Auditing Profession Act, 2005 (Act No. 26 of 2005)

Board Notices

Independent Regulatory Board for Auditors

New Rules Regarding Improper Conduct and Code of Professional Conduct for Registered Auditors

Code of Professional Conduct for Registered Auditors

Part B : Registered Auditors in Public Practice

Section 290 : Independence-Audit and Review Engagements

Financial Interests
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Introduction

 

290.102 Holding a financial interest in an audit client may create a self-interest threat. The existence and significance of any threat created depends on: (a) the role of the person holding the financial interest, (b) whether the financial interest is direct or indirect, and (c) the materiality of the financial interest.

 

290.103 Financial interests may be held through an intermediary (e.g. a collective investment vehicle, estate or trust). The determination of whether such financial interests are direct or indirect will depend upon whether the beneficial owner has control over the investment vehicle or the ability to influence its investment decisions. When control over the investment vehicle or the ability to influence investment decisions exists, this Code defines that financial interest to be a direct financial interest. Conversely, when the beneficial owner of the financial interest has no control over the investment vehicle or ability to influence its investment decisions, this Code defines that financial interest to be an indirect financial interest.

 

Financial interest in an audit client

 

290.104 If a member of the audit team, a member of that individual's immediate family or a firm has a direct financial interest or a material indirect financial interest in the audit client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an acceptable level. Therefore, none of the following shall have a direct financial interest or a material indirect financial interest in the client: a member of the audit team; a member of that individual's immediate family; or the firm.

 

Close family holding a financial interest in an audit client

 

290.105 When a member of the audit team has a close family member who the audit team member knows has a direct financial interest or a material indirect financial interest in the audit client, a self-interest threat is created. The significance of the threat will depend on factors such as:
•The nature of the relationship between the member of the audit team and the close family member; and
•The materiality of the financial interest to the close family member.

 

The significance of the threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an acceptable level. Examples of such safeguards include:

•The close family member disposing, as soon as practicable, of all of the financial interest or disposing of a sufficient portion of an indirect financial interest so that the remaining interest is no longer material;
•Having a registered auditor review the work of the member of the audit team; or
•Removing the individual from the audit team.

 

Financial interest in an entity that is holding a financial interest in an audit client

 

290.106If a member of the audit team, a member of that individual's immediate family or a firm has a direct or material indirect financial interest in an entity that has a controlling interest in the audit client, and the client is material to the entity, the self-interest threat created would be so significant that no safeguards could reduce the threat to an acceptable level. Therefore, none of the following shall have such a financial interest: a member of the audit team; a member of that individual's immediate family; and the firm.

 

Firm's retirement benefit plan holding a financial interest in an audit client

 

290.107 The holding by a firm's retirement benefit plan of a direct or material indirect financial interest in an audit client creates a self- interest threat. The significance of the threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an acceptable level.

 

Other partners holding a financial interest in an audit client

 

290.108If other partners in the office in which the engagement partner practices in connection with the audit engagement, or their immediate family members, hold a direct financial interest or a material indirect financial interest in that audit client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an acceptable level. Therefore, neither such partners nor their immediate family members shall hold any such financial interests in such an audit client.

 

290.109The office in which the engagement partner practices in connection with the audit engagement is not necessarily the office to which that partner is assigned. Accordingly, when the engagement partner is located in a different office from that of the other members of the audit team, professional judgment shall be used to determine in which office the partner practices in connection with that engagement.

 

Other partners and managerial employees providing non-audit services to an audit client and holding a direct or material indirect financial interest in that audit client

 

290.110 If other partners and managerial employees who provide non- audit services to the audit client, except those whose involvement is minimal, or their immediate family members, hold a direct financial interest or a material indirect financial interest in the audit client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an acceptable level. Accordingly, neither such personnel nor their immediate family members shall hold any such financial interests in such an audit client.

 

290.111 Despite paragraphs 290.108 and 290.110, the holding of a financial interest in an audit client by an immediate family member of (a) a partner located in the office in which the engagement partner practices in connection with the audit engagement, or (b) a partner or managerial employee who provides non-audit services to the audit client, is deemed not to compromise independence if the financial interest is received as a result of the immediate family member's employment rights (e.g., through pension or share option plans) and, when necessary, safeguards are applied to eliminate any threat to independence or reduce it to an acceptable level. However, when the immediate family member has or obtains the right to dispose of the financial interest or, in the case of a stock option, the right to exercise the option, the financial interest shall be disposed of or forfeited as soon as practicable.

 

290.112A self-interest threat may be created if the firm or a member of the audit team, or a member of that individual's immediate family, has a financial interest in an entity and an audit client also has a financial interest in that entity. However, independence is deemed not to be compromised if these interests are immaterial and the audit client cannot exercise significant influence over the entity. If such interest is material to any party, and the audit client can exercise significant influence over the other entity, no safeguards could reduce the threat to an acceptable level. Accordingly, the firm shall not have such an interest and any individual with such an interest shall, before becoming a member of the audit team, either:
(a) Dispose of the interest; or
(b) Dispose of a sufficient amount of the interest so that the remaining interest is no longer material.

 

290.113 A self-interest, familiarity or intimidation threat may be created if a member of the audit team, or a member of that individual's immediate family, or the firm, has a financial interest in an entity when a director, officer or controlling owner of the audit client is also known to have a financial interest in that entity. The existence and significance of any threat will depend upon factors such as:
•The role of the professional on the audit team;
•Whether ownership of the entity is closely or widely held;
•Whether the interest gives the investor the ability to control or significantly influence the entity; and
•The materiality of the financial interest.

 

The significance of any threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an acceptable level. Examples of such safeguards include:

•Removing the member of the audit team with the financial interest from the audit team; and
•Having a registered auditor review the work of the member of the audit team.

 

Financial interest in an audit client as a trustee

 

290.114 The holding by a firm, or a member of the audit team, or a member of that individual's immediate family, of a direct financial interest or a material indirect financial interest in the audit client as a trustee creates a self-interest threat. Similarly, a self-interest threat is created when:
(a) A partner in the office in which the engagement partner practices in connection with the audit,
(b) Other partners and managerial employees who provide non-assurance services to the audit client, except those whose involvement is minimal, or
(c) their immediate family members hold a direct financial interest or a material indirect financial interest in the audit client as trustee.

 

Such an interest shall not be held unless:

(a) Neither the trustee, nor an immediate family member of the trustee, nor the firm are beneficiaries of the trust;
(b) The interest in the audit client held by the trust is not material to the trust;
(c) The trust is not able to exercise significant influence over the audit client; and
(d) The trustee, an immediate family member of the trustee, or the firm cannot significantly influence any investment decision involving a financial interest in the audit client.

 

Known financial interests in an audit client held by other individuals

 

290.115 Members of the audit team shall determine whether a self- interest threat is created by any known financial interests in the audit client held by other individuals including:
•Partners and professional employees of the firm, other than those referred to above, or their immediate family members; and
•Individuals with a close personal relationship with a member of the audit team.

 

Whether these interests create a self-interest threat will depend on factors such as:

•The firm's organisational, operating and reporting structure; and
•The nature of the relationship between the individual and the member of the audit team.

 

The significance of any threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an acceptable level. Examples of such safeguards include:

•Removing the member of the audit team with the personal relationship from the audit team;
•Excluding the member of the audit team from any significant decision-making concerning the audit engagement; or
•Having a registered auditor review the work of the member of the audit team.

 

Financial interest received by way of an inheritance, gift or as a result of a merger

 

290.116 If a firm or a partner or employee of the firm, or a member of that individual's immediate family, receives a direct financial interest or a material indirect financial interest in an audit client, for example, by way of an inheritance, gift or as a result of a merger and such interest would not be permitted to be held under this section, then:
(a) If the interest is received by the firm, the financial interest shall be disposed of immediately, or a sufficient amount of an indirect financial interest shall be disposed of so that the remaining interest is no longer material;
(b) If the interest is received by a member of the audit team, or a member of that individual's immediate family, the individual who received the financial interest shall immediately dispose of the financial interest, or dispose of a sufficient amount of an indirect financial interest so that the remaining interest is no longer material, or the individual shall be removed from the audit team; or
(c)If the interest is received by an individual who is not a member of the audit team, or by an immediate family member of the individual, the financial interest shall be disposed of as soon as possible, or a sufficient amount of an indirect financial interest shall be disposed of so that the remaining interest is no longer material. Pending the disposal of the financial interest, a determination shall be made as to whether any safeguards are necessary.

 

Inadvertent violations

 

290.117When an inadvertent violation of this section as it relates to a financial interest in an audit client occurs, it is deemed not to compromise independence if:
(a) The firm has established policies and procedures that require prompt notification to the firm of any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the audit client;
(b) The actions in paragraph 290.116 (a)-(c) are taken as applicable; and
(c) The firm applies other safeguards when necessary to reduce any remaining threat to an acceptable level. Examples of such safeguards include:
•Having a registered auditor review the work of the member of the audit team; or
•Excluding the individual from any significant decision-making concerning the audit engagement.

 

The firm shall determine whether to discuss the matter with those charged with governance.