Independence II

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Independence II

• Dave Winetroub
• Task Force Chair

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Overview

• Comment period ended October 15, 2007
• IESBA discussed in January and plans to approve
  April
• 44 responses received
• Internal audit
• Fees relative size
• Contingent fees

3
Internal Audit ED Position

• Self-review threat may be created when a firm
  provides internal audit services to an audit
  client
• Should not perform management functions

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Internal Audit ED Position

• Should only provide assistance to an audit
  clients internal audit function if
• Client acknowledges responsibility for
  establishing, maintaining and monitoring internal
  control
• Client designates competent employee to be
  responsible for activities
• Client, or those charged with governance, approve
  scope, risk and frequency of work
• Client evaluates adequacy of procedures and
  findings
• Findings and recommendations are reported
  appropriately to those charged with governance

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Internal Audit ED Responses

• Majority of respondents supported approach
• Eight respondents not supportive
• No internal audit to any audit client (2
  responses)
• No internal audit to a PIE audit client (3
  responses)
• No internal audit if going to place significant
  reliance in external audit (1 response)
• Safeguards not sufficiently robust (1 response)
• Proposals not sufficiently restrictive (1
  response)

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Internal Audit ED Responses

• More clarity needed on definition/description of
  internal audit services

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Internal Audit Proposed Changes

• New paragraph describing internal audit
  activities consistent with ISA 610 Auditors
  Consideration of the Internal Audit Function
• More guidance on types of internal audit services
  that involve assuming a management responsibility

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Internal Audit Proposed Changes Non Public
Interest Entities

• If firm provides internal audit services, and
  results of the services will be used in the
  external audit, self-review threat created
  because of possibility results will be used
  without appropriate evaluation
• Significance of threat depends on
• Materiality of related financial statement
  amounts
• Risk of material misstatement of assertions
  related to those financial statement amounts
• Degree of reliance

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Internal Audit IESBA Direction Public Interest
Entities

• Restrict provision of internal audit services for
  public interest audit clients

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Internal Audit Task Force Proposal Public
Interest Entities

• Firm should not provide internal audit services
  that relate to internal accounting controls,
  financial systems or financial statements (does
  not preclude operational auditing)
• Firm not precluded from providing a non-recurring
  internal audit service to evaluate a particular
  matter (e.g. assist in a fraud investigation),
  provided services otherwise permitted under
  Section 290 and conditions in 290.189 are met

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Fees Relative Size ED Proposal

• Non PIEs threats and safeguards
• PIEs If total fees gt15 for two years disclose
  to those charged with governance and either
• Post issuance review by accountant who is not a
  member of the firm or
• Pre-issuance review by accountant who is not a
  member of the firm
• PIEs In subsequent years in determining which
  of these safeguards should be applied
  consideration to be given to relative size of
  fee. At a minimum a post issuance review once
  every three years

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Fees Relative Size ED Responses

• Mixed as to whether a bright-line test is
  appropriate
• In Favor (eleven)
• Reasonable threshold
• Necessary for clarity and consistent application
• Against (fourteen)
• Not consistent with a conceptual framework
  approach
• Might have a disproportionate impact on smaller
  firms and on firm concentration

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Fees Relative Size ED Responses

• Disclosure to those charged with governance
  general support
• Pre and post issuance review general support
  though some expressed the view that only a
  pre-issuance review was strong enough - some
  stated review could be performed by a regulatory
  body
• Insufficient guidance on size relative to partner
  or office

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Fees Relative Size Proposed Changes

• Require the application of safeguards to the
  second years audit opinion
• Indicate review could be performed by a
  professional regulatory body
• Require firm to discuss with those charged with
  governance the safeguard that will be applied
• If fees significantly exceed 15 firm should
  determine whether pre-issuance review is the
  necessary safeguard (not-post issuance)
• Expand guidance on size relative to partner or
  office

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Contingent fees ED Position

• Should not perform an assurance service for a
  contingent fee
• Should not perform a non-assurance service for an
  audit client if
• Amount of fee is material to the firm or
• Fee is dependent upon the outcome of a future or
  contemporary audit judgment related to a material
  amount in the financial statements

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Contingent fees ED Responses

• Generally supportive
• Four respondents of view should not charge any
  contingent fee to an audit client
• Two respondents of view there should be specific
  guidance on tax
• Two respondents of view guidance should include
  prohibition on contingent fee arrangements
  between a firm and a third party
• One respondent of view should address contingent
  fees charged by a network firm
• Several noted Section 291 not aligned to 290

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Contingent fees Proposed Changes

• Clarify contingent fee cannot be charged directly
  or indirectly
• Expand guidance to include a prohibitions on
• Network firms that participate in a significant
  part of the audit from charging a material
  contingent fee and
• No contingent fee for non-assurance service where
  the financial statement amounts are material and
  will be subject of significant future or
  contemporary audit judgment
• Align guidance in Section 291 with 290 on
  providing an assurance service for a contingent
  fee

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Discussion