall not perform a valuation service if the valuation
service has a material effect on the financial statements and the
valuation involves a significant degree of subjectivity.

 Audit Clients that are Public Interest Entities

• A firm shall not provide valuation services if the valuations would
have a material effect, separately or in the aggregate, on the
financial statements.
 Non-assurance Services

Taxation Services
 Tax Return Preparation

• Providing tax return preparation services does not

generally create a threat to independence if
management takes responsibility for the returns and any
significant judgments made.
 Non-assurance Services

Taxation Services
 Tax Calculations – Audit Clients that are not Public
Interest Entities

• Preparing calculations of current and deferred tax

liabilities (or assets) for purpose of preparing
accounting entries that will be subsequently audited by
the firm creates a self-review threat.
• The significance shall be evaluated and safeguards
applied when necessary.
 Non-assurance Services
Taxation Services
 Tax Calculations – Audit Clients that are Public Interest
Entities
• Except in emergency situations, a firm shall not prepare tax
calculations of current and deferred tax liabilities (or assets) for
the purpose of preparing accounting entries that are material to
the financial statements.
• In emergency or unusual situations when it is impractical for the
client to make other arrangements, a firm may prepare tax
calculations if (1) those who provide services are not on audit
team, (2) the services are provided only for a short period of time
and are not expected to recur, and (3) the situation is discussed
with those charged with governance.
 Non-assurance Services
Taxation Services
 Tax Planning and Other Tax Advisory Services
• A self-review threat may be created when advice will affect
matters to be reflected in the financial statements. The threat
shall be evaluated and safeguards applied when necessary.
• A firm shall not provide tax advice if the effectiveness of
the advice depends on a particular accounting treatment or
financial statement presentation and:
– The audit team has reasonable doubt as to the appropriateness of the
related accounting treatment or presentation; and
– The outcome or consequence of the tax advice would have a material
effect on the financial statements.
 Non-assurance Services
Taxation Services
 Assistance in the Resolution of Tax Disputes
• An advocacy or self-review threat may be created when the
firm assists the audit client with the resolution of a tax dispute
once the tax authorities have notified the client that they have
rejected the client’s arguments and the matter is being
referred for determination in a formal proceeding. The threats
shall be evaluated and safeguards applied when necessary.
• A firm shall not act as an advocate for the audit client before
a public tribunal or court in the resolution of a tax matter if
the amounts involved are material to the financial statements.
 Non-assurance Services
Internal Audit Services
 General Provisions
• When providing internal audit services to an audit client, firm
personnel shall not assume a management responsibility, and the
firm shall be satisfied that:
– The client designates an appropriate and competent resource to be in charge
and acknowledge responsibility for internal controls;
– Management or those charged with governance review, assess and approve
the scope, risk and frequency of the services;
– Management evaluates the adequacy and results;
– Management decides which recommendations to implement; and
– Management reports to those charge with governance the significant findings
and recommendations.
 Non-assurance Services
Internal Audit Services
 General Provisions

• If the firm provides internal audit services and the results

of those services will be used in conducting the external
audit, a self-review threat is created, which shall be
evaluated and safeguards applied when necessary.
 Non-assurance Services
Internal Audit Services
 Audit Clients that are Public Interest Entities

• A firm shall not provide internal audit services that

relate to:
– A significant part of the internal controls over financial
reporting;
– Financial accounting systems that generate information that is,
separately or in the aggregate, significant to the client’s
accounting records or financial statements; or
– Amounts or disclosures that are, separately or in the aggregate,
material to the client’s financial statements.
 Non-assurance Services
IT Systems Services
• The firm may provide the following services provided firm
personnel do not assume a management responsibility:
– Designing or implementing IT systems that are unrelated to internal
control over financial reporting;
– Designing or implementing IT systems that do not generate
information forming a significant part of the accounting records or
financial statements;
– Implementation of “off-the-shelf” accounting or financial
information reporting software not developed by the firm if no
significant customization is required to meet the client’s needs; and
– Evaluating and making recommendations on a system designed,
implemented or operated by another or the client.
 Non-assurance Services
IT Systems Services
 Audit Clients that are not Public Interest Entities
• A firm shall only provide services involving the design or
implementation of IT systems that:
– Form a significant part of the internal control over financial
reporting; or
– Generate information that is significant to the accounting records or
financial statements

if certain specified safeguards are put in place to ensure

that the client takes responsibility for the services. A
determination shall be made as to whether other safeguards
are necessary.
 Non-assurance Services
IT Systems Services
 Audit Clients that are Public Interest Entities

• A firm shall not provide services involving the design

or implementation of IT systems that:
– Form a significant part of the internal control over financial
reporting; or
– Generate information that is significant to the accounting
records or financial statements.
 Non-assurance Services

Litigation Support Services

• If the firm provides litigation support services
involving estimating damages or other amounts that
affect the financial statements, the requirements
regarding valuation services shall be followed.
• For other litigation support services, the significance of
any threat created shall be evaluated and safeguards
applied when necessary.
 Non-assurance Services

Legal Services
• A firm shall not act in an advocacy role for an audit
client in resolving a dispute or litigation when the
amounts involved are material to the financial
statements.
• A partner or employee shall not act as General Counsel
for legal affairs of an audit client.
• For other legal services, the significance of any threat
created shall be evaluated and safeguards applied when
necessary.
 Non-assurance Services
Recruiting Services
• Providing recruiting services may create threats to
independence, which shall be evaluated and safeguards
applied when necessary.
• A firm may generally provide services such as:
– Reviewing the professional qualifications of candidates and
providing advice on their suitability for a position; and
– Interviewing candidates and advising on their competence for
financial accounting, administrative or control positions.
 Non-assurance Services
Recruiting Services
 Audit Clients that are Public Interest Entities

• A firm shall not provide the following services with

respect to a director or officer of the audit client or
senior management in a position to exert significant
influence over the client’s accounting records or
financial statements:
– Searching for or seeking out candidates for such positions; and
– Undertaking reference checks of prospective candidates for
such positions.
 Non-assurance Services
Corporate Finance Services
• Providing corporate finance services may create threats
to independence, which shall be evaluated and
safeguards applied when necessary.
• A firm shall not provide corporate finance advice if the
effectiveness of the advice depends on a particular
accounting treatment or financial statement
presentation and:
– The audit team has reasonable doubt as to the appropriateness
of the accounting treatment or presentation; and
– The outcome or consequence of the corporate finance advice
would have a material effect on the financial statements.
Fees – Relative Size
• Threats are created when fees from an audit client
represent a large proportion of the total fees of the firm
or a large proportion of the total revenue of an
individual partner or an individual office of the firm.
• The threats shall be evaluated and safeguards applied
when necessary.
Fees – Relative Size
 Audit Clients that are Public Interest Entities
• If the total fees from the client are more than 15% of the firm’s
total fees for two years, the firm shall discuss which of the
following safeguards to apply with those charged with
governance:
– A pre-issuance engagement quality control review performed by a
professional accountant who is not a member of the firm; or
– A post-issuance review equivalent to an engagement quality control
performed by a professional accountant who is not a member of the firm.

• If the total fees significantly exceed 15% of the firm’s total fees ,
the firm shall determine whether the significance of the threat is
such that a pre-issuance review is necessary.
Fees – Overdue
• A threat may be created when fees from an audit client
remain unpaid for a long time.
• Generally, the firm is excepted to require payment of
any significant unpaid fees before the issue of the audit
report for the following year.
• If fees remain unpaid after the report has been issued,
any threat shall be evaluated and safeguards applied
when necessary.
Contingent Fees
• A contingent fee shall not be charged in respect of an audit
engagement.
• A contingent fee shall not be charged for a non-assurance
service provided to an audit client if:
– The fee is charged by the firm and the fee is material or expected to
be material to the firm;
– The fee is charged by a network firm that participates in a significant
part of the audit and the fee is material or expect to be material to the
network firm; or
– The outcome of the non-assurance service, and therefore the amount
of the fee, is dependent on a future or contemporary judgment
related to the audit of a material amount in the financial statements.
Contingent Fees
• For other contingent fee arrangements, threats to
independence shall be evaluated and safeguards applied
when necessary.
Compensation and Evaluation Policies
• Key audit partners shall not be evaluated on or
compensated for the partner’s success in selling non-
assurance services to their audit clients.
• A threat may be created if other members of the audit
team are evaluated on or compensated for their success
in selling non-assurance services to their audit clients.
The threat shall be evaluated and safeguards applied
when necessary.
Gifts and Hospitality
• A firm or member of the audit team shall not accept
gifts or hospitality from an audit client unless the value
is trivial and inconsequential.
Actual or Threatened Litigation
• Litigation between the firm or a member of the audit
team and an audit client creates a threat to
independence.
• The significance of the threat shall be evaluated and
safeguards applied when necessary.
• If safeguards do not reduce the threats to an acceptable
level, the firm shall withdraw from the audit
engagement.
Reports that Include a Restriction on Use or Distribution

• The Code provides for some modifications to the

independence requirements for audit engagements where
the report includes a restriction on use and distribution,
unless the audit is required by law or regulation.
• The modifications are permitted if the intended users of
the report:
– Are knowledgeable as to the purpose and limitations of the
report; and
– Explicitly agree to the application of the modified independence
requirements.
Effective Date
• The revised Code is effective on January 1, 2011.
• Certain transitional provisions apply to the following:
– Public interest entities;
– Partner rotation;
– Non-assurance services;
– Fees – relative size; and
– Compensation and evaluation policies.
International Federation of
Accountants
www.ifac.org