| 200.1 | This Part of the Code describes how the conceptual framework contained in Part A applies in certain situations to registered auditors. This Part does not describe all of the circumstances and relationships that could be encountered by a registered auditor that create or may create threats to compliance with the fundamental principles. Therefore, the registered auditor is encouraged to be alert for such circumstances and relationships. |
| 200.2 | A registered auditor shall not knowingly engage in any business, occupation, or activity that impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would be incompatible with the fundamental principles. |
Threats and Safeguards
| 200.3 | Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances and relationships. The nature and significance of the threats may differ depending on whether they arise in relation to the provision of services to an audit client and whether the audit client is a public interest entity, to an assurance client that is not an audit client, or to a non-assurance client. |
Threats fall into one or more of the following categories:
These threats are discussed further in Part A of this Code.
| 200.4 | Examples of circumstances that create self-interest threats for a registered auditor include: |
| • | A member of the assurance team having a direct financial interest in the assurance client. |
| • | A firm having undue dependence on total fees from a client. |
| • | A member of the assurance team having a significant close business relationship with an assurance client. |
| • | A firm being concerned about the possibility of losing a significant client. |
| • | A member of the audit team entering into employment negotiations with the audit client. |
| • | A firm entering into a contingent fee arrangement relating to an assurance engagement. |
| • | A registered auditor discovering a significant error when evaluating the results of a previous professional service performed by a member of the registered auditor’s firm. |
| 200.5 | Examples of circumstances that create self-review threats for a registered auditor include: |
| • | A firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or implementing the systems. |
| • | A firm having prepared the original data used to generate records that are the subject matter of the assurance engagement. |
| • | A member of the assurance team being, or having recently been, a director or officer of the client. |
| • | A member of the assurance team being, or having recently been, employed by the client in a position to exert significant influence over the subject matter of the engagement. |
| • | The firm performing a service for an assurance client that directly affects the subject matter information of the assurance engagement. |
| 200.6 | Examples of circumstances that create advocacy threats for a registered auditor include: |
| • | The firm promoting shares in an audit client. |
| • | A registered auditor acting as an advocate on behalf of an audit client in litigation or disputes with third parties. |
| 200.7 | Examples of circumstances that create familiarity threats for a registered auditor include: |
| • | A member of the engagement team having a close or immediate family member who is a director or officer of the client. |
| • | A member of the engagement team having a close or immediate family member who is an employee of the client who is in a position to exert significant influence over the subject matter of the engagement. |
| • | A director or officer of the client or an employee in a position to exert significant influence over the subject matter of the engagement having recently served as the engagement partner. |
| • | A registered auditor accepting gifts or preferential treatment from a client, unless the value is trivial or inconsequential. |
| • | Senior personnel having a long association with the assurance client. |
| 200.8 | Examples of circumstances that create intimidation threats for a registered auditor include: |
| • | A firm being threatened with dismissal from a client engagement. |
| • | An audit client indicating that it will not award a planned non-assurance contract to the firm if the firm continues to disagree with the client's accounting treatment for a particular transaction. |
| • | A firm being threatened with litigation by the client. |
| • | A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees. |
| • | A registered auditor feeling pressured to agree with the judgment of a client employee because the employee has more expertise on the matter in question. |
| • | A registered auditor being informed by a partner of the firm that a planned promotion will not occur unless the registered auditor agrees with an audit client's inappropriate accounting treatment. |
| 200.9 | Safeguards that may eliminate or reduce threats to an acceptable level fall into two broad categories: |
| (a) | Safeguards created by the profession, legislation or regulation; and |
| (b) | Safeguards in the work environment. |
Examples of safeguards created by the profession, legislation or regulation are described in paragraph 100.14 of Part A of this Code.
| 200.10 | A registered auditor shall exercise judgment to determine how best to deal with threats that are not at an acceptable level, whether by applying safeguards to eliminate the threat or reduce it to an acceptable level or by terminating or declining the relevant engagement. In exercising this judgment, a registered auditor shall consider whether a reasonable and informed third party, weighing all the specific facts and circumstances available to the registered auditor at that time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of safeguards, such that compliance with the fundamental principles is not compromised. This consideration will be affected by matters such as the significance of the threat, the nature of the engagement and the structure of the firm. |
| 200.11 | In the work environment, the relevant safeguards will vary depending on the circumstances. Work environment safeguards comprise firm- wide safeguards and engagement-specific safeguards. |
| 200.12 | Examples of firm-wide safeguards in the work environment include: |
| • | Leadership of the firm that stresses the importance of compliance with the fundamental principles. |
| • | Leadership of the firm that establishes the expectation that members' of an assurance team will act in the public interest. |
| • | Policies and procedures to implement and monitor quality control of engagements. |
| • | Documented policies regarding the need to identify threats to compliance with the fundamental principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the threats to an acceptable level or, when appropriate safeguards are not available or cannot be applied, terminate or decline the relevant engagement. |
| • | Documented internal policies and procedures requiring compliance with the fundamental principles. |
| • | Policies and procedures that will enable the identification of interests or relationships between the firm or members of engagement teams and clients. |
| • | Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from a single client. |
| • | Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client. |
| • | Policies and procedures to prohibit individuals who are not members of an engagement team from inappropriately influencing the outcome of the engagement. |
| • | Timely communication of a firm's policies and procedures, including any changes to them, to all partners and professional staff, and appropriate training and education on such policies and procedures. |
| • | Designating a member of senior management to be responsible for overseeing the adequate functioning of the firm's quality control system. |
| • | Advising partners and professional staff of assurance clients and related entities from which independence is required. |
| • | A disciplinary mechanism to promote compliance with policies and procedures. |
| • | Published policies and procedures to encourage and empower staff to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them. |
| 200.13 | Examples of engagement-specific safeguards in the work environment include: |
| • | Having a registered auditor who was not involved with the non-assurance service review the non-assurance work performed or otherwise advise as necessary. |
| • | Having a registered auditor who was not a member of the assurance team review the assurance work performed or otherwise advise as necessary. |
| • | Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another registered auditor. |
| • | Discussing ethical issues with those charged with governance of the client. |
| • | Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged. |
| • | Involving another firm to perform or re-perform part of the engagement. |
| • | Rotating senior assurance team personnel. |
| 200.14 | Depending on the nature of the engagement, a registered auditor may also be able to rely on safeguards that the client has implemented. However it is not possible to rely solely on such safeguards to reduce threats to an acceptable level. |
| 200.15 | Examples of safeguards within the client's systems and procedures include: |
| • | The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. The client has competent employees with experience and seniority to make managerial decisions. |
| • | The client has implemented internal procedures that ensure objective choices in commissioning non-assurance engagements. |
| • | The client has a corporate governance structure that provides appropriate oversight and communications regarding the firm's services. |
